SEC Adopts Money Market Fund Reforms Including Mandatory Liquidity Fee

Yesterday, the SEC voted 3 – 2 to adopt amendments to the rule governing money market funds.  Notably, the Commission abandoned its swing pricing proposal in favor of a mandatory liquidity fee.  As expected, the Commission removed the temporary redemption gates imposed and decoupled discretionary liquidity fees from a fund’s weekly asset minimum that were required by the 2014 money market fund amendments.  Changes to the rule include:

• Increasing money market funds’ daily liquid asset minimum to 25% and weekly liquid asset minimum to 50%
• Removing redemption gates and decoupling discretionary liquidity fees from a fund’s weekly liquid assets
• Imposing mandatory liquidity fees on institutional prime money market funds and institutional tax-exempt money market funds when daily net redemptions exceed 5% of net assets (unless liquidity costs are de minimis).  (Non-government money market funds must impose a discretionary liquidity fee if the fund’s board (or its delegate) determines that a fee is in the best interest of the fund.)
• Allowing retail and government money market funds in negative interest rate environments to either convert from a stable share price to a floating share price or by reducing the number of shares outstanding to maintain a stable net asset value per share
• Imposing certain modified reporting requirements.

The rule will become effective 60 days after it is published in the federal register.  Compliance will be tiered, and compliance with the mandatory liquidity fee will be required within 12 months of the effective date of the rule. 

Chair Gensler stated “I support this adoption because it will enhance these funds’ resiliency and ability to protect against dilution.”  Commissioners Peirce and Uyeda voted against adoption.  In her dissent, Commissioner Peirce pointed out that “[t]he proposing release discussed the use of liquidity fees as an alternative to fight dilution costs in the proposal, but it also rejected that option . . .”  Acknowledging that some commenters supported liquidity fees over swing pricing, she noted that the comments were “hardly a full-throated endorsement of a liquidity fee. Those same commenters also likely would prefer one fly in their soup to four, but I suspect that most would check none of the above if given that choice.” 

Commissioner Uyeda stated “[k]ey questions, such as whether remaining shareholders of money market funds were disadvantaged as a result of redemption activity in March 2020 and, if so, whether and to what extent a mandatory liquidity fee would solve that problem, remain unanswered.”  He joined Commissioner Peirce in suggesting that the liquidity fee portion of the rule should have been reproposed to allow interested parties to comment on the specifics of the rule.  In addition, Commissioner Uyeda noted that “[t]he procedural shortcomings surrounding the adoption of the mandatory fee mechanism are compounded by the fact that the public often has inaccurate information on the timing of Commission action.  Thus, they are unable to identify when to engage with the Commission and its staff on a particular rulemaking initiative.  The Commission’s Spring 2023 Regulatory Agenda lists 37 rules in the final rule stage, of which 27 rules—including money market fund reforms – have a final action date of October 2023.  Yet, the Commission is adopting the final rule today in July."