Starting in October of 2016, the Securities and Exchange Commission is implementing amendments to the rules that govern money market mutual funds. These rules build upon reforms adopted by the Commission in March 2010 and implement a series of structural and operational changes that fundamentally alter the way money market mutual funds operate.
The amendments are an effort to address risks associated with runs on money market funds in times of extraordinary market stress and to provide additional transparency for investors. The rules extend to both directly held (money market mutual funds that are position traded like other mutual fund securities) and sweep money market mutual funds.
Generally speaking, there are three types of money market mutual funds: prime, municipal, and government. The rules impact the different fund types in various ways. Once implemented, the amendments require prime funds, which generally invest in corporate debt and securities, and municipal funds, which generally invest in tax-exempt securities, to delineate between retail and institutional fund types based on beneficial ownership.
Institutional Money Market Fund Pricing
Under the rule, institutional prime and municipal funds are required to value portfolio securities using market-based factors and sell and redeem shares based on a floating NAV (Net Asset Value). These funds are no longer able to use special pricing and valuation conventions that previously permitted them to maintain a constant price of $1.00. This means the prices of these funds will now fluctuate along with changes in the market-based value of portfolios of securities. Furthermore, securities of this nature must be priced out to four decimal places (e.g. $1.0000).
Retail Money Market Fund Pricing
Conversely, retail prime and municipal funds are able to continue maintaining a stable NAV and constant price of $1.00, but must limit beneficial ownership to only natural persons. This means that only natural persons (individual investors) or accounts beneficially owned by natural persons are able to purchase retail funds. Government funds (funds that invest in government securities) are also allowed to maintain a stable NAV and constant price of $1.00, but are not required to delineate between retail and institutional fund types or limit beneficial ownership.
The rules also afford fund companies with a series of tools to help stem redemptions in times of market crises in an effort to raise liquidity. The amendments allow retail and institutional funds to put in place liquidity fees (a fee on all redemptions out of the fund) and/or redemption gates (a temporary halt on all redemptions) and work as follows:
- Liquidity Fees: If a fund’s weekly liquid assets fall below 30%, a fee of up to 2% may be put in place on all redemptions if the fund’s board deems that the fee is in the best interest of the fund. If the fund’s weekly liquid assets fall below 10%, funds are required to put in place fee of 1%, unless the fund’s board determines it’s not in the best interest of the fund.
- Redemption Gates: If a fund’s weekly liquid assets fall below 30%, the fund’s board has the discretion to temporarily suspend (gate) redemptions if it’s board of directors finds that imposing a gate is in the fund’s best interest. A redemption gate cannot be imposed for more than 10 days in a 90 day period.
Government funds are allowed to but not required to impose both gates and fees.
If you would like to learn more about the SEC’s new rules for mutual funds, please visit the Commission’s website.