Money Market Fund Reforms; Form PF Reporting Requirements for Large Liquidity Fund Advisers; Technical Amendments to Form N-CSR and Form N-1A, 51404-51549 [2023-15124]
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Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 270, 274 and 279
[Release Nos. 33–11211; 34–97876; IA–
6344; IC–34959; File No. S7–22–21]
RIN 3235–AM80
Money Market Fund Reforms; Form PF
Reporting Requirements for Large
Liquidity Fund Advisers; Technical
Amendments to Form N–CSR and
Form N–1A
Securities and Exchange
Commission.
ACTION: Final rule.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’) is
adopting amendments to certain rules
that govern money market funds under
the Investment Company Act of 1940.
These amendments are designed to
improve the resilience and transparency
of money market funds. The
amendments will revise the primary
rule that governs money market funds to
remove the ability for a fund board to
temporarily suspend redemptions if the
fund’s liquidity falls below a threshold.
SUMMARY:
In addition, the amendments will
remove the tie between liquidity
thresholds and the potential imposition
of liquidity fees. The amendments will
also require certain money market funds
to implement a liquidity fee framework
that will better allocate the costs of
providing liquidity to redeeming
investors. In addition, the Commission
is increasing the daily liquid asset and
weekly liquid asset minimum
requirements to 25% and 50%,
respectively. The Commission also is
amending certain reporting
requirements on Form N–MFP and
Form N–CR and making certain
conforming changes to Form N–1A to
reflect amendments to the regulatory
framework for money market funds. In
addition, the Commission is addressing
how money market funds with stable
net asset values may handle a negative
interest rate environment, including by
adopting amendments that will permit
these funds to use share cancellation,
subject to certain conditions. Further,
the Commission is adopting rule
amendments to specify how funds must
calculate weighted average maturity and
weighted average life. In addition, the
Commission is adopting amendments to
Form PF concerning the information
large liquidity fund advisers must report
for the liquidity funds they advise.
Finally, the Commission is adopting two
technical amendments to Form N–CSR
and Form N–1A to correct errors from
recent Commission rulemakings.
DATES: Effective dates: The rule
amendments are effective October 2,
2023. The amendments to Forms N–1A
and N–CSR are effective October 2, 2023
and the amendments to Forms N–CR,
N–MFP, and PF are effective June 11,
2024.
Compliance dates: The applicable
compliance dates are discussed in
section II.H.
FOR FURTHER INFORMATION CONTACT:
Blair Burnett, Christian Corkery, David
Driscoll, or Laura Harper Powell, Senior
Counsels; Angela Mokodean, Branch
Chief; or Brian M. Johnson, Assistant
Director at (202) 551–6792, Investment
Company Regulation Office, Division of
Investment Management, Securities and
Exchange Commission, 100 F Street NE,
Washington, DC 20549–8549.
SUPPLEMENTARY INFORMATION: The
Commission is adopting amendments to
the following rules and forms:
Commission reference
CFR Citation (17 CFR)
Investment Company Act of 1940 (‘‘Act’’ or ‘‘Investment Company Act’’) 1 .......................
Securities Act of 1933 (‘‘Securities Act’’) 2 and Investment Company Act .........................
Securities Exchange Act of 1934 (‘‘Exchange Act’’) 3 and Investment Company Act .......
Investment Advisers Act of 1940 (‘‘Advisers Act’’) .............................................................
§ 270.2a–7.
§ 270.31a–2.
§ 274.201.
§ 274.222.
§§ 239.15A and 274.11A.
§§ 249.331 and 274.128.
§ 279.9.
I. Introduction
A. Role of Money Market Funds and
Existing Regulatory Framework
B. March 2020 Market Events and Need for
Reform
II. Discussion
A. Amendments To Remove the Tie
Between the Weekly Liquid Asset
Threshold and Redemption Gates and
Liquidity Fees
1. Unintended Effects of the Tie Between
the Weekly Liquid Asset Threshold and
Liquidity Fees and Redemption Gates
2. Removal of Redemption Gates From
Rule 2a–7
B. Liquidity Fee Requirement
1. Determination To Adopt a Liquidity Fee
Requirement
2. Terms of the New Mandatory Liquidity
Fee Requirement
3. The Continued Availability of
Discretionary Liquidity Fees
4. Disclosure
5. Tax and Accounting Implications of
Liquidity Fees
C. Amendments to Portfolio Liquidity
Requirements
1. Increase of the Minimum Daily and
Weekly Liquidity Requirements
2. Consequences for Falling Below
Minimum Daily and Weekly Liquidity
Requirements
3. Amendments to Liquidity Metrics in
Stress Testing
D. Amendments Related to Potential
Negative Interest Rates
E. Amendments to Specify the Calculation
of Weighted Average Maturity and
Weighted Average Life
F. Amendments to Reporting Requirements
1. Amendments to Form N–CR
2. Amendments to Form N–MFP
3. Amendments to Form PF
G. Technical Amendments to Form N–CSR
and Form N–1A
H. Effective and Compliance Dates
III. Other Matters
IV. Economic Analysis
A. Introduction
B. Baseline
1. Money Market Funds
2. Large Liquidity Funds and Form PF
3. Other Affected Entities
C. Costs and Benefits of the Final
Amendments
1. Removal of the Tie Between the Weekly
Liquid Asset Threshold and Liquidity
Fees and Redemption Gates
2. Raised Liquidity Requirements
3. Stress Testing Requirements
4. Liquidity Fees
5. Amendments Related to Potential
Negative Interest Rates
6. Disclosures
7. Calculation of Weighted Average
Maturity and Weighted Average Life
8. Form PF Requirements for Large
Liquidity Fund Advisers
D. Alternatives
1. Alternatives to the Removal of
Temporary Redemption Gates
1 15 U.S.C. 80a–1 et seq. Unless otherwise noted,
all references to statutory sections are to the
Investment Company Act, and all references to
rules under the Investment Company Act are to title
17, part 270 of the Code of Federal Regulations [17
CFR part 270].
2 15
Table of Contents
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Rule 2a–7 ........................
Rule 31a–2 ......................
Form N–MFP ...................
Form N–CR .....................
Form N–1A ......................
Form N–CSR ...................
Form PF ...........................
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U.S.C. 77a et seq.
U.S.C. 78a et seq.
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2. Alternatives to the Removal of the Tie
Between Weekly Liquid Assets and
Discretionary Liquidity Fees
3. Alternatives to the Final Increases in
Liquidity Requirements
4. Alternative Stress Testing Requirements
5. Alternative Implementations of
Liquidity Fees
6. Swing Pricing
7. Expanding the Scope of the Floating
NAV Requirements
8. Countercyclical Weekly Liquid Asset
Requirements
9. Amendments Related to Potential
Negative Interest Rates
10. Amendments Related to WAL/WAM
Calculation
11. Form PF Amendments for Large
Liquidity Fund Advisers
12. Disclosures
13. Sponsor Support
14. Capital Buffers
15. Minimum Balance at Risk
16. Liquidity Exchange Bank Membership
17. Alternative Compliance and Filing
Periods
E. Effects on Efficiency, Competition, and
Capital Formation
V. Paperwork Reduction Act
A. Introduction
B. Rule 2a–7
C. Form N–MFP
D. Form N–CR
E. Form N–1A
F. Form PF
G. Rule 31a–2
VI. Regulatory Flexibility Act Certification
Statutory Authority
I. Introduction
The Commission is adopting
amendments to rule 2a–7 under the
Investment Company Act of 1940.
Money market funds are a type of
mutual fund registered under the Act
and regulated pursuant to rule 2a–7.4
These funds are popular cash
management vehicles for both retail and
institutional investors because they seek
to provide investors with principal
stability and access to daily liquidity. In
addition, money market funds serve as
an important source of short-term
financing for businesses, banks, and
Federal, state, municipal, and Tribal
governments. In March 2020, in
connection with an economic shock
from the onset of the COVID–19
pandemic, certain types of money
market funds had significant outflows,
contributing to stress on short-term
funding markets that resulted in
government intervention to enhance the
liquidity of such markets.5 Our
historical experience with these funds
and the events of March 2020 have led
us to re-evaluate certain aspects of the
regulatory framework applicable to
4 Money market funds are also sometimes called
‘‘money market mutual funds’’ or ‘‘money funds.’’
5 See infra section I.B (discussing these events in
more detail).
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money market funds. Accordingly, the
Commission is adopting amendments to
rule 2a–7 and certain reporting forms
that are designed to improve the
resilience of money market funds during
times of market stress while preserving
the benefits that investors have come to
expect from these funds.
In December 2021, the Commission
proposed to amend rule 2a–7 to remove
the tie between weekly liquid asset
thresholds and the potential imposition
of liquidity fees and redemption gates,
since it appears these provisions
contributed to investors’ incentives to
redeem from certain funds in March
2020 and affected fund managers’
willingness to use available liquidity in
their portfolios to meet redemptions.6
For funds that experienced the heaviest
outflows in March 2020 and in prior
periods of market stress, the proposal
also included a new swing pricing
requirement that was designed to
mitigate the dilution and investor harm
that can occur when other investors
redeem—and remove liquidity—from
these funds, particularly when certain
markets in which the funds invest are
under stress and effectively illiquid. The
Commission also proposed to increase
the minimum daily and weekly liquid
asset requirements to better equip
money market funds to manage
significant and rapid investor
redemptions. In addition, we proposed
certain form amendments to improve
transparency and facilitate Commission
monitoring of money market funds. As
part of the proposal, the Commission
proposed to amend rule 2a–7 to prohibit
a stable net asset value (‘‘NAV’’) money
market fund from using share
cancellation or a reverse distribution
mechanism in a negative interest rate
environment.
The Commission received comment
letters on the proposal from a variety of
commenters, including funds and
investment advisers, law firms, other
fund service providers, investor
advocacy groups, professional and trade
associations, and interested
individuals.7 As discussed in greater
detail throughout this release, these
commenters expressed a diversity of
views. Many commenters expressed
support for aspects of the proposal,
including removing the link between
liquidity thresholds and the imposition
of redemption gates and liquidity fees;
increasing the minimum daily and
weekly liquid asset requirements above
6 Money Market Fund Reforms, Investment
Company Act Release No. 34441 (Dec. 15, 2021) [87
FR 7248 (Feb. 8, 2022)] (‘‘Proposing Release’’).
7 The comment letters on the Proposing Release
(File No. S7–22–21) are available at https://
www.sec.gov/comments/s7-22-21/s72221.htm.
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current minimums; and clarifying the
calculation of weighted average
portfolio maturity and weighted average
life maturity.8 Many commenters,
however, expressed concern about the
consequences of the proposed swing
pricing requirement, suggesting, among
other reasons, that it would be
operationally difficult and may not
effectively prevent destabilizing runs
during periods of stress.9 Separately,
several commenters expressed that the
Commission should adopt more modest
increases to the daily and weekly liquid
asset requirements than proposed.10
Many commenters also generally
opposed the proposed clarification of
how stable net asset value money
market funds should handle a negative
interest rate environment, stating that
the proposed prohibition from using
share cancellation in certain negative
interest environments could be
operationally burdensome and costly
without clear benefits for investors.11
Lastly, while some commenters were
supportive of the proposed
modifications to the fund reporting
requirements, others expressed concern
about the sensitivity or burdens of
reporting certain information regarding
money market fund investors or
portfolios, as well as significant declines
in liquidity.12
After considering the comments on
the proposal, we are adopting rule and
form amendments to improve the
resilience and transparency of money
market funds, with certain
modifications.13 As proposed, the final
amendments will remove the
redemption gate provision from rule 2a7; increase the minimum daily and
8 See, e.g., Comment Letter of Investment
Company Institute (Apr. 11, 2022) (‘‘ICI Comment
Letter’’); Comment Letter of Americans for
Financial Reform Education Fund (Apr. 11, 2022)
(‘‘Americans for Financial Reform Comment
Letter’’).
9 See, e.g., Comment Letter of The Asset
Management Group of the Securities Industry and
Financial Markets Association (Apr. 11, 2022)
(‘‘SIFMA AMG Comment Letter’’); Comment Letter
of State Street Global Advisors (Apr. 11, 2022)
(‘‘State Street Comment Letter’’).
10 See, e.g., Comment Letter of Western Asset
Management Company, LLC (Apr. 11, 2022)
(‘‘Western Asset Comment Letter’’); Comment Letter
of Healthy Markets Association (Apr. 12, 2022)
(‘‘Healthy Markets Association Comment Letter’’).
11 See, e.g., Comment Letter of Federated Hermes
Inc. (Apr. 11, 2022) (‘‘Federated Hermes Comment
Letter I’’); Comment Letter of Allspring Funds
Management, LLC (Apr. 11, 2022) (‘‘Allspring
Funds Comment Letter’’); Comment Letter of
Fidelity Management Research Company LLC (Apr.
11, 2022) (‘‘Fidelity Comment Letter’’).
12 See infra section II.F.
13 We have consulted and coordinated with the
Consumer Financial Protection Bureau regarding
this final rulemaking in accordance with section
1027(i)(2) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act.
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weekly liquid asset requirements to
25% and 50%, respectively; specify the
weighted average portfolio maturity and
weighted average life maturity
calculations; and require public
reporting of significant declines in
liquidity on Form N–CR. However, we
are not adopting the proposed swing
pricing requirement. Rather, the final
amendments will modify the current
liquidity fee framework to require
institutional prime and institutional taxexempt money market funds to impose
a liquidity fee when the fund
experiences net redemptions that
exceed 5% of net assets, while also
allowing any non-government money
market fund to impose a discretionary
liquidity fee if the board determines a
fee is in the best interest of the fund.
Similar to the proposed swing pricing
requirement, the liquidity fee
framework is designed to better allocate
liquidity costs associated with
redemptions to the redeeming investors.
In addition, in a change from the
proposal, the final amendments will
permit retail and government money
market funds to use a reverse
distribution mechanism if negative
interest rates occur in the future with
certain conditions, including
appropriate disclosure to concisely and
clearly describe to shareholders the
fund’s use of a reverse distribution
mechanism and its effect on investors.
Moreover, while we are adopting the
amended reporting requirements for
Form N–MFP largely as proposed, we
are making modifications to certain
aspects of the requirements in response
to commenter concerns about the
sensitivity of publicly reporting certain
investor and portfolio information. We
are also adopting, largely as proposed in
a January 2022 Proposing Release,
amendments to Form PF reporting
requirements for large liquidity fund
advisers.14 The final amendments to
Form PF generally are designed to align
with relevant revisions we are making to
Form N–MFP. Finally, we are adopting
two technical amendments to Form N–
CSR and Form N–1A to correct errors
from recent Commission rulemakings.
A. Role of Money Market Funds and
Existing Regulatory Framework
Money market funds are managed
with the goal of providing principal
stability by investing in high-quality,
short-term debt securities—such as
Treasury bills, repurchase agreements,
14 Amendments to Form PF to Require Current
Reporting and Amend Reporting Requirements for
Large Private Equity Advisers and Large Liquidity
Fund Advisers, Investment Advisers Act Release
No. 5950 (Jan. 26, 2022) [87 FR 9106 (Feb. 17,
2022)] (‘‘Form PF Proposing Release’’).
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or commercial paper—whose value does
not fluctuate significantly in normal
market conditions. Money market fund
investors receive dividends that reflect
prevailing short-term interest rates and
have access to daily liquidity, as money
market fund shares are redeemable on
demand. The combination of limited
principal volatility, diversification of
portfolio securities, payment of shortterm yields, and liquidity has made
money market funds popular cash
management vehicles for retail and
institutional investors. Money market
funds also serve as an important source
of short-term financing for businesses,
banks, and governments.
Different types of money market funds
exist to meet differing investor needs.
‘‘Prime money market funds’’ hold a
variety of taxable short-term obligations
issued by corporations and banks, as
well as repurchase agreements and
asset-backed commercial paper.15
‘‘Government money market funds,’’
which are currently the largest category
of money market fund, almost
exclusively hold obligations of the U.S.
Government, including obligations of
the U.S. Treasury and Federal agencies
and instrumentalities, as well as
repurchase agreements collateralized by
government securities.16 Compared to
prime funds, government money market
funds generally offer greater safety of
principal but historically have paid
lower yields. ‘‘Tax-exempt money
market funds’’ (or ‘‘municipal money
market funds’’) primarily hold
obligations of state and local
governments and their
instrumentalities, and pay interest that
is generally exempt from Federal
income tax for individual taxpayers.17
Within the prime and tax-exempt
money market fund categories, some
funds are ‘‘retail’’ funds and others are
‘‘institutional’’ funds. Retail money
15 Commission staff regularly publish
comprehensive data regarding money market funds
on the Commission’s website, available at https://
www.sec.gov/divisions/investment/mmfstatistics.shtml. This data includes information
about the monthly holdings of prime money market
funds by type of security. Staff reports and other
staff documents (including those cited herein)
represent the views of Commission staff and are not
a rule, regulation, or statement of the Commission.
The Commission has neither approved nor
disapproved the content of these documents and,
like all staff statements, they have no legal force or
effect, do not alter or amend applicable law, and
create no new or additional obligations for any
person.
16 Some government money market funds
generally invest at least 80% of their assets in U.S.
Treasury obligations or repurchase agreements
collateralized by U.S. Treasury securities and are
called ‘‘Treasury money market funds.’’
17 In this release, we also use the term ‘‘nongovernment money market fund’’ to refer to prime
and tax-exempt money market funds.
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market funds are held only by natural
persons, and institutional funds can be
held by a wider range of investors, such
as corporations, small businesses, and
retirement plans.18
To some extent, different types of
money market funds are subject to
different requirements under rule 2a–7.
One primary example is a fund’s
approach to valuation and pricing.
Government and retail money market
funds can rely on valuation and pricing
techniques that generally allow them to
sell and redeem shares at a stable share
price, typically $1.00, without regard to
small variations in the value of the
securities in their portfolios.19 If the
fund’s stable share price and marketbased value per share deviate by more
than one-half of 1%, the fund’s board
may determine to adjust the fund’s
share price below $1.00, which is also
colloquially referred to as ‘‘breaking the
buck.’’ 20 Institutional prime and
institutional tax-exempt money market
funds, however, are required to use a
‘‘floating’’ NAV per share to sell and
redeem their shares, based on the
current market-based value of the
securities in their underlying portfolios
rounded to the fourth decimal place
(e.g., $1.0000). These institutional funds
are required to use a floating NAV
because their investors have historically
made the heaviest redemptions in times
of market stress and are more likely to
act on the incentive to redeem if a
fund’s stable price per share is higher
than its market-based value.21
As of March 2023, there were
approximately 294 money market funds
registered with the Commission, and
these funds collectively held over $5.7
trillion of assets.22 The vast majority of
these assets are held by government
money market funds ($4.4 trillion),
followed by prime money market funds
($1 trillion) and tax-exempt money
18 A retail money market fund is defined as a
money market fund that has policies and
procedures reasonably designed to limit all
beneficial owners of the fund to natural persons.
See 17 CFR 270.2a–7(a)(21) (rule 2a–7(a)(21)).
19 See Proposing Release, supra note 6, at n.10
(discussing amortized cost method and penny
rounding cost method); see also 17 CFR 270.2a–
7(c)(1)(i) and (g)(1) and (2). Throughout this release,
we generally use the term ‘‘stable share price’’ or
‘‘stable NAV’’ to refer to the stable share price that
these money market funds seek to maintain and
compute for purposes of distribution, redemption,
and repurchases of fund shares.
20 These funds must compare their stable share
price to the market-based value per share of their
portfolios at least daily.
21 See Proposing Release, supra note 6, at n.12.
22 Money Market Fund Statistics, Form N–MFP
Data, period ending Mar. 2023, available at: https://
www.sec.gov/files/mmf-statistics-2023-03.pdf. This
data excludes ‘‘feeder’’ funds to avoid double
counting assets.
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market funds ($119 billion).23 Of prime
money market funds’ assets,
approximately 44% are held by retail
prime money market funds, with the
remaining assets almost evenly split
between institutional prime money
market funds that are offered to the
public and institutional prime money
market funds that are not offered to the
public.24 The vast majority of taxexempt money market fund assets are
held by retail funds.
The Commission adopted rule 2a–7 in
1983 and has amended the rule several
times over the years, including in 2010
and 2014, in response to market events
that have highlighted money market
fund vulnerabilities.25 Among other
things, these past reforms introduced
minimum daily and weekly liquid asset
requirements, provided for redemption
gates and liquidity fees as available
tools when a fund’s liquidity drops
below a threshold, required institutional
money market funds to use floating
NAVs, and improved transparency
through reporting and website posting
requirements.26
In addition to reforms for money
market funds, in 2014 the Commission
introduced new reporting requirements
for large advisers of liquidity funds on
Form PF to better align reporting
obligations of advisers regarding private
liquidity funds to those of money
market funds, in order to help the
Commission have a more complete
picture of the broader short-term
financing market.27 Liquidity funds
follow similar investment strategies as
money market funds, but investment
advisers are not required to register
liquidity funds as investment
companies under the Act. Liquidity
funds are a relatively small but
important category of private funds due
to the role they play along with money
market funds as sources, and users, of
liquidity in markets for short-term
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23 Id.
24 Some asset managers establish privately offered
money market funds to manage cash balances of
other affiliated funds and accounts.
25 See Proposing Release, supra note 6, at n.16
and accompanying text (providing more detail
related to previous Commission actions and
government intervention following the 2008
financial crisis).
26 Money Market Fund Reform, Investment
Company Act Release No. 29132 (Feb. 23, 2010) [75
FR 10060 (Mar. 4, 2010)] (‘‘2010 Adopting
Release’’); Money Market Fund Reform;
Amendments to Form PF, Investment Company Act
Release No. 31166 (July 23, 2014) [79 FR 47735
(Aug. 14, 2014)] (‘‘2014 Adopting Release’’).
27 Generally, investment advisers registered (or
required to be registered) with the Commission with
at least $150 million in private fund assets under
management must file Form PF.
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financing.28 Similar to money market
funds, liquidity funds are managed with
the goal of maintaining a stable net asset
value or minimizing principal volatility
for investors. However, liquidity funds
are not required to comply with the risklimiting conditions of rule 2a–7, such as
the restrictions on the maturity,
diversification, credit quality, and
liquidity of investments. Consequently,
liquidity funds may take on greater risks
and, as a result, may be more sensitive
to market stress relative to money
market funds.
B. March 2020 Market Events and Need
for Reform
As discussed in the Proposing
Release, 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.29
Institutional investors, in particular,
sought highly liquid investments,
including government money market
funds.30 In contrast, institutional prime
and institutional tax-exempt money
market funds experienced outflows
beginning the week of March 9, 2020,
which accelerated the following week.31
Outflows from retail prime and retail
tax-exempt funds began the week of
March 16, a week after outflows in
institutional funds began.
During the two-week period of March
11 to 24, publicly offered institutional
prime funds had a 30% redemption rate
(about $100 billion), which included
outflows of approximately 20% of assets
during the week of March 20 alone.32 In
contrast, privately offered institutional
prime funds had redemptions of 3% of
assets during the week of March 20, and
lost approximately 6% of their total
assets ($17 billion) from March 9
through 20. Retail prime funds had
outflows of approximately 11% of their
total assets ($48 billion) in the last three
weeks of March 2020. Outflows from
tax-exempt money market funds, which
are mostly retail funds, were
approximately 8% of their total assets
($12 billion) from March 12 through 25.
28 As of Sept. 2022, there were 79 liquidity funds
reported on Form PF with $336 billion in gross
assets under management.
29 See SEC Staff Report on U.S. Credit Markets
Interconnectedness and the Effects of the COVID–
19 Economic Shock (Oct. 2020) (‘‘SEC Staff
Interconnectedness Report’’), at 2, available at
https://www.sec.gov/files/US-Credit-Markets_
COVID-19_Report.pdf.
30 More specifically, government money market
funds had record inflows of $838 billion in Mar.
2020 and an additional $347 billion of inflows in
Apr. 2020. See id. at 25.
31 Id.
32 See Proposing Release, supra note 6, at n.30.
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The Proposing Release discussed the
potential factors that incentivized
investors to redeem from certain money
market funds in March 2020.33 These
factors included concerns about the
potential imposition of redemption
gates or liquidity fees based on observed
declines in some funds’ weekly liquid
assets, general concerns about declining
fund liquidity, general uncertainty
related to a global health crisis and fears
of associated economic downturns, and
the need to meet near-term cash needs
unrelated to the market stress. The
Proposing Release also discussed data
regarding the relationship between a
fund’s weekly liquid asset levels and the
amount of outflows it experienced in
March 2020. The data showed that
funds with lower weekly liquid asset
levels were more likely to have
significant outflows in March 2020, but
some funds with higher levels of
liquidity also experienced large
outflows.34
These outflows caused some money
market funds to engage in greater than
normal selling activity in short-term
funding markets which, when combined
with similar selling activity from other
market participants such as hedge funds
and bond mutual funds, both
contributed to, and was impacted by,
stress in short-term funding markets.35
In markets for private short-term debt
instruments, such as commercial paper
and certificates of deposit, conditions
significantly deteriorated in the second
week of March 2020. These markets, in
which prime money market funds and
other participants invest, essentially
became ‘‘frozen’’ in March 2020, making
it more difficult to sell these
instruments, which have limited
secondary trading even in normal
market conditions.36 Similarly, stresses
in short-term municipal markets
contributed to pricing pressures and
outflows for tax-exempt money market
funds which, in turn, contributed to
increased stress in municipal markets.37
One factor that appears to have
contributed to money market funds’
sales of long-term portfolio securities is
the incentive fund managers had to
maintain weekly liquid assets above
30% in an effort to avoid investors’
concerns about the possibility of
redemption gates or liquidity fees under
our current rule.38
33 Id.,
at n.42 and accompanying discussion.
at n.44.
35 See Proposing Release, supra note 6, at n.54
and accompanying discussion.
36 Id.
37 Id.
38 Id., at n.77 and accompanying discussion.
34 Id.,
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On March 18, 2020, the Federal
Reserve, with the approval of the
Department of the Treasury, broadened
its program of support for the flow of
credit to households and businesses by
taking steps to enhance the liquidity
and functioning of money markets with
the establishment of the Money Market
Mutual Fund Liquidity Facility
(‘‘MMLF’’). The MMLF provided loans
to financial institutions on
advantageous terms to purchase
securities from money market funds that
were raising liquidity, thereby helping
enhance overall market functioning and
credit provisions to the broader
economy.39 MMLF utilization reached a
peak of just over $50 billion in early
April 2020, or about 5% of net assets in
prime and tax-exempt money market
funds at the time.40 Along with other
Federal Reserve actions and programs to
support the short-term funding markets,
the MMLF had the effect of significantly
slowing outflows from prime and taxexempt money market funds.41 The
MMLF ceased providing loans in March
2021.
Commenters generally agreed that the
growing economic concerns related to
the impact of the COVID–19 pandemic
led investors to seek liquidity in the
form of cash and short-term government
securities in March 2020, leading to
outflows from prime money market
funds and significant inflows to
government money market funds.42
Commenters also acknowledged that the
markets for private short-term debt
instruments, such as commercial paper
and certificates of deposit, significantly
deteriorated during this period.43
However, some commenters questioned
the nexus between the liquidity crisis in
the short-term funding markets and the
outflows from prime money market
funds, asserting that events in the
money market fund market were not a
significant cause of the liquidity issues
in the short-term funding markets in
March 2020.44 Accordingly, some
commenters suggested that any reform
exclusive to money market funds by
themselves will likely not address the
broader liquidity challenges in the
short-term funding markets.45 Going
further, a few commenters expressed
that the proposed reforms would have
negative impacts to the short-term
funding markets because they would
reduce the demand for prime money
market funds, thereby reducing capacity
in the short-term funding markets.46
Some of these commenters encouraged
the Commission, and policymakers
more generally, to re-examine the shortterm funding markets and the various
events surrounding the volatility in
March 2020, and to consider available
tools other than reforms to the money
market fund regulatory framework, that
would improve resiliency in this
segment of our markets.47 Conversely,
other commenters asserted that liquidity
issues with money market funds served
as a source of significant contagion that
imperiled the short-term markets
broadly and forced government
intervention.48 Some of these
commenters suggested that the
Commission should consider more
aggressive reforms to solve the unique
problems presented by money market
funds, mainly that they are hybrid
instruments that embody elements of
both securities investments and banking
products that are treated as cash-like by
investors.49
We understand that money market
funds are not the totality of the shortterm funding markets and that the
reforms discussed in this adopting
release may not solve all future issues
connected to the short-term funding
markets. However, we believe the events
of March 2020 evidence that money
39 Information about the MMLF is available on the
Federal Reserve’s website at https://
www.federalreserve.gov/monetarypolicy/mmlf.htm.
The Federal Reserve Bank of Boston operated the
MMLF.
40 See Proposing Release, supra note 6, at n.36.
41 Id., at n.37.
42 See, e.g., ICI Comment Letter; Comment Letter
of The Vanguard Group, Inc. (Apr. 11, 2022)
(‘‘Vanguard Comment Letter’’); Comment Letter of
Professors Samuel G. Hanson, David S. Scharfstein,
and Adi Sunderam, Harvard Business School (Apr.
11, 2022) (‘‘Prof. Hanson et al. Comment Letter’’);
Comment Letter of Blackrock (Apr. 11, 2022)
(‘‘BlackRock Comment Letter’’); Comment Letter of
the CFA Institute (Apr. 11, 2022) (‘‘CFA Comment
Letter’’).
43 See, e.g., Comment Letter of Invesco Ltd. (Apr.
11, 2022) (‘‘Invesco Comment Letter’’); Vanguard
Comment Letter; BlackRock Comment Letter
(asserting that they struggled to find bids from
dealer banks in the secondary market for much of
the commercial paper, bank certificates of deposits,
or municipal debt they were holding).
44 See, e.g., ICI Comment Letter; Federated
Hermes Comment Letter I; Invesco Comment Letter;
Vanguard Comment Letter; BlackRock Comment
Letter; Healthy Markets Association Comment
Letter.
45 See, e.g., ICI Comment Letter; Federated
Hermes Comment Letter I; Invesco Comment Letter;
Vanguard Comment Letter; BlackRock Comment
Letter.
46 See, e.g., SIFMA AMG Comment Letter;
Comment Letter of J.P. Morgan Asset Management
(Apr. 11, 2022) (‘‘JP Morgan Comment Letter’’).
47 See, e.g., JP Morgan Comment Letter; Federated
Hermes Comment Letter I; ICI Comment Letter
(recommending adjusting bank regulations to
enable banks and their dealers to expand their
balance sheets to provide market liquidity during
periods of market stress without materially
reducing the overall resilience of those firms).
48 See, e.g., Comment Letter of Better Markets
(Apr. 11, 2022) (‘‘Better Markets Comment Letter’’);
CFA Comment Letter.
49 See, e.g., Better Markets Comment Letter; Prof.
Hanson et al. Comment Letter.
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market funds need better functioning
tools for managing through stress while
mitigating harm to shareholders.
Specifically, in addition to requiring
higher liquidity minimums to prepare
for significant and rapid investor
redemptions, funds need to be able to
use that liquidity when such
redemptions occur. In addition, to
prevent redeeming shareholders from
diluting the interests of remaining
shareholders by removing liquidity from
the fund in times of market stress, when
liquidity in underlying short-term
funding markets is scarce and costly,
funds need tools to ensure that liquidity
costs are fairly allocated to redeeming
investors. Moreover, while the period of
market stress in March 2020 was
relatively brief, it is important to
consider that future stressed periods—
whether specific to certain money
market funds or the short-term funding
markets more generally—may be more
protracted or more severe than in March
2020, particularly absent Federal
Reserve action. We believe that these
needs for better functioning tools to
manage through stress while mitigating
harm to shareholders can be met while
preserving the benefits that investors
have come to expect from money market
funds. Accordingly, we are adopting
amendments to rule 2a–7 and related
reporting and registration forms that are
designed to achieve these key objectives
and to reflect our experience with the
rule since it was initially adopted in
1983.50
II. Discussion
A. Amendments To Remove the Tie
Between the Weekly Liquid Asset
Threshold and Redemption Gates and
Liquidity Fees
1. Unintended Effects of the Tie
Between the Weekly Liquid Asset
Threshold and Liquidity Fees and
Redemption Gates
Following amendments to rule 2a–7
in 2014, a money market fund has the
ability to impose liquidity fees or
redemption gates (generally referred to
as ‘‘fees and gates’’) after crossing a
specified liquidity threshold.51 A
money market fund may impose a
liquidity fee of up to 2%, or temporarily
suspend redemptions for up to 10
business days in a 90-day period, if the
50 See generally Valuation of Debt Instruments
and Computation of Current Price Per Share by
Certain Open-End Investment Companies (Money
Market Funds), Investment Company Act Release
No. 13380 (July 11, 1983) [48 FR 32555 (July 18,
1983)].
51 Government funds are permitted, but not
required, to impose fees and gates, as discussed
below. See 17 CFR 270.2a–7(c)(2); 2014 Adopting
Release, supra note 26.
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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.52 Additionally, a nongovernment money market fund is
required to impose a liquidity fee of 1%
on all redemptions if its weekly liquid
assets fall below 10% of its total assets,
unless the board of directors of the fund
determines that imposing such a fee
would not be in the best interests of the
fund.53 Separately, a money market
fund is required to provide daily
disclosure of the percentage of its total
assets invested in weekly liquid assets
(as well as daily liquid assets) on its
website to provide transparency to
investors and increase market
discipline.54
Money market fund fees and gates
below these thresholds were intended to
serve as redemption restrictions that
would provide a ‘‘cooling off’’ period to
temper the effects of a short-term
investor panic and preserve liquidity
levels in times of market stress, as well
as better allocate the costs of providing
liquidity to redeeming investors.55
However, these provisions did not
achieve these objectives during the
period of market stress in March 2020.
As discussed in the Proposing Release,
evidence suggests that in March 2020,
even though no money market fund
imposed a liquidity fee or gate, the
possibility of their imposition after
crossing the publicly disclosed 30%
weekly liquid asset threshold appears to
have contributed to investors’ incentives
to redeem from prime money market
funds.56 The presence of this threshold
appears to have increased investor
redemption activity as prime and taxexempt money market funds
approached the 30% weekly liquid asset
level.57 Further, this liquidity threshold
also appeared to affect money market
fund managers’ behavior in March 2020
and contributed to incentives for money
market fund managers to maintain
weekly liquid asset levels above a 30%
weekly liquid asset threshold, rather
than use those assets to meet
52 If, at the end of a business day, a fund has
invested 30% or more of its total assets in weekly
liquid assets, the fund must cease charging the
liquidity fee (up to 2%) or imposing the redemption
gate, effective as of the beginning of the next
business day. See 17 CFR 270.2a–7(c)(2)(i).
53 The board also may determine that a lower or
higher fee would be in the best interests of the fund.
See 17 CFR 270.2a–7(c)(2)(ii)(A).
54 17 CFR 270.2a–7(h)(10)(ii); 2014 Adopting
Release, supra note 26, at section III.E.9.a.
55 See 2014 Adopting Release, supra note 26, at
section III.A.
56 See Proposing Release, supra note 6, at section
I.B.
57 See id.
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redemptions.58 Thus, contrary to its
intended benefit, this threshold
appeared to heighten prime and taxexempt money market funds’
susceptibility to heavy redemptions as
funds’ publicly disclosed weekly liquid
assets approached it and increased the
lack of liquidity in underlying shortterm funding markets in March 2020.
In addition, as discussed in the
Proposing Release, it appears that
money market fund investors are more
sensitive to the possibility of
redemption gates than the possibility of
liquidity fees.59 While liquidity fees
impose a cost for an investor to redeem,
gates outright stop redemptions for the
duration of the gate. Money market fund
investors—who typically invest in
money market funds for cash
management purposes—are generally
sensitive to being unable to access their
investments for a period of time and
have a tendency to redeem from such
funds preemptively if they fear a gate
may be imposed.
Many commenters agreed with the
Commission’s assessment that the
regulatory link between a known
liquidity threshold and the imposition
of fees and gates contributed to
investors’ incentives to redeem from
money market funds in March 2020.60
Many commenters also agreed with the
Commission’s assessment that the
weekly liquid asset threshold also
contributed to incentives for managers
to avoid falling below this threshold.61
One commenter suggested that
removing the regulatory link between
weekly liquid assets and redemption
gates (and liquidity fees) would free up
an additional 30% of liquidity that
58 See id. See also ICI Comment Letter; SIFMA
AMG Comment Letter.
59 See Proposing Release, supra note 5, at nn. 75–
76 and accompanying text (discussing comment
letters that expressed views that the possibility of
redemption gates was a greater concern for
investors, particularly institutional investors, in
Mar. 2020 than the possibility of liquidity fees and
that retail investors appeared less sensitive to fees
and gates than institutional investors).
