On July 12, 2023, the SEC adopted amendments to Rule 2a-7 and certain other rules that govern money market funds under the Investment Company Act of 1940. As noted in the Commission’s adopting release (No. 33-11211), the amendments are designed to improve the resilience and transparency of money market funds following the liquidity stresses experienced in March 2020 in connection with the COVID-19 pandemic and the associated stresses in the short-term funding markets. Currently, $6 trillion is invested in money market funds. Highlights of the amendments include:
Increase of the Minimum Daily and Weekly Liquidity Requirements
The amendments will amend the portfolio liquidity requirements of Rule 2a-7, increasing the weekly liquid asset requirement to 50% (from the current level of 30%) and the daily liquid asset requirement to 25% (from the current level of 10%) for all money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions.
Removal of Temporary Redemption Gates and the Tie Between the Weekly Liquid Asset Threshold and Liquidity Fees
The amendments remove provisions in Rule 2a-7 that permit a money market fund to impose a temporary redemption gate as well as remove provisions in Rule 2a-7 that tied a money market fund’s ability to impose liquidity fees to its level of weekly liquid assets. In the Commission’s adopting release, the SEC noted that in March 2020, these provisions had unintended consequences and that the mere possibility of liquidity fees and/or redemption gates being imposed appears to have contributed to investors’ incentives to redeem and contributed to incentives for money market managers to maintain weekly liquid asset levels above a 30% weekly liquid asset threshold, rather than use those assets to meet redemptions. These changes will reduce the risk of investor runs on money market funds during periods of market stress.
Liquidity Fee Requirement
To address concerns about redemption costs and liquidity, and in lieu of the proposed swing pricing regime, the amendments will require institutional prime and institutional tax-exempt money market funds, including those that are not publicly offered, to impose liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets, unless the fund’s liquidity costs are de minimis. In addition, the amendments will require any non-government money market fund, including those that are not publicly offered, to impose a discretionary liquidity fee of up to 2% if the board determines that a fee is in the best interest of the fund. The amended liquidity fee framework is designed to protect remaining shareholders from dilution and to more fairly allocate costs so that redeeming shareholders bear the costs of redeeming from the fund when liquidity in underlying short-term funding markets is costly.
Under the adopting release, retail and government money market funds may handle a negative interest rate environment either by converting from a stable share price to a floating share price or by reducing the number of shares outstanding to maintain a stable net asset value per share, subject to certain board determinations and disclosures to investors. The amendments also modify certain reporting forms to reflect the amendments to the regulatory framework for money market funds. The Commission believes the modifications to the reporting requirements will improve transparency and facilitate the SEC’s monitoring of money market funds. In addition, the Commission adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, to require additional information regarding the liquidity funds they advise that is generally aligned with the amended reporting for money market funds.
The rule amendments will become effective 60 days after publication in the Federal Register. The reporting form amendments will become effective June 11, 2024. The Commission is adopting a tiered approach to the transition periods for the other final amendments. The Commission has provided for a six-month transition period for funds to comply with certain amendments, including the minimum portfolio liquidity requirements and the discretionary liquidity fee provision. Funds will have twelve months after the effective date to comply with the amended rule’s mandatory liquidity fee provision.
The full text of SEC Release No. 33-11211 is available at