On June 5, 2013, the commissioners of the Securities and Exchange Commission (SEC) voted unanimously in favor of issuing a formal proposal for further regulation of money market mutual funds. A Notice of Proposed Rulemaking that details the proposed changes will be posted on the SEC website and published in the Federal Register, the daily journal of the U.S. Government. As expected, there will be a 90-day comment period so that industry participants, investors and other interested members of the public can provide their viewpoints on the proposed changes.
In summary, the proposal includes two principal alternative reforms1:
Alternative One: Floating Net Asset Value (NAV)—Prime institutional money market funds would be required to transact at a floating NAV, not at a $1.00 stable share price. Government money market funds and retail money market funds would be exempt.
Alternative Two: Liquidity Fees and Redemption Gates—Money market funds would continue to transact at a stable share price, but would be able to use liquidity fees and redemption gates in times of stress. A 2% liquidity fee would be imposed if the “weekly liquid assets” of a fund were to fall below half of the required 30% of its total assets. The board of directors could also impose a temporary suspension of redemptions. Government money market funds would be exempt. However, these funds could voluntarily opt into this requirement.
Additional Measures—Additional diversification and disclosure measures would apply under either alternative. Namely, enhanced disclosure requirements, elimination of the current 60-day delay on public availability of the information filed on Form N-MFP, improved private liquidity fund reporting, stronger diversification requirements and enhanced stress testing.
The SEC indicated that it will consider whether to combine the two principal alternatives of the floating NAV and the liquidity fees and gates proposal into a single reform package. If adopted in that form, prime institutional money market funds would be required to transact at a floating NAV, and all nongovernment money market funds would be able to impose liquidity fees or gates in certain circumstances.
It’s important to keep in mind that this is a just a proposal, just one step in the lengthy rulemaking process. The commissioners and SEC staff may spend many months after the close of the comment period evaluating the remarks received and refining any proposed regulation. To approve any final rulemaking, a majority of the commissioners must vote in favor of the rule at a public meeting announced in advance. Typically, any rule that requires changes in processes specifies an effective date, which may be gradually phased in over many months, if not years.
Western Asset continues to be interested in any regulatory proposals that could impact money market funds and will monitor the situation closely as it evolves.
- Fact Sheet Reforming Money Market Funds, SEC Open Meeting, June 5, 2013.