60 See, e.g., Comment Letter of Morgan Stanley
Investment Management Inc. (Apr. 8, 2022)
(‘‘Morgan Stanley Comment Letter’’); ICI Comment
Letter; Comment Letter of Northern Trust Asset
Management (Mar. 24, 2022) (‘‘Northern Trust
Comment Letter’’); Fidelity Comment Letter; see
also Proposing Release, supra note 6, at section
II.A.1 (‘‘Available evidence, supported by many
comment letters in response to the Commission’s
request for comment [ ] suggested that funds’
incentives to maintain weekly liquid assets above
the 30% threshold were directly tied to investors’
concerns about the possibility of redemption gates
and liquidity fees under our rules if a fund drops
below that threshold.’’).
61 See, e.g., ICI Comment Letter, Comment Letter
of T. Rowe Price (Apr. 11, 2022) (‘‘T. Rowe
Comment Letter’’); JP Morgan Comment Letter.
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51409
funds could use in a crisis similar to
March 2020.62
Several commenters stated that the
potential imposition of redemption
gates in particular, as opposed to
liquidity fees, drove instability and
redemptions in March 2020.63 For
example, one commenter suggested that
the mere possibility that fund boards
may impose gates was a key factor that
contributed significantly to the stresses
experienced by publicly offered
institutional prime funds in March
2020.64 Another commenter stated that,
based on a survey of institutional
investor clients, investors were
particularly concerned about gates and
perceived the 30% weekly liquid asset
threshold as a ‘‘bright line’’ not to be
crossed.65 An additional commenter
stated that, based on data and
discussions with its member funds, the
possibility of a gate especially caused
investors in March 2020 to redeem
heavily.66
Thus, based on available evidence
and as suggested by many commenters,
the weekly liquid asset threshold for
consideration of fees and gates appear to
have potentially increased the risks of
investor runs without providing benefits
to money market funds as intended by
the Commission. In addition, money
market fund investors have
demonstrated particular sensitivity to
the possibility of gates and the
corresponding lack of access to their
investments, and these concerns appear
to have incentivized redemptions in
March 2020 more so than any concerns
about the possibility of fees.
Accordingly, after considering the
comments received, we are adopting
amendments to the fee and gate
provisions in rule 2a–7 to remove the
regulatory link between weekly liquid
assets and fees and gates. As discussed
below, we are amending rule 2a–7 to
remove gate provisions altogether and
amending the liquidity fee structure to
remove weekly liquid asset-linked
thresholds and implement a modified
liquidity fee framework that will
provide for both mandatory and
discretionary liquidity fees. We believe
these changes will provide more
effective tools for money market funds
to use to mitigate short-term investor
panic and preserve liquidity levels in
times of market stress, as well as better
62 See
Federated Hermes Comment Letter I.
e.g., Fidelity Comment Letter; Northern
Trust Comment Letter; Comment Letter of the
Institute of International Finance (Apr. 11, 2022)
(‘‘IIF Comment Letter’’); ICI Comment Letter.
64 See Fidelity Comment Letter.
65 See JP Morgan Comment Letter.
66 See ICI Comment Letter.
63 See,
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allocate the costs of providing liquidity
to redeeming investors.
2. Removal of Redemption Gates From
Rule 2a–7
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We are adopting, as proposed, the
removal of money market funds’ ability
through rule 2a–7 to temporarily
suspend redemptions (i.e., impose a
‘‘gate’’).67 In the Proposing Release, we
discussed our concern that gates may
not be an effective tool for money
market funds to stem heavy
redemptions in times of stress due to
money market fund investors’ general
sensitivity to being unable to access
their investments for a period of time
and tendency to redeem from funds
preemptively if they fear a gate may be
imposed. We believe that removing gate
provisions altogether from rule 2a–7
will reduce the risk of investor runs on
money market funds during periods of
market stress. Money market funds will
continue to be able to impose
permanent gates to facilitate an orderly
liquidation of a fund pursuant to 17 CFR
270.22e–3 (‘‘rule 22e–3’’), and we are
not adopting any changes to that rule.68
Many commenters generally
supported the proposal to remove
redemption gates in rule 2a–7.69 Several
of these commenters stated that use of
rule 22e–3 to suspend redemptions in
connection with a fund liquidation
would be sufficient to address scenarios
in which a fund may need to suspend
redemptions.70 One such commenter
suggested that any money market fund
that needed to impose a gate would
likely need to fully liquidate, making
rule 22e–3 sufficient for these
purposes.71
Some commenters supported
removing the tie between the weekly
liquid asset threshold and a fund’s
ability to impose a gate but suggested
that gates could still be a useful tool
outside of a fund liquidation. These
commenters suggested that fund boards
67 See Proposing Release, supra note 6, at section
II.A.2.
68 See 17 CFR 270.22e–3. Rule 22e–3 under the
Act permits money market funds to suspend
redemptions and postpone the payment of proceeds
in connection with a liquidation upon certain
declines in liquidity or deviations between marketbased and stable prices, board approval of
liquidation, and notice to the Commission.
69 See, e.g., Western Asset Comment Letter;
Morgan Stanley Comment Letter; Vanguard
Comment Letter; CFA Comment Letter; SIFMA
AMG Comment Letter; Comment Letter of the
Committee on Capital Markets Regulation (Apr. 11,
2022) (‘‘CCMR Comment Letter’’); T. Rowe
Comment Letter.
70 See Allspring Funds Comment Letter; CFA
Comment Letter; IIF Comment Letter; Northern
Trust Comment Letter; SIFMA AMG Comment
Letter.
71 See Invesco Comment Letter.
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should have broader discretion to
impose gates without linkage to a
weekly liquid asset threshold.72 Some
commenters suggested that the rule
should permit fund boards to impose a
gate if the board determines a gate is in
the best interests of the fund and its
shareholders, subject to certain policies
and procedures, disclosure, and
reporting requirements.73 Another
commenter suggested that fund boards
should have complete discretion with
respect to imposing gates but that the
SEC should require relevant
disclosures.74
After considering these comments, we
continue to believe that the removal of
money market funds’ ability to impose
gates through rule 2a–7 is appropriate.75
By removing the gate provision, either
with or without an associated liquidity
threshold, we seek to limit the potential
for investor uncertainty and destabilizing preemptive investor
redemption behavior related to the
potential use of gates during stress
events as well as to better encourage
funds to more effectively use their
existing liquidity buffers in times of
stress. As discussed above, rather than
providing an effective tool for money
market funds to manage redemption
pressures during a period of stress, the
potential availability of gates under
prescribed parameters exacerbated the
redemption pressures experienced by
some funds during March 2020.
Retaining a gate provision under rule
2a–7 without an associated liquidity
threshold, as suggested by some
commenters, could result in continuing
investor uncertainty and may contribute
to preemptive investor redemption
behavior during stress events. In normal
and stressed markets, shareholders may
need or want to access their funds for
various reasons, including to meet nearterm cash needs. When in place, a gate
fully inhibits the redeemability of the
money market fund shares for the
duration of the gate, thereby blocking
shareholders’ access to their shares. We
believe this complete halt to
72 See Federated Hermes Comment Letter I;
Comment Letter of Federated Hermes Funds Board
of Trustees (Apr. 11, 2022) (‘‘Federated Hermes
Fund Board Comment Letter’’); Comment Letter of
the Cato Inst. (Feb. 10, 2022) (‘‘Cato Inst. Comment
Letter’’).
73 See Federated Hermes Comment Letter I
(stating that funds should be required to report the
basis for imposing temporary gates to the
Commission); Federated Hermes Fund Board
Comment Letter.
74 See Cato Inst. Comment Letter.
75 As proposed, in addition to removing the gate
provisions from rule 2a–7, we are also removing
associated disclosure and reporting requirements
about a fund’s potential or actual imposition of
gates. See Items 4(b)(1)(ii) and 16(g) of current Form
N–1A; Parts F and G of current Form N–CR.
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redemptions, even if temporary, has the
potential to significantly incentivize
preemptive redemptions. As discussed
above, several commenters stated that
fear of gates in particular contributed to
redemptions in March 2020. Removing
the link to a publicly disclosed liquidity
threshold seemingly would expand the
current gate provisions under rule 2a–7,
potentially increasing investor
uncertainty regarding when a fund may
impose a gate. Even if such action by a
money market fund board is unlikely to
occur, as suggested by some
commenters,76 the mere possibility of a
gate would persist and thus investor
uncertainty and fear may remain,
particularly when there are signs that a
fund or short-term funding markets are
under stress. Accordingly, we are
removing the gate provision from rule
2a–7 to avoid this unintended outcome.
In light of the proposed removal of
gates under rule 2a–7, some commenters
suggested additional amendments to
rule 22e–3. This rule generally allows a
money market fund to suspend
redemptions if, among other conditions,
(1) the fund has invested less than 10%
of its total assets in weekly liquid assets
or, in the case of a government or retail
money market fund, the fund’s marketbased price per share has deviated or is
likely to deviate from its stable price,
and (2) the fund’s board has approved
the fund’s liquidation. Some
commenters suggested that the SEC
remove the weekly liquid asset
threshold enumerated in rule 22e–3 and
give fund boards more flexibility to
approve liquidations.77 One of these
commenters suggested that the weekly
liquid asset threshold in rule 22e–3
would not remain meaningful because
of the Commission’s proposal to remove
the liquidity fee provisions from rule
2a–7, including the default liquidity fee
provision for non-government money
market funds with weekly liquid assets
that fall below 10%.78
We do not agree that expanding the
availability of rule 22e–3 is appropriate.
Rule 22e–3 provides a mechanism for a
money market fund to permanently
suspend redemptions when the fund is
under significant stress to facilitate an
orderly liquidation. While the
amendments in this release include the
removal of a default liquidity fee
provision for non-government money
market funds linked to a 10% weekly
liquid asset threshold, we do not agree
76 See, e.g., Comment Letter of Mutual Fund
Directors Forum (Apr. 11, 2022) (‘‘Mutual Fund
Directors Forum Comment Letter’’).
77 See Allspring Funds Comment Letter;
Comment Letter of Dechert LLP (Apr. 11, 2022)
(‘‘Dechert Comment Letter’’).
78 See Dechert Comment Letter.
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with the contention that the significance
of the 10% weekly liquid asset
threshold is thereby meaningfully
reduced with respect to rule 22e–3. Due
to the absolute and significant nature of
a permanent suspension of redemptions
and liquidation, the conditions in rule
22e–3, including the 10% weekly liquid
asset threshold, limit the fund’s ability
to permanently suspend redemptions to
circumstances that present a significant
risk of a run on the fund and potential
harm to shareholders.79 We continue to
believe that where a fund’s weekly
liquid assets fall below 10%, the fund
is reasonably understood to be
experiencing significant stress and
circumstances may present a significant
risk of a run on the fund and potential
harm to shareholders. In these
circumstances, the ability of the board
of directors of such fund to suspend
redemptions in light of a decision to
liquidate can help address the
significant run risk and reduce potential
harm to shareholders. Where a money
market fund is unable to avail itself of
a permanent suspension of redemptions
under rule 22e–3, the fund may suspend
redemptions after obtaining an
exemptive order from the
Commission.80 Accordingly, we are not
adopting amendments to rule 22e–3.
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B. Liquidity Fee Requirement
1. Determination To Adopt a Liquidity
Fee Requirement
After considering comments, we are
adopting a mandatory liquidity fee
framework for institutional prime and
institutional tax-exempt funds instead
of the proposed swing pricing
requirement. We believe the mandatory
liquidity fee will reduce operational
burdens associated with swing pricing
while still achieving many of the
benefits we were seeking with swing
pricing by allocating liquidity costs to
redeeming investors in stressed periods.
In addition, we are adopting a
discretionary liquidity fee for all nongovernment money market funds so that
liquidity fees are an available tool for
such funds to manage redemption
pressures when the mandatory fee does
not apply. Whether the fee is mandatory
or discretionary, we are, as proposed,
removing from rule 2a–7 the tie between
liquidity fees and a fund’s weekly liquid
asset levels to avoid predictable triggers
that may incentivize investors to
preemptively redeem to avoid incurring
fees.81 This liquidity fee framework,
79 See 2010 Adopting Release, supra note 26, at
section II.H.
80 15 U.S.C. 80a–22(e).
81 By ‘‘predictable,’’ we mean that an investor can
use available information to predict whether a fee
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independent of a predictable threshold
for its application, achieves the
intended benefits of the current
liquidity fee regime by allocating
liquidity costs to redeeming
shareholders in times of stress while, in
contrast to the current rule, avoiding
incentives for preemptive redemptions
associated with weekly liquid asset
triggers. An approach solely based on
liquidity fees, as opposed to gates, does
not present the same concerns about
incentivizing redemptions that exist
under current rule 2a–7. As discussed,
money market fund investors seemingly
have been more concerned about the
possibility of redemption gates than the
possibility of liquidity fees.82 This
change is designed to increase the
resilience of money market funds.
The Commission proposed a swing
pricing requirement under which an
institutional prime or institutional taxexempt fund would downwardly adjust
its current NAV per share by a swing
factor when a fund has net redemptions.
The swing factor adjustment would
reflect spread and transaction costs and,
if net redemptions exceeded 4% of the
fund’s net assets, then the swing factor
would also include market impact costs.
The Commission also proposed to
remove the liquidity fee provision in
rule 2a–7, which conditions the use of
liquidity fees upon declines in fund
liquidity below identified, predictable
thresholds, and to specify that money
market funds could instead impose
liquidity fees under 17 CFR 270.22c–2
(‘‘rule 22c–2’’) at their discretion.83
Many commenters expressed broad
concerns about the swing pricing
proposal and its potential effect on
institutional money market funds and
investors. Several commenters stated
that the proposed swing pricing
requirement was incompatible with how
will apply on a given day or on future days. In the
case of weekly liquid assets, an investor can observe
the weekly liquid asset level disclosed for the prior
day and use that information to predict whether the
fund will cross the weekly liquid asset threshold in
the near term. In the case of the net redemption
threshold we are adopting for mandatory liquidity
fees, while an investor can observe net flows for the
prior day, that flow information does not
necessarily predict the fund’s flows for that day or
future days, as net flows depend on independent
investment decisions made by a large number of
investors with differing needs and considerations.
See infra section IV.C.4.a.i.
82 See supra section II.A.1.
83 See 17 CFR 270.22c–2 (rule 22c–2 under the
Investment Company Act) (providing that an openend fund may impose a redemption fee, not to
exceed 2% of the value of the shares redeemed,
upon the determination by the fund’s board of
directors that such fee is necessary or appropriate
to recoup for the fund the costs it may incur as a
result of those redemptions or to otherwise
eliminate or reduce so far as practicable any
dilution of the value of the outstanding securities
issued by the fund).
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51411
money market funds operate and
manage liquidity, which may limit the
utility of these funds as cash
management vehicles.84 For instance,
commenters expressed concern that
swing pricing may inhibit a fund’s
ability to offer features such as same-day
settlement and multiple NAV strikes per
day due to concerns that swing pricing
would delay a fund’s ability to
determine its NAV.85 Some commenters
suggested that swing pricing may
assume a greater degree of liquidity
costs than funds incur to meet
redemptions because money market
funds generally satisfy redemptions
through maturing assets, rather than
secondary market selling activity, and
are equipped to handle relatively large
redemptions with available liquidity.86
Some commenters stated that swing
pricing would introduce greater
volatility in fund share prices and
performance, which they asserted
would reduce investor demand for
institutional money market funds.87 In
addition, some commenters indicated
that the operational costs of the
proposed swing pricing requirement
could cause some sponsors to eliminate
their institutional prime and
institutional tax-exempt money market
funds, particularly smaller funds, and
reduce money market fund assets.88 In
light of these considerations, some
commenters suggested that swing
pricing is not an appropriate tool for
money market funds and stated that a
84 See, e.g., Comment Letter of Independent
Directors Council (Apr. 11, 2022) (‘‘IDC Comment
Letter’’); Mutual Fund Directors Forum Comment
Letter; Comment Letter of The Bank of New York
Mellon (Apr. 11, 2022) (‘‘BNY Mellon Comment
Letter’’); Fidelity Comment Letter; Comment Letter
of State Street Global Advisors (Apr. 11, 2022)
(‘‘State Street Comment Letter’’); Comment Letter of
Federated Hermes, Inc. (Apr. 11, 2022) (‘‘Federated
Hermes Comment Letter II’’) (letter primarily
focused on the proposed swing pricing
requirement).
85 See, e.g., Comment Letter of Capital Group
Companies, Inc. (Apr. 11, 2022) (‘‘Capital Group
Comment Letter’’); State Street Comment Letter; ICI
Comment Letter; Federated Hermes Comment Letter
II; SIFMA AMG Comment Letter; BNY Mellon
Comment Letter.
86 See, e.g., SIFMA AMG Comment Letter;
Comment Letter of American Bankers Association
(Apr. 11, 2022) (‘‘ABA Comment Letter I’’); Invesco
Comment Letter; Fidelity Comment Letter;
Allspring Funds Comment Letter.
87 See SIFMA AMG Comment Letter; Western
Asset Comment Letter; see also Northern Trust
Comment Letter; Federated Hermes Comment Letter
II.
88 See, e.g., JP Morgan Comment Letter;
BlackRock Comment Letter; IDC Comment Letter;
Comment Letter of U.S. Chamber of Commerce,
Center for Capital Markets Competitiveness (Apr.
11, 2022) (‘‘US Chamber of Commerce Comment
Letter’’); CCMR Comment Letter; Comment Letter of
Americans for Tax Reform (Apr. 9, 2022)
(‘‘Americans for Tax Reform Comment Letter’’);
Northern Trust Comment Letter.
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liquidity fee framework would be better
suited to the structure and
characteristics of money market funds,
if the Commission determines that an
anti-dilution tool is necessary for these
funds.89
Commenters expressed different
views on whether the proposed swing
pricing requirement would achieve the
Commission’s goal of ensuring that the
costs stemming from net redemptions
are fairly allocated and do not give rise
to dilution or a potential first-mover
advantage, particularly in times of
stress. A few commenters were
supportive of swing pricing and
suggested that it would enhance the
resilience of money market funds.90
Many commenters, however, expressed
concern that swing pricing would not
achieve the Commission’s goals of
allocating liquidity costs and reducing
dilution and potential first-mover
advantages. Some commenters
suggested that redemptions are not
motivated by a first-mover advantage
and that liquidity, rather than avoiding
dilution from other shareholders’
redemptions, was the motivation for
redemptions in March 2020.91 Some
commenters suggested that swing
pricing would not address first-mover
issues because investors would not
know at the time they submitted
89 See, e.g., ICI Comment Letter (suggesting that,
if data and analysis show that an anti-dilution
mechanism is necessary for public institutional
prime and tax-exempt funds, modifying and
leveraging the existing fee framework would be less
problematic than swing pricing and could serve the
Commission’s goals in a way that avoids imposing
unnecessary operational costs); Invesco Comment
Letter; SIFMA AMG Comment Letter (suggesting
that, to the extent the Commission continues to
believe, based on data driven findings and analysis,
that an additional anti-dilution tool is necessary,
the Commission consider liquidity fees instead of
swing pricing); Federated Hermes Comment Letter
I; Federated Hermes Comment Letter II; Invesco
Comment Letter; Comment Letter of The Charles
Schwab Corporation (Apr. 11, 2022) (‘‘Schwab
Comment Letter’’); Morgan Stanley Comment Letter;
JP Morgan Comment Letter; BlackRock Comment
Letter; State Street Comment Letter; Western Asset
Comment Letter; IIF Comment Letter; Allspring
Funds Comment Letter. Some of the comments
received with respect to the swing pricing proposal
are also relevant to issues implicated by the
liquidity fee mechanism that we are adopting. We
primarily discuss those comments below in the
relevant sections addressing the amended liquidity
fee framework.
90 See, e.g., Americans for Financial Reform
Comment Letter; CFA Comment Letter; Comment
Letter of Systemic Risk Council (Apr. 15, 2022)
(‘‘Systemic Risk Council Comment Letter’’); Better
Markets Comment Letter; Comment Letter of Chris
Barnard (Oct. 19, 2022) (‘‘Chris Barnard Comment
Letter’’).
91 See, e.g., Fidelity Comment Letter; Capital
Group Comment Letter; BlackRock Comment Letter;
Americans for Tax Reform Comment Letter; see also
Federated Hermes Comment Letter I (suggesting
that the 2014 amendments that imposed a floating
NAV on institutional funds sufficiently addressed
first-mover issues).
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redemptions orders if a swing factor
would apply for that pricing period.92
Similarly, another commenter suggested
that small adjustments to a fund’s NAV
would be unlikely to affect a
shareholder’s decision to redeem, even
with a market impact factor.93 Some
other commenters suggested that
uncertainty regarding the application of
swing pricing may in fact increase
incentives for investors to redeem ahead
of others.94
As discussed in the Proposing
Release, swing pricing and liquidity fees
can be economically equivalent in terms
of charging redeeming investors for the
liquidity costs they impose on a fund.95
Both approaches allow funds to
recapture the liquidity costs of
redemptions to make non-redeeming
investors whole. The Commission
considered both approaches in the
Proposing Release and, after
acknowledging that each approach has
certain advantages and disadvantages
over the other, the Commission
expressed the view that swing pricing
appeared to have operational benefits
relative to liquidity fees. For example,
as discussed in the proposal, the
Commission believed swing pricing
would require less involvement by
intermediaries in applying a charge to
redeeming investors than liquidity
fees.96
Many commenters stated that
liquidity fees were preferable to swing
pricing.97 Many of these commenters
stated that liquidity fees would be easier
for money market funds to implement.98
92 See, e.g., Capital Group Comment Letter;
Dechert Comment Letter; Schwab Comment Letter;
Allspring Funds Comment Letter; Federated
Hermes Comment Letter II; JP Morgan Comment
Letter; BlackRock Comment Letter; ICI Comment
Letter; SIFMA AMG Comment Letter; see also US
Chamber of Commerce Comment Letter.
93 See Fidelity Comment Letter.
94 See, e.g., CCMR Comment Letter (suggesting
that swing pricing could incentivize runs as
investors seek to redeem before a market impact
factor is applied); Comment Letter of Institutional
Cash Distributors (Apr. 11, 2022) (‘‘ICD Comment
Letter’’); Prof. Hanson et al. Comment Letter; State
Street Comment Letter.
95 See Proposing Release, supra note 6, at sections
II.B.1 and III.D.5.
96 See id. at paragraph accompanying n.149 and
section III.D.5.
97 See, e.g., Invesco Comment Letter; SIFMA AMG
Comment Letter (stating that liquidity fees offer
many advantages as compared to swing pricing);
Federated Hermes Comment Letter I (suggesting
that a discretionary liquidity fee would be less
onerous than swing pricing); Federated Hermes
Commenter Letter II; Invesco Comment Letter;
Schwab Comment Letter; Morgan Stanley Comment
Letter; JP Morgan Comment Letter; BlackRock
Comment Letter; State Street Comment Letter;
Western Asset Comment Letter; IIF Comment Letter;
Allspring Funds Comment Letter; see also Dechert
Comment Letter; CFA Comment Letter.
98 See, e.g., Federated Hermes Comment Letter II;
Invesco Comment Letter; SIFMA AMG Comment
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For instance, some commenters
suggested that funds would be able to
build on their existing experience with
liquidity fees under current rules.99
Similarly, some commenters raised the
concern that swing pricing is ill-suited
for money market funds given the
general lack of experience with swing
pricing in the money market fund
industry.100
Several commenters stated that a
liquidity fee framework would provide
benefits to investors relative to swing
pricing.101 Some of these commenters
suggested that a liquidity fee would be
less confusing and more transparent
with respect to the liquidity costs
redeeming investors incur because
investors are more familiar with the
concept of liquidity fees (which exist in
the current rule) and because the size of
the swing factor is not readily
observable in the fund’s share price.102
Some commenters suggested that a
liquidity fee would be a more direct way
to pass along liquidity costs and, unlike
swing pricing, would do so without
providing a discount to subscribing
investors or adding volatility to the
fund’s NAV.103 Some commenters
suggested that the changes in a fund’s
Letter; Schwab Comment Letter; IIF Comment
Letter; BlackRock Comment Letter.
99 See, e.g., Federated Hermes Comment Letter II;
Invesco Comment Letter; SIFMA AMG Comment
Letter; Schwab Comment Letter; IIF Comment
Letter.
100 See Morgan Stanley Comment Letter; SIFMA
AMG Comment Letter; IIF Comment Letter;
Federated Hermes Comment Letter I; Federated
Hermes Comment Letter II; Comment Letter of
Senator Pat Toomey (Apr. 12, 2022) (‘‘Senator
Toomey Comment Letter’’); Mutual Fund Directors
Forum Comment Letter; see also Comment Letter of
Professor Stephen G. Cecchetti, Brandeis
International Business School, and Professor Kermit
L. Schoenholtz, Leonard N. Stern School of
Business, New York University (Feb. 1, 2022)
(‘‘Profs. Ceccheti and Schoenholtz Comment
Letter’’).
101 See, e.g., ICI Comment Letter; Invesco
Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; Federated
Hermes Commenter Letter II; Invesco Comment
Letter; Schwab Comment Letter; Morgan Stanley
Comment Letter; JP Morgan Comment Letter;
BlackRock Comment Letter; State Street Comment
Letter; Western Asset Comment Letter; IIF Comment
Letter; Allspring Funds Comment Letter; see also
Dechert Comment Letter; CFA Comment Letter.
102 See, e.g., Morgan Stanley Comment Letter
(expressing the belief that investors understand and
are more comfortable with a fee-based regime, as
compared to swing pricing, because of previous
efforts of money market fund sponsors to educate
fund investors on liquidity fees, as well as
investors’ experiences with redemption fees under
rule 22c–2 and sales charges and deferred sales
charges); SIFMA AMG Comment Letter; Federated
Hermes Comment Letter II.
103 See, e.g., ICI Comment Letter; Federated
Hermes Comment Letter II (‘‘Shareholders who
subscribe on days when price is swung down will
receive a windfall profit.’’); JP Morgan Comment
Letter (‘‘[R]emaining investors will not experience
additional NAV volatility as with swing pricing.’’).
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NAV caused by application of the swing
factor may cause investors to time their
purchases of money market shares to
attain a pricing advantage during
predictable seasonal redemption activity
such as tax payment dates or monthend.104 Further, one commenter
indicated that a liquidity fee framework
could better preserve same-day liquidity
for investors than swing pricing because
liquidity fees are already operationally
feasible for many money market funds
and present fewer implementation
challenges.105
Commenters suggested various
alternatives regarding the form and
structure of liquidity fees. Some
commenters suggested that fund boards
should have discretion to determine
whether to impose liquidity fees.106
Some commenters suggested an
approach where liquidity fees would
apply automatically upon certain
events, such as upon net redemptions
exceeding an identified threshold or
liquidity dropping below a certain
level.107
After considering these comments, we
are adopting a liquidity fee framework
to better allocate liquidity costs to
redeeming investors. The proposed
swing pricing requirement was designed
to address potential shareholder
dilution and the potential for a firstmover advantage for institutional funds.
While we continue to believe these
goals are important, we are persuaded
by commenters that these same goals are
better achieved through a liquidity fee
mechanism, particularly given that
current rule 2a–7 includes a liquidity
fee framework that funds are
accustomed to and can build upon.
The mandatory liquidity fee
framework we are adopting is designed
to address concerns with the prior
104 See Federated Hermes Comment Letter I;
Federated Hermes Comment Letter II (expressing
concern about other scenarios in which swing
pricing may incentivize trading to take advantage of
fluctuations in the fund’s NAV, such as incentives
to purchase in early pricing periods—when money
market funds tend to have more redemptions—and
redeem in a later pricing period, when net
redemptions are less likely); Western Asset
Comment Letter; Dechert Comment Letter
(suggesting that swing pricing may have a
potentially unintended dilutive effect of
incentivizing investors to buy into a fund at a lower
NAV once the fund swings).
105 See IIF Comment Letter.
106 See, e.g., ICI Comment Letter; Schwab
Comment Letter; Federated Hermes Comment Letter
I; Federated Hermes Comment Letter II; Federated
Hermes Fund Board Comment Letter; Invesco
Comment Letter; SIFMA AMG Comment Letter.
107 See, e.g., Morgan Stanley Comment Letter;
Western Asset Comment Letter; BlackRock
Comment Letter; State Street Comment Letter;
SIFMA AMG Comment Letter; ICI Comment Letter;
JP Morgan Comment Letter; IIF Comment Letter;
Invesco Comment Letter.
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liquidity fee framework—namely the
incentives for preemptive redemptions
associated with predictable weekly
liquid asset triggers. At the same time it
continues to seek to ensure that the
costs stemming from redemptions in
stressed market conditions are more
fairly allocated to redeeming investors.
Specifically, institutional prime and
institutional tax-exempt money market
funds will be subject to a mandatory
liquidity fee when net redemptions
exceed 5% of net assets.108 Funds will
not be required to impose this fee,
however, when liquidity costs are less
than one basis point, which we
anticipate will often be the case under
normal market conditions.109 As
discussed in more detail throughout this
section, the mandatory liquidity fee we
are adopting will broadly address the
concerns commenters raised about the
swing pricing proposal while still
generally achieving the goals we sought
in that proposal. Separately, similar to
the statements in the proposal that
money market funds can impose
discretionary liquidity fees under rule
22c–2, amended rule 2a–7 will provide
a discretionary liquidity fee tool to all
non-government money market funds,
which a fund will use if its board (or the
board’s delegate, in accordance with
board-approved guidelines) determines
that such fee is in the best interests of
the fund.110
The mandatory liquidity fee approach
that we are adopting will require
redeeming investors to pay the cost of
depleting a fund’s liquidity, particularly
under stressed market conditions and
when net redemptions are sizeable. As
discussed in the proposal, trading
activity and other changes in portfolio
holdings associated with meeting
redemptions may impose costs,
including trading costs and costs of
depleting a fund’s daily or weekly
liquid assets. These costs, which
currently are borne by the remaining
investors in the fund, can dilute the
interests of non-redeeming shareholders
and create incentives for shareholders to
redeem quickly to avoid losses,
particularly in times of market stress.111
If shareholder redemptions are
motivated by this first-mover advantage,
they can lead to increasing outflows,
and as the level of outflows from a fund
increases, the incentive for remaining
shareholders to redeem may also
increase. Regardless of the motive for
108 See
amended rule 2a–7(c)(2)(ii).
amended rule 2a–7(c)(2)(iii)(D).
110 A government money market fund may elect
to be subject to the discretionary liquidity fee
requirement.
111 See infra section IV.B.1.c.
109 See
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51413
investor redemptions, there can be
significant, unfair adverse consequences
to remaining investors in a fund in these
circumstances, including material
dilution of remaining investors’
interests in the fund. The mandatory
liquidity fee mechanism is designed to
reduce the potential for such dilution.
Some commenters suggested that an
anti-dilution tool is not necessary for
money market funds. Several of these
commenters suggested that money
market funds do not experience dilution
as a general matter because they are able
to address their liquidity needs without
cost and without selling assets by using
daily liquid assets and weekly liquid
assets, which are held to maturity.112
Some commenters further suggested that
the Commission did not provide
sufficient data analysis to support its
view that money market funds are
subject to dilution.113 Some commenters
suggested an anti-dilution tool was
unnecessary in light of either the
proposed increased daily and weekly
liquid asset requirements, the proposed
removal of the tie to weekly liquid
assets, or a combination of those factors
because funds would have additional
liquidity to meet redemptions and
would be better able to use that liquidity
in future stress periods.114
After considering comments, we
continue to believe that in periods of
market stress, when liquidity in
underlying short-term funding markets
is scarce and costly, redeeming
investors should bear liquidity costs
associated with sizeable redemption
activity. While we recognize that a fund
may not incur immediate costs to meet
those redemptions if the fund can
satisfy redemptions using daily liquid
assets, the fund is likely to face costs to
rebalance the liquidity of its portfolio
112 See, e.g., Northern Trust Comment Letter;
Fidelity Comment Letter; SIFMA AMG Comment
Letter; IIF Comment Letter; Federated Hermes
Comment Letter II; CCMR Comment Letter; State
Street Comment Letter; ICI Comment Letter; JP
Morgan Comment Letter; Comment Letter of
Stephen A. Keen (Apr. 11, 2022) (‘‘Keen Comment
Letter’’); Comment Letter of U.S. Bancorp Asset
Management (Apr. 14, 2022) (‘‘Bancorp Comment
Letter’’).
113 See, e.g., Morgan Stanley Comment Letter;
Fidelity Comment Letter (suggesting that the SEC
lacked data to demonstrate the significance or
materiality of shareholder dilution); ICI Comment
Letter; SIFMA AMG Comment Letter; CCMR
Comment Letter.
114 See, e.g., Schwab Comment Letter; Healthy
Markets Association Comment Letter; Allspring
Funds Comment Letter; Fidelity Comment Letter;
Invesco Comment Letter; BlackRock Comment
Letter; Federated Hermes Comment Letter II; ICI
Comment Letter; SIFMA AMG Comment Letter; but
see Better Markets Comment Letter (suggesting that
increasing the costs of redemptions would reduce
potential first-mover advantages).
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over time.115 Moreover, if redemptions
are large and ongoing, there is an
increased likelihood that the fund will
need to sell less liquid assets to satisfy
redemptions, which involves greater
costs. Thus, there is a timing
misalignment between an investor’s
redemption activity and when the fund,
and its remaining shareholders, incur
liquidity costs. The liquidity fee
requirement we are adopting is designed
to protect remaining shareholders from
dilution under these circumstances and
to more fairly allocate costs so that
redeeming shareholders bear the costs of
removing liquidity from the fund when
liquidity in underlying short-term
funding markets is costly.
In response to comments suggesting
that we conduct a data analysis on the
extent to which money market fund
shareholders have experienced dilution
in the past, we do not have fundspecific data on dilution because funds
do not report information about their
daily portfolio holdings and
transactions. However, as discussed in
the Proposing Release, in March 2020
institutional prime and institutional taxexempt money market funds
experienced significant outflows,
spreads for instruments in which these
funds invest widened sharply, and these
funds sold significantly more long-term
portfolio securities (i.e., securities that
mature in more than a month) than
average.116 For instance, Form N–MFP
data suggests that publicly offered
institutional prime funds increased their
sales of long-term securities in March
2020 to 15% of total assets, in
comparison to a 4% monthly average
between October 2016 and February
2020. In addition, the March 2020
figure, which is over three times the
monthly average as compared to data
from prior years, likely understates the
full extent of the selling activity, as
Form N–MFP currently does not
provide insight on sales of portfolio
securities that a fund acquired during
the relevant month.117 As an example of
widening spreads in the markets in
which prime funds invest, bid-ask
spreads of highly rated dealer-placed
commercial paper reached between
115 Theoretically, a money market fund would not
incur rebalancing costs if it were able to perfectly
‘‘ladder’’ the maturity of its portfolio structure, such
that investments are maturing in parallel with
investors’ redemption activities. However, as a
practical matter, perfect laddering is impossible
because funds do not have advance notice of all
investor purchase and redemption activity.
116 See Proposing Release, supra note 6, at section
I.B.
117 As discussed below, we are amending Form
N–MFP to require prime funds to report the value
of non-maturing portfolio securities they sold each
month. See infra section II.F.2.a.
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approximately 25 and 55 basis points at
the height of the stress in March and
April 2020 depending on maturity.118
Thus, available evidence indicates that
money market funds were incurring
liquidity costs to meet redemptions, but
these costs generally were not borne by
redeeming investors who received the
NAV at the time of their redemptions.119
Moreover, the dilution the final rule is
designed to address is not limited to the
costs a fund incurs in selling portfolio
securities to meet redemptions. The
final rule also addresses dilution from
the costs of reducing the liquidity of a
fund’s portfolio, including associated
rebalancing costs, which would also
require granular daily data that funds do
not publicly report.
We understand that future stress
periods may not look exactly the same
as March 2020, and, as some
commenters suggested, in future periods
funds may feel more comfortable
drawing on available liquidity to meet
redemptions because we are removing
the tie between liquidity thresholds and
fees and gates. Funds also may begin
future stressed periods with higher
levels of daily and weekly liquid assets
than in March 2020, although at that
time some funds had liquidity above the
minimums we are adopting. However, it
is also possible that future stress periods
will be longer or otherwise more severe
than March 2020, that future stress
events will have no Federal intervention
to alleviate those stresses, or that a
particular fund or group of funds will
come under stress due to factors
idiosyncratic to the fund(s). It is
important for funds to be able to manage
through various types of stress events
and not to rely solely on liquidity
buffers to manage stress. As discussed
below and in the Proposing Release,
while liquidity minimums are an
important tool for managing
redemptions, our analysis suggests that
some funds would run out of liquidity
if faced with the redemptions rates
experienced in March 2020.120 Thus, we
do not agree with commenters who
suggested that amendments to enhance
money market fund liquidity, and the
usability of that liquidity, would be
118 See
infra paragraph accompanying note 630.
the extent that ultra-short bonds may be
somewhat comparable to the debt instruments that
money market funds hold and the magnitude of
NAV discounts that ultra-short bond exchangetraded funds experienced in March 2020 may proxy
for liquidity costs of money market funds that hold
similar assets, this could suggest that institutional
prime money market funds have nontrivial dilution
costs during market stress. See id.
