US SEC proposes tighter liquidity rules for prime money market funds

The Securities and Exchange Commission today voted to propose amendments to certain rules that govern money market funds under the Investment Company Act of 1940. 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. Prime and tax-exempt money market funds, particularly institutional funds, experienced large outflows, which contributed to stress on short-term funding markets. The Commission’s proposed amendments are designed, in part, to address concerns about prime and tax-exempt money market funds highlighted by these events.

Rule 2a-7 is the principal rule governing money market funds. Currently, the rule requires that immediately after acquisition of an asset, a money market fund must hold at least 10% of its total assets in daily liquid assets and at least 30% of its total assets in weekly liquid assets. These requirements are designed to support funds’ ability to meet redemptions from cash, or securities convertible to cash, even in market conditions in which money market funds cannot rely on a secondary or dealer market to provide liquidity. The proposal would increase daily and weekly liquid asset requirements to 25% and 50%, respectively. These increased thresholds are informed by analysis of the level of liquid assets needed to meet redemptions, based on redemptions in March 2020. The increased thresholds would provide a more substantial buffer to better equip money market funds to manage significant and rapid investor redemptions.

Rule 2a-7 currently provides that a money market fund may impose a liquidity fee of up to 2% or temporarily suspend redemptions (i.e., impose a “gate”), if the fund’s weekly liquid assets fall below 30% of its total assets and the fund’s board of directors determines that imposing a fee or gate is in the fund’s best interests…. The proposed amendments would remove the fee and gate provisions from rule 2a-7.

The proposed rule is available at

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