SEC Alert! SEC Adopts New Rule for Money Market Fund Reforms and Amendments to Form PF Reporting Requirements for Large Liquidity Fund Adviser Boosting Transparency. Changes to how funds report information to Forms N-CR, N-MFP, and PF

https://www.sec.gov/rules/final/2023/33-11211.pdf (424 pages!)Wut mean?:

The Securities and Exchange Commission (SEC) is making some changes to the rules that control money market funds. Money market funds are like a type of mutual fund that invests in highly liquid, short-term financial instruments. These changes are meant to make these funds more resilient and transparent.

1. No More Suspension of Redemptions: Previously, if a fund's liquidity (how quickly assets in the fund can be converted to cash) fell below a certain level, the fund's board could temporarily stop redemptions (investors getting their money back). This will no longer be allowed.
2. Liquidity Fees: The SEC is removing the link between liquidity levels and the possibility of liquidity fees. Instead, some money market funds will have to set up a system for liquidity fees that will better distribute the costs of providing liquidity to investors who are redeeming their shares.
3. Increased Liquid Asset Requirements: The minimum requirements for daily and weekly liquid assets are being increased to 25% and 50% respectively. This means funds need to have more assets that can be quickly converted to cash.
4. New Liquidity Fee Framework: Some money market funds will have to implement a new system for liquidity fees. This is designed to more fairly distribute the costs of providing liquidity to investors who are redeeming their shares.
5. Handling Negative Interest Rates: The SEC is also addressing how money market funds with stable net asset values (the value of a fund's total assets, minus its liabilities) can deal with a negative interest rate environment. They're allowing these funds to use share cancellation, but with certain conditions.
6. Calculating Maturity and Life: The SEC is specifying how funds should calculate the weighted average maturity (the average time it takes for securities in a fund to mature) and weighted average life (average length of time until the principal amount of its securities is repaid).
7. Reporting Requirements: There are also changes to certain reporting requirements and forms.Fact Sheet: https://www.sec.gov/files/33-11211-fact-sheet.pdf

Wut mean?:

Why This Matters: Money market funds are popular cash management vehicles for both retail and institutional investors. They provide short-term financing for businesses, banks, and governments. However, during the COVID-19 pandemic, large outflows from these funds led to stress on short-term funding markets. The new amendments aim to address these issues and improve the resilience and transparency of money market funds.

What’s Required:

1. Increased Minimum Liquidity Requirements: The minimum liquidity requirements for money market funds will be increased to 25% for daily liquid assets and 50% for weekly liquid assets. This will help funds manage significant and rapid investor redemptions in stressed market conditions.
2. Removal of Temporary Redemption Gates: The ability for money market funds to temporarily suspend redemptions will be removed. This will reduce the risk of investor runs on money market funds during periods of market stress.
3. Liquidity Fee Requirement: Institutional prime and institutional tax-exempt money market funds will be required to impose mandatory liquidity fees when a fund experiences daily net redemptions that exceed 5% of net assets, unless the fund’s liquidity costs are de minimis.
4. Handling Negative Interest Rate Environment: 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.
5. Reporting Requirements: The amendments will modify certain reporting forms to reflect the amendments to the regulatory framework for money market funds.

What’s Next: 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.Press Release: https://www.sec.gov/news/press-release/2023-129

The Securities and Exchange Commission today adopted amendments to certain rules that govern money market funds under the Investment Company Act of 1940.

The amendments will increase minimum liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The amendments will also remove provisions in the current rule that permit a money market fund to suspend redemptions temporarily through a gate and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold. These changes are designed to reduce the risk of investor runs on money market funds during periods of market stress.

To address concerns about redemption costs and liquidity, the amendments will require institutional prime and institutional tax-exempt money market funds 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 to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund. These amendments are 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.

“Money market funds – nearly $6 trillion in size today – provide millions of Americans with a deposit alternative to traditional bank accounts,” said SEC Chair Gary Gensler. “Money market funds, though, have a potential structural liquidity mismatch. As a result, when markets enter times of stress, some investors – fearing dilution or illiquidity – may try to escape the bear. This can lead to large amounts of rapid redemptions. Left unchecked, such stress can undermine these critical funds. I support this adoption because it will enhance these funds’ resiliency and ability to protect against dilution. Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress. That benefits investors.”

Separately, the amendments will also modify certain reporting forms that are applicable to money market funds and large private liquidity funds advisers.

The rule amendments will become effective 60 days after publication in the Federal Register with a tiered transition period for funds to comply with the amendments. The reporting form amendments will become effective June 11, 2024.TLDRS:

Money market funds are like parking spots for cash for both everyday and big-time investors. They're also a source of quick cash for businesses, banks, and governments.

• But during the COVID-19 pandemic, a lot of money was pulled out of these funds, causing some stress in the market.
• The SEC is making changes to make these funds more resilient and transparent.

What’s Required:

1. More Liquid Assets: Money market funds will need to have more assets that can be quickly turned into cash. This is to help them handle large, quick withdrawals in tough market conditions.
2. No More Suspension of Redemptions: Funds won't be able to temporarily stop investors from withdrawing their money. This is to prevent a rush of investors trying to pull out their money during market stress.
3. Liquidity Fee Requirement: Some types of money market funds will have to charge a fee if they have a lot of withdrawals in one day, unless the cost of providing the cash is very small. This is to protect the investors who remain in the fund.
4. Handling Negative Interest Rates: Some funds may have to change their share price from a fixed amount to a fluctuating amount or reduce the number of shares to keep the value per share stable if interest rates go below zero.
5. Reporting Requirements: Funds will have to change how they report certain information to reflect the new rules.

What’s Next: The new rules will start 60 days after they're published in the Federal Register. Changes to how funds report information will start on June 11, 2024. The SEC is giving funds different amounts of time to adjust to the other changes.

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