120 See infra sections II.C.1 and IV.C.2; Proposing
Release, supra note 6, at sections II.C.1 and III.C.2.
119 To
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sufficient on their own, without an
available anti-dilution tool.
Moreover, to the extent that investors
currently are incentivized to redeem
quickly during periods of market stress
to avoid potential costs from a fund’s
future sale of less liquid securities, the
amendments will reduce those firstmover incentives and the associated run
risk. While some academic papers
support the premise that liquidity
externalities may create a first-mover
advantage that may lead to cascading
anticipatory redemptions, we recognize
that investors may redeem from a fund
for a variety of reasons, and these
reasons may vary among investors.121
Notably, we are concerned about
dilution and fair allocation of costs
when a fund has sizeable net
redemptions in a stressed period
regardless of the reasons for investors’
redemptions. In response to comments
suggesting that an anti-dilution tool
would not address first-mover issues if
an investor does not know if it will
incur liquidity costs at the time the
investor submits the redemption order,
we disagree. We believe that an
investor’s general awareness that it may
incur liquidity costs, particularly in
stressed market conditions and when
other investors may also be redeeming,
is sufficient to mitigate the first-mover
advantage and reduce its potential
influence on an investor’s redemption
decisions. We also disagree with
commenters who suggested that an antidilution tool with a net redemption
trigger may increase incentives for
investors to redeem ahead of others.
Investors generally will not know with
certainty if the fund’s flows for any
particular day will trigger a liquidity fee
since a fund’s net flows are dependent
on many investors’ individual
investment decisions, which are not
knowable in advance and can be
influenced by a multitude of different
factors.122 While investors may
anticipate that a fund will have net
redemptions during a market stress
event, the investors will also know that
if they redeem, the likelihood of
incurring fees increases. This dynamic
should reduce investors’ incentives to
attempt to preemptively redeem to
avoid liquidity fees. We agree with
commenters that suggested that a net
redemption threshold would be
appropriate to avoid the threshold
effects seen in March 2020.123
121 See infra note 550 and accompanying text
(discussing these academic papers).
122 See infra section IV.C.4.b.i (further discussing
how a liquidity fee based on a net redemptions
trigger may mitigate run incentives).
123 See, e.g., SIFMA AMG Comment Letter;
BlackRock Comment Letter: IIF Comment Letter;
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Moreover, the 5% net redemption
threshold is designed to help mitigate
the risk that a significant amount of
redemptions could occur under stressed
market conditions before a fee is
triggered, thus incentivizing investors to
redeem ahead of others.
As the Commission has previously
recognized, in the absence of an
exemption, imposing liquidity fees
could violate 17 CFR 270.22c–1 (‘‘rule
22c–1’’), which (together with section
22(c) and other provisions of the
Investment Company Act) requires that
each redeeming shareholder receive his
or her pro rata portion of the fund’s net
assets.124 As a result, we are exercising
our authority under section 6(c) of the
Act to provide exemptions from these
and related provisions of the Act so that
a money market fund can institute
liquidity fees, which can benefit the
fund and its shareholders by providing
a more systematic and equitable
allocation of liquidity costs,
notwithstanding these restrictions.125
We believe that such exemptions do not
implicate the concerns that Congress
intended to address in enacting these
provisions, and thus they are necessary
and appropriate in the public interest
and consistent with the protection of
investors and the purposes fairly
intended by the Act.
As discussed, we are adopting a
mandatory liquidity fee framework in
51415
lieu of the proposed swing pricing
requirement. Table 1 below compares
the key elements of the current rule’s
default liquidity fee, the proposed swing
pricing requirement, and the mandatory
liquidity fee provision we are adopting.
In addition, Table 2 below compares the
key elements of the current rule’s
discretionary liquidity fee, the
redemption fee approach contemplated
by the proposal, and the discretionary
liquidity fee provision we are adopting.
We discuss these aspects of the final
rule and how they relate to comments
on the proposal in the following
sections.
TABLE 1—COMPARISON OF THE CURRENT RULE’S DEFAULT LIQUIDITY FEE, THE PROPOSED RULE’S SWING PRICING
REQUIREMENT, AND THE FINAL RULE’S MANDATORY LIQUIDITY FEE
Current rule’s default liquidity fee
Description of mechanism.
Scope of affected
funds.
Scope of affected investors.
Threshold for applying
a charge.
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Duration and application of the charge.
A default fee is charged to redeeming investors when the fund’s weekly liquid assets
decline below 10%, subject to certain
board discretion.
Prime and tax-exempt money market funds ..
Redeeming investors are charged a liquidity
fee. The liquidity fee does not affect subscribing investors.
If weekly liquid assets fall below 10%, then a
default fee would apply to redeeming investors, unless the board determines a fee
is not in the best interests of the fund.1
The liquidity fee begins to apply on the business day after the fund crosses the 10%
weekly liquid asset threshold. Once imposed, the fee must be applied to all
shares redeemed and remains in effect
until the fund’s board, including a majority
of directors who are not interested persons
of the fund, determines that imposing a fee
is not in the best interests of the fund.
If the fund has invested 30% or more of its
total assets in weekly liquid assets as of
the end of a business day, the fund must
cease charging a fee effective the beginning of the next business day.
Morgan Stanley Comment Letter. As discussed
further below, some of these commenters suggested
a trigger for liquidity fees that paired a net
redemption threshold with a weekly liquid asset
threshold.
124 See 2014 Adopting Release, supra note 26, at
section III.A.3.
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Proposed rule’s swing pricing requirement
The fund’s NAV is adjusted downward by a
swing factor when the fund has net redemptions.
A mandatory fee is charged to redeeming investors when the fund has net redemptions above 5% of net assets.
Institutional prime and institutional tax-exempt money market funds.
The NAV is adjusted downward for both redeemers and subscribers. Redeeming investors’ redemption proceeds are reduced
and subscribing investors purchase at a
discounted price, compared to the
unadjusted NAV they both otherwise would
have received.
At any level of net redemptions for a pricing
period, the swing factor includes spreads
and certain other transaction costs (i.e.,
brokerage commissions, custody fees, and
any other charges, fees, and taxes associated with portfolio security sales).
Institutional prime and institutional tax-exempt money market funds.
Redeeming investors are charged a liquidity
fee. The liquidity fee does not affect subscribing investors.
If net redemptions for a pricing period exceed 4% of net assets divided by the number of pricing periods per day, or such
smaller amount of net redemptions as the
swing pricing administrator determines, the
swing factor also includes market impact
costs.
The price is adjusted for all shareholders
transacting in the fund’s shares during the
relevant pricing period.
125 Section 6(c) of the Investment Company Act.
In addition, like current rule 2a–7, the final rule
provides that, notwithstanding section 27(i) of the
Investment Company Act, a variable insurance
contract issued by a registered separate account
funding variable insurance contracts or the
sponsoring insurance company of such separate
account may apply a liquidity fee to contract
owners who allocate all or a portion of their
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Final rule’s mandatory liquidity fee
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Fees are triggered when the fund has total
daily net redemptions that exceed 5% of
net assets based on flow information available within a reasonable period after the
last computation of the fund’s net asset
value on that day, or such smaller amount
of net redemptions as the board determines.
The fund must apply a liquidity fee to all
shares that are redeemed at a price computed on the day the fund has total daily
net redemptions that exceed 5% of net assets.
contract value to a subaccount of the separate
account that is either a money market fund or that
invests all of its assets in shares of a money market
fund. See 17 CFR 270.2a–7(c)(2)(iv); amended rule
2a–7(c)(2)(iv). Section 27(i)(2)(A) makes it unlawful
for any registered separate account funding variable
insurance contracts or the sponsoring insurance
company of such account to sell a variable contract
that is not a ‘‘redeemable security.’’
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Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
TABLE 1—COMPARISON OF THE CURRENT RULE’S DEFAULT LIQUIDITY FEE, THE PROPOSED RULE’S SWING PRICING
REQUIREMENT, AND THE FINAL RULE’S MANDATORY LIQUIDITY FEE—Continued
Current rule’s default liquidity fee
Proposed rule’s swing pricing requirement
Final rule’s mandatory liquidity fee
Size of the charge ......
The default fee is 1%, unless the fund’s
board of directors, including a majority of
the directors who are not interested persons of the fund, determines that a higher
or lower fee level is in the best interests of
the fund.
The swing factor would be determined by
making good faith estimates of the spread,
other transaction, and market impact costs
the fund would incur, as applicable, if it
were to sell a pro rata amount of each security in its portfolio to satisfy the amount
of net redemptions.
Affected money market funds could estimate
costs and market impact factors for each
type of security with the same or substantially similar characteristics and apply
those estimates to all securities of that
type in the fund’s portfolio, rather than
analyze each security separately.
Maximum charge ........
The fee cannot exceed 2% of the value of
the shares redeemed.
The board is responsible for administering
the liquidity fee requirement. The board
may not delegate liquidity fee determinations.
The swing factor has no upper limit ...............
The size of the fee generally is determined
by making a good faith estimate of the
spread, other transaction, and market impact costs the fund would incur if it were to
sell a pro rata amount of each security in
its portfolio to satisfy the amount of net redemptions.
Affected money market funds can estimate
costs and market impacts for each type of
security with the same or substantially
similar characteristics and apply those estimates to all securities of that type in the
fund’s portfolio, rather than analyze each
security separately.
If the estimated liquidity costs are less than
one basis point (0.01%) of the value of the
shares redeemed, a fund is not required to
apply a fee under the de minimis exception.
If the fund cannot estimate the costs of selling a pro rata amount of each portfolio security in good faith and supported by data,
a default liquidity fee of 1% of the value of
shares redeemed applies.
The fee has no upper limit.
Party who administers
the provision.
The board must approve swing pricing policies and procedures. The swing pricing
administrator is charged with administering
the swing pricing requirement. The swing
pricing administrator is the fund’s investment adviser, officer, or officers responsible for administering the fund’s swing
pricing policies and procedures, as designated by the fund’s board. The administrator can be an individual or a group of
persons.
The board is responsible for administering
the liquidity fee requirement, but the board
can delegate this responsibility to the
fund’s investment adviser or officers, subject to written guidelines established and
reviewed by the board and ongoing board
oversight.2
Notes:
1 The board determinations this Table refers to generally must include a majority of the directors who are not interested persons of the fund.
2 This approach is consistent with the operation of several other provisions of rule 2a–7.
TABLE 2—COMPARISON OF THE CURRENT RULE’S DISCRETIONARY LIQUIDITY FEE, THE PROPOSED RULE, AND THE FINAL
RULE’S DISCRETIONARY LIQUIDITY FEE
Current rule’s discretionary liquidity fee
Proposed rule and rule 22c–2
Description of mechanism.
A discretionary fee may be charged to redeeming investors when the fund’s weekly
liquid assets decline below 30% and the
board determines that a fee is in the best
interests of the fund.1
Scope of affected
funds.
Prime and tax-exempt money market funds.
Government money market funds may opt
in.
Scope of affected investors.
Redeeming investors are charged a liquidity
fee. The liquidity fee does not affect subscribing investors.
If weekly liquid assets fall below 30%, then a
fund may institute a fee if the board determines that the fee is in the best interests
of the fund.
The proposal would have removed the discretionary liquidity fee provision in rule 2a–
7 and stated that money market fund
boards could rely on existing rule 22c–2 if
they determine redemption fees are needed to address dilution.
Any money market fund may elect to rely on
rule 22c–2 to impose fees, in which case
the fund would no longer be an excepted
fund under that rule.
Redeeming investors are charged a liquidity
fee. The liquidity fee does not affect subscribing investors.
The fund’s board may impose a redemption
fee that in its judgment is necessary or appropriate to recoup for the fund the costs it
may incur as a result of redemptions or to
otherwise eliminate or reduce so far as
practicable any dilution of the value of the
outstanding securities issued by the fund.
Generally subject to board discretion under
the rule.
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Threshold for applying
a charge.
Duration and application of the charge.
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Once imposed, the discretionary fee must be
applied to all shares redeemed and remain
in effect until the fund’s board determines
that imposing a fee is not in the best interests of the fund.
If the fund has invested 30% or more of its
total assets in weekly liquid assets as of
the end of a business day, the fund must
cease charging a fee effective the beginning of the next business day.
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Final rule’s discretionary liquidity fee
Irrespective of liquidity or redemption levels,
a discretionary fee is charged to redeeming investors when the board determines
that the fee is in the best interests of the
fund.
Prime and tax-exempt money market funds.
Government money market funds may opt
in.
Redeeming investors are charged a liquidity
fee. The liquidity fee does not affect subscribing investors.
If the board determines that doing so is in
the best interests of the fund, the board
must impose a liquidity fee.
Once imposed, the discretionary fee must be
applied to all shares redeemed and remain
in effect until the fund’s board determines
that imposing such fee is no longer in the
best interests of the fund.
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51417
TABLE 2—COMPARISON OF THE CURRENT RULE’S DISCRETIONARY LIQUIDITY FEE, THE PROPOSED RULE, AND THE FINAL
RULE’S DISCRETIONARY LIQUIDITY FEE—Continued
Current rule’s discretionary liquidity fee
Size of the charge ......
The rule does not prescribe the manner or
amount of the fee calculation. The fee,
however, must be in the best interests of
the fund.
Maximum charge ........
The fee cannot exceed 2% of the value of
the shares redeemed.
The board is responsible for administering
the liquidity fee requirement. The board
may not delegate liquidity fee determinations.
Party who administers
the provision.
Proposed rule and rule 22c–2
Final rule’s discretionary liquidity fee
The fee must be necessary or appropriate,
as determined by the board, to recoup for
the fund the costs it may incur as a result
of those redemptions or to otherwise eliminate or reduce so far as practicable any
dilution of the value of the outstanding securities issued by the fund.
The fee cannot exceed 2% of the value of
the shares redeemed.
The fund’s board ............................................
The rule does not prescribe the manner or
amount of the fee calculation. The fee,
however, must be in the best interests of
the fund.
The fee cannot exceed 2% of the value of
the shares redeemed.
The board is responsible for administering
the liquidity fee requirement, but the board
can delegate this responsibility to the
fund’s investment adviser or officers, subject to written guidelines established and
reviewed by the board and ongoing board
oversight.2
Notes:
1 The board determinations this Table refers to generally must include a majority of the directors who are not interested persons of the fund.
2 This approach is consistent with the operation of several other provisions of rule 2a–7.
2. Terms of the New Mandatory
Liquidity Fee Requirement
ddrumheller on DSK120RN23PROD with RULES2
The mandatory liquidity fee we are
adopting, like the swing pricing
proposal, is based upon a net
redemption threshold and only applies
to institutional prime and institutional
tax-exempt funds.126 Unlike the swing
pricing proposal, however, the antidilution measure triggers only when net
redemptions for the business day exceed
5% of net assets.127 Similar to the
proposed swing pricing proposal, the
fee amount would reflect the fund’s
good faith estimate of liquidity costs,
supported by data, of the costs the fund
would incur if it sold a pro rata amount
of each security in its portfolio (i.e.,
vertical slice) to satisfy the amount of
net redemptions, including: (1) spread
costs and any other charges, fees, and
taxes associated with portfolio security
sales; and (2) market impacts for each
security.128 The final rule will not
require a fund to apply a fee if the
estimated costs are de minimis, meaning
that if the fee were applied, the amount
of the fee would be less than 0.01% of
126 We refer to money market funds that are not
government money market funds or retail money
market funds collectively as ‘‘institutional funds’’
when discussing the liquidity fee requirement.
127 See amended rule 2a–7(c)(2)(ii) (allowing a
fund’s board to determine to use a smaller net
redemption threshold than 5%). In contrast, the
proposed swing pricing requirement would have
required an institutional fund to adjust its current
NAV per share by a swing factor reflecting spread
and transaction costs, as applicable, if the fund has
net redemptions for the pricing period. If the
institutional fund experienced net redemptions
exceeding 4% of the fund’s net asset value (divided
by the number of pricing periods the fund has in
a business day, or such smaller amount of net
redemptions as the swing pricing administrator
determines), then the swing factor would also
include market impact costs.
128 See amended rule 2a–7(c)(2)(iii)(A).
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the value of the shares redeemed.129 In
addition, if a fund cannot make a good
faith estimate of liquidity costs, it will
apply a default fee of 1%.130 This
mandatory liquidity fee regime
substantially accomplishes the same
goals as the proposed swing pricing
mechanism and, like swing pricing, it is
designed to ensure that the costs
stemming from significant net
redemptions in periods of market stress
are fairly allocated and will not give rise
to dilution or a first-mover advantage.
The new mandatory liquidity fee has
some key differences as compared to the
current rule. For example, the
mandatory liquidity fee is triggered by
net redemptions as opposed to weekly
liquid assets.131 In addition, unlike the
current rule, but consistent with the
proposed swing pricing requirement,
the amended framework does not
provide discretion to the board with
respect to its application. Rather, the
fund will be required to apply a fee if
it crosses the net redemption threshold
unless the fee amount is de minimis.
Moreover, the final amendments are
more specific in terms of how a fund
determines the amount of the fee than
the current rule and, as a result, does
not include a limit on the amount of the
fee a fund can charge.132
The new mandatory liquidity fee only
applies to institutional prime and
129 See
amended rule 2a–7(c)(2)(iii)(D).
amended rule 2a–7(c)(2)(iii)(C).
131 See 17 CFR 270.2a–7(c)(2)(ii) (requiring a nongovernment money market fund to impose a default
liquidity fee of 1% on all redemptions if its weekly
liquid assets fall below 10% of its total assets,
unless the board of directors of the fund (including
a majority of its independent directors) determines
that imposing such a fee would not be in the best
interests of the fund).
132 In contrast, under the current rule, a liquidity
fee may not exceed 2% of the value of the shares
redeemed. See 17 CFR 270.2a–7(c)(2)(ii)(A).
130 See
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institutional tax-exempt funds. This is
in contrast to the current rule’s default
liquidity fees, which apply to retail
funds, but is consistent with the
approach we proposed for swing
pricing. We are not requiring retail or
government money market funds to
implement mandatory liquidity fees due
to differences in investor behavior and,
in the case of government funds,
liquidity costs. As discussed in the
proposal, retail money market funds
historically have had smaller outflows
than institutional funds during times of
market stress and appear to be less
sensitive to declines in a fund’s
liquidity.133 As a consequence, we
continue to believe retail fund managers
may be more comfortable drawing down
available liquidity from the fund’s daily
liquid assets and weekly liquid assets to
meet redemptions in times of stress,
without engaging in secondary market
sales that could result in significant
liquidity costs. In addition, we do not
believe that retail prime and tax-exempt
money market funds need special
provisions requiring them to impose
liquidity fees given both the anticipated
effect of the daily and weekly liquid
asset requirement changes and, as
described below, the availability of the
discretionary liquidity fee we are
adopting. As for government money
market funds, investors typically view
these funds, in contrast to prime money
market funds, as a relatively safe
investment during times of market
turmoil, and government money market
funds have seen inflows during periods
of market instability. Government
money market funds are also less likely
to incur significant liquidity costs when
they purchase or sell portfolio securities
133 See Proposing Release, supra note 6, at section
II.B.1.
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Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
ddrumheller on DSK120RN23PROD with RULES2
due to the generally higher levels of
liquidity in the markets in which they
invest.
Consistent with the swing pricing
proposal, the mandatory anti-dilution
mechanism (in this case a liquidity fee)
applies to all institutional funds,
irrespective of whether they are offered
publicly. Some commenters suggested
that privately offered institutional funds
should not be subject to a mandatory
anti-dilution tool.134 Asset managers
typically organize privately offered
institutional money market funds to
manage cash balances of other affiliated
funds and accounts. These funds
operate in almost all respects as a
registered money market fund, except
that their securities are privately offered
and thus not registered under the
Securities Act.135 Some commenters
suggested privately offered institutional
funds are not subject to the same firstmover and run concerns as publicly
offered institutional funds because they
serve as tools for funds within the same
fund complex and are used for internal
purposes such as cash management and
investing collateral from securities
lending transactions.136 For example,
one commenter suggested that, because
of these characteristics, such funds are
focused more on liquidity than yield.137
Other commenters suggested that such
funds have greater transparency into
redemptions than publicly offered
institutional funds.138 We decline to
provide an exception for these funds
from the mandatory liquidity fee
requirement because we do not believe
that such funds are immune to the risks
of dilution and potential first-mover
advantages that mandatory liquidity fees
are designed to address. For example,
registered funds investing in a privately
offered institutional fund may have an
incentive to redeem shares in times of
market stress (e.g., to raise funds to pay
their own redemptions, which may be
heightened at that time), increasing the
134 See, e.g., Fidelity Comment Letter; BlackRock
Comment Letter; Capital Group Comment Letter; ICI
Comment Letter; Comment Letter of Dimensional
Fund Advisors LP (Apr. 11, 2022) (‘‘Dimensional
Fund Advisors Comment Letter’’); Dechert
Comment Letter.
135 See 17 CFR 270.12d1–1 (generally requiring
that the acquiring fund reasonably believes that the
money market fund operates in compliance with
rule 2a–7).
136 See, e.g., Fidelity Comment Letter; ICI
Comment Letter; BlackRock Comment Letter;
Capital Group Comment Letter; ICI Comment Letter;
Dimensional Fund Advisors Comment Letter;
Dechert Comment Letter; but see 2014 Adopting
Release, supra note 26, at section III.C.5 (discussing
the Commission’s belief that unregistered money
market funds are not immune to the risks posed by
money market funds generally).
137 See Capital Group Comment Letter.
138 See Capital Group Comment Letter; ICI
Comment Letter.
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20:11 Aug 02, 2023
Jkt 259001
risk of dilution for remaining registered
funds. Potential first-mover incentives
may also exist, particularly if registered
funds are investing in a privately offered
institutional fund in another fund
complex in which the registered funds
have no greater transparency, creating a
potential incentive to redeem ahead of
other investors in times of market
stress.139
The final rule provides for mandatory
liquidity fees for institutional funds
because institutional investors have a
history of redeeming from these funds
quickly in times of stress, increasing the
risk of dilution for remaining
shareholders in institutional funds. In
addition, if the liquidity fee regime for
these funds were purely voluntary,
institutional funds (or their boards) may
require additional time or information
to decide whether to impose fees,
depending on the considerations on
which the fee is based. This could result
in a delay that creates timing
misalignments between an investor’s
redemption activity and the imposition
of liquidity costs, thus allowing some
investors to redeem without bearing the
associated liquidity costs and
contributing to dilution and a firstmover advantage. Further, some funds
(or their boards) may be reluctant to
impose fees to avoid perceived
reputational or competitiveness issues
associated with imposing fees before
other institutional funds, which
institutional investors may be more
likely to react to than retail investors.140
As a result, a purely voluntary regime
may result in institutional funds not
imposing a fee unless a fund is under
severe and prolonged stress, by which
point the fee’s effectiveness in
addressing dilution and potential firstmover advantages would be
significantly reduced.141
139 See 2014 Adopting Release, supra note 26, at
section III.C.5.
140 As discussed above and in the Proposing
Release, available evidence suggests that
institutional investors were more sensitive to the
possibility of redemption gates or liquidity fees in
Mar. 2020 than retail investors, and institutional
prime and institutional tax-exempt money market
funds managed their portfolios to avoid having less
than 30% of their total assets invested in weekly
liquid assets, at which point a board could
determine to institute gates or fees. In addition, the
one money market fund to fall below this threshold
in Mar. 2020 did not institute gates or fees. See
supra sections I.B and II.A; Proposing Release,
supra note 6, at sections I.B. and II.A. While we
believe that institutional investors are more
sensitive to redemption gates than to liquidity fees,
some institutional investors may prefer to avoid the
possibility of liquidity fees as well, if possible.
141 One commenter, suggesting that discretionary
fees would be sufficient, indicated that fund boards
would have incentives to impose fees if
redemptions reduced the fund’s NAV and imposed
material dilution, including due to legal and
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a. Threshold for Mandatory Liquidity
Fees
We are requiring that institutional
funds apply the mandatory liquidity fee
when net redemptions for the business
day exceed 5% of net assets, or such
smaller amount of net redemptions as
the board (or its delegate) determines.
This 5% threshold is in contrast to the
swing pricing proposal, which would
have required funds to charge
redeeming investors spread and certain
other transaction costs if the fund had
any net redemptions for the pricing
period and to include market impacts in
the charge if net redemptions exceeded
4% of net assets, or such smaller
amount of net redemptions as the swing
pricing administrator determines. In the
proposal, application of this 4%
threshold would have required funds to
divide the 4% value by the number of
pricing periods (i.e., NAV strikes) the
fund has each day.142 In contrast, the
5% net redemption threshold is based
on flows for all pricing periods in a
given day. In addition, unlike the
current rule, but consistent with the
proposal, application of the antidilution mechanism is not tied to a
weekly liquid asset threshold. Also,
unlike the current rule, but consistent
with the proposal, the mechanism
applies to redemptions on each business
day a fund crosses the net redemption
threshold. This is in contrast to the
current rule’s default liquidity fee,
which applies to redemptions the
business day after weekly liquid assets
fall below the 10% threshold and
continues to apply on subsequent days
until the board determines that the
liquidity fee is no longer in the best
interests of the fund. Per the rule we are
adopting, an institutional prime or
institutional tax-exempt money market
fund must apply a liquidity fee if its
total daily net redemptions exceed 5%
of the fund’s net asset value based on
flow information available within a
reasonable period after the last
computation of the fund’s net asset
reputational risk associated with a failure to act. See
Comment Letter of Federated Hermes, Inc. (July 5,
2023) (‘‘Federated Hermes Comment Letter V’’).
Absent persuasive information that redemptions
would have these stated effects, however, there may
be contrary incentives to delay any fee
determinations to avoid reputational risk or secondguessing associated with imposing a fee,
particularly if comparable funds are not imposing
fees.
142 The proposal defined ‘‘pricing period’’ to
mean the period of time in which an order to
purchase or sell securities issued by the fund must
be received to be priced at the next computed NAV.
For example, if a fund computes a NAV as of 12
p.m. and 4 p.m., the fund would determine if it had
net redemptions for each pricing period and, if so,
apply swing pricing for the corresponding NAV
calculation.
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Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
value on that day. If this threshold is
crossed, the fund must apply a liquidity
fee to all shares that are redeemed at a
price computed on that day.143
Many commenters suggested that the
proposed 4% market impact threshold
was too low and that a redemptionbased threshold for applying any charge
to redeeming investors should be higher
than 4%. Some commenters suggested
that money market funds frequently
experience net redemptions greater than
4% in normal market conditions due to
seasonal redemption activity such as
investor redemptions to fulfill payroll or
tax obligations.144 Some commenters
suggested that money market funds do
not incur transaction costs or dilution at
such low levels of net redemptions due
to the structure of these funds,
including liquidity requirements that
insulate funds from transaction costs,
which allows funds to pay redemptions
through maturing assets instead of
secondary market activity even during
periods with high redemption levels.145
Some commenters suggested that if a
fund has multiple NAV strikes per day,
then the 4% threshold would be
particularly problematic because the
proposal divided the 4% figure by the
number of pricing periods per day,
resulting in a lower threshold.146 One
commenter suggested that swing pricing
should be triggered by portfolio security
sales that are needed to fund
shareholder redemptions.147 The same
commenter stated that funds should
have discretion in setting their own
swing thresholds.
Many commenters suggested limiting
the application of liquidity fees to
periods of market stress. Several
commenters suggested that fund boards
should have discretion to determine
when fees should apply, which would
effectively limit fees to times of
stress.148 Several commenters expressed
143 See
amended rule 2a–7(c)(2)(ii).
e.g., Morgan Stanley Comment Letter;
Bancorp Comment Letter; Federated Hermes
Comment Letter I; IIF Comment Letter; SIFMA
AMG Comment Letter; BlackRock Comment Letter;
Federated Hermes Comment Letter II.
145 See, e.g., Allspring Funds Comment Letter;
Fidelity Comment Letter; T. Rowe Comment Letter;
US Chamber of Commerce Comment Letter;
Vanguard Comment Letter; Western Asset Comment
Letter; SIFMA AMG Comment Letter; Federated
Hermes Comment Letter II.
146 See, e.g., Bancorp Comment Letter; ICI
Comment Letter.
147 See Capital Group Comment Letter.
148 See, e.g., ICI Comment Letter (suggesting that
the rule require fund boards to consider certain
enumerated factors when deciding whether to
implement a liquidity fee, subject to a
determination that implementing fees is in the best
interests of the fund and its shareholders and is
necessary to prevent material dilution or other
unfair results); JP Morgan Comment Letter;
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144 See,
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support for requiring a fund to apply a
liquidity fee if it has net redemptions of
more than 10%. These commenters
generally suggested that the rule should
pair a net redemption threshold with a
weekly liquid asset threshold to ensure
that the fee would apply only when the
fund is under stress.149 Some of these
commenters suggested that a liquidity
threshold is needed because a fund
could meet net redemptions of more
than 10% without dilution if it has
sufficient liquidity and because
redemptions exceeding more than 10%
can occur under normal market
conditions, although they are rarer than
net redemptions exceeding 4% of net
assets.150 Some commenters suggested
that pairing a weekly liquid asset
threshold with a net redemption
threshold would reduce the
predictability of the liquidity fee trigger
and reduce the likelihood of preemptive
redemptions in comparison to the
current rule, especially considering the
effect of removing redemption gates
from the rule, which commenters
suggested were more likely to
incentivize investor redemptions than
liquidity fees.151 Some commenters
suggested a tiered approach with
multiple thresholds and fee amounts,
beginning with the dual threshold of
10% net redemptions and 30% weekly
liquid assets and then using weekly
liquid asset-based thresholds to
determine when to increase the fee
amount.152 Two commenters discussed
using a tiered approach with solely
weekly liquid asset thresholds.153
Commenters supporting a tiered
approach generally suggested that
beginning with relatively small fee
amounts may reduce investor incentives
to preemptively redeem in response to
declines in liquidity in an effort to avoid
a fee.154 Separately, some commenters
suggested thresholds based on the
amount of net redemptions over
Federated Hermes Comment Letter II; Invesco
Comment Letter; SIFMA AMG Comment Letter.
149 See, e.g., Invesco Comment Letter; IIF
Comment Letter; SIFMA AMG Comment Letter
(explaining that the 10% net redemption threshold
was selected because it represents half of the
commenter’s preferred 20% daily liquid asset
threshold and is less likely to be triggered by
routine, expected flow activity, particularly if
paired with a liquidity threshold); ICI Comment
Letter.
150 See, e.g., SIFMA AMG Comment Letter; ICI
Comment Letter.
151 See, e.g., IIF Comment Letter; JP Morgan
Comment Letter; BlackRock Comment Letter.
152 See, e.g., BlackRock Comment Letter; JP
Morgan Comment Letter; IIF Comment Letter.
153 See Western Asset Comment Letter (suggesting
a mandatory approach to tiered fees that would first
trigger when weekly liquid assets are below 30%);
ICI Comment Letter.
154 See, e.g., ICI Comment Letter; Western Asset
Comment Letter; JP Morgan Comment Letter.
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multiple days to identify circumstances
in which a fund is under stress.155
After considering comments, we are
adopting a 5% net redemption threshold
for mandatory liquidity fees. We
recognize that some funds would trigger
the proposed 4% net redemption
threshold with some frequency under
normal market conditions, particularly
if the fund had multiple NAV strikes per
day and therefore used a smaller
threshold for each pricing period under
the proposal. Based on historical flow
data, we estimate that an average of
4.4% of institutional prime and
institutional tax-exempt money market
funds would cross a 4% net redemption
threshold on a given day.156 To reduce
the burdens of the liquidity fee
requirement and to reduce the
frequency at which the requirement may
trigger under normal market conditions,
when liquidity costs and the benefits to
remaining shareholders of imposing
liquidity fees are likely small, we are
increasing the threshold to 5%. We
estimate that an average of 3.2% of
institutional funds would cross a 5%
net redemption threshold on a given
day. While funds may still cross the 5%
threshold under normal market
conditions, we anticipate that a fund’s
liquidity costs generally will be de
minimis under those circumstances, and
the final rule will not require a fund to
apply a fee when estimated costs are de
minimis.157 We are also making other
changes to the final rule that we believe
will reduce the burdens of determining
the amount of the fee, as discussed
below.
Consistent with the swing pricing
proposal, the final rule permits a fund
to use a lower net redemption threshold
than is required.158 Allowing a fund’s
board (or delegate) to use a net
redemption threshold below 5% for
purposes of applying mandatory fees is
designed to recognize that there may be
circumstances in which a smaller
threshold would be appropriate to
mitigate dilution of fund shareholders.
For example, this may be the case when
155 See, e.g., Morgan Stanley Comment Letter
(suggesting a framework in which fees would apply
when net redemptions are more than 15% over two
consecutive trading days); State Street Comment
Letter (suggesting that fees should trigger if net
redemptions exceed 5% for three consecutive days
and the fund has experienced an event that requires
reporting on Form N–CR).
156 See infra section IV.C.4.b.i (analyzing
historical daily redemptions out of institutional
prime and institutional tax-exempt money market
funds between Dec. 2016 and Oct. 2021).
157 See amended rule 2a–7(c)(2)(iii)(D).
158 See amended rule 2a–7(c)(2)(ii); proposed rule
2a–7(c)(2)(vi)(B).
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a fund holds a larger amount of less
liquid investments or in times of stress.
We are not adopting an even higher
net redemption threshold, or a net
redemption threshold paired with a
liquidity threshold, as some
commenters suggested. While a higher
net redemption threshold, such as 10%,
would reduce the likelihood of a fund
crossing the threshold under normal
market conditions when liquidity costs
are low, it likewise would reduce the
likelihood of a liquidity fee applying in
the beginning wave of redemptions in a
crisis period. For example, of the
outflows from institutional prime and
tax-exempt money market funds during
the week of March 20, 2020,
approximately 31% of fund days were
above the 5% threshold, but only 11%
of fund days were above the 10%
threshold.159 If investors can redeem
during the beginning stages of a crisis
with a very low likelihood of incurring
a fee, that may incentivize investors to
redeem early, contributing to a firstmover advantage. In addition, we
considered the effect of different net
redemption thresholds during periods of
prolonged stress, which might have
occurred in March 2020 absent
government intervention, by modeling
fund portfolios and liquidity levels.160
If we were to pair a 10% net
redemption threshold with a weekly
liquid asset threshold, that would
further reduce the likelihood of a
liquidity fee applying to the first wave
of redemptions in a stress period.
Moreover, adding a weekly liquid asset
threshold to a net redemption threshold,
or using a weekly liquid asset threshold
on its own, would allow investors to
better predict when a liquidity fee may
apply, which may contribute to
preemptive redemptions. Incorporating
a fund’s weekly liquid assets into the
liquidity fee trigger also may incentivize
fund managers to maintain weekly
liquid assets above the relevant
threshold, creating a disincentive for
using available liquidity to meet
redemptions and potentially
159 See infra section IV.C.4.b.i (discussing this
analysis and other analyses regarding net
redemption thresholds for mandatory liquidity
fees). ‘‘Fund days’’ refers to observations of daily
redemptions using a sample set of funds during a
particular period of time. Here, the fund days relate
to a measure of daily outflows during the week of
Mar. 20, 2020. To illustrate the analysis, we
observed 43 institutional prime and institutional
tax-exempt money market funds over the 5 days
that week. This results in 215 (= 43 × 5) fund day
observations. Using a net redemption threshold of
5%, we observed that during the week of Mar. 20
funds would have exceeded that threshold on 31%
of fund days. This means that net outflows
exceeded the 5% threshold on 67 (= 0.31 × 215)
fund days during the week of Mar. 20.
160 See id.
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contributing to dilution of remaining
shareholders through the sale of longerterm portfolio securities in a stress
period. In March 2020, we observed
both of these unintended results from
the tie between liquidity fees and
weekly liquid assets in the current rule.
