SEC Proposes Rule on Money Market Fund Reform
On June 5, 2013, the SEC issued a proposed rule that would address stable value pricing1 of the prime institutional money market funds (MMFs). The proposal would help protect investors by making such funds less susceptible to runs (i.e., redemptions when MMFs “break the buck”2).
Under the proposed rule, MMFs could choose one of two alternatives, or a combination of both, that address an MMF’s net asset value (NAV). The first alternative would require all prime institutional MMFs to transact at a floating NAV. Such funds would be required to use market factors instead of amortized cost to value their asset portfolios. In addition, fluctuating daily share prices would be (1) reported on the basis of market value changes related to a fund’s asset portfolio and (2) rounded to the nearest hundredth of a percent rather than penny rounded.
The second alternative would allow MMFs to continue transacting at a stable NAV but rescinds the use of amortized cost to value the funds. However, under this alternative, when a fund’s weekly liquid assets (as defined in the proposed rule) fall below 15 percent of its total assets:
- The fund would, with limited exceptions, be required to impose a 2 percent liquidity fee on all redemptions from the fund unless the fund's board determines that it is not in the best interest of the fund.
- The fund’s board could impose a temporary suspension of redemptions (or “redemption gate”) for up to 30 days in any 90-day period.
- The fund would be required to promptly notify the public. Public notification would also be required when the fund makes decisions regarding redemption fees and redemption gates and would include a “discussion of the board’s analysis in determining whether or not to impose a fee or gate.”
Government and retail3 MMFs would be exempt from the proposed rule’s requirements related to NAV.
In addition to providing the two NAV-related alternatives above, the proposal would require MMFs to (1) enhance their disclosures, (2) strengthen their “stress-testing,” (3) increase their diversification, and (4) provide additional information about their holdings and liquidity.
Comments on the proposed rule are due 90 days after the date of its publication in the Federal Register.
[1] Money market funds (MMFs) traditionally have been priced with a stable net asset value (NAV) of $1.00 because of their short-term nature and because the assets underlying the funds are supposed to be short-term and highly liquid.
[2] An MMF “breaks the buck” when its “market-based value deviates [by] more than 0.5 percent ($0.005) from its stable $1.00 share price [or NAV]”; in such circumstances, the fund generally reprices its shares at market value.
[3] Retail MMFs are defined as MMFs that limit shareholder redemptions to up to $1 million per business day.
