Regulation

SEC adopts MMF reform rules

The Securities and Exchange Commission has adopted amendments to the rules that govern money market mutual funds (MMFs), making structural and operational reforms to address investor risk while preserving the benefits of the funds.

The rules build upon the reforms adopted by the commission in March 2010 that were designed to reduce the interest rate, credit and liquidity risks of money market fund portfolios. 
 
When the commission adopted the 2010 amendments, it recognised that the 2008 financial crisis raised questions of whether more fundamental changes to money market funds might be warranted. 
 
The new rules require a floating net asset value (NAV) for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets and provide non-government money market fund boards new tools – liquidity fees and redemption gates – to address runs. 
 
“Today’s reforms fundamentally change the way that money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system,” says SEC chair Mary Jo White. “Together, this strong reform package will make our markets more resilient and enhance transparency and fairness of these products for America’s investors.”
 
With a floating NAV, institutional prime money market funds (including institutional municipal money market funds) are required to value their portfolio securities using market-based factors and sell and redeem shares based on a floating NAV.  These funds no longer will be allowed to use the special pricing and valuation conventions that currently permit them to maintain a constant share price of USD1.00.  With liquidity fees and redemption gates, money market fund boards have the ability to impose fees and gates during periods of stress.  The final rules also include enhanced diversification, disclosure and stress testing requirements, as well as updated reporting by money market funds and private funds that operate like money market funds.
 
The final rules provide a two-year transition period to enable both funds and investors time to fully adjust their systems, operations and investing practices.
 
Norm Champ, director of the SEC’s division of investment management, says: “Today’s adoption of final money market fund reforms represents a significant additional step to address a key area of systemic risk identified during the financial crisis.  These reforms are important both to investors who use money market funds as a cash management vehicle and to the corporations, financial institutions, municipalities and others that use them as a source of short-term funding.”
 
The SEC has also issued a related notice proposing exemptions from certain confirmation requirements for transactions effected in shares of floating NAV money market funds.  Additionally, the SEC re-proposed amendments to the commission’s money market fund rules and Form N-MFP to address provisions that reference credit ratings.  The re-proposed amendments would implement section 939A of the Dodd-Frank Wall Street and Consumer Protection Act of 2010, which requires the commission to review its rules that use credit ratings as an assessment of credit-worthiness, and replace those credit-rating references with other appropriate standards. 
 
The rules will be effective 60 days after their publication in the Federal Register, and the re-proposal will have a 60-day public comment period following its publication in the Federal Register.

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