As for a tiered approach, we understand
some commenters’ views that using a
weekly liquid asset threshold to trigger
a very small fee amount may be less
likely to trigger preemptive runs at the
outset. However, a tiered approach that
increases the fee amount according to a
specific schedule as liquidity declines
below predictable thresholds has the
risk of ‘‘cliff effects.’’ Specifically, a
tiered approach may incentivize
investors to redeem before a fund
crosses a lower, predictable weekly
liquid asset threshold to avoid a
nonlinear jump in the fee size.
We also are not adopting other
liquidity fee approaches that some
commenters suggested. A net
redemption threshold based on net
redemptions over multiple trading days
may lead to a threshold that is more
predictable than same day net
redemptions, as funds provide
information about the prior day’s net
flows on their websites.161 In addition,
a multi-day threshold would contribute
to operational complexity if the fee
applied to redemptions that trigger the
fee, as a fund would need to apply a fee
to redemptions that occurred on a prior
day. Alternatively, if the fee applied to
redemptions occurring after the
threshold is triggered, this approach
would contribute to a first-mover
advantage, as investors redeeming at the
onset of market stress would be
significantly less likely to incur a fee.
We also are not adopting an approach
that allows funds to establish their own
criteria for triggering liquidity fees or
that relies on board considerations of
certain criteria. If institutional funds
were permitted to establish their own
criteria for triggering liquidity fees, we
believe they may use criteria that are
unlikely to trigger liquidity fees,
particularly if they perceive the
potential for reputational harm from
imposing fees. With respect to board
determinations, as discussed in the
Proposing Release, we do not believe an
approach that relies on board
determinations would result in timely
decisions to impose liquidity fees on
days when the fund has net
redemptions that, due to associated
costs to meet those redemptions, will
dilute the value of the fund for
161 See
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remaining shareholders.162 For instance,
it may take time for a fund board to
convene and determine whether to
apply a liquidity fee with respect to any
particular stress event. We do not
believe that these discretionary
approaches would provide an effective
tool for addressing institutional
shareholder dilution and potential
institutional investor incentives to
redeem quickly in times of liquidity
stress to avoid further losses. Finally,
we are not adopting a threshold based
on when a fund must sell portfolio
securities to satisfy redemptions
because, as discussed above, we believe
such an approach overlooks the costs
redeeming investors impose by
removing liquidity from the fund,
including subsequent rebalancing costs,
and by increasing the likelihood that the
fund will need to sell less liquid assets
to satisfy future redemptions.
When a fund crosses the 5% net
redemption threshold, it must apply a
liquidity fee to all shares that are
redeemed at a price computed on that
day. As a result, when the 5% net
redemption threshold is crossed, the fee
must be applied to all shares redeemed
that day, including redemptions that are
eligible to receive a NAV computed on
that day even if received by the fund
after the last pricing period of the day.
This approach will require redeeming
investors who cause the fund to exceed
the threshold to bear the costs of their
redemption activity, irrespective of
when they redeem during the day. This
approach is different from the current
rule, which provides that default
liquidity fees begin to apply on the day
after the fund has crossed the 10%
weekly liquid asset threshold.
Compared to the current rule, the
approach we are adopting is designed to
better align the application of liquidity
fees to those investors whose
redemptions result in liquidity costs for
the fund and to reduce potential firstmover advantages. We recognize,
however, that funds and intermediaries
may need to update their systems to
apply fees to redemptions on the day
the net redemption threshold is
crossed.163
162 See Proposing Release, supra note 6, at n.95
and accompanying text.
163 Under the current rule, the determination to
apply discretionary liquidity fees could occur at
any time during the day, meaning that funds and
intermediaries would need to begin to apply fees to
redemptions on that day. See 2014 Adopting
Release, supra note 26, at n.383 and accompanying
text. It is our general understanding, in light of the
current rule, that there has been an industry
expectation that a fund board would determine to
impose discretionary fees after the end of a trading
day, such that discretionary fees would begin to
apply on the next morning.
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Consistent with the final rule, the
proposed swing pricing requirement
would have applied a charge to
redeeming investors who caused the
fund to have net redemptions. However,
the design of the net redemption
threshold in the final rule is somewhat
different from the proposal, which
would have applied a charge to
redeeming investors based on net
redemption activity for each pricing
period if a fund had multiple NAV
strikes per day. Some commenters
expressed concern about separately
analyzing flows for each pricing period
under the proposal. For example, some
commenters stated that institutional
money market fund investors tend to
redeem in the morning and move
remaining cash back into the fund
toward the end of the day, making it
more likely that funds would need to
apply swing pricing in the morning
even if investor activity for the day, on
net, would not cross a threshold.164
Some commenters expressed concern
about potentially needing to calculate
liquidity costs and apply a charge
multiple times a day.165 In addition,
some commenters suggested that it
would be particularly difficult to
calculate liquidity costs under a tightly
compressed timeline, which is
especially a concern for funds that offer
same-day settlement since the swing
pricing adjustment had to occur before
a fund published its NAV.166
The final rule will not distinguish
between flows for different pricing
periods during the day and, instead,
will apply a fee to all investors who
redeemed on that day if the threshold is
crossed. This addresses commenters’
concerns about applying a threshold to
individual pricing periods during the
day and reduces burdens by requiring
no more than one liquidity fee
determination per day. We recognize,
however, that the requirement to apply
a liquidity fee to all shares redeemed on
the day the 5% threshold is crossed will
likely require some adjustments for
funds that offer multiple NAV strikes
per day.167 Specifically, we recognize
that an investor may redeem at a pricing
period in the morning or early
afternoon, before the fund knows that it
has crossed the 5% threshold for the
164 See, e.g., Invesco Comment Letter; Western
Asset Comment Letter; SIFMA AMG Comment
Letter; BlackRock Comment Letter.
165 See, e.g., Northern Trust Comment Letter; U.S.
Chamber of Commerce Comment Letter; Invesco
Comment Letter; ABA Comment Letter I; IIF
Comment Letter; Mutual Fund Directors Forum
Comment Letter.
166 See, e.g., SIFMA AMG Comment Letter;
BlackRock Comment Letter; Capital Group
Comment Letter.
167 See infra section IV.C.4.b.ii.
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day. Under these circumstances, the
final rule will necessitate a fund that
offers multiple NAV strikes to develop
a method for applying the fee to shares
redeemed in an earlier pricing period on
that day. Funds might take different
approaches to address this issue. For
instance, among other potential
approaches, the fund might apply the
liquidity fee charge to the remaining
balance in an investor’s account if the
investor did not redeem the full amount
of its shares in the fund. Another
approach would be to hold back a
portion of the redemption proceeds
until the end of the day when the
liquidity fee determination is made.168
Alternatively, a fund might develop a
mechanism for taking back a portion of
redemption proceeds that the investor
has already received. Further, while not
required, some funds might choose to
reduce the number of NAV strikes they
offer or no longer offer multiple NAV
strikes for operational ease.169 Funds
and intermediaries may also develop
other approaches to address this issue.
Depending on a given fund’s approach,
a redeeming investor may experience a
reduction in its access to liquidity
relative to current practices. In addition,
different approaches may have differing
effects on investors or raise tax or other
considerations. Overall, we believe it is
unlikely that the mandatory liquidity
fee would result in a redeeming investor
being unable to access same-day
liquidity.170
Some commenters questioned the
fairness of applying a charge to certain
types of investors who redeem on a
given day. For instance, some
commenters suggested that it would be
unfair to apply a charge to investors
who redeem and later purchase an
identically sized investment on the
same day, because these investors
would incur costs despite having no net
effect on liquidity.171 One commenter
suggested that it would be unfair for a
shareholder redeeming a relatively
small number of shares to be charged a
liquidity fee because another
shareholder redeemed a large number of
shares and triggered the threshold.172
168 See BlackRock Comment Letter (stating that,
under its preferred liquidity fee framework, it
would plan for its multi-strike NAV funds to pay
out a portion of redemption proceeds after each
intraday NAV is struck, with the remaining
redemption proceeds paid out after the close if no
fee is required or reduced by the fee if a fee is
required).
169 See infra section IV.C.4.b.ii.
170 See id.
171 See, e.g., Federated Hermes Comment Letter I;
Allspring Funds Comment Letter; Americans for
Tax Reform Comment Letter.
172 See Dechert Comment Letter.
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51421
With respect to the application of a
fee to an investor who has both
redeemed and purchased the fund’s
shares on the relevant day, the final rule
would permit funds to apply liquidity
fees based on an investor’s net
transaction activity for that day. The
current rule likewise provides this
flexibility.173 When the Commission
adopted the liquidity fee framework in
the current rule, however, several
commenters suggested that it may be too
operationally difficult and costly for
funds to apply liquidity fees to
shareholders based on their net activity
for the day. As a result, while we are
permitting a fund to apply fees based on
a shareholder’s net activity, this
approach is not required, and a fund
could instead apply liquidity fees to
each redemption separately. As for the
application of a liquidity fee to small
redemptions, the final rule will require
application of liquidity fees regardless
of the size of the redemption. Consistent
with the Commission’s views in 2014
with respect to the current rule’s
liquidity fee framework, an exception
from the mandatory liquidity fee for
small redemptions would increase the
cost and complexity of the amendments
and could facilitate gaming on the part
of investors because investors could
attempt to fit their redemptions within
the scope of an exception.174
Under the final rule, to determine
whether a fund has crossed the 5%
threshold, the fund will use information
about its net flows for the day that are
available within a reasonable period of
time after the last pricing time of that
day.175 For example, if the fund’s last
NAV strike is as of 3 p.m., it would
calculate its net flows within a
reasonable time period thereafter such
that the fund can calculate and apply
any fee as of that day. The fund’s
approach to determining when to
calculate net flows should be in its
board-approved guidelines on the
application of liquidity fees.176 In
determining when to calculate its net
flows, a fund should consider historical
data on when it typically receives flow
173 See 2014 Adopting Release, supra note 26, at
paragraph accompanying n. 380.
174 See id. at section III.C.7.a (stating that such an
exception for small redemptions would add cost
and complexity both as an operational matter—for
example, fund groups would need to be able to
separately track which shares are subject to a fee
and which are not, and create the system and
policies to do so—and in terms of ease of
shareholder understanding).
175 See amended rule 2a–7(c)(2)(ii).
176 See infra section II.B.2.b (discussing liquidity
fee guidelines that the fund’s board must approve
if it delegates its responsibility for liquidity fee
determinations to the fund’s investment adviser or
officers).
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information and may also consider the
period of time needed to calculate and
apply fees. For example, if a fund
generally receives substantially all of its
flows by 5 p.m. and the process for
determining the fee amount will take up
to one hour, the rule would not require
the fund to wait until 6 p.m. to calculate
its net flows if, by 6 p.m., the fund
typically has an even larger percentage
of its flows. Using the same example, it
would not be reasonable for this fund to
calculate its net flows at 3:30 p.m.,
when it generally has less than a
majority of its net flows by this time,
given that the fund can reasonably
expect, based on historical data, to have
more net flow information by 5 p.m. and
still be able to calculate and apply any
fee as of that later time. This approach
is designed to provide a fund with
flexibility to calculate daily flows using
the best information available to the
fund while still being able to offer sameday settlement. Consistent with the
proposal and with 17 CFR 270.18f–3
(‘‘rule 18f–3’’), an institutional fund
with multiple share classes must
include net flow activity across all share
classes in the aggregate when
determining if the fund has crossed the
5% threshold, rather than applying the
threshold on a class by class basis.177
Some commenters stated that it may
be difficult for funds to receive
sufficient flow information to
implement swing pricing.178 A few
commenters suggested that using
estimates of flows for swing pricing
would raise potential NAV error and
liability concerns.179 A few commenters
suggested that funds may need to
establish earlier cut-off times for
receiving investor orders.180 As
discussed below, the amended rule
requires that funds calculate net
redemptions based on actual flow data
for the day, as opposed to estimates of
flows. In addition, in a change from the
proposal, we are not requiring funds to
separately examine flows for each
pricing period of the day or reflect the
charge in the form of a NAV adjustment.
We believe these changes help mitigate
commenters’ concerns about sufficiency
of flow information, as well as liability
and other risks.
As discussed in the Proposing
Release, institutional money market
funds often impose order cut-off times
to be able to offer same-day settlement,
which requires that funds complete
Fedwire instructions before the Federal
Reserve’s 6:45 p.m. Eastern Time (ET)
Fedwire cut-off time.181 Therefore, we
believe many institutional funds would
have a sizeable portion of their daily
flows by the last pricing time of the day
or within a reasonable period of time
thereafter. We understand there will be
circumstances in which the flow
information a fund uses to determine
whether it has crossed the net
redemption threshold does not reflect
the fund’s full flows for that day. For
example, a fund may receive subsequent
cancellations or corrections to correct
intermediary or investor errors, which
modify the flows. In addition, the fund,
or a share class of the fund, may settle
some transactions on T+1 and receive
flow information for those trades from
intermediaries later, although they are
eligible to receive the NAV as of the last
pricing time.182 To the extent that a
fund received additional flow
information after determining that it
crossed the 5% threshold, but before
applying a liquidity fee, the fund could
take the additional flow information
into account when determining the
amount of the liquidity fee. While using
the fund’s net flows available within a
reasonable period after the last pricing
time to determine whether the fund has
crossed the 5% threshold may result in
false positives and false negatives under
certain circumstances, we believe the
associated risk is relatively low because
we anticipate that funds typically will
not impose liquidity fees under normal
market conditions under the de minimis
exception, and institutional money
market funds often have net
redemptions in periods of stress.
Moreover, this risk is justified by the
177 See Proposing Release, supra note 6, at n. 112
and accompanying text.
178 See, e.g., ICI Comment Letter; Fidelity
Comment Letter; Capital Group Comment Letter;
Invesco Comment Letter.
179 See, e.g., Invesco Comment Letter; ICI
Comment Letter; SIFMA AMG Comment Letter; ICI
Comment Letter; see also Western Asset Comment
Letter (expressing concern about erroneous
application of market impacts if an investor or its
intermediary partner notifies the fund of large
outflows and then cancels the instructions late in
the trading day).
180 See, e.g., Invesco Comment Letter; State Street
Comment Letter; Dechert Comment Letter; IDC
Comment Letter; JP Morgan Comment Letter;
Federated Hermes Comment Letter I; Fidelity
Comment Letter.
181 See Proposing Release, supra note 6, at section
II.B.2. Based on a 2021 analysis of information from
CraneData, a majority of the prime institutional
money market funds that impose an order cut-off
time impose a 3 p.m. ET deadline for same-day
processing of shareholder transaction requests. See
id.; see also Fidelity Comment Letter (stating that
its prior publicly offered institutional prime fund
that offered same-day settlement used the same
order cut-off and NAV strike times to allow the
fund to calculate its NAV and wire redemption
proceeds as quickly as possible to meet shareholder
expectations and cash needs).
182 See Federated Hermes Comment Letter II
(stating that over a 3-month representative period,
its institutional prime fund received 35.7% of trade
notices after 3 p.m. and that generally settled on
T+1).
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benefits of a framework that is easier for
funds to operationalize and likely less
prone to error than a framework based
on estimated flows. In addition, to the
extent that a fund did not have net
redemptions of more than 5% within a
reasonable period after the last pricing
period but subsequently received
additional net redemptions that would
cause it to cross the threshold, the fund
should consider imposing a liquidity fee
under the discretionary fee provision
discussed below.
We recognize that institutional money
market funds that are used as cash
management vehicles for other funds
may have particular difficulty obtaining
flow information by the last pricing time
of the day.183 As with other institutional
funds that may cross the 5% threshold
after the last pricing time of the day,
these funds should consider imposing
liquidity fees under the discretionary
fee provision if they subsequently cross
the 5% threshold under market
conditions where estimated liquidity
costs are not de minimis.
In general, the proposed swing pricing
requirement would have required
institutional money market funds to
apply charges to reflect spread and
certain other transaction costs for any
level of net redemptions. We are not
requiring institutional funds to apply a
liquidity fee when net redemptions are
below the 5% net redemption threshold.
After considering comments, we do not
believe that the benefits of the proposed
approach justify the costs at this time
because the structure of money market
funds, including minimum liquidity
requirements, helps mitigate dilution
risk when the fund has low levels of net
redemptions. In addition, the vast
majority of money market funds already
price portfolio securities at the bid price
when striking their NAVs.184 This
market practice effectively passes
spread costs on to redeeming investors,
which means that the proposed
application of swing pricing when a
fund has low levels of net redemptions
would have had limited effect.185
183 See
Capital Group Comment Letter.
ICI Comment Letter; JP Morgan Comment
Letter; see also Allspring Funds Comment Letter.
185 See Financial Accounting Standards Board
Accounting Standards Codification (‘‘FASB ASC’’)
820–10–35–36C. Generally accepted accounting
principles (‘‘GAAP’’) provide that if an asset
measured at fair value has a bid price and an ask
price (for example, an input from a dealer market),
the price within the bid-ask spread that is most
representative of fair value in the circumstances
shall be used to measure fair value, and that the use
of bid prices for asset positions is permitted but not
required for these purposes. Id; see also FASB ASC
820–10–35–36D (stating that use of mid-market
pricing as a practical expedient for fair value
measurements within a bid-ask spread is not
precluded). Very generally, mid-market pricing
184 See
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b. Administration of Mandatory
Liquidity Fees
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Under the final rule, an institutional
fund’s board will be responsible for
administering the mandatory liquidity
fee, but the board can delegate this
responsibility to the fund’s investment
adviser or officers, subject to written
guidelines established and reviewed by
the board and ongoing board
oversight.186 The current rule, in
contrast, does not permit a board to
delegate its responsibility for liquidity
fee determinations.187 Boards will be
able to delegate liquidity fee
determinations under the final rule,
unlike under the current rule, to
facilitate timely application of liquidity
fees on days when the fund has net
redemptions that, due to associated
costs to meet those redemptions, will
dilute the value of the fund for
remaining shareholders. This change
will better allow funds to address
liquidity fee determinations in periods
of market stress when it may not be
practical to assemble a quorum of the
necessary directors in advance of the
required application of a fee,
particularly because the final rule
requires application of fees to
redemptions on the same day the 5%
net redemption threshold is crossed.
Because money market funds already
have experience with liquidity fee
requirements, it is appropriate to allow
for the delegation of liquidity fee
determinations. This approach is
consistent with other delegable routine
board functions under rule 2a–7.
Allowing a board to delegate the
responsibilities for making liquidity fee
determinations is similar to the
proposed requirement for a boarddesignated swing pricing administrator.
Also consistent with the proposal, the
board will be responsible for oversight
of the anti-dilution mechanism.
Specifically, the board will be required
to review its written guidelines and the
delegate’s liquidity fee determinations
periodically. This approach is similar to
values a security at the average of its bid price and
ask price. Since a seller generally asks for a higher
price for a security than a buyer bids for that
security, the mid-market price is incrementally
higher than the bid price for a security, but lower
than its ask price.
186 See amended rule 2a–7(j). Consistent with rule
2a–7, the fund must maintain and preserve for six
years a written copy of these guidelines. The fund
also must maintain and preserve for six years a
written record of the board’s considerations and
actions taken in connection with discharging its
responsibilities, to be included in the board’s
minutes. See 17 CFR 270.2a–7(h)(1) and (2).
187 See 17 CFR 270.2a–7(j) (stating that a board
may not delegate determinations related to liquidity
fees and temporary gates).
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the proposed board oversight of the
swing pricing administrator.
Under the final rule’s delegation
provision, a board will need to adopt
and periodically review written
guidelines (including guidelines for
determining the application and size of
liquidity fees) and procedures under
which a delegate makes liquidity fee
determinations. Such written guidelines
generally should specify the manner in
which the delegate is to act with respect
to any discretionary aspect of the
liquidity fee mechanism (e.g., whether
the fund will apply a fee to a
shareholder based on the shareholder’s
gross or net redemption activity for the
relevant day, the fund’s approach to
determining the reasonable period after
the last pricing period of the day when
the delegate will measure the fund’s
flows for purposes of the 5% net
redemption threshold). The board will
also need to periodically review the
delegate’s liquidity fee determinations.
This approach is consistent with rule
2a–7’s approach to the delegation of
board responsibilities generally and
provides a framework for a board
effectively to oversee liquidity fees
imposed by the fund.
c. Calculation and Size of Mandatory
Liquidity Fees
The mandatory liquidity fee provision
we are adopting generally will require
an institutional fund to determine the
amount to charge redeeming investors
by making a good faith estimate,
supported by data, of the costs the fund
would incur if it sold a pro rata amount
of each security in its portfolio (i.e.,
‘‘vertical slice’’) to satisfy the amount of
net redemptions, including spread costs,
such that the fund is valuing each
security at its bid price and any other
charges, fees, and taxes associated with
portfolio security sales (‘‘transaction
costs’’) and market impacts.188 This is a
change from the current rule, which
establishes a default fee of 1% and
provides for board discretion to adjust
that amount down or up (subject to a
2% limit), but does not prescribe how
the board determines the liquidity fee
amount. The final rule’s approach,
however, is similar to the proposal’s
swing pricing requirement and its
inclusion of transaction costs and good
faith estimates of market impacts in the
swing factor when net redemptions
exceed a specified level. In a change
from the proposal, we are modifying the
188 Amended rule 2a–7(c)(2)(iii)(A); see Proposing
Release, supra note 6, at section II.B.1; see also
amended rule 31a–2(a)(2) (requiring funds to
preserve for the prescribed periods all schedules
evidencing and supporting each computation of a
liquidity fee by the fund).
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51423
requirements for the liquidity fee
calculation in response to comments, as
well as providing additional guidance
on how a fund may arrive at good faith
estimates of the costs. For instance, the
final rule will provide that if an
institutional fund makes a good faith
estimate that liquidity costs are de
minimis, then the fund is not required
to charge a liquidity fee.189 In addition,
if a fund cannot estimate in good faith
the costs of selling a pro rata amount of
each portfolio security, then the fund
will apply a default fee of 1% of the
value of the shares redeemed.190
As discussed in the proposal, the
vertical slice approach may help
prevent remaining shareholders from
bearing the costs associated with fund
redemptions and may help discourage
investors from redeeming quickly
during periods of market stress. Several
commenters expressed concern about
the proposed vertical slice assumption
for estimating the costs imposed by
redeeming investors. These commenters
generally argued that because money
market funds generally meet
redemptions with available liquidity
from maturing assets, rather than
through the sale of a vertical slice of the
fund’s portfolio, the vertical slice
assumption may impose costs on
redeeming investors that the fund does
not actually incur.191 We understand
that a money market fund does not
typically sell a vertical slice of its
portfolio to meet redemptions. However,
the vertical slice approach is designed
to account for the costs of leaving
remaining investors with a less liquid
portfolio and potential rebalancing
costs. For example, if investor
redemptions are met through daily or
weekly liquid assets, the redemptions
leave the fund with less liquidity, which
increases the likelihood that further
redemptions could require the fund to
sell less liquid assets or incur costs in
rebalancing the portfolio, particularly in
periods of market stress when
redemptions may be elevated. If we
instead required funds to determine the
amount of a liquidity fee based on the
direct transaction costs incurred to meet
redemptions, a fund would not charge a
liquidity fee to redeeming investors
until after other investors’ redemptions
had already extracted much of the
189 Amended
rule 2a–7(c)(2)(iii)(D).
rule 2a–7(c)(2)(iii)(C).
191 See, e.g., SIFMA AMG Comment Letter;
BlackRock Comment Letter; State Street Comment
Letter; ICI Comment Letter; Federated Hermes
Comment Letter II; Bancorp Comment Letter; ABA
Comment Letter I; Invesco Comment Letter; Fidelity
Comment Letter; Allspring Funds Comment Letter;
Keen Comment Letter; Western Asset Comment
Letter.
190 Amended
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fund’s liquidity. Such a framework
could incentivize preemptive
redemptions to avoid liquidity fees in
periods of stress and would not account
for the full costs of removing liquidity
from the fund in these periods.
Consistent with the proposal, the fee
has two components: (1) transaction
costs; and (2) market impact costs. The
transaction costs category includes
spread costs, such that the fund is
valuing each security at its bid price,
and any other charges, fees, and taxes
associated with portfolio security
sales.192 Several commenters suggested
that money market funds would not
need to include spread costs in a charge
to redeeming investors because most
money market funds already value their
portfolio securities at bid prices when
striking their NAVs.193 In light of this
general market practice, we recognize
that most funds will not have to include
spread costs in their charged liquidity
fee because they already use bid pricing.
Per the rule, however, the few funds
that do not currently use bid pricing
will need to include spread costs in the
fee.
The second component of the
mandatory liquidity fee calculation
requires that funds make a good faith
estimate of the market impact of selling
a vertical slice of a fund’s portfolio to
satisfy the amount of net
redemptions.194 The required market
impact calculation is designed to
provide a good faith estimate of the full
liquidity costs of selling a vertical slice
of a money market fund’s portfolio
because, for a money market fund’s less
liquid investments, market impacts may
impose significant costs on a fund that
should be borne by redeeming investors
as opposed to remaining investors. This
concern may be particularly acute when
net redemptions are large or in times of
stress and when a fund must sell less
liquid investments. In terms of the
mechanics, a fund would first establish
a market impact factor for each security,
192 The proposal included within this category of
costs specific references to both brokerage and
custody fees. A few commenters suggested that
brokerage fees would not be applicable to money
market funds and custody fees would not increase
when a fund has net redemptions. See Allspring
Funds Comment Letter; see also Capital Group
Comment Letter. In a change from the proposal, we
have removed from the final rule those references,
but we expect the transaction costs category to
include, as applicable, any charges the fund would
incur if it sold a pro rata amount of each security
in its portfolio to satisfy the amount of net
redemptions, whether in the form of brokerage,
custody, or other fees.
193 See Americans for Tax Reform Comment
Letter; Allspring Funds Comment Letter; ICI
Comment Letter; JP Morgan Comment Letter; see
also Federated Hermes Comment Letter I.
194 See amended rule 2a–7(c)(2)(iii)(A).
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which is a good faith estimate of the
percentage change in the value of the
security if it were sold, per dollar of the
amount of the security that would be
sold, if the fund sold a pro rata amount
of each security in its portfolio to satisfy
the amount of net redemptions, under
current market conditions. A fund
would then multiply the market impact
factor by the dollar amount of the
security that would be sold.195
Some commenters stated that it would
be challenging to make a good faith
estimate of the market impact of selling
a vertical slice of a money market fund’s
portfolio because of the limited nature
of the secondary market for funds’
portfolio securities.196 Some
commenters expressed particular
concern about funds’ abilities to make
good faith estimates of market impacts
in stress events such as March 2020,
when some underlying markets are
prone to freezing and few transactions
occur.197 Some commenters suggested
that the market impact calculations will
require estimates in periods of market
stress and will result in either errors or
incorrect estimates.198 One commenter
suggested that estimating market impact
costs a priori is challenging and requires
judgments for which it may be difficult
to have a high degree of confidence.199
Some commenters suggested that it
would take time to undertake the market
impact calculation, which may create
operational burdens that result in the
need for earlier order cut-off times or a
reduction of features like multiple NAV
strikes per day or same-day
settlement.200 Some commenters
suggested that funds need additional
guidance to make the good faith
estimates of market impacts that the rule
will require.201 One commenter
suggested that if funds have too much
discretion in making good faith
estimates, then it could lead to artificial
manipulation.202
195 See
amended rule 2a–7(c)(2)(iii)(A)(2).
e.g., ICI Comment Letter; BlackRock
Comment Letter.
197 See, e.g., Federated Hermes Comment Letter II;
ICI Comment Letter; BlackRock Comment Letter;
SIFMA AMG Comment Letter.
198 See Federated Hermes Comment Letter I;
Federated Hermes Comment Letter II; CCMR
Comment Letter; BlackRock Comment Letter; see
also Western Asset Comment Letter (suggesting that
application of calculation is likely to vary across the
industry and lead to inconsistencies).
199 See ICI Comment Letter.
200 See, e.g., State Street Comment Letter; IIF
Comment Letter; see also Capital Group Comment
Letter; Northern Trust Comment Letter.
201 See, e.g., BlackRock Comment Letter; ICI
Comment Letter (suggesting particular challenges
exist for securities that do not trade frequently);
Federated Hermes Comment Letter II; Capital Group
Comment Letter.
202 See Morgan Stanley Comment Letter.
196 See,
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We recognize that market impact costs
of a transaction cannot be determined
with certainty before the transaction
occurs. As a result, the rule requires
good faith estimates of these costs, given
that a fund generally is not selling a
vertical slice of its portfolio to meet net
redemptions.203 While the calculated
liquidity fee will be based on good faith
estimates and thus will not precisely
reflect the liquidity costs of
redemptions, this result is preferable to
an overly low liquidity fee that does not
attempt to include market impact costs,
which can be a significant source of
liquidity costs. We also recognize the
challenges in assessing the amount of a
liquidity fee to charge in times of market
stress when underlying markets are
frozen or transactions are rare. To
reduce these challenges, we are
providing guidance on one method
funds could use to make a good faith
estimate of the costs of selling a vertical
slice of the fund’s portfolio to meet net
redemptions. In addition, like the
proposal, the final rule permits a fund
to make a good faith estimate of costs for
each type of security with the same or
substantially similar characteristics and
apply those good faith estimates to all
securities of that type in the fund’s
portfolio, rather than analyze each
security separately.204 Some
commenters suggested that the
Commission should provide additional
guidance on how to determine which
securities share substantially similar
characteristics.205 As discussed in the
proposal, a fund could determine that
the liquidity, trading, and pricing
characteristics of a subset of securities
justifies the application of the same
costs and market impact factor to all
securities of that type within its
portfolio. Further examples of the kinds
of criteria that fund might consider
when determining how to group
securities could include: issuance size,
credit worthiness, number of other
investors in the same issuance,
maturity, industry, and geographic
region. Also consistent with the
proposal, and as reflected in the
amended rule, we continue to believe it
would be reasonable to assume a market
impact of zero for the fund’s daily and
weekly liquid assets, since a fund could
reasonably expect such assets to convert
203 If a fund were to manipulate its estimates of
market impact costs in an effort to increase or
decrease the calculated fee amount, without regard
to a reasonable assessment of costs under current
market conditions, the manipulated estimates
would not be ‘‘good faith’’ estimates.
204 See amended rule 2a–7(c)(2)(iii)(B).
205 See Capital Group Comment Letter; Fidelity
Comment Letter; see also Federated Hermes
Comment Letter II.
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to cash without a market impact to
fulfill redemptions (e.g., because the
assets are maturing shortly).206 In
addition, in a change from the proposal,
we are requiring funds to apply a
default fee of 1% of the value of shares
redeemed if they are unable to make
good faith estimates of these costs. This
change is intended to reduce the burden
on funds if good faith estimates are not
feasible. The default fee provision
applies if costs cannot be estimated in
good faith and supported by data.
To develop good faith estimates of
market impact costs supported by data,
funds may consider using historical data
to model the reasonably expected price
concessions a fund may need to make to
sell different amounts of a security
under different market conditions.
Specifically, among other potential
methods for establishing a good faith
estimate of the market impact of selling
a vertical slice of the fund’s portfolio to
meet net redemptions, a fund could
estimate and document in pricing grids
the effect of selling different amounts of
the security on a security’s price for
each group of securities in its portfolio
with the same or substantially similar
characteristics under different market
conditions. Under a grid-based
approach, a fund would develop
separate grids for different market
conditions, such as normal market
conditions or periods with credit stress,
liquidity stress, or interest rate stress (or
a combination of such stresses).207
Because market impact varies
depending on the amount a fund sells,
the grids would assess market impact of
selling different amounts of a security.
For example, a grid might estimate the
market impact of selling various
percentage- or value-based ranges of a
security or group of securities. Thus, on
a day a fund has net redemptions of
more than 5%, it could calculate market
impact by referring to the appropriate
grid that reasonably approximates
current market conditions and
identifying the market impact estimate
for the assumed amount to be sold
under the required vertical slice
analysis. If a fund uses grids to
implement its market impact
calculations, it generally should review
the grids periodically and update them
to account for recent market data. Under
the rule, if a fund encountered
unforeseen market conditions not
contemplated in advance and the fund
was not able to otherwise make a good
206 See amended rule 2a–7(c)(2)(iii)(A)(2);
Proposing Release, supra note 6, at section II.B.1.
207 Funds may be able to leverage existing
processes and historical data from existing sources,
including stress testing, to develop and maintain
such grids.
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faith estimate of its liquidity costs, then
the fund would rely on the 1% default
liquidity fee provision of the amended
rule.208
After estimating the transaction costs
and market impact costs of selling a
vertical slice of the fund’s portfolio to
meet net redemptions, the fund will
need to determine the liquidity fee
amount, as a percentage of the value of
the shares redeemed, to fairly allocate
these costs across all redemptions. To
do so, a fund will need information
about gross redemptions from each
intermediary for that day.209 We
recognize that some intermediaries may
currently provide only net flow
information to funds. In those
circumstances, funds may need to
update their arrangements with
intermediaries to obtain the gross
amount of redemptions in a timely
manner.210 We also recognize, as
discussed above, that a fund may not
have complete flow information at the
time it determines to apply a fee. The
fund’s board-approved guidelines for
implementing mandatory liquidity fees
may want to specify the time by which
the fund will review its flow
information for purposes of calculating
the liquidity fee amount. We recognize
that this time may differ among funds.
For example, some funds (e.g., those
that typically settle the vast majority of
shareholder purchase and redemption
activity on T+0) may use the same flow
information they use to determine if the
fund has crossed the 5% net redemption
208 See Federated Hermes Comment Letter II
(suggesting that funds could develop schedules of
estimated market impact costs stratified by the size
of trade for different classes of securities, which
would require periodic updating over time as
market conditions evolve, but that these schedules
may not be able to reflect good faith estimates in
stressed conditions).
209 Information about the gross number of shares
redeemed will allow the fund to fairly allocate the
liquidity costs across all redemptions. If a fund
instead allocated the liquidity costs based on net
redemptions, the fund would charge a higher fee
amount per share redeemed and would collect more
than its calculated liquidity costs when applied to
each redemption on a gross basis. As a stylized
example, assume a fund’s estimated liquidity costs
are $100 to sell a vertical slice of the fund’s
portfolio to meet net redemptions of 10,000 shares
at a per share price of $1.0000 (or net redemptions
of $10,000). On that day, 20,000 shares are
redeemed in total (i.e., not netted against purchase
activity). Using gross redemptions to determine the
fee, the fund charges redeeming investors $0.005
per share ($100 liquidity cost divided by gross
redemptions of 20,000 shares) and collects the $100
of estimated liquidity costs ($0.005 per share
multiplied by 20,000 shares). If the fund were to
instead use net redemptions to determine the
charge to apply to all redeeming investors, the
charge would be $0.01 per share ($100 liquidity
cost divided by net redemptions of 10,000 shares),
and the fund would collect $200 ($0.01 per share
multiplied by 20,000 shares redeemed).
210 See infra section IV.C.4.a.ii.
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51425
threshold. Other funds may determine
to wait until a later point, particularly
if they have developed a method for
applying a fee after a trade is executed.
As discussed above, some funds may
develop such methods in connection
with applying liquidity fees to
redemptions that occurred in earlier
pricing periods on the relevant day.
As discussed above, institutional
funds may cross the 5% net redemption
threshold under normal market
conditions. Under these circumstances,
the calculated liquidity fee amount is
likely to be very small. For instance,
under normal market conditions a fund
generally will be able to assume no
market impact for at least 50% of its
assets invested in weekly liquid
assets.211 In addition, in many cases, the
fund may estimate in good faith that the
market impact costs of selling other
positions in its portfolio will be
minimal if dealer accommodation
allows it to transact at or close to bid or
mid prices under normal market
conditions.212 To recognize that there
are limited benefits to imposing a very
small liquidity fee under these
circumstances, the final rule does not
require a fund to impose the mandatory
liquidity fee if its estimated liquidity
costs are de minimis. Some commenters
stated that money market funds would
have minimal costs stemming from
redemptions under normal market
conditions or when the fund holds a
significant amount of daily and weekly
liquid assets.213 The final rule provides
that estimated costs are de minimis for
purposes of the liquidity fee
requirement if the amount of the fee
would be less than 0.01% of the value
of the shares redeemed.214 The de
minimis exception for liquidity fees is
similar to the swing pricing proposal,
211 This is also true for the fund’s portfolio
securities that qualify as daily liquid assets but, by
definition, daily liquid assets are also weekly liquid
assets.
212 This will not be the case for any illiquid
securities the fund holds, but a money market fund
may not acquire any illiquid security if,
immediately after the acquisition, the fund would
have invested more than 5% of its total assets in
illiquid securities. See 17 CFR 270.2a–7(d)(4)(i).
Under rule 2a–7, an illiquid security is a security
that cannot be sold or disposed of in the ordinary
course of business within seven calendar days at
approximately the value the fund ascribed to it. See
17 CFR 270.2a–7(a)(18).
213 See, e.g., T. Rowe Comment Letter; Fidelity
Comment Letter; Vanguard Comment Letter.
