[Editor’s Note: The following post is authored by Davis Polk & Wardwell LLP]
On June 5, 2013, the Securities and Exchange Commission (the “SEC”) proposed amendments to rules under the Investment Company Act of 1940 (the “Investment Company Act”) and related requirements that govern money market funds (“MMFs”). The SEC’s proposal is the latest action taken by U.S. regulators as part of the ongoing debate about systemic risks posed by MMFs and the extent to which previous reform efforts have addressed these concerns.
The proposal sets out two alternative reforms to Rule 2a-7 under the Investment Company Act. Under the first of the two alternative reforms, prime institutional MMFs (as described in the sidebar) would no longer be permitted to rely on the provisions in Rule 2a-7 that allow them to maintain a stable $1 per share net asset value (“NAV”). Under the second alternative, all MMFs could maintain a stable NAV but could, subject to action by the fund’s board of directors, impose liquidity fees and gates against investor redemptions if the fund’s weekly liquid assets, as defined in the proposal, fell below 15% of its total assets. The proposal also would modify other requirements for all MMFs, including the Rule 22e-3 provisions relating to suspension of redemptions, and would impose new disclosure and reporting requirements on MMFs.
Notably, the proposal contains a detailed analysis of, but does not include, several of the MMF reforms proposed by the Financial Stability Oversight Council in 2012, including NAV buffer and minimum balance at risk requirements. The SEC also considered, but did not propose, the establishment of a private emergency liquidity facility or the regulation of MMFs as special purpose banks, as put forth by the 2009 President’s Working Group Paper on MMF reform. The proposal would not modify the ability of an MMF sponsor to support the fund’s operations through affiliate purchases of the MMF’s securities, though it would require additional disclosure with respect to such support. The proposal also does not address issues raised in the SEC’s 2011 proposal to remove references to credit ratings in Rule 2a-7 and other Investment Company Act rules, but the SEC indicated that it expects to address this issue in the future.
The proposal is of interest not only to sponsors and operators of MMFs, but also to institutional and retail MMF investors and to firms that issue commercial paper and other types of short-term debt securities that currently are widely held by MMFs. The proposal contains more than 1,000 questions and requests for comments with respect to the reforms included in the proposal as well as those not proposed by the SEC.
This memorandum provides an overview of the SEC’s proposal, highlighting those areas that have been the focus of debate among regulators and market participants. Comments to the SEC on the proposal are due within 90 days after its publication in the Federal Register.
Click here to read the entire memorandum.