SEC Proposes New Money Market Fund Rules

The proposed amendments are designed to address potential runs on money market funds during times of market stress.

The Securities and Exchange Commission (SEC) has voted to propose amendments to certain rules that govern money market funds under the Investment Company Act of 1940.

The agency notes that in March 2020, growing economic concerns about the impact of the COVID-19 pandemic led investors to reallocate their assets into cash and short-term government securities. The market fall sparked by fears of the pandemic started on March 9, 2020, with a record-setting 7.79% drop in the Dow Jones Industrial Average. Two more record-setting days followed—a 9.99% dive on March 12 and a 12.93% plunge on March 16 for the Dow.

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As a result of the market drops, prime and tax-exempt money market funds, particularly institutional funds, experienced large outflows, which contributed to stress on short-term funding markets. The SEC says its proposed amendments are designed, in part, to address concerns about prime and tax-exempt money market funds highlighted by these events.

The SEC says the proposed amendments would increase liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The proposed amendments also would remove provisions in the current rule permitting or requiring a money market fund to impose liquidity fees or to suspend redemptions through a gate when a fund’s liquidity drops below an identified threshold. These provisions appeared to contribute to investors’ incentives to redeem in March 2020, as some funds’ reported liquidity levels declined, the SEC says.

To address concerns about redemption costs and liquidity, the proposal would require institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures that would require redeeming investors, under certain circumstances, to bear the liquidity costs of their redemptions. In addition, the proposal would amend certain reporting requirements to improve the availability of information about money market funds and enhance the SEC’s monitoring and analysis of these funds.

“Together, these amendments are designed to reduce the likelihood of runs on money market funds during periods of stress,” says SEC Chair Gary Gensler. “They also would equip funds to better meet large redemptions, addressing concerns about redemption costs and liquidity. Given the broad reach of short-term funding markets, these proposals speak to our remit to maintain fair, orderly and efficient markets.”

The SEC began evaluating the need for further money market fund reforms following the events in March 2020. Its proposal follows the agency issuing a request for comment to gather public feedback on potential reforms, including options discussed in a December 2020 report from the President’s Working Group on Financial Markets.

A fact sheet about the proposal is here, and the text of the proposed rule is here. A 60-day comment period will start after the proposed rule is published in the Federal Register.