214 See amended rule 2a–7(c)(2)(iii)(D). This
provision does not reflect an interpretation of the
term de minimis for any other purpose. See also
Federated Hermes Comment Letter I (stating that if
the portfolio cost of processing a net redemption
does not move the money market fund’s share price,
the costs should not viewed as material to any
money market fund investor and the costs should
not be assessed).
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which would not have required a fund
to apply a swing factor if it would not
have changed the fund’s price per
share.215
Some commenters suggested that,
even in periods of market stress, the
required calculation would result in
small charges to redeeming investors.216
For example, one commenter estimated
the impact of swing pricing on its
privately offered institutional prime
money market fund on March 16, 2020,
and seemed to suggest that the price
change would have been slightly more
than one basis point.217 While the
commenter did not provide significant
detail about its analysis, the March 2020
Form N–MFP filing for this fund shows
that the fund had daily liquid assets of
around 30% and weekly liquid assets of
around 53% at the end of the relevant
week. Based on available information,
we believe that the commenter was
assuming a market impact of zero for
these holdings, which would be
consistent with the proposal and the
final rule. This contributes to a lower
estimated cost, and this cost would rise
as the liquidity of the fund’s portfolio
declines. Another commenter analyzed
the size of a swing factor adjustment if
a fund held 50% of its assets in weekly
liquid assets and applied a 100-basis
point upward move in market yield for
all other holdings (a historically large
move based on a review of changes in
three-month LIBOR rates since 2007,
according to the commenter) as a proxy
of market impact. The commenter stated
that, in this analysis, a fund’s price per
share would only move down by
$0.0007.218 Because of rule 2a–7’s risk
limiting requirements, money market
funds generally hold portfolios that are
not subject to significant credit or
interest rate risks. As a result, changes
to a reference rate reflecting these risks,
such as LIBOR, are somewhat muted
relative to risk indicators applicable to
215 See 17 CFR 270.2a–7(c)(1)(ii) (providing that
an institutional money market fund must compute
its price per share for purposes of distribution,
redemption, and repurchase by rounding the fund’s
current net asset value per share to a minimum of
the fourth decimal place in the case of a fund with
a $1.0000 share price or an equivalent or more
precise level of accuracy for funds with a different
share price, for example $10.000 per share or
$100.00 per share).
216 See, e.g., Capital Group Comment Letter;
Fidelity Comment Letter.
217 See Capital Group Comment Letter (stating
that spread costs and other transaction costs would
not have affected the fund’s NAV by more than 1
basis point and suggesting that if the fund had
experienced net redemptions of 8% on that day, the
market impact would have decreased the fund’s
NAV by barely more than 3/100 of 1 basis point).
218 See Fidelity Comment Letter (stating that if the
fund had 30% weekly liquid assets and the market
impact factor was 150 basis points, the NAV would
decline by $0.0014).
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longer-dated or lower credit quality
portfolios even during periods of market
stress.
We recognize that the estimated
liquidity costs may be rather small
when a fund holds high levels of daily
and weekly liquid assets because, as
discussed above, funds can assume a
market impact of zero for these assets.
Several commenters agreed that the
market impact factor for daily liquid
assets and weekly liquid assets should
be set at zero.219 In addition, as
discussed above, several commenters
suggested that the amount of a fund’s
liquidity should be a consideration for
when a fee is triggered. While we
decline to have a built-in liquidity
threshold for triggering the application
of fees in light of the experience with
the current rule in March 2020, the
determination of the amount of the fee
will take into account the liquidity of
the fund’s portfolio.
In response to commenters’ concerns
about the ability of funds to make good
faith estimates of the market impact of
selling a vertical slice of the fund’s
portfolio in periods of market stress,
particularly when the markets for
portfolio securities are frozen, the final
rule provides that a fund must impose
a default liquidity fee of 1% if the fund
is not able to make a good faith estimate
of its liquidity costs.220 Like the current
rule, the default fee amount is 1% of the
value of shares redeemed.221 The new
default fee, however, is not connected to
a weekly liquid asset threshold and not
subject to a decision by the fund’s board
as to whether the fee is in the best
interests of the fund. In addition, unlike
the current rule, the fund’s board will
not have discretion to modify the
default fee amount, because the
amended rule provides a separate
framework for determining the liquidity
fee amount based on good faith
estimates and available data. Rather,
funds will use the default fee when they
cannot estimate transaction and market
impact costs in good faith, and
supported by data. We are persuaded by
the comments that it may prove difficult
at times for funds to make good faith
estimates of liquidity costs in periods of
219 See
Fidelity Comment Letter; Federated
Hermes Comment Letter I; see also Mutual Fund
Directors Forum Comment Letter.
220 See amended rule 2a–7(c)(2)(iii)(C).
221 See 2014 Adopting Release, supra note 26, at
section III.A.2.c (discussing analysis in support of
a default fee of 1% under the current rule); infra
note 668 and accompanying text (discussing that a
1% default fee is generally consistent with the
range of money market fund liquidity costs during
March 2020 to the degree that discounts
experienced by ultra-short bond exchange traded
funds in this period may serve as a proxy for
liquidity costs of money market funds).
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market stress. The 1% default fee is
designed to provide money market
funds with the ability to apply a fee
when the fund determines that its
pricing grid, or other method for
estimating transaction and market
impact costs, does not reflect a good
faith estimate of these costs in current
market conditions.
We are also amending our
recordkeeping rules to require funds to
retain records that document how they
determine the amount of any liquidity
fee.222 For example, if a fund establishes
good faith estimates of its liquidity costs
by using pricing grids or otherwise, it
must preserve records supporting each
fee computation. If the fund applies a
1% default liquidity fee, the fund must
preserve records supporting its
determination that it cannot establish a
good faith estimate of its liquidity costs.
If a fund determines that its liquidity
costs are less than 0.01% of the value
of the shares redeemed and therefore the
fund is not required to apply a liquidity
fee under the rule, the fund must
preserve records supporting how it
determined that the costs would be less
than 0.01%.
The mandatory liquidity fee will not
be capped since it is reflective of a
fund’s estimated liquidity costs. The
uncapped fee is consistent with the
proposed swing pricing requirement.
This is a change, however, as compared
to the current rule, which does not
allow a fee to exceed 2% of the value
of the shares redeemed.223 Some
commenters suggested that the rule
should cap the amount of a liquidity fee
to provide transparency to investors
about the size of fee they may incur.224
Some commenters expressed concern
that an uncapped charge may cause
investors to leave institutional money
market funds due to concerns about the
possibility of incurring high charges
when redeeming.225 In addition, some
commenters suggested that it is unlikely
that a fund’s liquidity costs would
exceed 2% because of the nature of
money market fund portfolio holdings,
maturity limits, and historical price
222 See amended rule 31a–2. The Commission
similarly proposed to amend rule 31a–2 to require
funds to preserve records supporting swing factor
computations for the proposed swing pricing
requirement.
223 See 17 CFR 270.2a–7(c)(2)(ii)(A).
224 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; see also Northern Trust Comment
Letter (suggesting that a swing factor with no upper
limit would impede the core functions of money
market funds).
225 See, e.g., JP Morgan Comment Letter; Morgan
Stanley Comment Letter; BlackRock Comment
Letter.
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movements.226 We believe that the
specific parameters in the rule for
determining the liquidity fee amount
sufficiently mitigate the concerns that a
liquidity fee would place an undue
restriction on investors’ ability to
redeem. Further, if a fund were to
experience high costs associated with
redemptions, we believe it is
appropriate for redeeming investors to
bear the costs their redemptions create
for the benefit of remaining investors.
As discussed below, we recognize,
however, that it is unlikely a fund’s
calculated liquidity costs would exceed
2% of the value of shares redeemed.227
Given our experience with investor
behavior in March 2020, we also believe
that requiring redeeming investors to
internalize the liquidity costs of their
redemptions will likely make investors
consider potential redemption requests
more carefully in periods of market
stress, and will prevent remaining
investors from bearing costs imposed on
the fund by redeeming investors.
Some commenters suggested
approaches for determining the amount
of liquidity fees that differ from what we
are adopting. For example, several
commenters suggested a static fee
amount, such as 1% or 2%.228 Some
commenters suggested tiered liquidity
fees, where the rule would provide for
identified increases to the liquidity fee
amount as a fund crossed different
thresholds meant to reflect increasing
levels of stress.229 These commenters
suggested thresholds for applying
liquidity fees that would only trigger in
times of significant stress. Because, as
discussed above, a fund may cross the
5% net redemption threshold we are
adopting under normal market
conditions, we do not believe that a
static fee amount is appropriate. We
anticipate that liquidity costs generally
will be de minimis under normal market
conditions. We also decline to adopt
tiered liquidity fee amounts. The
commenters suggesting tiered liquidity
fee amounts generally set specific
weekly liquid asset thresholds for when
the fee would increase. We believe this
approach would establish ‘‘cliff effects’’
in the rule that investors may seek to
avoid through preemptive redemptions,
226 See, e.g., Federated Hermes Comment Letter I;
Western Asset Comment Letter.
227 See infra section IV.C.4.b.v.
228 See, e.g., ICI Comment Letter; Invesco
Comment Letter; SIFMA AMG Comment Letter;
Morgan Stanley Comment Letter (suggesting a
liquidity fee of 2%); State Street Comment Letter.
229 See, e.g., JP Morgan Comment Letter; ICI
Comment Letter; BlackRock Comment Letter;
SIFMA AMG Comment Letter.
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similar to the behavior we observed in
March 2020.
3. The Continued Availability of
Discretionary Liquidity Fees
We are largely retaining the
discretionary liquidity fee provisions in
current rule 2a–7, but without the tie
between liquidity fees and weekly
liquid assets.230 The Commission
proposed to remove the liquidity fee
provision in rule 2a–7 for three reasons.
First, the current rule’s tie to liquidity
thresholds had unintended
consequences in March 2020. Second,
institutional prime and institutional taxexempt money market funds would be
subject to the proposed swing pricing
requirement, which was designed to
address shareholder dilution and
potential institutional investor
incentives to redeem quickly in times of
liquidity stress to avoid further losses.
Third, the proposed increased liquidity
requirements—which would have the
largest effect on retail prime funds based
on their average historical liquidity
levels—should result in these funds
being able to manage heavier
redemptions than they have
experienced during any previous stress
period.231 While the Commission did
not propose to retain a discretionary
liquidity fee provision in rule 2a–7, it
did state that funds could use rule 22c–
2 under the Act to impose redemption
fees to mitigate dilution arising from
shareholder transaction activity
generally, including indirect costs such
as liquidity costs, and asked for
comment on whether instead of
removing the current liquidity fee
provisions, we should modify the
circumstances in which a money market
fund may impose liquidity fees.232
Several commenters supported money
market funds continuing to have the
ability to impose discretionary liquidity
fees without a liquidity threshold,
whether achieved through rule 2a–7 or
rule 22c–2.233 One commenter stated
that rule 2a–7 would be a more
appropriate place to address the
implementation of such fees for money
market funds.234
230 See amended rule 2a–7(c)(2)(i); 17 CFR
270.2a–7(c)(2)(i).
231 See Proposing Release, supra note 6, at section
II.A.3.
232 See 17 CFR 270.22c–2.
233 See, e.g., SIFMA AMG Comment Letter;
Invesco Comment Letter; Federated Hermes
Comment Letter I; Federated Hermes Comment
Letter II; Federated Hermes Fund Board Comment
Letter; Americans for Tax Reform Comment Letter;
Fidelity Comment Letter; Schwab Comment Letter.
234 See Federated Hermes Comment Letter I
(suggesting that rule 22c–2 is less appropriate for
money market funds because it was designed to
deter market timing and the history of the rule
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We recognize that a discretionary
liquidity fee provides money market
fund boards with an additional tool to
manage liquidity, particularly in times
of stress. As a result, we are retaining a
discretionary liquidity fee provision in
rule 2a–7.235 The discretionary liquidity
fee we are adopting, like current rule
2a–7, applies to all non-government
money market funds. Like the current
rule, a government money market fund
may choose to rely on the ability to
impose liquidity fees.236 Unlike the
current rule, but consistent with the
proposal’s observation that funds could
impose fees under rule 22c–2, the fee is
not tied to a weekly liquid asset
threshold.237 Although several
commenters suggested that investor
redemptions in March 2020 were largely
driven by concerns about the potential
for redemption gates, and less so by
concerns about liquidity fees, we
continue to believe it is appropriate to
remove the tie between discretionary
liquidity fees and a liquidity threshold
to reduce the possibility of incentivizing
preemptive redemptions.238 Many
commenters agreed with removing this
tie.239
Similar to the discretionary liquidity
fee under current rule 2a–7, the
discretionary liquidity fee we are
adopting is designed to allow a fund
board (or its delegate) the flexibility to
determine when a fee is necessary based
on current market conditions and the
specific circumstances of the fund.240
Under the amended rule, irrespective of
weekly liquid asset levels (or
redemption levels), a non-government
money market fund will apply a
discretionary fee if the board (or its
delegate) determines that such fee is in
the best interests of the fund. Such
discretion, untethered from any weekly
liquid asset requirement or prescribed
factors for implementation, should
lessen the likelihood that sophisticated
indicates that it was not meant for money market
funds).
235 See amended rule 2a–7(c)(2)(i).
236 See 17 CFR 270.2a–7(c)(2)(iii); amended rule
2a–7(c)(2)(i)(A).
237 Under current rule 2a–7, a money market fund
may impose a liquidity fee of up to 2% 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 is in the fund’s best interests.
See 17 CFR 270.2a–7(c)(2)(i).
238 See, e.g., Invesco Comment Letter; BlackRock
Comment Letter; Northern Trust Comment Letter;
Fidelity Comment Letter.
239 See, e.g., Healthy Markets Association
Comment Letter; Western Asset Comment Letter;
Cato Inst. Comment Letter; Schwab Comment
Letter; Federated Hermes Comment Letter I;
Federated Hermes Comment Letter II; ICI Comment
Letter.
240 See 2014 Adopting Release, supra note 26, at
section III.A.2.
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investors can preferentially predict
when a fee is going to be imposed, thus
reducing the potential for a run or other
adverse effects. Also, the possibility of
a fund imposing discretionary liquidity
fees during periods of stress is unlikely,
on its own, to incentivize investors to
preemptively redeem. As discussed,
investors are more sensitive to gates
than to liquidity fees. Moreover, as the
Commission discussed in the Proposing
Release, redemptions in March 2020
from retail and institutional nongovernment funds appear to have been
unrelated to declines in market-based
prices.241 This suggests that money
market fund investors are less sensitive
to losses than they are to losing access
to liquidity and may not preemptively
redeem in response to the possibility of
liquidity fees. In addition, while
institutional investors reacted quickly to
declines in liquidity in March 2020 and
redeemed in large sizes, any similar
behavior in the future that is intended
to avoid a board (or delegate)
determination to apply discretionary
fees will increase the likelihood of a
fund applying a mandatory liquidity fee
under the amended rule. Thus, it will be
more difficult for institutional investors
to preemptively redeem under the
amended rule to avoid any type of
liquidity fee, including discretionary
fees. As for retail investors, they
appeared to be less sensitive to the
possibility of redemption gates or
liquidity fees in March 2020, and retail
funds historically have experienced
lower levels of redemptions in stress
periods than institutional funds. Some
commenters suggested that a
discretionary liquidity fee would be a
useful tool for fund boards when
addressing dilution issues or unfair
results.242 We agree that funds will
benefit by having the ability to mitigate
the broader effects of preemptive runs
and otherwise manage potential
dilution.
The Commission previously
expressed some concern that a purely
discretionary trigger for liquidity fees
could cause some funds to use fees
when they are not under stress and in
contravention of the principles
underlying the Investment Company
Act.243 For example, this would be the
case if a fund was not under any
liquidity stress and applied a liquidity
fee on redemptions to recover losses
241 See Proposing Release, supra note 6, at
paragraph accompanying n. 48.
242 See, e.g., Americans for Tax Reform Comment
Letter; CFA Comment Letter; Invesco Comment
Letter; SIFMA AMG Comment Letter; Schwab
Comment Letter; ICI Comment Letter.
243 See 2014 Adopting Release, supra note 26, at
paragraph accompanying n.234.
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incurred in the fund’s portfolio and to
repair the fund’s NAV. We would not
consider a liquidity fee to be in the best
interests of the fund under those
circumstances.244 The Commission also
expressed concern that a discretionary
threshold may result in a board being
reluctant to impose fees (e.g., out of fear
that a fee would signal trouble for the
fund or fund complex or could incite
redemptions in other money market
funds in the fund complex). The
framework of the new mandatory
liquidity fee reduces these concerns
with respect to the discretionary
liquidity fee provision we are adopting,
because it is likely that some number of
funds will cross the 5% net redemption
threshold for mandatory fees in future
periods of stress. This experience with
the actual imposition of liquidity fees in
the money market fund space should
help mitigate the potential stigma of
applying discretionary fees. This is in
contrast to the current rule’s 10%
weekly liquid asset threshold for
imposing default fees, as no fund has
ever been required to consider fees
under this provision. Regardless, the
new rule requires funds to impose a
discretionary fee when such fee is in the
best interests of the fund.
The amended rule does not change
the best interest standard by which a
fund board (or its delegate) would
determine to impose a fee. Like current
rule 2a–7, the rule we are adopting
requires a majority of directors who are
not interested persons of the fund to
agree that applying a liquidity fee is in
the best interests of the fund. In a
change from the proposal, we are
amending rule 2a–7 to permit fund
boards to delegate liquidity fee
determinations to the fund’s adviser or
officers, subject to board guidelines and
oversight.245 Under this approach, a
fund will need to adopt and periodically
review board-approved written
guidelines (including guidelines for
determining the application and size of
liquidity fees) and procedures under
which a delegate makes such
determinations.246 Such written
guidelines generally should specify the
manner in which the delegate is to act
244 See,
e.g., id.
amended rule 2a–7(j) (removing language
that expressly prohibited a fund’s board of directors
from delegating determinations related to liquidity
fees).
246 Because rule 2a–7 requires a majority of
directors who are not interested persons of the fund
to agree that applying a liquidity fee is in the best
interests of the fund, a majority of directors who are
not interested persons of the fund must agree to
delegate the liquidity fee determinations to the
fund’s adviser or officers and must approve the
liquidity fee guidelines the fund’s adviser or
officers would follow.
245 See
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with respect to any discretionary aspect
of the liquidity fee mechanism (e.g.,
whether the fund will apply a fee to a
shareholder based on the shareholder’s
gross or net redemption activity for the
relevant day). The board will also need
to periodically review the delegate’s
liquidity fee determinations. This
approach is consistent with rule 2a–7’s
approach to the delegation of board
responsibilities generally and provides a
framework for a board effectively to
oversee liquidity fees imposed by the
fund. Providing boards with the ability
to delegate the responsibility for
administering discretionary liquidity
fees to the fund’s adviser or officers also
addresses the concerns we expressed in
the proposal regarding potential delays
in board action to impose a liquidity fee,
which may create timing misalignments
between an investor’s redemption
activity and the imposition of liquidity
costs.247 This is consistent with some
commenters’ suggestions that
discretionary liquidity fees should be
accompanied by enhanced policies,
including escalation procedures to
ensure timely consideration of the
potential fees in times of stress.248
Like the current rule, our
amendments will permit money market
fund boards to impose a liquidity fee, if
in the best interests of the fund, of up
to 2%, and do not require a particular
approach to determining the level of a
fee. This approach is designed to
preserve for the board (or its delegate)
sufficient flexibility when making
determinations regarding discretionary
liquidity fees and to allow funds to rely
upon current procedures for
determining the amount of discretionary
fees without the need to make
operational or systems changes.249 Some
commenters suggested that
discretionary liquidity fees (like the
current rule) should be capped at 2%.250
We agree that, given the latitude in
determining the fee amount to impose,
an upper limit on the fee amount
continues to be appropriate. Some
commenters seemed to suggest a lower
cap for discretionary fees, such as 1%,
but did not explain why a lower cap
would be preferable.251 A 2% upper
247 See Proposing Release, supra note 6, at n.95
and accompanying text.
248 See, e.g., Federated Hermes Comment Letter I
(suggesting that discretionary fees should
reasonably approximate the cost of liquidity); CFA
Comment Letter; Schwab Comment Letter.
249 As with mandatory liquidity fees, funds will
be required to preserve records supporting the
computation of a discretionary liquidity fee. See
amended rule 31a–2(a)(2).
250 See, e.g., Federated Herms Comment Letter I;
Western Asset Comment Letter.
251 See ICI Comment Letter (favoring a
discretionary fee with a cap and providing an
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limit will provide fund boards (or their
delegates) with greater flexibility to
impose a fee that is based on liquidity
costs in times of stress than a lower
limit. Moreover, 2% is an appropriate
upper limit because, as discussed
below, it is unlikely a fund’s liquidity
costs would exceed 2% of the value of
shares redeemed.252 In addition, given
that the current rule contemplates a fee
of up to 2%, funds and investors have
experience with this metric as a
maximum fee for discretionary liquidity
fees.
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4. Disclosure
Money market funds use Form N–
MFP to report portfolio and other
information to the Commission each
month. In connection with the proposed
swing pricing requirement, the
Commission proposed to require
reporting of the size and frequency of
swing factor adjustments to a fund’s
NAV.253 Because we are adopting
liquidity fee provisions instead of swing
pricing, the final amendments to Form
N–MFP will instead require money
market funds to report certain
information related to any application of
a liquidity fee. Specifically, we are
amending Form N–MFP to require that
money market funds report whether
they applied a liquidity fee during the
reporting period and, if so, information
about each liquidity fee applied,
including the date, the type of fee, and
the amount.254 This reporting
requirement will apply to both
mandatory and discretionary liquidity
fees. To identify the circumstances for
applying a liquidity fee (i.e., the fund
had daily net redemptions of more than
5% or the fund’s board (or delegate)
made a best interests determination),
funds will be required to identify
whether a fee was a mandatory fee or a
discretionary fee. In addition, in the
case of a mandatory liquidity fee, a fund
will be required to identify whether the
amount of the fee was based on good
faith estimates of the fund’s liquidity
costs or was a default fee. This
information will help investors and the
Commission understand the extent to
which funds are able to estimate their
example of a cap of up to 1%); see also State Street
Comment Letter (suggested a fixed fee, perhaps of
1%, when certain conditions are met); Invesco
Comment Letters (suggesting a static fee of 1%
would be suitable when conditions for market stress
exist).
252 See infra section IV.C.4.b.v.
253 See Proposing Release, supra note 6, at section
II.B.4 (proposing to require money market funds
that are not government funds or retail funds to
report the number of times the fund applied a swing
factor over the course of the reporting period, and
each swing factor applied).
254 See Item A.22 of amended Form N–MFP.
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liquidity costs in good faith. The
proposal did not provide for
discretionary swing pricing or default
charges if liquidity costs could not be
estimated, but did discuss and request
comment on these alternatives.
Moreover, current reporting
requirements on Form N–CR about the
imposition of liquidity fees, which we
are removing in favor of new reporting
on Form N–MFP, provide information
about whether a fee imposed under the
current rule is a discretionary fee or a
default fee.255 In addition, in
comparison to the proposal and current
reporting requirements on Form N–CR,
the final amendments provide more
specificity about how to report the
amount of the charge applied.
Specifically, the final amendments will
require funds to report the total dollar
value of the fee applied to redemptions
and the amount of the fee as a
percentage of the value of shares
redeemed. The percentage-based
amount will allow investors and the
Commission to compare fees across
money market funds and better
understand the amount of fees that
funds may charge, while the dollarbased amount will provide investors
and the Commission with information
about the fund’s total liquidity costs.
Overall, the reporting requirement, like
that proposed for swing pricing, will
help the Commission monitor the size of
the charges funds are applying to
redeeming investors, as well as the
frequency at which funds apply
liquidity fees.
In addition, we are amending the
narrative risk disclosure requirement in
Form N–1A. The final rule will continue
to require money market funds to
provide narrative risk disclosure related
to liquidity fees, as applicable, in their
prospectuses, but we have modified the
disclosure to reflect the amended
liquidity fee framework.256 The required
narrative disclosures relate to both the
mandatory and discretionary liquidity
fees and vary depending upon the type
of money market fund. As proposed, we
are removing from the required
narrative disclosures references to the
suspension of redemptions because
money market funds cannot impose
gates under rule 2a–7 as amended.
The amendments also modify the
required disclosures in a fund’s
Statement of Additional Information
(‘‘SAI’’) that currently relate to both the
imposition of liquidity fees and the
255 See Part E of current Form N–CR (requiring
information about the fund’s imposition of a
liquidity fee, including the fund’s weekly liquid
asset level, which identifies whether a fee under the
current rule is a discretionary fee or a default fee).
256 See Item 4(b) of amended Form N–1A.
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51429
suspension of fund redemptions.257 The
proposal would have removed the
disclosures related to liquidity fees in
light of the swing pricing mechanism
and the proposed elimination of fees
and gates from rule 2a–7. In a change
from the proposal, the amended form
will include liquidity fee disclosures
designed to reflect the new liquidity fee
mechanism. In a change from current
Form N–1A, the required liquidity fee
disclosures are no longer tied to weekly
liquid asset thresholds. Also, amended
Form N–1A, like the proposal, removes
references to the suspension of fund
redemptions. These changes reflect the
amendments to rule 2a–7 that remove
the tie between weekly liquid assets and
liquidity fees and remove redemption
gates from the rule.
The modified SAI disclosure will, like
the current form, require a fund to
report information about any liquidity
fees imposed during the past 10 years,
including the date a liquidity fee was
imposed and the amount of the fee. The
required SAI disclosure is similar to
what funds will report in amended
Form N–MFP, except the SAI disclosure
will provide investors with a historical
perspective over a 10 year look-back
period. In addition, consistent with the
proposal, because we are no longer
requiring funds to report on Form N–CR
when they impose liquidity fees, we are
removing the current requirement to
incorporate in the SAI disclosure, as
appropriate, any information the fund
reported on Form N–CR regarding the
fee event and to point investors to the
fund’s Form N–CR filing for additional
information.
The amended disclosure related to
liquidity fees will improve transparency
related to money market funds as well
as assist investors in their assessment of
a fund’s overall risk profile. Moreover,
the disclosure will provide investors
and the Commission with historic
context and a useful understanding of
past stress events. Current and
prospective fund investors could use
this information as one factor to
compare the potential costs of investing
in different money market funds.
5. Tax and Accounting Implications of
Liquidity Fees
In addition to the operational and
similar concerns commenters raised
about the proposed swing pricing
requirement, some commenters raised
questions about the tax and accounting
implications of the proposed
requirement. Because a liquidity fee
framework is part of current rule 2a–7,
adopting a liquidity fee provision
257 See
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Item 16(g) of amended Form N–1A.
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instead of swing pricing generally will
resolve most of commenters’ questions
and concerns. The specific tax treatment
of any liquidity fee regime, however,
may depend on how the regime is
structured, particularly with respect to
timing.
In response to the proposed swing
pricing requirement, several
commenters raised concerns related to
potential increased tax reporting
burdens, including whether the wash
sale rules would apply to redemptions
in floating NAV money market funds
using swing pricing.258 Because the tax
treatment of money market fund
liquidity fees is already established, as
current rule 2a–7 already includes
liquidity fee provisions, our adoption of
a modified liquidity fee framework
avoids commenters’ tax concerns
associated with swing pricing. As the
Commission has previously discussed,
we understand that shareholders
incurring a liquidity fee would generally
treat the fee as offsetting the
shareholder’s amount realized on the
redemption (decreasing the
shareholder’s gain, or increasing the
shareholder’s loss, on redemption).
Funds would generally treat such fees as
having no associated tax effect for the
fund.259 In addition, tax regulations
provide for a simplified method of
accounting for an investor’s gain or loss
on money market fund shares, where
the gain or loss is based on the change
in the aggregate value of the investor’s
shares during a selected computation
period and on the net amount of
purchases and redemptions during that
period (the ‘‘NAV method’’).260 Because
under the NAV method a gain or loss is
not associated with any particular
redemption of shares, use of the NAV
method also addresses any effect that a
liquidity fee would have under the wash
sale rule.261 In addition, even if a
shareholder does not use the NAV
method, redemptions from floating NAV
money market funds are not treated as
part of a wash sale.262 As discussed
above, however, in the case of a fund
that offers multiple NAV strikes per day,
we recognize that there could be tax
considerations associated with applying
a liquidity fee to redemptions that
occurred before the last pricing period,
depending on a fund’s chosen approach
to applying a fee to such redemptions.
Some commenters discussed potential
accounting implications of swing
pricing. For example, some commenters
questioned whether money market fund
shares held by corporate entities would
still qualify as cash equivalents under
the swing pricing proposal.263 Current
U.S. GAAP defines cash equivalents as
short-term, highly liquid investments
that both are readily convertible to
known amounts of cash and are so near
their maturity that they present
insignificant risk of changes in value
because of changes in interest rates.264
The Commission’s continued position is
that under normal circumstances, an
investment in a money market fund that
has the ability to impose a fee under
rule 2a–7(c)(2) qualifies as a ‘‘cash
equivalent’’ for purposes of U.S.
GAAP.265 Under normal market
conditions, we generally would not
expect the amount of a liquidity fee a
fund charges to prevent a shareholder
from continuing to classify the fund’s
shares as ‘‘cash equivalent’’ under U.S.
GAAP. However, as is the case today, if
events that give rise to credit or
liquidity issues for funds occur,
shareholders would need to reassess if
their investments in that money market
fund would continue to meet the
definition of a cash equivalent.266 If
events occur that cause shareholders
that are corporate entities to determine
that their money market fund shares are
258 See, e.g., Northern Trust Comment Letter;
Capital Group Comment Letter; ICI Comment Letter;
SIFMA AMG Comment Letter; Federated Hermes
Comment Letter II; Americans for Tax Reform
Comment Letter; Bancorp Comment Letter.
259 See 2014 Adopting Release, supra note 26, at
section III.A.6 (discussing the tax treatment of
redemption fees under rule 22c–2 and stating the
belief that liquidity fees would receive the same
Federal income tax treatment); see also Investment
Income and Expenses (Including Capital Gains and
Losses), Internal Revenue Service (IRS) Publication
550, at 41 (‘‘The fees and charges you pay to acquire
or redeem shares of a mutual fund are not
deductible. . . A fee paid to redeem the shares is
usually a reduction in the redemption price (sales
price).’’), available at https://www.irs.gov/pub/irspdf/p550.pdf.
260 See Method of Accounting for Gains and
Losses on Shares in Money Market Funds; Broker
Returns With Respect to Sales of Shares in Money
Market Funds, 81 FR 44508 (July 8, 2016); 26 CFR
1.446–7.
261 See 26 U.S.C. 1091. The ‘‘wash sale’’ rule
applies when shareholders sell securities at a loss
and, within 30 days before or after the sale, buy
substantially identical securities. Generally, if a
shareholder incurs a loss from a wash sale, the loss
cannot be recognized currently and instead must be
added to the basis of the new, substantially
identical securities, which postpones the loss
recognition until the shareholder recognizes gain or
loss on the new securities.
262 See Rev. Proc. 2014–45 (2014–34 IRB 388),
available at https://www.irs.gov/pub/irs-drop/rp-1445.pdf.
263 See, e.g., ICI Comment Letter; Bancorp
Comment Letter (stating that corporate investors
rely on the treatment of money market funds as
cash and cash equivalents rather than investment
securities).
264 See FASB Accounting Standards Codification
(‘‘FASB ASC’’) Master Glossary.
265 See 2014 Adopting Release, supra note 26, at
section III.A.7.
266 See id.
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not cash equivalents, the shares would
need to be classified as investments, and
shareholders would have to account for
them accordingly.267
As for accounting implications of
swing pricing for affected money market
funds, some commenters raised
questions about how to best reflect the
use of swing pricing in financial
statements and other disclosures. For
instance, some commenters questioned
the manner in which a fund should
disclose its use of swing pricing in its
financial statements and other
materials.268 Another commenter
suggested that if the proposed swing
pricing requirement modified the
method of accounting for gains or losses
in money market fund shares, then it
would increase the burden on investors,
money market funds, and brokers who
would be required to implement new
mechanisms to accommodate the
changes.269 Another commenter
suggested that swing pricing could
cause short term volatility in a fund’s
NAV, which could present internal
accounting challenges should the
recorded value of an investor’s cash
position appear to fluctuate on a day to
day basis.270 This commenter suggested
that a liquidity fee mechanism would be
preferable to swing pricing in light of
the accounting concerns. Like the tax
implications discussed above, our move
to a liquidity fee requirement avoids
these potential issues. Instead, funds are
able rely upon existing guidance and
established practices to address these
accounting items.
C. Amendments to Portfolio Liquidity
Requirements
1. Increase of the Minimum Daily and
Weekly Liquidity Requirements
We are adopting, as proposed, the
requirements that a money market fund,
immediately after acquisition of an
asset, hold at least 25% of its total assets
in daily liquid assets and at least 50%
of its total assets in weekly liquid
assets.271 Currently, the daily and
267 Id.
268 See Capital Group Comment Letter; see also
Comment Letter of Deloitte & Touche LLP (Apr. 11,
2022) (‘‘Deloitte Comment Letter’’) (requesting
clarification as to whether a money market fund
would be required to include the effect of swing
pricing on total return in the financial highlights).
269 SIFMA AMG Comment Letter; see also
Deloitte Comment Letter (recommending guidance
on the appropriate methodologies to calculate the
per share impact of swing pricing for each class of
shares).
270 See JP Morgan Comment Letter.
271 See amended rule 2a–7(d)(4)(ii) and (iii). Taxexempt money market funds are not subject to the
daily liquid asset requirements due to the nature of
the markets for tax-exempt securities and the
limited supply of securities with daily demand
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weekly liquid asset requirements in rule
2a–7 are 10% and 30%, respectively.272
Assets that make up daily liquid assets
and weekly liquid assets are cash or
securities that can readily be converted
to cash within one business day or five
business days, respectively.273
Generally, the daily and weekly liquid
asset 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.274 As
the Commission stated in the Proposing
Release, we believe that the increased
daily and weekly liquidity requirements
will provide a more substantial buffer
that would better equip money market
funds to manage significant and rapid
investor redemptions, like those
experienced in March 2020, while
maintaining funds’ flexibility to invest
in diverse assets during normal market
conditions.
Commenters generally supported
increasing the current minimum daily
and weekly liquidity requirements for
money market funds.275 In particular,
commenters expressed support for the
Commission’s overall goal of providing
a stronger liquidity buffer for money
market funds to provide liquidity during
market stress events and/or prolonged
periods of redemption pressure.276
Some industry commenters and several
academic and advocacy group
commenters supported the 25% daily
liquid asset and 50% weekly liquid
asset requirements in the proposal.277
Moreover, some commenters urged the
Commission to consider higher liquidity
features. See 2010 Adopting Release, supra note 26,
at n.243 and accompanying text. This would
continue to be the case under the amended rule.
272 See 17 CFR 270.2a–7(d)(4)(ii) and (iii).
273 Daily liquid assets are: cash; direct obligations
of the U.S. Government; certain securities that will
mature (or be payable through a demand feature)
within one business day; or amounts
unconditionally due within one business day from
pending portfolio security sales. See 17 CFR
270.2a–7(a)(8). Weekly liquid assets are: cash; direct
obligations of the U.S. Government; agency
discount notes with remaining maturities of 60 days
or less; certain securities that will mature (or be
payable through a demand feature) within five
business days; or amounts unconditionally due
within five business days from pending security
sales. See 17 CFR 270.2a–7(a)(28).
274 See 2010 Adopting Release, supra note 26, at
n.213 and accompanying and following text.
275 See, e.g., SIFMA AMG Comment Letter; ICI
Comment Letter; BlackRock Comment Letter;
Invesco Comment Letter.
276 Id.
277 See, e.g., Fidelity Comment Letter (expressing
support for the proposed liquidity requirements
with respect to institutional prime funds only);
Schwab Comment Letter; Vanguard Comment
Letter; Americans for Financial Reform Comment
Letter; ICD Comment Letter.
