The U.S. Securities and Exchange Commission voted 3-2 today to adopt significant changes to the regulation of money market funds in an effort to minimize the potential for a systemic “run” on money market funds like the one experienced in 2008.1
This alert provides a broad overview of the reforms adopted by the SEC in a release that is over 850 pages.
The principal reforms, which had been previously proposed as separate alternatives and are now being adopted in combination, involve:
Today’s amendments are largely consistent with the reforms the SEC proposed on June 5, 2013 (click here for Bingham’s alert on the proposing release), with some significant modifications. Two key differences from the proposal are the definitions of “retail” money market funds and “government” money market funds.
The SEC had proposed to define “retail” money market funds as those that limit daily redemptions to $1 million per investor. In response to industry comments regarding the operational difficulties this definition would entail, the SEC has instead adopted a definition that would require retail money market funds to have policies and procedures in place that are reasonably designed to ensure that its investors are natural persons.
Under the new rules, a “government” money market fund will refer to a fund that invests at least 99.5% of its assets in cash, government securities, and repurchase agreements collateralized by government securities. The initial proposal, consistent with the current “fund name” rule, would have required only 80% of a money market fund’s assets to be invested in this manner in order to qualify as a “government” money market fund.
Other reforms include enhanced website disclosure obligations (e.g., prompt disclosure of market-based NAVs and amount of weekly and daily liquid assets), changes to Form N-MFP and Form PF, the adoption of a new form for disclosure of certain material events (such as the imposition of liquidity fees or redemption gates), stronger diversification requirements and enhanced stress testing.
In addition, in response to comments from industry participants, members of Congress and other observers, the SEC noted that the U.S. Department of Treasury and the Internal Revenue Service are expected to issue rulemaking and guidance to allay concerns about the tax consequences to investors in money market funds that are subject to the floating NAV requirement.
Money market funds and their sponsors will have two years from the date of the final rule’s publication in the Federal Register to comply with the floating NAV requirement and the amendments relating to liquidity fees and redemption gates (and related amendments). The other reforms will take effect either nine or 18 months after that date, depending on the particular change.
The SEC release regarding these new amendments may be viewed at http://www.sec.gov/rules/final/2014/33-9616.pdf. We expect to issue a more detailed alert on the amendments.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Copenhefer-Lea-Anne
This article was originally published by Bingham McCutchen LLP.