At yesterday's open meeting, the SEC adopted rule changes tightening restrictions on money funds and aimed at increasing their stability and preventing the kind of sudden vulnerability they suffered last fall due to liquidity problems and market events. These rule changes strengthen the risk limiting parts of Rule 2a-7, including credit quality, maturity, and liquidity, increase the transparency of money market funds to both the Commission and investors, and make changes designed to lessen the effect when a particular fund breaks the buck and decides to liquidate.
Credit Quality Provisions:
Among the changes to rule 2a-7's credit quality provisions, the amendments:
- decrease the amount of tier 2 securities allowed in a money fund portfolio from 5% down to 3%.
- limit the maximum weighted average maturity ("WAM") to 60 days (down from 90)
- limit the aggregate WAM from any single issuer to 45 days
- limit the weighted average life of portfolio securities to 120 days.
In addition, the new rules retain reliance on Nationally Recognized Statistical Rating Agencies (NRSROs) in evaluating credit quality of investments for the money market portfolios, as well as the NRSRO credit quality floor for securities to be included in a money fund portfolio. The rule amendments do require, however, that fund boards select four NRSROs annually, and determine each year that, in their judgement, the four selected continue to be valid rating agencies on which the fund may rely.
In addition, the new rules impose new standards money funds must meet in terms of liquidity. Money funds will be required to maintain:
- at least 10% of their portfolio in daily assets (i.e., those that can be converted to cash in a day)
- 30% of their portfolio in weekly in weekly assets (i.e., those that can be converted to cash in week)
- and must limit the amount of illiquid securities to 5% (down from 10% under the previous rules).
Provisions for Times of Market Stress:
The Commission chose, at this time, not to unmoor money market funds from their historical fixed $1 per share NAV. Though Chairman Schapiro stressed that the Commissioners had reserved judgement on the matter, and may consider it again later. The new rules do introduce new rules for instances of market stress, such as times when a money market fund is at risk of "breaking the buck," or times of extraordinary redemptions. In order to avoid runs on the fund, boards, in certain circumstances may suspend redemptions to prevent the fund from having to engage in a fire sale of all its assets into a temporarily frozen or illiquid market. In addition, the rules require money market funds to have the capability of processing redemptions at a price other than $1 per share in these instances. Also, the Commission has eased rule restricting money market fund affiliates from purchasing troubled assets from the money market fund's portfolio in order to stabilize the fund and prevent its "breaking the buck" or a run on the fund. In addition, the rules require money market funds to establish "know your customer" procedures in order to anticipate potential large redemptions from shareholders with large interests in the fund. Also, the new rules mandate
Transparency and Disclosure
The rule amendments also introduce more money market fund disclosures in order to make the funds, and the industry, more transparent to both shareholders and the Commission. The amendments will require money funds to provide monthly to the Commission, on new form N-MFP, detailed shadow pricing NAV and portfolio data that the SEC will use to guide examinations, and track risk related to the money market fund industry as whole.
The rules further require money market funds to disclose publicly on a website (with a month's lag) information about the fund's market-based ("mark to market") NAV, as well portfolio information.
These final rules were not uncontroversial, even amongst the Commissioners. Commissioner Casey stressed that, though she voted in favor of adopting the final rules, thought that the reforms did not go far enough to address what she considers widespread risk, liquidity, and credit quality problems she sees in the broader money market industry. Casey echoed Chairman Schapiro's assertion that certain issues, like the fixed $1 NAV and reliance on NRSROs should remain open for more reforms.
Chairman Schapiro's remarks on money market reforms at today's open meeting are available at: http://www.sec.gov/news/speech/2010/spch012710mls-mmf.htm
The full text of the final release adopted today will be available in upcoming weeks on the Commission's website, http://www.sec.gov
The full text of the money market rule proposal proposing release is available at: http://www.sec.gov/rules/proposed/2009/ic-28807.pdf
- “SEC Proposes Money Market Reform Options,” June 24, 2009
- “President’s Plan Maintains and Strengthens SEC’s and CFTC’s Powers,” June 18, 2009
- “Schapiro Affirms Role of Directors in Money Market Reform,” June 9, 2009
- “Forum Comments on Potential Money Market Reforms,” June 1, 2009
- “Chairman Schapiro’s First Address to the Fund Industry,” May 4, 2009
- “Donohue Outlines IM Regulatory Priorities,” March 24, 2009