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thresholds relative to the proposal.278 A
commenter supporting the proposed
minimum liquidity requirements
asserted that attempting to increase
liquidity once a market stress event has
occurred is much more challenging than
requiring a fund to hold a healthier
percentage of liquid assets prior to a
stress event in order to prevent, or at the
least lessen, liquidity pressure on the
fund.279
Many commenters, however, urged
the Commission to adopt more modest
increases to the daily and weekly liquid
asset requirements.280 Many of these
commenters suggested required
thresholds of 20% daily liquid assets
and 40% weekly liquid assets.281
Commenters expressed that a more
modest increase to the liquidity
requirements would be more
appropriate given that the amendments
to the current liquidity fee and
redemption gate framework would
allow money market funds to use
existing liquid assets more freely to
meet redemptions.282 Several
commenters asserted that the bright line
established by the current rule’s
regulatory link between a fund’s weekly
liquid asset levels and the possibility of
a fund imposing a fee or gate was the
primary incentive for money market
fund managers to maintain weekly
liquid asset levels above 30% in March
2020, rather than using those assets to
meet redemptions.283 These
commenters suggested that, absent this
regulatory link, funds could have met
redemptions in March 2020 as securities
naturally matured into weekly liquid
assets, without the need to sell less
liquid, longer term assets. Accordingly,
one commenter, in response to our
analysis in the Proposing Release of the
278 See Systemic Risk Council Comment Letter;
Profs. Ceccheti and Schoenholtz Comment Letter;
Prof. Hanson et al. Comment Letter (suggesting that
if the rule’s objective is to reduce the likelihood of
future government support, minimum liquidity
requirements would likely have to be set higher
than proposed).
279 See Fidelity Comment Letter.
280 See, e.g., ICI Comment Letter; CFA Comment
Letter; SIFMA AMG Comment Letter; State Street
Comment Letter; Western Asset Comment Letter;
Healthy Markets Association Comment Letter.
281 Id.; cf. IIF Comment Letter (suggesting 20%
daily liquid asset and 30% weekly liquid asset
thresholds); Bancorp Comment Letter (suggesting
25% daily liquid asset and 40% weekly liquid asset
thresholds); Morgan Stanley Comment Letter
(suggesting 25% daily liquid asset and 45% weekly
liquid asset thresholds).
282 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I; T. Rowe Comment Letter; Invesco Comment
Letter.
283 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I; T. Rowe Comment Letter; Invesco Comment
Letter.
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51431
redemption patterns of institutional
prime funds in March 2020 using
hypothetical portfolios, asserted that
40% weekly liquid assets is more than
sufficient liquidity to accommodate
substantial ongoing redemptions absent
a regulatory link between weekly liquid
assets and the potential imposition of
redemption gates.284 Alternatively, a
commenter suggested that the
Commission should first analyze how
funds react and operate under a
regulatory framework that removes
redemption gates before adjusting the
minimum liquidity requirements.285
Several commenters also asserted that
increasing the minimum liquidity
requirements as proposed could reduce
the spread between prime and
government money market funds,
resulting in lower investor demand for
prime funds.286 Specifically,
commenters suggested that higher liquid
asset requirements would result in
lower yields for investors in prime
funds because funds may have to sell off
longer-term, higher-yielding securities
in favor of short-term, lower-yielding
securities to meet liquidity
requirements.287 Moreover, some
commenters expressed that decreased
investor demand for prime money
market funds could have unintended
consequences for the short-term funding
market, such as reducing funding to
private companies and financial
institutions.288 Some of these
commenters also expressed that lower
yields for prime funds could push
investors to non-money market fund
alternatives, including more opaque or
less regulated investment products.289
In addition, some commenters argued
that imposing higher minimum liquidity
requirements, as a practical matter,
could result in de facto higher
minimums than imposed by
regulations.290 These commenters
asserted that, despite the removal of
284 See ICI Comment Letter (asserting that a fund
with 40% weekly liquid assets would have
decreasing weekly liquid assets in the first several
weeks, but would stabilize after five weeks at nearly
30% weekly liquid assets, assuming the redemption
patterns of prime money market funds in Mar.
2020); see also Proposing Release, supra note 6, at
section II.C.1.
285 See SIFMA AMG Comment Letter.
286 See, e.g., ICI Comment Letter; JP Morgan
Comment Letter; Federated Hermes Comment Letter
I.
287 See, e.g., Dechert Comment Letter; Americans
for Tax Reform Comment Letter.
288 See, e.g., ICI Comment Letter; Federated
Hermes Comment Letter I; Invesco Comment Letter;
CCMR Comment Letter.
289 See CCMR Comment Letter; see also Federated
Hermes Comment Letter I; SIFMA AMG Comment
Letter.
290 See BlackRock Comment Letter; SIFMA AMG
Comment Letter; Sen. Toomey Comment Letter.
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redemption gates from rule 2a–7,
institutional investors will continue to
view weekly liquid assets as the primary
metric of liquidity and health of a
money market fund. Consequently,
these commenters suggested that fund
managers will still be incentivized to
maintain liquid assets above the
regulatory minimums, particularly since
fund liquidity levels will continue to be
publicly available on a fund’s website.
Conversely, a commenter asserted that,
absent a regulatory tie between liquidity
levels and the potential imposition of a
redemption gate, fund managers could
be incentivized to carry less liquidity.291
Some commenters also suggested that a
fund that consistently maintains
liquidity closer to the minimum
requirements likely does so because it
has determined that holding more liquid
assets is unnecessary to effectively
manage its redemptions and overall
liquidity profile.292
Some commenters suggested that
minimum liquidity requirements should
vary based on a money market fund’s
investor base.293 For example, in light of
the fact that the outflows for retail prime
money market funds were not as heavy
as those experienced by institutional
prime money market funds in March
2020, some commenters urged the
Commission to consider whether an
increase in liquidity minimums for
retail funds is necessary to the same
degree as for institutional money market
funds.294 Some commenters asserted
that, relative to institutional investors,
historically retail investors display more
stable and predictable redemption
behavior in all market conditions.295
These commenters therefore believe that
it would be more appropriate for the
Commission either to not increase the
liquidity requirements or to implement
more modest increases for retail money
market funds. In addition, one
commenter suggested that liquidity
requirements should vary depending on
a fund’s investor concentration, with
greater liquidity requirements for funds
291 See
JP Morgan Comment Letter.
SIFMA AMG Comment Letter; Federated
Hermes Comment Letter I (arguing that ‘‘managers
will not attempt to skirt regulatory minimums and
risk operating a portfolio with improper liquidity
levels as doing so could jeopardize a particular
fund’s continued operations’’).
293 See, e.g., Fidelity Comment Letter; Americans
for Tax Reform Comment Letter; SIFMA AMG
Comment Letter; T. Rowe Comment Letter; CFA
Comment Letter.
294 Id.
295 See Fidelity Comment Letter; T. Rowe
Comment Letter.
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292 See
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with larger levels of investor
concentration.296
Some commenters opposed increasing
rule 2a–7’s current minimum liquidity
requirements for any type of money
market fund.297 A few of these
commenters reasoned that the rule’s
current requirement for a money market
fund to hold sufficient liquidity to meet
reasonably foreseeable shareholder
redemptions renders further increases in
the rule’s minimum liquidity
requirements unnecessary.298 Further,
one commenter explained that this
obligation should continue to be
tailored using properly considered
know-your-customer procedures, which
provide fund managers with investor
information that is helpful for managing
fund liquidity.299 Conversely, another
commenter stated that there are limits to
know-your-customer procedures, such
as the use of omnibus accounts masking
individual shareholder activity and
identity, and the reality that some
investors may have unpredictable cash
flow needs that even the investor cannot
predict.300
We are adopting, as proposed,
requirements for money market funds to
hold a minimum of 25% daily liquid
assets and 50% weekly liquid assets
because we believe it is important for
money market funds to have a strong
source of available liquidity to meet
daily redemption requests, particularly
in times of stress, when liquidity in the
secondary market can be less reliable for
many instruments in which they invest.
Although we considered lower liquidity
requirements relative to the proposed
thresholds, our analysis suggests that
25% daily liquid assets and 50% weekly
liquid assets paired with our other
amendments would be sufficient to
allow most money market funds to
manage their liquidity risk in a market
crisis, while lower minimum levels of
liquidity may not provide an adequate
buffer during a market crisis.301 For
example, the largest weekly outflow in
March 2020 was around 55%, and the
largest daily outflow was about 26%
(both well above the respective weekly
296 See Comment Letter of HSBC Global Asset
Management (Apr. 11, 2022) (‘‘HSBC Comment
Letter’’).
297 See Federated Hermes Comment Letter I; Sen.
Toomey Comment Letter; T. Rowe Comment Letter.
298 See Federated Hermes Comment Letter I;
HSBC Comment Letter.
299 See Federated Hermes Comment Letter I
(stating that know-your-customer processes help a
fund manager understand key information about the
fund’s investor base, such as investor type and
liquidity preferences).
300 See HSBC Comment Letter.
301 See infra section IV.D.3.a (discussing the
potential effect of various liquidity thresholds).
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liquid asset and daily liquid asset
thresholds of 30% and 10%).
In response to a commenter’s
conclusion that, pursuant to its data
analysis, daily liquid asset and weekly
liquid asset minimums of 20% and
40%, respectively, would serve as
sufficient levels of liquidity during a
market stress event after we remove the
connection between weekly liquid
assets and the consideration of gates, we
conducted further analysis to probe this
assertion.302 Our updated analysis takes
into account the potential effect of
removing the tie between liquidity
thresholds and fees and gates. It also
modifies certain assumptions in the
commenter’s analysis that are not in line
with the observed variations in
redemption patterns across funds during
the stress of March 2020 and typical
portfolio constructions of funds.303 With
these adjustments, our analysis suggests
that a significant number of funds
would not be able to withstand multiple
weeks of redemption stress if they began
with 40% weekly liquid assets.304
Specifically, our updated analysis
observes that after two weeks of
redemptions akin to the most significant
week of outflows in March 2020, 30%
of these portfolios would have weekly
liquid assets of 13% or less. In contrast,
30% of portfolios that began with
weekly liquid assets of 50% would have
weekly liquid assets of 32% or less by
the end of the two week period.
Accordingly, we continue to believe that
25% daily liquid assets and 50% weekly
liquid assets are appropriate minimum
liquidity requirements that will better
equip money market funds to manage
significant and rapid investor
redemptions in times of stress.
As discussed in the Proposing
Release, the liquidity minimums that we
are adopting are generally close to the
average liquidity levels prime money
market funds have maintained over the
past several years.305 We agree with
commenters that at the higher levels of
302 See ICI Comment Letter (asserting that an
institutional prime fund holding 40% weekly liquid
assets can withstand 10 weeks of 16% redemptions
and still have a weekly liquid assets above 25%).
See infra section IV.C.2.a (discussing our updated
analysis in more detail).
303 See infra section IV.D.3.a (detailing the
Commission’s review of the commenter’s data
assumptions and providing additional economic
analysis for various liquidity minimum levels).
304 Id.
305 See Proposing Release, supra note 6, at section
II.C.1. According to analysis of Form N–MFP data
from Oct. 2016 to Mar. 2023, the average amount
of daily liquid assets and weekly liquid assets for
prime money market funds was 38% and 54%,
respectively. See also section IV.C.2.b, at Table 5
(reflecting the distribution of daily weekly liquid
assets and weekly liquid assets among different
types of prime money market funds, as of March
2023).
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liquidity that funds typically have
maintained, if money market funds had
used their liquidity buffers in March
2020, many would have been able to
fulfill redemption requests without
selling longer-term portfolio securities
or receiving sponsor support. However,
we understand that rule 2a–7’s fee and
gate provisions have been a significant
motivating factor for funds to maintain
liquidity buffers well above the current
regulatory minimums. Accordingly, the
removal of the link between a fund’s
liquidity and the potential imposition of
fees and gates on its own may result in
funds subsequently reducing their
liquidity levels.306 As we saw in March
2020, markets can become illiquid very
rapidly in response to events that fund
managers may not anticipate. The
failure of a single fund to anticipate
such conditions may lead to a run
affecting all or many funds. We
continue to think it would be ill-advised
to rely solely on the ability of managers
to anticipate liquidity needs, which may
arise from events the money market
fund manager cannot anticipate or
control. As expressed by a commenter,
predicting cash flow needs can be
challenging for investors and fund
managers.307 Accordingly, requiring a
higher minimum amount of daily liquid
assets and weekly liquid assets for all
money market funds, as we are adopting
in this release, limits the potential effect
on fund liquidity that may otherwise
arise from removing the fee and gate
provisions from rule 2a–7, while also
providing an additional level of liquid
assets for funds to meet redemptions
during times of market stress.
We generally disagree with
commenters’ assertions that the
minimum liquidity requirements that
we are adopting will have a significantly
negative effect on the yield of prime
money market funds or the demand for
such funds. As discussed above, over
the past several years prime money
market funds generally have maintained
levels of liquidity that are close to or
that exceed the thresholds we are
adopting in this release. This
demonstrates that funds have the ability
to operate at these minimum liquidity
levels while continuing to serve as an
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306 See
Proposing Release, supra note 6, at n.81
(discussing a comment letter on the 2020
President’s Working Group on Financial Markets
report that stated that for the more than 6 years that
the 30% weekly liquid asset threshold was in effect
but not connected to fee and gate provisions, 68%
of prime money market funds and 10% of taxexempt money market funds dropped below the
30% weekly liquid asset threshold at least once,
and at least one prime money market fund was
below this threshold in nearly each week during
this period).
307 See HSBC Comment Letter.
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efficient and diversified cash
management tool for investors.308
Accordingly, we believe that concerns
raised by commenters related to reduced
lending in the short-term funding
market and pushing investors into
alternative products are overstated.309
Moreover, investors could allocate flows
from prime money market funds into
government money market funds, which
may better match the risk tolerance and
yield expectations for certain investors
with cash management and capital
preservation as their primary objectives.
In addition, while we acknowledge that
requirements to provide daily liquid
asset and weekly liquid asset levels on
funds websites and on Form N–MFP
may encourage funds to hold liquidity
buffers above the regulatory minimums,
as some commenters suggested, this
would not be required by our rules nor
would it be necessarily an expected
outcome. This is not necessarily an
expected outcome because, relative to
the current lower minimums, it seems
less likely that an investor will be
concerned that a fund will rapidly run
out of daily or weekly liquid assets
merely because its liquidity has
dropped below the 25% or 50%
thresholds we are adopting. In addition,
since the final amendments remove the
regulatory link between minimum
liquidity levels and the potential
imposition of fees and gates, it is also
likely that investors will be less
sensitive to funds approaching or
temporarily dropping below a liquidity
minimum.
With the exception of tax-exempt
money market funds, which will
continue to be exempt from the daily
liquid asset requirements, the
amendments do not establish different
liquidity thresholds by type of fund.310
As discussed in the Proposing Release,
outflows in March 2020 were more
308 In addition, Form N–MFP data from 2022
reflects that prime money market funds have
increased their daily and weekly liquidity levels
while simultaneously increasing assets, further
demonstrating that prime money market funds can
maintain higher liquidity levels without reducing
investor demand. See also infra section IV.C.2.b
(discussing mitigating factors to the potential costs
of the final amendments if, in fact, the amended
liquidity requirements were to result in decreased
demand for prime money market funds, as
suggested by several commenters).
309 See also infra section IV.C.2.b (discussing that
the final amendments will have a limited impact on
commercial paper markets since money market
funds hold less than a quarter of outstanding
commercial paper, while also acknowledging that if
the final amendments were to result in less demand
in the commercial paper markets, other investors,
such as mutual funds or insurance companies, may
absorb some of the newly available supply).
310 See supra note 271 (discussing the current
exception tax-exempt funds have from the required
daily liquid asset investment minimum).
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51433
acute in institutional prime money
market funds than in retail prime money
market funds. We do not know that
redemption patterns would be the same
in future periods of market turmoil,
however, particularly without official
sector intervention to support shortterm funding markets.311 In addition,
while the amendments will require
retail prime funds to maintain higher
levels of liquidity than they have
historically maintained on average, the
resulting larger liquidity buffers will
increase the likelihood that these funds
can meet redemptions without
significant dilution, which influenced
our decision not to apply mandatory
liquidity fee requirements to retail funds
as part of this rulemaking.312 Moreover,
retail prime money market funds invest
in markets that are prone to illiquidity
in stress periods, and increased
liquidity requirements will help provide
flexibility so that these funds can meet
redemptions in times of stress. Also,
while we believe that unique factors like
investor concentration are a relevant
consideration when determining if a
fund should have additional liquidity
above the regulatory minimums, we are
not adopting minimum liquidity
requirements that vary depending on a
fund’s investor concentration, as
suggested by a commenter.313 We
believe that a uniform approach
encourages sufficient liquidity levels
across all money market funds, thereby
reducing the potential incentive for
investors to flee from funds that might
otherwise be perceived as holding
insufficient liquidity during market
stress events.
Lastly, we agree that money market
funds have a general obligation to hold
sufficient liquidity to meet reasonably
foreseeable shareholder redemptions
and any commitments the fund made to
shareholders.314 Policies and
procedures related to onboarding
shareholders, including know-yourcustomer processes, are important tools
to gather information about the
characteristics and liquidity needs of a
fund’s shareholders. However, we agree
with the view expressed by a
commenter that investors may have
311 As an example, if retail investors are merely
slower to act initially in periods of market stress,
retail prime and retail tax-exempt funds may need
higher liquidity levels to meet ongoing redemptions
if a stress period is not relatively brief.
312 Based on analysis of Form N–MFP data, retail
prime money market funds maintained average
daily liquid assets of 30% and average weekly
liquid assets of 46% during the period of Oct. 2016
through Mar. 2023. In contrast, institutional prime
fund averages during this period were 44% and
59%, respectively.
313 See supra note 296.
314 See 17 CFR 270.2a–7(d)(4).
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unpredictable cash flow needs that are
challenging for the investor, much less
the fund manager, to predict.315 Further,
this unpredictability can be exacerbated
during market stress events. We also
agree with the sentiment expressed by a
commenter that requiring a level of
liquidity designed to provide a buffer in
the event of market stress at all times
(i.e., prior to a market stress event) is
more effective than funds attempting to
increase liquidity once a market stress
event has occurred.316 Moreover,
although the rule includes the general
obligation to hold sufficient liquidity to
meet reasonably foreseeable
redemptions and commitments, since
2010 the rule has also included a more
prescriptive requirement to hold certain
minimum liquidity levels. For the
reasons discussed in this section,
maintaining this general obligation
while also increasing the specific
minimum daily liquid assets
requirement to 25% of total assets and
weekly liquid assets requirement to
50% of total assets will provide a more
substantial buffer that will make money
market funds more resilient during
times of market stress while maintaining
funds’ flexibility to invest in diverse
assets during normal market conditions.
We are adopting, as proposed,
minimum liquidity requirements of
25% daily liquid assets and 50% weekly
liquid assets, rather than any higher
threshold. While these liquidity levels
do not reduce a fund’s liquidity risk to
zero, we believe that these thresholds
would be sufficiently high to allow most
money market funds to manage their
liquidity risk in a market crisis.
Moreover, the increase in funds’
required daily and weekly liquid assets
is not the only tool money market funds
have to address redemptions under the
final rule amendments. The amended
rule includes a liquidity fee framework
that is designed to mitigate the effect of
large scale redemptions on remaining
investors in the fund.
2. Consequences for Falling Below
Minimum Daily and Weekly Liquidity
Requirements
Currently, rule 2a–7 requires that a
money market fund comply with the
daily liquid asset and weekly liquid
asset standards at the time each security
is acquired.317 A money market fund’s
portfolio that does not meet the
minimum liquidity standards has not
failed to satisfy the daily liquid asset
and weekly liquid asset conditions of
rule 2a–7; the fund simply may not
315 See
HSBC Comment Letter.
316 See Fidelity Comment Letter.
317 See 17 CFR 270.2a–7(d)(4)(ii) and (iii).
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acquire any assets other than daily
liquid assets or weekly liquid assets,
respectively, until it meets these
minimum thresholds. As proposed, we
will continue to maintain this approach
with respect to the increased minimum
liquidity thresholds that we are
adopting.
Commenters generally supported
maintaining the requirement that a
money market fund comply with the
minimum liquidity requirements at the
time each security is acquired.318 These
commenters expressed that a potential
regulatory penalty for falling below the
liquidity minimum, such as mandating
that funds over-correct to a higher
liquidity level, could convert what
should otherwise be useable liquidity to
a de facto floor, with fund managers
operating to avoid the potential penalty.
They also asserted that a minimum
liquidity maintenance requirement (i.e.,
requiring that funds maintain the
minimum liquidity at all times) would
necessitate that funds hold an
additional buffer in excess of the
required liquidity levels at all times and
could similarly disincentivize fund
managers from using available liquidity
in times of need.
We agree with concerns from
commenters and continue to believe
that imposing a new regulatory penalty
when a fund drops below a minimum
liquidity threshold, or requiring the
fund to ‘‘overcorrect’’ in that case, could
have the unintended effect of
incentivizing some fund managers to
sell less liquid assets into a declining
market rather than use their daily and
weekly liquid assets during market
stress events out of fear of approaching
or falling below the regulatory
threshold.319 Accordingly, compliance
with the minimum liquidity
requirements will continue to be
determined at security acquisition. As
proposed, the amendments to rule 2a–
7 maintain the current approach and
simply require that a fund that falls
below 25% daily liquid assets or 50%
weekly liquid assets may not acquire
any assets other than daily liquid assets
or weekly liquid assets, respectively,
until it meets these minimum
thresholds.320
As proposed, the amendments,
however, will require a fund to notify its
board of directors when the fund’s
liquidity falls to less than half of the
required levels, that is, when the fund
has invested less than 25% of its total
assets in weekly liquid assets or less
318 See, e.g., Fidelity Comment Letter; Federated
Hermes Comment Letter I; CFA Comment Letter.
319 Id.
320 See amended rule 2a–7(d)(4)(ii) and (iii).
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than 12.5% of its total assets in daily
liquid assets (a ‘‘liquidity threshold
event’’).321 A fund must notify the board
within one business day of the liquidity
threshold event and must provide the
board with a brief description of the
facts and circumstances that led to the
liquidity threshold event within four
business days after its occurrence.322
The Commission received a few
comments on this aspect of the
proposal. Commenters generally
supported board reporting for increased
oversight, monitoring, and
transparency.323 Some of these
commenters shared that many funds
currently notify their board when their
liquidity levels approach the regulatory
minimum or some other specified
threshold, suggesting that some form of
the proposed board reporting
requirement is already occurring in
practice.324 A commenter articulated
that a 50% shortfall in liquidity is a
significant enough event that signals
likely liquidity pressures that the board
should be aware of so that it can
exercise its oversight duties.325
Although several commenters expressed
support for a requirement to notify the
board following a liquidity threshold
event, some commenters suggested that
a liquidity threshold event should
reflect a 50% decline from their
preferred minimum liquidity levels
(e.g., 20% daily liquid assets and 40%
weekly liquid assets).326 Conversely,
one commenter expressed concern with
the general concept of the requirement,
stating that a fund should only be
required to notify its board during
periods of extreme market volatility.327
This commenter believes that there
should be no required liquidity
threshold for board notification, but
funds should instead notify their boards
only upon an unexpected event
resulting in a fund’s liquidity level
falling materially below required levels.
In contrast, another commenter
321 See
amended rule 2a–7(f)(4)(i).
amended rule 2a–7(f)(4)(i) and (ii). Similar
to these board notification requirements, we are
adopting a requirement that funds file reports on
Form N–CR upon a liquidity threshold event. See
infra section II.F.1.a.
323 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Dechert Comment Letter; JP
Morgan Comment Letter.
324 See ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I. See also infra note 682 and accompanying
discussion.
325 See Fidelity Comment Letter (stating that it
does ‘‘not expect shortfalls of this magnitude to be
a common occurrence and, thus, the reporting
obligations should not impose an undue burden on
funds or advisors’’).
326 See ICI Comment Letter; JP Morgan Comment
Letter; Fidelity Comment Letter.
327 See Federated Hermes Comment Letter I.
322 See
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suggested that funds should notify their
boards if a fund’s liquidity drops 25%
or more below a regulatory
minimum.328
Triggering a liquidity threshold event
reflects that a fund’s liquidity has
decreased by more than 50% below at
least one of the minimum daily and
weekly liquid asset requirements. We
agree with commenters suggesting that
this is a significant event that likely
signals liquidity pressure of which a
fund’s board should be aware. This
provision is designed to facilitate
appropriate board notification,
monitoring, and engagement when such
an event occurs, and will build on the
practices some money market funds
have today to inform fund boards about
declines in liquidity, as explained by
commenters. Further, we disagree with
the commenter that suggested the rule
should not include a specified level for
a liquidity threshold event. A uniform
approach that requires board
notification at a 50% decline of the
minimum daily or weekly liquidity
levels is a simple and unambiguous
metric that does not require subjective
assessment of future cash flow needs or
market conditions. We believe this
requirement will provide the board with
timely information in a context that
would better facilitate the board’s
understanding and monitoring of
significant declines in the fund’s
liquidity levels. Moreover, we are not
adopting a smaller threshold for
triggering board notifications, such as a
25% decline of the minimum daily or
weekly liquidity levels. We recognize
that some funds currently may notify
their boards about such declines in
liquidity, or may do so in the future as
a matter of practice, and the final rule
would not prevent or discourage these
notifications. However, for purposes of
a regulatory requirement to notify the
fund’s board promptly within one
business day of a decline, it is
reasonable to limit the requirement to
significant declines of more than 50%
below a minimum to limit potential
disincentives for a fund to use available
liquidity to meet redemptions and to
align with the public reporting
requirement on Form N–CR. After
considering the comments on the
proposal, we are adopting the liquidity
threshold event board notification
requirement as proposed.
3. Amendments to Liquidity Metrics in
Stress Testing
As proposed, we are adopting
amendments to the liquidity metrics in
the rule’s stress testing requirements to
328 See
CFA Comment Letter.
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reflect amendments to the liquidity fee
framework and the increase of
regulatory liquidity minimums.329 Each
money market fund is currently
required to engage in periodic stress
testing under rule 2a–7 and report the
results of such testing to its board.330
Currently, one aspect of periodic stress
testing involves the fund’s ability to
have invested at least 10% of its total
net assets in weekly liquid assets under
specified hypothetical events described
in rule 2a–7. The Commission chose the
10% threshold because dropping below
this threshold triggered a default
liquidity fee, absent board action, and
thus, had consequences for a fund and
its shareholders.331 The amendments
that we are adopting no longer provide
for default liquidity fees if a fund has
weekly liquid assets below 10%.
Further, we are increasing the weekly
liquid asset minimum from 30% to
50%. Accordingly, we no longer believe
that the rule should require funds to test
their ability to maintain 10% weekly
liquid assets under the specified
hypothetical events described in rule
2a–7. Instead, we will require funds to
test whether they are able to maintain
sufficient minimum liquidity under
such specified hypothetical events.332
As a result, each fund will be required
to determine the minimum level of
liquidity it seeks to maintain during
stress periods, identify that liquidity
level in its written stress testing
procedures, periodically test its ability
to maintain such liquidity, and provide
the fund’s board with a report on the
results of the testing.
Of the commenters that discussed
liquidity stress testing, nearly all
supported the proposal’s removal of the
10% weekly liquid asset metric from the
stress testing requirements.333
Commenters generally agreed that the
proposed principles-based approach
would improve the utility of the stress
test results. In contrast, one commenter
supported the existing liquidity stress
testing framework asserting more
generally that when faced with an actual
stressed market environment the results
of stress tests themselves are of little
value to the fund and its board.334
supra section II.B.
17 CFR 270.2a–7(g)(8).
331 See 2014 Adopting Release, supra note 26, at
section III.J.2.
332 See amended rule 2a–7(g)(8)(i) and
(g)(8)(ii)(A).
333 See ICI Comment Letter; SIFMA AMG
Comment Letter; T. Rowe Comment Letter; Schwab
Comment Letter.
334 See Comment Letter of Federated Hermes Inc.
(Nov. 1, 2022) (‘‘Federated Hermes Comment Letter
IV’’). Separately, one commenter expressed concern
if the fund’s board, as opposed to its adviser, were
required to determine the liquidity level used in the
51435
After considering comments, and
given the amendments to the liquidity
fee framework and the minimum
liquidity requirements that we are
adopting, consistent with the proposal,
it is appropriate to permit each fund to
determine the level of liquidity that it
considers sufficient for purpose of the
rule’s stress testing requirements,
instead of continuing to provide a
bright-line threshold that all funds must
use uniformly for internal stress testing.
This approach is designed to improve
the utility of stress test results because
they will reflect whether the fund is
able to maintain the level of liquidity it
considers sufficient in stress periods,
which may differ among funds for a
variety of reasons (e.g., type of money
market fund or characteristics of
investors, such as investor
concentration or composition that may
contribute to large redemptions).
Separately, one commenter urged the
Commission to further strengthen the
stress testing requirements by, among
other things, disclosing results to
investors.335 We are not requiring funds
to disclose stress testing results publicly
as part of this rulemaking. Stress testing
is an important tool to evaluate different
drivers of liquidity risks, and is
designed to enhance the manager’s and
the board’s understanding of the risks to
the fund portfolio under extreme and
plausible market conditions. Public
dissemination of stress test results may
not provide much utility to the public
considering that stress testing is not
standardized from fund to fund and the
results could be prone to
misinterpretation from the public, given
the hypothetical nature of the
exercise.336
D. Amendments Related to Potential
Negative Interest Rates
If negative interest rates occur in the
future, the gross yield of a money
market fund’s portfolio may turn
negative. Under those circumstances, it
would be challenging or impossible for
a government or retail money market
fund (or ‘‘stable NAV fund’’) to maintain
its stable share price under the current
329 See
330 See
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stress tests. See T. Rowe Comment Letter. The rule
does not require the board specifically to make this
determination, however, and also provides the
ability for the board to delegate the responsibility
to make most determinations under the rule to the
fund’s adviser. See 17 CFR 270.2a–7(j); amended
rule 2a–7(j).
335 See Systemic Risk Council Comment Letter
(stating that ‘‘the market lacks the tools to
determine whether the tests are appropriately
calibrated, reducing the usefulness of the exercise
with no apparent benefit’’).
336 See Federated Hermes Comment Letter IV.
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rule, as the fund would begin to lose
money.337
Rule 2a–7, in its current form, does
not explicitly address how money
market funds must operate when
interest rates are negative. However,
rule 2a–7 states that government and
retail money market funds may seek to
maintain a stable share price by using
amortized cost and/or penny rounding
accounting methods. A fund may only
take this approach so long as the fund’s
board of directors believes that the
stable share price fairly reflects the
fund’s market based net asset value per
share.338 Accordingly, the proposal
stated that if negative interest rates turn
a stable NAV fund’s gross yield
negative, a board may reasonably
believe the stable share price does not
fairly reflect the market based price per
share and the fund would need to
convert to a floating share price under
these circumstances as a result. The
proposed rule also would have
prohibited a money market fund from
reducing the number of its shares
outstanding to seek to maintain a stable
NAV per share or stable price per share
(the ‘‘proposed RDM prohibition’’). As
explained in the Proposing Release, the
Commission believed that an approach
involving a fund reducing the number of
its shares to maintain a stable NAV
(referred to as ‘‘share cancellation,’’
‘‘reverse distribution mechanism,’’ or
‘‘RDM’’) would not be intuitive for retail
investors and may cause these investors
to assume that their investment in a
fund with a stable share price is holding
its value while, in fact, the investment
is losing value over time.339 The
Commission requested comment on the
RDM mechanism and the proposed
RDM prohibition.
After considering comments, we
continue to believe that a scenario in
which a fund has negative gross yield as
a result of negative interest rates could
lead a fund to convert to a floating share
price, as the current rule already
permits. However, in a change from the
proposal, the final rule will also permit
a stable NAV fund to reduce the number
337 See Proposing Release, supra note 6, at section
II.D (discussing the relevant provisions of the
current rule).
338 See 17 CFR 270.2a–7(c)(1)(i); see also 17 CFR
270.2a–7(g)(1) (requiring the fund’s board to
consider what, if any, action to take if the deviation
between the fund’s stable share price and the
market-based value of its portfolio exceeds 1⁄2 of 1%
and separately imposing a duty on the fund’s board
to consider appropriate action whenever the board
believes the extent of any deviation may result in
material dilution or other unfair results to investors
or current shareholders).
339 See Proposing Release, supra note 6, at section
II.D (discussing potential investor confusion as the
Commission’s rationale for the proposed RDM
prohibition).
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of its shares outstanding to maintain a
stable NAV per share in the event of
negative interest rates, subject to certain
board determinations and disclosures to
investors.340 Accordingly, under the
final rule, a stable NAV fund will be
permitted to either convert to a floating
NAV or to engage in share cancellation
in this scenario. If a stable NAV fund
converts to a floating NAV under these
circumstances, the fund’s losses will be
reflected through a declining share
price. If a fund uses a share cancellation
mechanism, the fund will maintain a
stable share price, despite losing value,
by reducing the number of its
outstanding shares. Investors in such a
fund would observe a stable share price
but a declining number of shares for
their investment.341
With respect to the proposed RDM
prohibition, commenters generally
recommended that an RDM should be
an available option for stable NAV
funds to use, in addition to the
conversion to a floating NAV.342 Some
commenters stated that many investors
prefer a stable NAV investment.343
Commenters stated that, for example,
investors may rely on the ability of
stable NAV funds to process cash
balances through cash sweep programs
offered by many brokers, banks, and
fund sponsors, and such sweep
programs typically cannot accommodate
floating NAVs.344 One commenter also
observed that brokers and fund sponsors
typically offer investors a range of bank340 Compare amended rule 2a–7(c)(3) (permitting
share cancellation under certain conditions) with
proposed rule 2a–7(c)(3) (prohibiting share
cancellation).
341 See Proposing Release, supra note 6, at section
II.D (discussing how use of an RDM helps a fund
maintain a stable NAV and its potential effects on
the fund’s investors).
342 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I; Allspring Funds Comment Letter; Fidelity
Comment Letter; BNY Mellon Comment Letter;
State Street Comment Letter; Sen. Toomey
Comment Letter; Americans for Tax Reform
Comment Letter; Dechert Comment Letter; CCMR
Comment Letter; IDC Comment Letter. One
commenter suggested that the Commission could
permit a stable NAV money market fund to use a
de-accumulating share class as an alternative
approach, where negative income would result in
a reduction in capital at the share class level and
a fluctuating NAV per share. See BlackRock
Comment Letter. We are not adopting provisions
that would allow de-accumulating share classes at
this time. We understand that such an approach
would raise similar issues as a floating NAV for
sweep programs and others and would raise tax
considerations as well.
343 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I; Allspring Funds Comment Letter; ABA Comment
Letter I.
344 See, e.g., Federated Hermes Comment Letter I;
Fidelity Comment Letter; ABA Comment Letter I;
ICI Comment Letter; SIFMA AMG Comment Letter;
Morgan Stanley Comment Letter; BNY Mellon
Comment Letter.
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like features and services, such as ATM
access, check writing, and ACH and
Fedwire transfers that generally are only
provided through stable NAV fund
systems.345 In response to concerns
expressed in the Proposing Release
about the possibility that RDM may
confuse investors, particularly retail
investors, some commenters stated that
RDM and floating NAV are
economically equivalent options that
can be explained to investors in clear
disclosures.346 A few commenters
provided sample disclosure to show
how funds could explain RDM to
investors.347 One of these commenters
suggested disclosure to investors in
advance of a fund’s use of RDM, as well
as ongoing disclosure in account
statements when RDM is in use.348
Another commenter suggested a hybrid
approach, where a fund could
determine to offer an RDM to
institutional investors or a floating NAV
to retail investors.349 Another
commenter suggested that transitioning
to a floating NAV could be more
complex and confusing for investors
than an RDM.350 Commenters opposing
the proposed RDM prohibition also
generally suggested there is a remote
likelihood of negative interest rates ever
occurring in the U.S., and stated that
there would be significant operational
burdens and costs on investors and
government and retail money market
funds to prepare to convert from a stable
NAV to a floating NAV.351 Some
commenters encouraged the
Commission to continue a dialogue with
the industry and study appropriate
345 See
ICI Comment Letter.
e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I; Allspring Funds Comment Letter; Fidelity
Comment Letter; BNY Mellon Comment Letter;
State Street Comment Letter; Sen. Toomey
Comment Letter; Americans for Tax Reform
Comment Letter; Dechert Comment Letter; CCMR
Comment Letter; IDC Comment Letter.
347 See Comment Letter of Federated Hermes
(Aug. 30, 2022) (‘‘Federated Hermes Comment
Letter III’’); SIFMA AMG Comment Letter.
348 Federated Hermes Comment Letter III
(providing examples of disclosure documents
including an initial notice upon a board’s adoption
of new prospectus disclosure on the potential use
of RDM with a hypothetical side-by-side example
to illustrate how a negative interest rate accrual
would be reflected in an investor’s account
statement using both an RDM and a floating NAV;
ongoing prospectus disclosure; a draft website
notice; and a mock account statement showing the
RDM as a negative dividend adjustment and
directing the investor to the fund’s prospectus for
additional information).
