SEC Proposes Rule Amendments to Address Money Market Volatility

The SEC has proposed amendments to the rules that govern money market funds under the 1940 Act to address concerns about prime and tax-exempt money market funds raised in March 2020 when the impact of the COVID-19 pandemic led investors to reallocate their assets into cash and short-term government securities. At that time, prime and tax-exempt money market funds, particularly institutional funds, experienced large outflows, which contributed to stress on short-term funding markets. “Together, these amendments are designed to reduce the likelihood of runs on money market funds during periods of stress,” said SEC Chairman 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.” According to the SEC the proposed amendments would improve the resilience and transparency of money market funds by:

• Increasing minimum liquidity requirements to provide a more substantial buffer in the event of rapid redemptions;
• Removing the ability of money market funds to impose liquidity fees and redemption gates when they fall below certain liquidity thresholds, which would eliminate an incentive for preemptive redemptions;
• Requiring certain money market funds to implement swing pricing so that redeeming investors bear the liquidity costs of their redemptions; and
• Enhancing certain reporting requirements to improve the Commission’s ability to monitor and analyze money market fund data.

In the coming weeks, the MFDF will present a webinar on the proposed amendments with attorneys from Dechert.