349 See ABA Comment Letter I. The commenter’s
suggested hybrid approach would raise several
financial reporting concerns and issues under rule
18f–3, which are beyond the scope of this
rulemaking.
350 See BNY Mellon Comment Letter.
351 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter.
346 See,
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responses to negative interest rates,
rather than adopt amendments to
prohibit the use of RDM to address
negative rates in this rulemaking.352
Other commenters supported the
proposed RDM prohibition.353 Two
commenters suggested that share
cancellation may be potentially
confusing or misleading to investors,
particularly retail investors, because it
presents less transparency about the loss
of value in a shareholder’s aggregate
investment.354 One commenter stated
that a floating NAV provides greater
transparency to investors by showing
daily fluctuations in the money market
fund’s NAV, thus enabling investors to
monitor the value of their investment.
This commenter also stated that the
Commission’s proposed approach
would allow for international
consistency among money market
funds, as European money market fund
regulations do not permit use of
RDM.355 Another commenter agreed
with the goal of the proposed approach
but encouraged the Commission to
consider a longer implementation
timeframe in the current rate
environment to better balance the costs
and benefits of the proposed
approach.356 One commenter
encouraged the Commission to allow
converted floating NAV funds to retransition into stable NAV funds when
yields become positive again.357
After considering the comments, we
continue to believe it is valuable to
address how government and retail
money market funds should handle a
negative interest rate scenario, as this is
a question the industry has encountered
multiple times over the years.358
However, we are persuaded by
commenters that the concern that
investors may find share cancellation
misleading or confusing can be
addressed by establishing conditions for
a fund’s use of share cancellation,
including required disclosures. We also
recognize that some investors may
prefer for a fund to maintain a stable
NAV and that a share cancellation
approach may be less disruptive or
costly than converting to a floating NAV
in some cases. As a result, should a
negative interest rate scenario ever
352 See, e.g., SIFMA AMG Comment Letter;
Fidelity Comment Letter; State Street Comment
Letter.
353 See Northern Trust Comment Letter; Vanguard
Comment Letter; CFA Comment Letter.
354 See Northern Trust Comment Letter; CFA
Comment Letter.
355 See Northern Trust Comment Letter.
356 See Vanguard Comment Letter.
357 See CFA Comment Letter.
358 See Proposing Release, supra note 6, at
paragraphs accompanying nn.234 and 240.
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occur in future periods and cause a
stable NAV fund to have negative gross
yield, a stable NAV fund will have the
flexibility under the final rule to use a
floating NAV, as already permitted, or to
use an RDM if the board determines that
cancelling shares is in the best interests
of the fund and its shareholders and the
fund provides appropriate disclosure to
mitigate the possibility of investor
confusion.
Specifically, the final rule will permit
a stable NAV fund to use an RDM only
if the fund has negative gross yield as
a result of negative interest rates (a
‘‘negative interest rate event’’).359
Moreover, even in a negative interest
rate event, the fund may use a share
cancellation mechanism only if the
fund’s board of directors determines
that reducing the number of the fund’s
shares outstanding is in the best
interests of the fund and its
shareholders.360 Among other things, in
determining whether cancelling shares
to maintain a stable NAV is in the best
interests of the fund and its
shareholders, the board generally
should consider the following:
• The capabilities of the fund’s
service providers and intermediaries to
support the equitable application of
RDM across the fund’s shareholders,
including considerations of whether the
operational and recordkeeping systems
of the service providers and
intermediaries are able to process and
apply a pro rata reduction of shares in
shareholder accounts on a daily basis.
• Any state law limitations on share
cancellation.
In determining the best interests of
the fund and its shareholders, the board
will also need to devote particular
attention to questions concerning the
applicable tax rules. Absent the use of
a share cancellation mechanism, we
understand that for Federal income tax
purposes all fund distributions to
shareholders with respect to the shares
of a normally operating stable-NAV
money market fund are treated as
dividends, and shareholders’ tax basis
in each share is always $1. As a result
of that constant basis, no gain or loss is
recognized on redemption of the shares.
On the other hand, if fund shares are
cancelled pursuant to RDM, there can be
no certainty that this tax treatment of
distributions and shareholder basis
would be unchanged. For example,
share cancellation may result in
shareholder basis that is more than $1
359 See
amended rule 2a–7(c)(3).
‘‘best interests of the fund and its
shareholders’’ in this context is not intended to
apply to each money market fund shareholder
individually, but rather to the fund’s shareholders
generally.
360 The
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51437
per share, and/or the treatment of
shareholder distributions in part not as
dividends but as a return of basis that
may reduce basis per share. Either
deviation from constant basis may
require tax reporting by shareholders,
funds, and fund intermediaries that are
different from those expected for stableNAV funds. There is no certainty either
that the Treasury Department and the
IRS will issue guidance to remove any
tax challenges to the use of RDM share
cancellation or that Congress will enact
legislation to do so.
Accordingly, in determining whether
cancelling shares to maintain a stable
NAV is in the best interests of the fund
and its shareholders, the board generally
should also consider the following,
taking into account the possibility that
no new tax guidance or legislation may
be forthcoming:
• The tax implications of share
cancellation for the fund itself. Those
implications for the fund’s tax
accounting concern not only any tax
liability of the fund but also the tax
attributes of the fund’s distributions to
its shareholders. It is particularly
important to consider distributions in
the latter part of a year whose earlier
portion had contained losses and share
cancellations.
• The tax implications of share
cancellation for a fund’s shareholders,
including:
Æ Whether investors will understand
the effects that RDM share cancellation
may have on their tax obligations, and
whether they will be able to comply
with any novelty and complexity in
those obligations.
Æ Whether the fund and its
intermediaries will be able to administer
shareholder tax reporting and related
matters.
Æ Whether the fund’s use of RDM
share cancellation would cause
shareholders to experience any adverse
tax consequences that they would not
experience if the fund used a floating
NAV instead, and, if so, whether these
consequences are justified by the
presence of benefits to shareholders
from RDM share cancellation.
Æ The tax characterization of the
cancellation, and whether the
cancellations directly produce losses for
shareholders or, instead, there is a
change in the bases of the shareholders’
remaining shares, affecting the amount
of subsequent loss or gain with respect
to those shares.
Æ If the cancellation directly
produces a loss, when the shareholders
recognize that loss, and what
responsibility the fund and its
intermediaries have for related reporting
to the shareholders.
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The board also generally should
review its determination that RDM share
cancellation is in the best interests of
the fund and its shareholders if
circumstances change, including if a
negative interest rate event appears to be
reasonably likely to occur in the near
future. Finally, the board may not
delegate to the fund’s investment
adviser or officers the responsibility to
make such determination.361 A fund’s
board, and not its adviser, is in the best
position to determine if share
cancellation is in the best interests of
the fund and its shareholders and, thus,
is the appropriate entity to determine
whether a fund will use share
cancellation within the parameters of
the rule.
The fund must provide timely,
concise, and plain-English disclosure
about the fund’s share cancellation
practices and their effects on investors
to investors both before and during a
negative interest rate event. Such
disclosures must include (i) advance
notification to investors in the fund’s
prospectus that the fund plans to use
share cancellation in a negative interest
rate event and the potential effects on
investors, and (ii) when the fund is
cancelling shares, information in each
account statement or in a separate
writing accompanying each account
statement identifying that such practice
is in use and explaining its effects on
investors.362 When disclosing the effects
of share cancellation on investors, the
fund should include a clear and
prominent statement that an investor is
losing money when the fund cancels the
investor’s shares. The fund generally
should also clearly and concisely
describe tax effects for shareholders.
With respect to prospectus disclosure,
this disclosure must be provided before
a fund begins to use share cancellation
and generally should be provided with
sufficient advance notice to allow an
investor to take into account
information about the fund’s possible
use of share cancellation and the effects
of that approach in the investor’s
investment decisions. If the board’s
determination allowing the fund to use
share cancellation occurs during a time
when a negative interest rate
environment does not appear to be
reasonably likely to occur in the near
future, the fund may include the
required disclosures in any relevant part
of the fund’s prospectus. However, if a
negative interest rate environment
appears to be reasonably likely to occur
in the near future, the fund must
include disclosures about its possible
361 See
amended rule 2a–7(j).
362 See amended rule 2a–7(c)(3)(iv).
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use of share cancellation and the effects
of share cancellation on investors in the
summary prospectus, as share
cancellation would be a component of
the fund’s principal investment
strategies or principal risks when a fund
is reasonably likely to use share
cancellation in the near future.363 If a
fund modifies its summary prospectus
to disclose the reasonable likelihood of
cancelling shares, or to disclose that the
fund has begun to use share
cancellation, then the fund also will be
required under Item 27A of Form N–1A
to report information about this change
as a material change in its next annual
shareholder report.364 In addition to
providing advance notice in fund
prospectuses, funds generally should
consider investor education efforts to
help investors understand share
cancellation and the effects of negative
interest rates, as investors may not have
ever experienced a negative interest rate
event. For example, if negative interest
rates are expected to occur in the near
term, money market funds should
consider additional communications
and outreach to educate investors about
negative interest rates and their effects
on money market fund investments,
including the tax effects of RDM share
cancellation and tax reporting.
When a fund is using share
cancellation, the final rule requires
disclosure in the account statement or a
separate writing accompanying the
account statement, because we believe
the account statement is where the
shareholder will see the direct effects of
share cancellation on the shareholder’s
investment. Specifically, if a fund
implements share cancellation, the
account statement would show the
reduction in the number of shares the
investor holds and the investor’s
reduced account balance. Funds
generally will need to work with their
distribution networks to make sure that
share cancellation is disclosed clearly
and explained in plain English in the
363 See Item 4 of Form N–1A. Depending on when
a fund believes that negative rates may be
reasonably likely to occur relative to the fund’s
annual prospectus update, a fund may ‘‘sticker’’ its
summary prospectus to provide this information.
See 17 CFR 230.497.
364 See Tailored Shareholder Reports for Mutual
Funds and Exchange-Traded Funds; Fee
Information in Investment Company
Advertisements, Investment Company Act Release
No. 34731 (Oct. 26, 2022) [87 FR 72758 (Nov. 25,
2022)], at section II.A.2.f (‘‘Tailored Shareholder
Reports Adopting Release’’); Item 27A(g) of Form
N–1A, as amended by the Tailored Shareholder
Reports Adopting Release. The compliance date for
the tailored shareholder report requirements ends
18 months after the effective date of Jan. 24, 2023.
Until the end of that compliance period, funds will
not be required to report material changes in their
annual shareholder reports.
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account statement or a separate writing
accompanying the account statement.
This may include, for example, showing
the share cancellation as a separate
transaction and explaining that the
shareholder is losing money on its
money market fund investment because
of negative interest rates.
Using share cancellation also will
have an effect on the fund’s financial
disclosures. For example, a fund’s
statements of changes in net assets must
include information about the total
distributions to shareholders coming
from different sources.365 Under the
requirements for disclosing the total
distributions to shareholders in 17 CFR
210.6–09, negative distributions
attributable to RDM would be ‘‘other
sources’’ of distributions. Funds
generally should disclose negative
distributions attributable to RDM
separately from any other sources of
distributions to shareholders in the
statement of changes in net assets.
Separate disclosure of negative
distributions in the statement will help
investors understand the effect of share
cancellation. Separately, as discussed
below, the final amendments will
require stable NAV funds to report on
Form N–MFP when they use share
cancellation.366
If a fund begins to use share
cancellation, it also should consider
effects on other information it provides
and evaluate whether that information
continues to present an accurate picture
of the fund. For example, when
calculating and providing the fund’s
market-based NAV per share, the fund
generally should use the number of
shares outstanding it would have but for
its use of share cancellation. We
generally do not believe that it would be
appropriate to use the actual number of
shares outstanding the fund has under
these circumstances because share
cancellation would have the effect of
inflating the fund’s market-based NAV
per share. That is, assuming two funds
have the same portfolios with the same
market-based value, if one fund used
share cancellation and the other fund
used a floating NAV, the fund using
share cancellation would appear to have
a higher market-based NAV per share
because it would divide the marketbased value across a smaller number of
shares than the fund using a floating
NAV.
Taken together, these disclosures are
intended to help the shareholder
understand how the value of its
investment is declining and to facilitate
365 See 17 CFR 210.6–09 (rule 6–09 of Regulation
S–X).
366 See infra section II.F.2.a.
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Commission monitoring of how stable
NAV money market funds address
negative interest rates. On balance, we
believe investors would benefit from the
ability to continue to invest in stable
NAV funds during a negative interest
rate environment, and that effective
disclosure prior to and during the use of
an RDM will help investors understand
why and how their investment is losing
value.
While this discussion focuses on
investor disclosures related to share
cancellation, a stable NAV fund that
plans to convert to a floating NAV if it
has negative gross yield due to negative
interest rates generally should consider
similar prospectus, shareholder report,
and account statement disclosures, as
applicable, given investors’ lack of
experience with negative interest rates
and potential expectation that the fund
will continue to maintain a stable NAV.
In addition to the proposed RDM
prohibition, the Commission proposed
to require stable NAV funds to
determine that each financial
intermediary in the fund’s distribution
network has the capacity to redeem and
sell the fund’s shares at non-stable
prices or, if this determination cannot
be made, to prohibit the relevant
intermediary from purchasing the fund’s
shares in nominee name.367 After
considering comments, and given that
we are permitting a stable NAV fund to
use RDM under specified conditions in
the final rule, we are not adopting this
aspect of the proposal. However, we are
providing the guidance below to address
how funds and financial intermediaries
generally should prepare for the
possibility of a stable NAV fund’s
conversion to a floating NAV fund.
Several commenters expressed
concerns with the potential burdens and
costs of implementing the proposed
requirement for government and retail
money market funds to determine each
financial intermediary’s capacity to
redeem and sell securities issued by a
fund at a floating NAV per share or
prohibit the financial intermediary from
purchasing the fund’s shares in nominee
name.368 Some of these commenters
stated that this proposed requirement
would be especially burdensome for
financial intermediary platforms that
operate cash sweep programs and bank367 See proposed rule 2a–7(h)(11)(ii). A stable
NAV fund also would have been required to
maintain records identifying the intermediaries the
fund determined had the capacity to transact at
non-stable prices and the intermediaries for which
the fund was unable to make this determination.
See proposed rule 2a–7(h)(11)(iii).
368 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I.
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like services under a ‘‘dollar in, dollar
out’’ infrastructure that does not
accommodate a floating share price.369
These commenters stated that such
platforms may be unwilling to bear such
burdens and costs and thus may no
longer offer government and retail
money market funds to their customers,
with potentially adverse effects on the
economy. Several commenters also
suggested that imposing this
requirement on government and retail
money market funds is misplaced, given
that such funds did not experience the
same large redemption pressures in
March 2020 as public institutional
prime and institutional tax-exempt
funds.370 Some commenters stated that
the proposed determination or
certification requirement is not an
appropriate role for fund providers.371
One commenter who agreed with the
need for the proposed determination
requirement suggested an alternative
approach in which the Commission
would act as a repository for such
determinations so that individual firms
would not have to conduct their own
due diligence.372 Another commenter
recommended that the Commission
modify this aspect of the proposal to
require that financial intermediaries
have a reasonably adequate plan or
playbook in place for how they would
respond to a negative interest rate
environment should one arise.373
Although the final rule will not
require funds to make determinations
related to intermediaries’ capabilities of
transacting at non-stable prices,
intermediaries themselves may be
subject to separate obligations to
investors with regard to the distribution
of proceeds received in connection with
investments made or assets held on
behalf of investors.374 We also believe
that stable NAV money market funds
generally should engage with their
distribution network in considering how
they would handle a negative interest
369 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I; Morgan Stanley Comment Letter; BNY Mellon
Comment Letter.
370 See, e.g., ICI Comment Letter; Morgan Stanley
Comment Letter.
371 See, e.g., BlackRock Comment Letter; IIF
Comment Letter.
372 See CFA Comment Letter.
373 See Fidelity Comment Letter.
374 Cf. 17 CFR 240.15c3–3 (requiring, among other
things, that broker-dealers take certain steps to
protect cash they hold for customers). See also
Gilman v. Merrill Lynch, Pierce, Fenner & Smith,
Inc. 404 N.Y.S.2d 258, 262 (N.Y. Sup. Ct. 1978)
(holding that after an investment is sold and
proceeds belonging to the customer come into the
broker’s possession, the broker becomes a fiduciary
with respect to those proceeds and may not
consciously use them to the detriment of the
customer and for the broker’s own benefit).
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51439
rate environment, as intermediaries’
abilities to move to a four-digit NAV
and apply a floating NAV or to process
share cancellations is an important
consideration in determining an
approach that is in the best interests of
the fund and its shareholders.
More generally, it is important for a
stable NAV money market fund to
understand the capabilities of its
distribution network in the event the
fund breaks the buck. To the extent
these funds have not already done so,
they generally should have a proactive
plan or playbook in place for such an
event that takes into account how
different intermediaries in the fund’s
distribution network would address a
fund’s use of a floating NAV (e.g.,
whether the intermediary has an
automated process for processing
transactions at a floating NAV or would
need to manually process such
transactions, as well as the likelihood
that an intermediary using a manual
approach would move investors to an
alternative investment to mitigate the
burdens of its manual process).
Consistent with the goals of the
Commission’s proposed amendments,
this information would help a fund
better prepare for a conversion to a
floating NAV and better understand the
extent to which some intermediaries
may quickly move investors’ money out
of the fund, which has implications for
the fund’s redemption risks and
liquidity management.375
E. Amendments To Specify the
Calculation of Weighted Average
Maturity and Weighted Average Life
We are adopting amendments as
proposed to rule 2a–7 to specify the
calculations of ‘‘dollar-weighted average
portfolio maturity’’ (‘‘WAM’’) and
‘‘dollar-weighted average life maturity’’
(‘‘WAL’’).376 WAM and WAL are
calculations of the average maturities of
all securities in a portfolio, weighted by
each security’s percentage of net assets.
These calculations are an important
determinant of risk in a portfolio, as a
longer WAM and WAL may increase a
fund’s exposure to interest rate risks. As
discussed in the Proposing Release,
funds have used different approaches
when calculating WAM and WAL under
the current definitions in rule 2a–7.377
We understand that a majority of money
market funds calculate WAM and WAL
based on the percentage of each
security’s market value in the portfolio,
375 See
Proposing Release, supra note 6, at section
II.D.
376 See
377 See
amended rule 2a–7(d)(1)(ii) and (iii).
Proposing Release, supra note 6, at section
II.E.
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while other money market funds base
calculations on the amortized cost of
each portfolio security. This
discrepancy can create inconsistency of
WAM and WAL calculations across
funds, including in data reported to the
Commission and provided on fund
websites.378 Under the amended
definitions of WAM and WAL, funds
will be required to calculate WAM and
WAL based on the percentage of each
security’s market value in the
portfolio.379
Commenters were generally
supportive of the proposal.380 However,
one commenter disagreed with the
proposal, suggesting that the small
difference between the WAM and WAL
calculated with amortized cost versus
market value would not meaningfully
impact a fund’s WAM and WAL and
therefore did not justify the operational
burdens for a fund not currently using
market values for these calculations.381
While the difference between a fund’s
WAM or WAL calculated using
amortized cost versus market value is
likely to be small in many
circumstances, there are also
circumstances where this difference
may be more significant, such as when
a security’s issuer experiences a credit
event, during periods of market stress,
or when interest rates rise rapidly,
particularly for assets with longer
maturities. Further, these amendments
are intended to enhance the consistency
of calculations for funds, while allowing
the Commission to better monitor and
respond to indicators of potential risk
and stress in the market. While we
recognize that some money market
funds may need to implement certain
operational changes to comply with the
new calculations, a majority of money
market funds already calculate WAM
and WAL based on the percentage of
each security’s market value in the
portfolio, and all types of money market
funds determine the market values of
their portfolio holdings for other
purposes, which should help limit the
extent of operational changes needed.
After considering the comments
received on the proposal, we are
adopting the amendments to the
definitions of WAM and WAL as
proposed.
378 See Items A.11 and A.12 of current Form N–
MFP; 17 CFR 270.2a–7(h)(10)(i)(A).
379 See amended rule 2a–7(d)(1)(ii) and (iii).
380 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Capital Group Comment Letter.
381 See Federated Hermes Comment Letter I.
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F. Amendments to Reporting
Requirements
1. Amendments to Form N–CR
We are adopting the amendments to
Form N–CR as proposed. In particular,
the final amendments add a new
requirement for a money market fund to
report publicly if it experiences a
liquidity threshold event (i.e., the fund
has invested less than 25% of its total
assets in weekly liquid assets or less
than 12.5% of its total assets in daily
liquid assets) because such an event
represents a significant drop in liquidity
of which investors should be aware.382
We are also adopting all other proposed
amendments to Form N–CR, including
the structured data requirement, to
improve the availability, clarity, and
utility of information about money
market funds.
a. Reporting of Liquidity Threshold
Events
Under the proposal, money market
funds would be required to report
publicly on Form N–CR when their
daily or weekly liquid assets declined
by more than 50% below the regulatory
minimums. We are adopting this
requirement as proposed. Under the
final amendments, a fund experiencing
a liquidity threshold event is required to
report: (1) the initial date on which the
fund fell below either the 25% weekly
liquid assets or the 12.5% daily liquid
assets threshold; (2) the percentage of
the fund’s total assets invested in both
weekly liquid assets and daily liquid
assets on the initial date of a liquidity
threshold event; and (3) a brief
description of the facts and
circumstances leading to the liquidity
threshold event. A fund will be required
to report the amount of both its weekly
liquid assets and its daily liquid assets,
regardless of whether it has dropped
below one or both thresholds, to provide
insight into the fund’s short-term and
immediate liquidity profile. The brief
description of facts and circumstances is
intended to help better inform investors,
the Commission, and our staff of events
that lead to significant declines in
liquidity.
Commenters had mixed views about
whether the reporting of these liquidity
threshold events should be made public
or filed confidentially with the
Commission. Some commenters
supported the proposed public reporting
requirement.383 These commenters
emphasized the benefits of increased
transparency for investors and the
382 See
Part E of amended Form N–CR.
CFA Comment Letter; Western Asset
Comment Letter; Better Markets Comment Letter.
383 See
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Commission. One commenter suggested
such public reporting would help
inform investors who do not regularly
monitor fund liquidity levels on fund
websites to understand what is
happening with their fund.384 Another
commenter stated that, while there is a
possibility investors will redeem in
response to a reported liquidity
threshold event, the proposed
amendments may reduce the likelihood
of such redemptions because this report
will provide information about why the
liquidity decline occurred, thus
reducing investor uncertainty.385
Commenters requesting confidential
reporting to the Commission reasoned
that money market funds are currently
required to provide information about
the size of their daily and weekly liquid
assets on a daily basis on their public
websites; thus, the commenters
suggested the proposed reporting of a
liquidity threshold event does not
provide investors with information they
do not otherwise have. These
commenters also suggested that public
reporting may heighten investor
sensitivity to liquidity levels and affect
redemption behavior.386 One of these
commenters expressed concerns that the
12.5% daily liquid asset and 25%
weekly liquid asset thresholds for
reporting could become new bright lines
that contribute to investor redemption
behavior and incentivize money fund
managers to maintain liquid asset levels
above these thresholds, rather than use
those assets to meet redemptions. This
commenter also suggested that the
requirement for a fund to report
liquidity threshold events to its board
reduces any investor protection or
public interest benefits of public
reporting.387
After considering comments, we
continue to believe public reporting
when a fund drops more than 50%
below a regulatory liquidity minimum is
important information for monitoring
purposes. Such a significant decrease in
liquidity merits prompt disclosure and
explanation to investors, the
Commission, and our staff. Required
public reporting also is consistent with
the required public disclosure of daily
384 See
CFA Comment Letter.
Better Markets Comment Letter.
386 See, e.g., ICI Comment Letter, Federated
Hermes Comment Letter I; Invesco Comment Letter;
Schwab Comment Letter; SIFMA AMG Comment
Letter; Bancorp Comment Letter.
387 See Dechert Comment Letter (drawing
parallels to the Commission’s determination not to
require public reporting on Form N–PORT if a nonmoney market fund falls below its highly liquid
investment minimum under rule 22e–4, because the
Commission considered the presence of board
oversight in that determination).
385 See
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liquidity levels on fund websites.388
While some commenters suggested a
public report is unnecessary because
investors already have access to daily
liquidity levels on fund websites, these
websites do not explain the facts and
circumstances surrounding a liquidity
threshold event. Investors benefit from
having contextual information to
understand the cause of the declining
liquidity, which is helpful for assessing
the fund’s risks and its ability to meet
redemptions. We also disagree that
public reporting is unnecessary because
funds must report liquidity threshold
events to their boards under the final
rule. Board reporting does not improve
transparency for investors around the
occurrence and causes of liquidity
threshold events. Moreover, in response
to some commenters’ suggestion that
such reporting might incentivize
redemptions, we cannot predict
individual shareholder actions with
certainty, but if such redemptions were
to occur, the final rule will provide
information about why the liquidity
decline occurred, thus reducing investor
uncertainty. In addition, the final rule
provides fund managers with liquidity
fees as a tool for managing these
redemptions. Further, while we
appreciate the concern that such a
reporting requirement might encourage
money market fund managers to use
assets other than daily or weekly liquid
assets to meet redemptions to avoid a
drop in liquidity that would trigger the
reporting requirement, we do not
believe such a requirement will
contribute significantly to such an
incentive because funds are already
required to provide daily liquidity
levels on their websites. As a result of
these considerations, as proposed, the
final amendments will require a fund to
report the occurrence of a liquidity
threshold event publicly on Form N–CR.
With respect to the type of liquidity
threshold event a fund must report on
Form N–CR, one commenter suggested
requiring a fund to report only if it is
50% below each of the daily and weekly
liquidity minimums for five consecutive
days, but did not offer a supporting
rationale.389 We continue to believe that
dropping 50% below a minimum
liquidity requirement is a significant
event that merits reporting on Form N–
CR to help investors, the Commission,
and its staff monitor significant declines
in liquidity, even if the drop in liquidity
is not a protracted event.390 Expanding
the number of days a fund must be 50%
388 17
CFR 270.2a–7(h)(10)(ii)(A) and (B).
Federated Hermes Comment Letter I.
390 See Proposing Release, supra note 6, at section
II.F.1.a.
389 See
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below a regulatory liquidity minimum
before it is required to report would
reduce the intended transparency and
utility of the reports on Form N–CR.
We are also adopting the same
informational requirements as proposed
for these reports. Commenters generally
did not discuss the proposed
informational requirements, except one
commenter expressed support for the
general approach.391 This commenter
expressed support for requiring a fund
to report both its daily and weekly
liquid asset levels when a liquidity
threshold event occurs (even if only one
threshold is crossed) and with requiring
disclosure about the basis for the
liquidity threshold event.
Consistent with current timing
requirements and with the proposal, a
fund will have to file a report within
one business day after occurrence of a
liquidity threshold event; however, a
fund may file an amended report
providing the required brief description
of the facts and circumstances leading to
the liquidity threshold event up to four
business days after such event.
Commenters did not suggest any
changes to the proposed timeframe for
filing reports on Form N–CR. If a fund
has daily liquid assets or weekly liquid
assets continuously below the relevant
threshold for consecutive business days
after reporting an initial liquidity
threshold event, as proposed, the final
amendments will only require the fund
to report the initial date of the liquidity
threshold event, and will not require
additional Form N–CR reports to
disclose that the same type of liquidity
threshold event continues.392 One
commenter discussed this approach and
agreed with it.393 Further, as proposed,
an additional report will be required if,
for example, a fund initially drops
below 25% weekly liquid assets and
then on a subsequent day drops below
12.5% daily liquid assets.394
391 See
Federated Hermes Comment Letter I.
Items E.1 and E.2 of amended Form N–
CR; see also Proposing Release, supra note 6, at
section II.F.1.a.
393 See Federated Hermes Comment Letter I.
394 As discussed in the Proposing Release, if a
fund initially falls below only one threshold and
then subsequently falls below the other threshold,
the final amendments will require a second Form
N–CR report. For example, if a fund dropped below
25% weekly liquid assets on Tuesday and dropped
below 12.5% daily liquid assets on Thursday, it
would be required to file two separate reports to
disclose each liquidity threshold event.
Additionally, if a fund fell below either threshold
and subsequently resolved the liquidity threshold
event before an initial or amended report is filed,
the fund would still be required to report the
liquidity threshold event and the facts and
circumstances leading to the liquidity threshold
event. See Proposing Release, supra note 6, at
n.261.
392 See
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b. Structured Data Requirement
As proposed, the final rule will
require money market funds to file
reports on Form N–CR in a custom
eXtensible Markup Language (‘‘XML’’)based structured data language created
specifically for reports on Form N–CR
(‘‘N–CR-specific XML’’).395 The few
comments the Commission received on
this topic were mixed.396 In support,
one commenter regarded it as a
reporting enhancement that would
increase transparency for institutional
and retail investors, and allow
regulators and policymakers to better
assess the state of the financial
system.397 In opposition, one
commenter suggested that structured
data is more expensive and not used by
investors.398
After considering commenters’ views,
we are adopting the structured data
requirement as proposed. While we
acknowledge that Form N–CR filers may
bear some additional reporting costs as
a result of this amendment, as one
commenter suggested, we believe these
costs will generally be related to funds
adjusting their systems to a different
data language.399 We continue to believe
that use of an N–CR-specific XML
language may result in reduced
reporting costs by introducing
additional efficiencies for funds already
accustomed to using structured data for
other required reports and may reduce
overall reporting costs in the longer
term.400 The structured data
requirement will provide more useful
data for investors and the Commission,
as applicable, because it will allow tools
to be developed for sorting and filtering
the available data according to specified
parameters to enhance comparative
assessments and customized analyses.
c. Other Amendments
We also are adopting the following
amendments to Form N–CR as
proposed: (1) require the registrant
name, series name, and legal entity
identifiers (‘‘LEIs’’) for the registrant and
the series to improve identifying
395 See General Instruction D of amended Form
N–CR.
396 See Western Asset Comment Letter; Federated
Hermes Comment Letter I.
397 See Western Asset Comment Letter.
398 See Federated Hermes Comment Letter I.
399 Id.
400 As discussed in the Proposing Release, money
market funds already have experience with a
custom XML language with respect to their reports
on Form N–MFP. In addition, we understand that
when money market funds prepare reports in
HTML or ASCII (as currently required for Form N–
CR reports), they generally need to reformat
required information from the way that information
is stored for normal business purposes. See
Proposing Release, supra note 6, at section II.F.1.b.
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information on the form; 401 (2) add
definitions of LEI, registrant, and series
to Form N–CR for clarity and
consistency with the same defined
terms on Form N–MFP; 402 (3) remove
the reporting events that relate to
liquidity fees and redemption gates, as
money market funds will no longer be
permitted to impose redemption gates
under rule 2a–7, and other disclosure
about the imposition of liquidity fees is
more appropriate than Form N–CR
disclosure under the final rule’s
amended liquidity fee framework; 403
and (4) amend Part C of Form N–CR,
which relates to the provision of
financial support to the fund.404
Specifically, when such support
involves the purchase of a security from
the fund, the final rule, as proposed,
will require reporting of the date the
fund acquired the security, which will
allow better identification of, and
context for, support that occurs within
a short period of time. For example, if
the fund purchased the security a few
days before the affiliate acquired it, this
could suggest that the risk profile of the
security deteriorated rapidly. One
commenter stated that we should not
adopt these proposed reporting
amendments but did not provide a
rationale.405 Accordingly, we are
adopting such amendments to realize
their intended benefits.
2. Amendments to Form N–MFP
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a. New Information Requirements
We are adopting, with the
modifications discussed below, the
reporting requirements regarding
additional information about the
composition and concentration of
money market fund shareholders and
about prime funds’ sales of nonmaturing investments. In addition,
similar to the proposed requirement to
report information about the use of
swing pricing, we are requiring funds to
report information about their
application of liquidity fees under the
final rule. Further, because the final rule
will permit stable NAV funds to use
share cancellation in a negative interest
rate environment, we are requiring
reporting related to share cancellation.
Shareholder Concentration
In a change from the proposal, after
considering comments raising privacy
and related concerns, we will not
401 See Items A.2, A.4, A.5, and A.7 of amended
Form N–CR.
402 See General Instruction F of amended Form
N–CR.
403 See Parts E through G of current Form N–CR.
404 See Item C.6 of amended Form N–CR.
405 See Federated Hermes Comment Letter I.
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require money market funds to disclose
the name of each person who is known
by the fund to own beneficially or of
record 5% or more of the shares
outstanding in the relevant class.406
Rather, the final rule requires money
market funds to report only the type of
beneficial or record owner who owns
5% or more of the shares outstanding in
the relevant class. Accordingly,
amended Form N–MFP includes the
following categories of owner types
from which filers will make the
appropriate selection: retail investor;
non-financial corporation; pension plan;
non-profit; state or municipal
government entity (excluding
governmental pension plans); registered
investment company; private fund;
depository institution or other banking
institution; sovereign wealth fund;
broker-dealer; insurance company; and
other.407 The shareholder concentration
information the final amendments
require will provide the Commission
and investors with a greater ability to
monitor redemption and liquidity risks.
As proposed, the final amendments
require funds to use a 5% ownership
threshold for the shareholder
concentration reporting requirement.
Commenters generally did not engage
substantively on the proposed 5%
ownership threshold, though one
commenter did agree that 5% would be
an appropriate threshold.408 Funds
currently provide similar ownership
information using a 5% threshold on an
annual basis in their registration
statements.409 More frequent reporting
of information on Form N–MFP is
designed to facilitate monitoring of a
fund’s potential risk of redemptions by
an individual or a small group of
investors that could significantly affect
the fund’s liquidity.
As proposed, to address
circumstances in which multiple
investors would be represented as a
406 See Item B.10 of amended Form N–MFP. If the
fund knows that two or more beneficial owners of
the class are affiliated with each other, the fund
would treat them as a single beneficial owner when
calculating the percentage ownership and identify
separately each affiliated beneficial owner by type
and the percentage interest of each affiliated
beneficial owner. For these purposes, an affiliated
beneficial owner would be one that directly or
indirectly controls or is controlled by another
beneficial owner or is under common control with
another beneficial owner.
407 See Item B.10.b of amended Form N–MFP.
This list of investor types is consistent with the
types of investors identified in the proposed and
final reporting item on shareholder composition of
institutional prime and institutional tax-exempt
funds, except the beneficial owner list includes
retail investors because the requirement to report
investor concentration is not limited to institutional
money market funds.
408 See Federated Hermes Comment Letter I.
409 See Item 18 of Form N–1A.
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single shareholder of record as a result
of omnibus accounts, the final
amendments require funds to report
beneficial owner information only to the
extent that such beneficial ownership is
known to the fund.410 Commenters did
not address this aspect of the proposal.
We recognize that funds may not have
information about the type of beneficial
owner or amount each beneficial owner
holds in an omnibus account. The
reporting item distinguishes between
the percent of shares outstanding owned
of record and owned beneficially to
facilitate a more nuanced understanding
of potential concentration levels.
Some commenters objected to the
proposal that funds must publicly
disclose the names of specific investors
on the basis that the information is
private and confidential.411 For
instance, one commenter suggested that
disclosure of investor names would be
anti-competitive and give other fund
sponsors a window into shareholder
composition of money market funds.412
Another commenter suggested such
reporting may cause investors to adjust
holdings as of month end to avoid
public disclosure of their money market
fund holdings and drive
redemptions.413 To address these
concerns, some commenters suggested
that the information should only be
reported to the Commission on a
confidential basis, particularly given the
frequency of the reporting.414
Some commenters suggested that
shareholder concentration information
is of little value and would be
burdensome for money market funds to
report on a monthly basis. For example,
some commenters questioned the
usefulness, both to the Commission and
investors, of shareholder concentration
information.415 Other commenters
410 Omnibus accounts are accounts established by
intermediaries that typically aggregate all customer
activity and holdings in a money market fund,
which can result in the fund not having information
about individual beneficial owners who hold their
shares through the omnibus account.
411 See, e.g., CFA Comment Letter; Federated
Hermes Comment Letter I; Invesco Comment Letter;
Dechert Comment Letter (expressing concern that
investors, particularly natural persons, would be at
risk of having their investments tracked or
monitored throughout the year); Schwab Comment
Letter; ICI Comment Letter; Bancorp Comment
Letter; SIFMA AMG Comment Letter; Northern
Trust Comment Letter; CCMR Comment Letter.
412 See Invesco Comment Letter.
413 See Northern Trust Comment Letter.
414 See, e.g., Federated Hermes Comment Letter I;
Invesco Comment Letter; Dechert Comment Letter
(stating that more frequent reporting raises privacy
concerns, as contrasted with the 30-day lag for
reporting similar information on Form N–1A);
BlackRock Comment Letter; Schwab Comment
Letter; ICI Comment Letter; Bancorp Comment
Letter; Northern Trust Comment Letter.
415 See Invesco Comment Letter (stating that it
was unlikely that the requirement for money market
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questioned the value of requiring
reporting of investor names relative to
the burden on money market funds.416
One commenter suggested that
intermediary omnibus accounts and the
use of nominee names may cause
confusion and interpretive issues since
interpretation of the data may be
subjective and potentially inaccurate.417
This commenter also suggested that
investors lack sufficient information to
assess the risks of single shareholder
positions. Another commenter
suggested that disclosure of
shareholders that own 5% or more of
shares is not necessary because daily
flow information is available on fund
websites and provides investors with
sufficient information to monitor
redemption risk.418
Upon consideration of the comments,
the amended rule will not require funds
to report the names of the greater than
5% owners. Although shareholder
concentration information is already
reported publicly by funds on an annual
basis on Form N–1A, we recognize the
sensitivities associated with publicly
reporting the names of owners with
ownership of more than 5% on a
monthly basis. Accordingly, the
amendments instead require funds to
provide information about the types of
owners who invest 5% or more in a
class of the fund. This amendment
addresses commenters’ concerns while
maintaining the value of the reported
information in monitoring a fund’s
potential risk of redemptions by an
individual or a small group of investors
that could significantly affect the fund’s
liquidity. We decline to make
shareholder concentration information
confidential, as some commenters
suggested, because confidential
reporting would deprive investors of the
increased ability to monitor redemption
and liquidity risk. In addition, as
proposed, the burden of the reporting
requirement is limited because funds
need only report beneficial ownership
information to the extent known by the
fund.
In response to comments questioning
the value of shareholder concentration
information, we believe that more
frequent information about shareholder
concentration will assist both the
funds to disclose shareholder concentration levels
regularly would produce standardized cross
industry data that could be used in a meaningful
manner); ICI Comment Letter; SIFMA AMG
Comment Letter; see also Western Asset Comment
Letter.
416 See BlackRock Comment Letter; see also
CCMR Comment Letter (noting general compliance
costs and the burden to funds); Western Asset
Comment Letter.
417 See Western Asset Comment Letter.
418 See Northern Trust Comment Letter.
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Commission and investors in
monitoring a fund’s potential risk of
redemptions. In particular, investors can
identify shareholder concentrations that
may significantly affect the fund’s
liquidity. While we recognize investors
have access to information about a
fund’s historical flows and liquidity
levels, this information may not present
the full picture of the risks of a single
shareholder redeeming a large position
in the fund’s shares. Investors will
benefit from additional information that
allows them to more efficiently monitor
and assess liquidity risk. The
shareholder concentration reporting
requirement will provide an additional
useful metric when undertaking
liquidity risk analyses, making the form
(and its data) more usable by filers,
regulators, and investors when
evaluating potential redemption
behavior and related investor risks.
Some commenters proposed
alternative reporting methodologies for
shareholder concentration. Some
commenters suggested that funds
should only be required to report the
number of investors with ownership at
or above a 5% threshold.419 Another
commenter suggested that funds should
report, without attribution, the
percentage holdings and type of the top
5 largest investors.420 Reporting only the
number of investors above the 5%
ownership threshold or only the
percentage holdings of the top 5 largest
investors would limit the utility of Form
N–MFP in monitoring for redemption
and liquidity risk. The approach we are
adopting is designed to provide a more
comprehensive overview of a fund’s
shareholder concentration and,
accordingly, facilitate a more incisive
risk analysis. In addition, this approach
aligns with the analysis funds already
must conduct annually when updating
their registration statements.
With respect to the proposed
requirement to report the number of
investors who own of record or
beneficially 5% or more, several
commenters suggested that it would be
difficult for funds to report the
necessary ownership information given
omnibus positions. Some commenters
suggested amendments to require
financial intermediaries to provide
certain information to money market
419 See, e.g., Federated Hermes Comment Letter I
(suggesting that funds should only report the
number of investors that own of record or
beneficially 5% or more, distinguishing between
record owners and beneficial owners); SIFMA AMG
Comment Letter (suggesting that funds disclose the
number of investors owning 5% or more of the
shares outstanding of a class of a fund).
420 See BlackRock Comment Letter.
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funds.421 As proposed, funds must
report beneficial ownership information
only to the extent known by the fund.
We recognize that money market funds
may not have information about all
beneficial owners. We agree with
commenters that information about
shareholder concentration can help
funds manage liquidity and improve
stress testing. As such, a fund could
consider periodically requesting
information from intermediaries about
shareholder concentration.
One commenter suggested that
shareholder concentration should be
reported monthly at the fund level, not
the share class level.422 Reporting this
information at the share class level
provides a more comprehensive view of
a fund’s overall shareholder
concentration and a better
understanding of the group of investors
that could impact the fund’s liquidity.
This is particularly relevant in times of
stress because the required
concentration information is more
specific and corresponds to the share
class flow level reporting on Form N–
MFP. Fund level reporting may still be
of value, and the Commission and
investors can use the data reported at
the class level to then analyze
concentration at the fund level if
needed. Reporting at the share class
level is also appropriate because money
market fund shares are sold on a class
level and, in addition, such reporting is
consistent with the current reporting of
shareholder concentration on Form N–
1A. Reporting at the share class level
also provides insight into customized
share classes, which may have unique
shareholder compositions for which
monitoring at the class level may be
particularly important from a liquidity
risk perspective.
Shareholder Composition
We are adopting, as proposed,
amendments requiring a money market
421 See Federated Hermes Comment Letter I
(suggesting that rule 22c–2(a)(2) be amended to
require money market funds to enter into
agreements with intermediaries to obtain the
needed shareholder information); Morgan Stanley
Comment Letter (‘‘SEC should consider requiring
financial intermediaries holding omnibus positions
to provide data periodically and consistently to
money market funds regarding the ten largest
underlying clients (excluding identities) to assist
money market funds in managing liquidity.’’);
BlackRock Comment Letter (‘‘The Commission
could assess whether requiring some transparency,
such as anonymized flows by client type, could
benefit stress testing and liquidity management.’’).
422 See BlackRock Comment Letter (‘‘[W]e note
that the data should be collected monthly at the
Fund level and not the share class level. While we
understand the SAI currently lists 5% holders at the
share class level, we believe that information is
provided for a different reason than needing to
monitor concentration in a fund.’’).
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fund that is not a government money
market fund or a retail money market
fund to provide information about the
composition of its shareholders by
type.423 Accordingly, funds must
identify the percentage of investors
within the following categories: nonfinancial corporation; pension plan;
non-profit; state or municipal
government entity (excluding
governmental pension plans); registered
investment company; private fund;
depository institution and other banking
institution; sovereign wealth fund;
broker-dealer; insurance company; and
other. This information is designed to
assist with monitoring the liquidity and
redemption risks of institutional money
market funds, as different types of
investors may pose different redemption
risks. We are not requiring this
information of government money
market funds because these funds have
lower redemption and liquidity risks
than other money market funds. In
addition, we are not applying this
requirement to retail funds because
these funds, by definition, are limited to
retail investors.
With respect to the proposal for funds
to report shareholder composition by
type, one commenter suggested that the
categories of investors should align with
the current National Securities Clearing
Corporation (‘‘NSCC’’) social codes,
which some industry participants
presently use.424 The NSCC list of social
codes includes several dozen distinct
designations, which may cause
confusion for money market funds
completing the disclosures as well as
investors reviewing such disclosures. In
contrast, our list of general categories
better facilitates the disclosure process
and provides sufficient detail for
Commission staff and investors
monitoring liquidity and redemption
risk.425
Prime Money Market Funds’ Selling
Activity
We are adopting, as proposed, an
amendment to require information
about the gross market value of portfolio
securities a prime money market fund
sold or disposed of during the reporting
period.426 Commenters did not address
423 See
Item B.11 of amended Form N–MFP.
Invesco Comment Letter.
425 The categories we are adopting have some
overlap with the types of beneficial owners that
large liquidity fund advisers and other private fund
advisers that report on Form PF use for purposes
of that form. See Question 16, Item B, Section 1b
of Form PF. As a result, there may be certain
efficiencies for money market funds with advisers
to liquidity funds or other private funds.
426 See Part D of amended Form N–MFP. The
proposed amendment referred to the ‘‘amount’’ of
portfolio securities. We are changing the
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424 See
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this aspect of the proposed requirement.
This information will facilitate
monitoring of prime money market
funds’ liquidity management, as well as
their secondary market activities in
normal and stress periods. It also will
improve the availability of data about
how selling activity by money market
funds relates to broader trends in shortterm funding markets. A prime fund
will be required to disclose the
aggregate amount it sold or disposed of
for each category of investment.427 The
categories of investments mirror the
categories funds already use on Form
N–MFP for identifying their month-end
holdings (e.g., certificate of deposit,
non-negotiable time deposit, financial or
non-financial company commercial
paper, or U.S. Treasury debt).428 To
focus the disclosure on secondary
market activity, as proposed, portfolio
securities held by a fund until maturity
are excluded from the disclosure. We
are requiring only prime funds to
provide information about securities
sold or disposed of because asset
liquidation by this type of money
market fund contributed to the market
stress in March 2020 and during the
2008 financial crisis. In contrast,
government funds generally receive
inflows during periods of market stress
and tend to provide liquidity to the
market by investing incoming cash flow
in the repurchase agreement market and
purchasing securities. Tax-exempt funds
are only a small segment of the money
market fund industry and are less likely
to generate significant liquidity
concerns for the broader municipal
market.
Liquidity Fees
Consistent with the changes described
above in the liquidity fee mechanism
section, and in a change from the
proposal, we are amending Form N–
MFP to require money market funds to
report the date on which the liquidity
fee was applied, the type of liquidity
fee, and the amount of the liquidity fee
applied by the fund.429 In addition, we
are removing existing reporting
requirements on Form N–CR related to
terminology to ‘‘gross market value’’ in the final
amendments to clarify that a fund may not net its
purchases and sales for purposes of this reporting
item. This clarification is consistent with language
in the Proposing Release referring to the ‘‘aggregate’’
amount a fund sold or disposed of. See Proposing
Release, supra note 6, at text accompanying n.274.
427 See Item D.1 of amended Form N–MFP. Thus,
if a prime money market fund sold an instrument
and then bought it back during the reporting period,
the fund should include the market value of that
sale in the reported gross market value of portfolio
securities sold during the reporting period.
428 See Item C.6 of current Form N–MFP.
429 See Item A.22 of amended Form N–MFP.
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the application of liquidity fees because
we believe monthly reporting of the
frequency, type, and size of liquidity
fees on Form N–MFP is more consistent
with the modified liquidity fee
framework we are adopting than
requiring current reporting on Form N–
CR.
Share Cancellation
Because the final rule permits stable
NAV funds to use share cancellation
when interest rates and the fund’s gross
yield are negative, subject to certain
conditions, the final amendments will
require a stable NAV fund to report
information about its use of share
cancellation on Form N–MFP.
Specifically, the amendments require a
fund to report if it used share
cancellation during the reporting period
and, if so, the dollar value of shares
cancelled, the number of shares
cancelled, and the dates on which it
used share cancellation.430 This
reporting will help the Commission and
investors monitor a fund’s
implementation of RDM share
cancellation under final rule 2a–7.
Under the proposed rule, the
Commission did not need to require
separate reporting of a fund’s
conversion to a floating NAV in
response to a negative interest rate
event, because investors and the
Commission can currently observe such
conversion through the fund’s reported
daily NAVs on Form N–MFP. Given that
the final rule will permit the use of
RDM share cancellation if a fund meets
the rule’s conditions, separate reporting
of its implementation is important to
allow the Commission and investors to
assess how all stable NAV funds address
negative interest rates.
b. Changes To Improve the Accuracy
and Consistency of Currently Reported
Information
We are adopting, with the
modifications discussed below, several
amendments to the information
currently reported on Form N–MFP
about money market funds and their
portfolio securities, including
repurchase agreements. These
amendments are designed to, among
other things, improve the accuracy and
consistency of such information
reported on Form N–MFP. However, in
response to comments, we are not
adopting the full scope of the
amendments we proposed such as
requirements for lot-level reporting of
portfolio holdings and disaggregated
information for certain repurchase
agreement reporting.
430 See
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We are adopting amendments that
will require additional information
about repurchase agreement
transactions and standardize how filers
report certain information. Specifically,
the final amendments will require, as
proposed, that filers identify (1) the
name of the counterparty in a
repurchase agreement; 431 (2) whether a
repurchase agreement is centrally
cleared and the name of the central
clearing counterparty, if applicable; 432
(3) if a repurchase agreement was settled
on a triparty platform; 433 and (4) the
CUSIP of the securities involved in the
repurchase agreement.434 As proposed,
the final amendments will also include
‘‘cash’’ as a category of investment that
most closely represents the collateral in
repurchase agreements.435 However, in
a change from the proposal, we are not
adopting the amendments to remove the
ability of funds to aggregate certain
required information if multiple
securities of an issuer are subject to the
repurchase agreement.
Several commenters disagreed with
the proposed removal of the ability of
money market funds to aggregate certain
required information on Form N–MFP if
multiple securities of an issuer are
subject to a repurchase agreement.436
These commenters suggested that the
additional reporting in a disaggregated
format would impose significant
additional operational burdens for funds
and that these burdens are not justified
by any benefit to the Commission or
investors of the additional
information.437 For example, one
commenter explained that a money
market fund can enter into a single
repurchase agreement that may cover
over one hundred unique CUSIPs, and
it would require significant time to
prepare and review this data for
reporting on Form N–MFP.438
As discussed in the Proposing
Release, the proposal to require
disaggregated information for
repurchase agreements was designed to
provide more complete information
431 See
Item C.1 of amended Form N–MFP.
Item C.8.b. of amended Form N–MFP.
433 See Item C.8.c. of amended Form N–MFP.
434 See Item C.8.f of amended Form N–MFP.
435 As discussed in the Proposing Release, adding
a ‘‘cash’’ category is designed to recognize that cash
is sometimes used as collateral for repurchase
agreements. We expect that this addition will
reduce inaccurate disclosure suggesting that a
repurchase agreement is under-collateralized. See
Proposing Release, supra note 6, at paragraph
accompanying n.278; Item C.8.k of amended Form
N–MFP.
436 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; BlackRock Comment Letter; CCMR
Comment Letter.
437 Id.
438 See BlackRock Comment Letter.
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about securities subject to a repurchase
agreement.439 This would assist the
Commission’s ability to analyze and
compare information regarding
repurchase agreements on Form N–
MFP. The other amendments we are
adopting will improve the reported
information about repurchase
agreements and allow for improved
Commission monitoring.440 In light of
the potential challenges of reporting
disaggregated information within five
business days of month-end at this time,
and considering the benefits of the other
information about repurchase
agreements we are requiring, we are not
requiring funds to report disaggregated
information about securities subject to a
repurchase agreement at this time.
Accordingly, under the final
amendments, money market funds will
continue to be permitted to aggregate
certain required information regarding
repurchase agreements under certain
conditions.
With respect to other repurchase
agreement-related amendments, one
commenter argued that the proposed
reporting of additional information
about the counterparty to the repurchase
agreement, whether a repurchase
agreement is centrally cleared or a
triparty agreement, and the CUSIP of
collateral subject to the repurchase
agreement are not appropriate given the
costs involved to provide such
information and the limited utility in
doing so.441 Another commenter
supported the proposed requirement to
report the CUSIP of collateral subject to
repurchase agreements.442 This
commenter further suggested that
money market fund managers would not
incur substantial additional costs or
burdens with respect to reporting CUSIP
identifiers of repurchase agreement
collateral because such managers more
likely than not already rely on the
CUSIP reference data to assemble their
funds’ portfolios. We do not agree with
the assertion that the costs are not
justified given the potential benefits
from requiring this information. As
discussed in the Proposing Release,
requiring the name of the counterparty
and indicating whether a repurchase
agreement is centrally cleared will
clarify how funds should report this
information on the form, as funds
currently report varying information
about repurchase agreements in
439 See Proposing Release, supra note 6, at section
II.F.2.
440 See Item C.1 and C.8 of amended Form N–
MFP.
441 See Federated Hermes Comment Letter I.
442 See Comment Letter of American Bankers
Association (Apr. 11, 2022) (‘‘ABA Comment Letter
II’’) (letter focusing on security identifiers).
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51445
response to an item that currently
requires the name of the issuer.443
Moreover, the amendments recognize
changes that have occurred in the
repurchase agreement market since the
form was last amended, such as the
introduction of centrally cleared (or
‘‘sponsored’’) repurchase agreements.
Requiring this additional information is
intended to improve data clarity
regarding repurchase arrangements and
assist us in monitoring money market
fund activity in various segments of the
market for repurchase agreements,
including potentially increased or
decreased activity during periods of
market stress, which may affect
availability of funding for borrowers.
Our proposed amendments to Form
N–MFP also included amendments to
specify that, for purposes of reporting a
fund’s schedule of portfolio securities in
Part C of Form N–MFP, filers would be
required to provide information
separately for the initial acquisition of a
security and any subsequent
acquisitions of the security (i.e., lotlevel reporting).444 Requiring funds to
report information separately for each
lot, including the trade date on which
the security was acquired and the yield
of the security as of that trade date,
could assist the Commission in
understanding how long a fund has held
a given position and the maturity of the
position when it was first acquired.445
Several commenters disagreed with
this aspect of the proposal.446 These
commenters expressed concern that
public lot-level reporting could reveal
trading strategies to predatory traders,
and thus should be kept confidential if
the Commission requires this
information. One commenter did not
believe this aspect of the proposal is
appropriate given the costs involved to
provide such information and the
limited utility of the information for the
Commission.447 Another commenter
expressed support for the proposed
portfolio securities reporting
requirement, but suggested that the
Commission periodically evaluate
whether any reporting continues to meet
policy objectives and remains useful.448
After considering these comments, we
understand the concern that requiring
public lot-level reporting and trade date
information may subject filers to the risk
443 See Proposing Release, supra note 6, at section
II.F.2.
444 See Proposing Release, supra note 6, at section
II.C.2.b.
445 See proposed Item C.6 of Form N–MFP.
446 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; BlackRock Comment Letter; CCMR
Comment Letter.
447 See Federated Hermes Comment Letter I.
448 See Western Asset Comment Letter.
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that predatory traders and other bad
actors may seek to misuse this
information. While we continue to
believe such information could, among
other things, help facilitate the
Commission’s understanding of money
market fund portfolio turnover during
normal and stressed market condition,
we are also adopting other amendments
to Form N–MFP that will help facilitate
the Commission’s understanding in this
area, including new Part D to Form N–
MFP, which includes information on
prime money market fund portfolio
securities sold or disposed of during the
reporting period, and more frequent
data reporting of daily liquidity, net
asset value, and flow data.449 In light of
the potential risks identified by
commenters coupled with the other
amendments to Form N–MFP that we
are adopting, we are not requiring
public lot-level reporting at this time.
Under the final amendments, filers will
continue to be permitted but are not
required to report information
separately for each lot.
We are also adopting, as proposed,
certain amendments to Form N–MFP
that are intended to make it easier and
more efficient to understand
information reported on the form. Under
current Form N–MFP, filers are required
to indicate the category of the money
market fund, choosing among categories
such as ‘‘Treasury,’’ ‘‘Government/
Agency,’’ and ‘‘Exempt Government,’’
among others. We understand that these
categories for government money market
funds have contributed to confusion and
inconsistent approaches to reporting.450
Accordingly, we proposed to replace
these three categories with a single
‘‘Government Category’’ and include a
new subsection that requires
government money market funds to
indicate whether they typically invest at
least 80% of the value of their assets in
U.S. Treasury obligations or repurchase
agreements collateralized by U.S.
Treasury obligations.451 These proposed
amendments were designed to provide
more clarity for filers and supply the
Commission with more accurate
identification of different types of
government money market funds.
Commenters generally did not discuss
this specific aspect of the proposal, but
the one commenter who addressed this
aspect of the proposal supported it.452
This commenter stated that the
proposed amendments would reduce
449 See
Part B and Part D of amended Form N–
MFP.
450 See
451 See
Item A.10 of current Form N–MFP.
Proposing Release, supra note 6, at section
II.F.2.b.
452 See Federated Hermes Comment Letter I.
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confusion and inconsistency in
categorizing government money market
funds. This commenter also supported
the proposed addition of a new
subsection to identify money market
funds that invest in Treasury
obligations, either directly or through
repurchase agreements. We agree and
are adopting the amendments as
proposed to money market fund
categorization.453
We are also adopting as proposed a
new item in Form N–MFP that would
require filers to indicate whether the
fund is established as a cash
management vehicle for affiliated funds
and accounts.454 This item is designed
to make it easier and more efficient to
identify privately offered institutional
money market funds. Separately, and as
proposed, we are adopting an
amendment to the form to require a
fund to affirmatively state whether it
seeks to maintain a stable price per
share, consistent with our proposal.455
Commenters generally did not discuss
these specific proposals, except one
commenter agreed that the proposed
requirement to require filers to indicate
whether the fund is established as a
cash management vehicle for affiliates is
sufficiently clear.456
Under current Form N–MFP, filers are
required to indicate the category of each
reported portfolio security using a list of
categories designated on the form.457
We are adopting as proposed the
amendments to the list of categories to
distinguish between U.S. Government
agency debt categorized as (1) a couponpaying note and (2) a no-coupon
discount note.458 This change will assist
us in understanding whether an agency
security is a weekly liquid asset, as only
agency discount notes with less than 60
days to maturity qualify as weekly
liquid assets under the rule. In addition,
we are adopting as proposed a
conforming change to the list of
investment categories that a fund must
use for purposes of disclosing
information about its holdings on its
website.459
Commenters generally did not discuss
these specific amendments, except one
commenter expressed support for this
aspect of the proposal if the
453 See
Item A.10 of amended Form N–MFP.
Item A.21 of amended Form N–MFP.
455 See Item A.18 of amended Form N–MFP.
456 See Federated Hermes Comment Letter I.
457 See Item C.6 of current Form N–MFP.
458 See Item C.6 of amended Form N–MFP.
459 See amended rule 2a–7(h)(10)(i)(B)(2). We are
also making modernizing changes to rule 2a–
7(h)(10) (e.g., by replacing the term ‘‘website’’ with
‘‘website’’) and correcting a typographical error in
rule 2a–7(h)(10)(iii) that refers to share prices of
$1.000 and $10.00 instead of $1.0000 and $10.000.
Commission would find this
information useful.460 As discussed
above, this amendment will assist us in
reviewing reported information.
Further, we are adopting, as proposed,
amendments to require money market
funds to report only the amount of any
fee waiver or expense reimbursement
that occurred during the reporting
period.461 Under current Form N–MFP,
funds are required to provide the name
of any person who paid for or waived
all or part of the fund’s operating
expenses or management fees during the
reporting period and describe the
amount and nature of the fee and
expense waiver or reimbursement.462 As
discussed in the Proposing Release,
these disclosures are difficult to use
because they are provided in a format
that is not structured.463 In addition,
identification of the person who paid for
or waived the fund’s expenses or fees is
not significantly beneficial to the
Commission’s monitoring and
assessment of fund risks, and investors
separately have access to information
about fee and expense waivers or
reimbursements in funds’ financial
statements. Commenters generally did
not discuss these specific proposals,
except one commenter agreed that the
simplified fee waiver and expense
reimbursement reporting is sufficient.464
Accordingly, for the reasons discussed
above and in the proposal, we are
adopting these amendments as
proposed.
c. More Frequent Data Points
As proposed, we are amending Form
N–MFP to require a money market fund
to provide in its monthly report certain
daily data points to improve the utility
of the reported information.
Specifically, the amendments require a
fund to report its percentage of total
assets invested in daily liquid assets and
in weekly liquid assets, net asset value
per share (including for each class of
shares), and shareholder flow data for
each business day of the month.465
Currently, in monthly reports on Form
N–MFP, a money market fund must
provide the same general information on
a weekly basis.466 Also, under current
rule 2a–7, a money market fund must
prominently disclose on its website, as
of the end of each business day during
454 See
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Fmt 4701
Sfmt 4700
460 See
Federated Hermes Comment Letter I.
Item B.9 of amended Form N–MFP.
462 See Item B.8 of current Form N–MFP.
463 See Proposing Release, supra note 6, at section
II.F.2.b.
464 See Federated Hermes Comment Letter I.
465 See Items A.13, A.20, B.6, and B.7 of amended
Form N–MFP.
466 See Items A.13, A.20, B.5, and B.6 of current
Form N–MFP.
461 See
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the preceding six months, the fund’s
weekly liquid assets and daily liquid
assets, as well as the fund’s net asset
value and net shareholder flow.467 The
more frequent information on Form N–
MFP will allow Commission staff to
better and more precisely monitor risks
and trends in these areas in an efficient
and more precise manner without
requiring frequent visits to the websites
of many different funds. It also will
provide industry-wide daily data in a
central repository as a resource for
investors and others.468 The weekly data
currently reported on Form N–MFP
provides only a snapshot of the
liquidity, net asset value, and flow data
for any given month, and is therefore
incomplete and less useful for purposes
of analysis and monitoring than data for
each business day in that month. In
addition, most of the data on Form N–
MFP is reported as of the end of the
month, making it difficult to analyze the
weekly data in a comprehensive
manner. This is because the weekly data
points generally relate to different days
than the monthly data points.
Consistent with the website information
funds already provide, the reported
daily data points will be calculated as
of the end of each business day.
One commenter opposed the proposal
to require liquidity, net asset value, and
flow data to be reported as of the close
of business on each business day of each
month on the basis that it would be
unduly burdensome and without any
added benefit.469 This commenter
suggested instead that the Commission
should look to private data resources
where such information is readily
available. As discussed in the proposal,
although private data vendors provide
some daily data based on information
gathered from funds’ websites, the staff
has observed this data can be
incomplete at times, and therefore may
not be appropriate for purposes of staff
monitoring and analyses. Also, money
market funds generally are already
required to provide on their websites
the same data that we are requiring be
reported on Form N–MFP, and thus we
believe this change will impose minimal
burden on money market funds.
As proposed, we are also increasing
the frequency with which funds report
certain yield information. Currently,
ddrumheller on DSK120RN23PROD with RULES2
467 17
CFR 270.2a–7(h)(10)(ii).
enhance consistency in reporting practices,
filers must report gross subscriptions and gross
redemptions as of the trade date (rather than as of
the settlement date). This change is designed to
ensure that funds are reporting the information in
the same manner. Filers that are master-feeder
funds must report the required shareholder flow
data at the feeder fund level only. See Item B.7 of
amended Form N–MFP.
469 See Federated Hermes Comment Letter I.
468 To
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funds must report 7-day gross yields (at
the series level) and 7-day net yields (at
the share class level) as of the end of the
reporting period. We are amending
Form N–MFP to require funds to report
this information for each business
day.470 One commenter opposed the
proposal to require money market funds
to report 7-day yield information on a
daily basis, suggesting instead that
money market funds should, at most, be
required to report 7-day yield
information on a weekly basis, though
the commenter preferred monthly
reporting.471 This commenter suggested
that the requirement would place an
undue burden on funds and would fail
to add value and enhance funds. The
higher-frequency reporting, however,
will assist in the timely monitoring and
assessment of fund risks, particularly
during periods of market stress. The
additional burdens associated with
these amendments are appropriate and
justified by the increased investor
protection and other benefits.
d. Other Amendments
As proposed, we are amending how
advisers report the identity of fund
registrants and series.472 Under current
Form N–MFP, a filer must disclose the
registrant’s LEI, if available, and the
form does not require the LEI of the
series.473 Filers also currently provide
the name of the registrant and series in
metadata associated with the form, but
they do not report these names on the
form itself. As adopted, the amended
form will require funds to identify the
name and LEI for both the fund
registrant and the series.474 Requiring
reporting of registrant and series names
on the form is intended to make the
form easier for investors to use. In
addition, the change to require LEIs for
the registrant and series will align Form
N–MFP with other reporting forms, such
as Forms N–CEN and N–PORT, which
require LEI reporting for the registrant
and series.
We are also adopting as proposed
amendments to specify that funds
should respond to an item request with
‘‘N/A’’ if the information is not
applicable (e.g., a company does not
have an LEI).475 The amended definition
of LEI in the form removes language
providing that, in the case of a financial
470 See
Items A.19 and B.8 of amended Form N–
MFP.
471 See
472 See
Federated Hermes Comment Letter I.
Proposing Release, supra note 6, at section
II.F.2.d.
473 See Item 3 of current Form N–MFP.
474 See Items 2, 4, 5, and 6 of amended Form N–
MFP.
475 See General Instruction A to amended Form
N–MFP.
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Fmt 4701
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51447
institution that does not have an
assigned LEI, a fund should instead
disclose the RSSD ID assigned by the
National Information Center of the
Board of Governors of the Federal
Reserve System, if any.476 Instead, the
amendments add RSSD ID as an
additional category of ‘‘other
identifiers’’ that a fund can use for
relevant portfolio securities.477 These
changes are designed to improve
consistency and comparability of
information funds report about the
securities they hold.
Commenters generally did not discuss
these specific aspects of the proposal,
except one commenter opposed them
without offering a supporting reason or
explanation.478 For the reasons
discussed above, we are adopting the
amendments as proposed.
Separately, some commenters
suggested that the Commission should
provide funds with more time to file
reports on the form because the
proposed amendments to Form N–MFP
would increase the volume and
frequency of reported data points.479
Currently, money market funds must
file reports on Form N–MFP by the fifth
business day of each month.480 Some
commenters recommended extending
the filing deadline to seven business
days after month-end to allow sufficient
time for review and verification of the
new information.481 Another
commenter recommended an extension
of 10 business days following monthend to reduce the risk of error in the
submitted data and information to the
Commission.482 For similar reasons,
another commenter recommended an
additional three business days, resulting
in a filing deadline on the eighth
business day of the following month.483
After considering these comments, we
are not amending the reporting
deadline, and funds will continue to be
required to file reports on Form N–MFP
by the fifth business day of each month.
As discussed above, we are not
adopting the full scope of the
476 See General Instruction E to amended Form
N–MFP for a revised definition of LEI.
477 See Item C.5 of amended Form N–MFP.
478 See Federated Hermes Comment Letter I.
479 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; BlackRock Comment Letter;
Federated Hermes Comment Letter I; CCMR
Comment Letter; Bancorp Comment Letter; Invesco
Comment Letter; Capital Group Comment Letter.
480 See 17 CFR 270.30b1–7; General Instruction A
of current Form N–MFP.
481 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; BlackRock Comment Letter;
Federated Hermes Comment Letter I (responding to
Question 132); CCMR Comment Letter; Bancorp
Comment Letter.
482 See Invesco Comment Letter.
483 See Capital Group Comment Letter.
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Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
amendments we proposed. For example,
we are not requiring lot-level reporting
of portfolio holdings or disaggregated
information if multiple securities of an
issuer are subject to a repurchase
agreement. In addition, several of the
amendments will require funds to report
daily data points they already publish
on their websites, including liquidity
levels and net asset values. Considering
the more tailored scope of the final
amendments and funds’ experience
collecting the same or similar data in
several cases, we believe the current five
business day timeline continues to be
appropriate and will ensure timely
public access to the data. To the extent
that a fund identifies an error in its
report after the filing deadline, it can
file an amendment to correct the error,
as currently permitted.484 In our
experience, only a small number of
funds needed to make amendments to
Form N–MFP filings to correct reporting
issues after the deadline.
ddrumheller on DSK120RN23PROD with RULES2
3. Amendments to Form PF
The Commission is also amending
Form PF, the confidential reporting
form for certain SEC-registered
investment advisers to private funds to
require additional information regarding
the liquidity funds they advise.
Liquidity funds are private funds that
seek to maintain a stable NAV (or
minimize fluctuations in their NAVs)
and thus can resemble money market
funds.485 The amendments to section 3
of Form PF will provide a more
complete picture of the short-term
financing markets in which liquidity
funds invest and enhance the
Commission’s and the Financial
Stability Oversight Council’s (‘‘FSOC’’)
ability to assess short-term financing
markets and facilitate our oversight of
those markets and their participants.486
This, in turn, is designed to enhance
investor protection efforts and systemic
risk assessment.487 We have consulted
484 See General Instruction A of current Form N–
MFP; General Instruction A of amended Form N–
MFP.
485 For purposes of Form PF, a ‘‘liquidity fund’’
is any private fund that seeks to generate income
by investing in a portfolio of short term obligations
in order to maintain a stable net asset value per unit
or minimize principal volatility for investors. See
Form PF: Glossary of Terms.
486 In addition, the changes will enhance the
Commission’s and FSOC’s ability to assess shortterm financing markets, facilitate the Commission’s
oversight of those markets, and improve the data
quality and comparability by making certain
categories in section 3 more consistent with the
categories the Federal Reserve Board uses in its
reports and analysis.
487 The Commission is adopting these
amendments, in part, pursuant to its authority
under section 204(b) of the Advisers Act, which
gives the Commission the authority to establish
certain reporting and recordkeeping requirements
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Jkt 259001
with FSOC to gain input on these
amendments to help ensure that Form
PF continues to provide FSOC with
information it can use to assess systemic
risk.
In a January 2022 release proposing
amendments to Form PF, the
Commission proposed changes to
section 3 of Form PF that were intended
to require large liquidity fund advisers
to report substantially the same
information that the Commission had
proposed money market funds to report
on Form N–MFP.488 The proposed
amendments to section 3 of Form PF
included requirements for additional
and more granular information
regarding large liquidity fund
operational information and assets,
portfolio holdings, financing, and
investor information as well as a new
item concerning the disposition of
portfolio securities.489 Consistent with
the final amendments to Form N–MFP,
we are adopting largely as proposed the
amendments to section 3 of Form PF,
with some modifications to better tailor
the reporting to private liquidity funds
and remain consistent with the final
requirements for money market funds
under amended Form N–MFP.
We received limited comments
regarding the proposed amendments to
section 3 of Form PF.490 Two
commenters were supportive of the
changes, with one commenter stating
that it was reasonable to require the
large liquidity fund advisers to provide
comprehensive reports to the SEC on
their operations and financial
condition.491 This commenter argued
that if a significant difference between
the requirements applicable to money
market funds and liquidity funds exists,
this difference could allow for a
significant but hidden risk to
for advisers to private funds and provides that the
records and reports of any private fund to which an
investment adviser registered with the Commission
provides investment advice are deemed to be the
records and reports of the investment adviser.
488 See Form PF Proposing Release, supra note 14;
Proposing Release, supra note 6, at section II.F.2.
489 See Form PF Proposing Release, supra note 14,
at section II.C.
490 See Comment Letter of Better Markets on File
No. S7–01–22 (Mar. 21, 2022) (‘‘Better Markets
Comment Letter on File No. S7–01–22’’); Comment
Letter from Andres Loubriel on File No. S7–01–22
(Oct. 13, 2022) (‘‘Loubriel Comment Letter on File
No. S7–01–22’’); Comment Letter of New York City
Bar Association on File No. S7–01–22 (Mar. 21,
2022) (‘‘NYC Bar Comment Letter on File No. S7–
01–22’’). Comment letters on the Form PF
Proposing Release (File No. S7–01–22) are available
at https://www.sec.gov/comments/s7-01-22/
s70122.htm.
491 See Better Markets Comment Letter on File
No. S7–01–22; Loubriel Comment Letter on File No.
S7–01–22.
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Fmt 4701
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develop.492 In contrast, another
commenter argued that the proposed
changes to Form PF would represent a
fundamental shift from the original
intent of Form PF to assist the FSOC in
its monitoring obligations and
questioned whether additional data was
necessary.493
We do not agree that the proposed
amendments represent a fundamental
shift from the original intent of Form
PF. The Commission adopted Form PF,
as required by the Dodd-Frank Act, to
enhance FSOC’s monitoring and
assessment of systemic risk; to provide
information for FSOC’s use in
determining whether and how to deploy
its regulatory tools; and to collect
additional data for the Commission’s
use in its own regulatory program,
including examinations, investigations,
and investor protection efforts relating
to private fund advisers.494 The final
amendments to section 3 of Form PF are
designed to provide the Commission
and FSOC with a more complete picture
of the short-term financing markets in
which liquidity funds invest, and in
turn, enhance the Commission’s and
FSOC’s ability to assess the potential
market and systemic risks presented by
liquidity funds’ activities and facilitate
our oversight of those markets and their
participants. Specifically, we believe
that the additional and more granular
information the final amendments
require will enable the Commission and
FSOC to better assess liquidity funds’
asset turnover, liquidity management
and secondary market activities,
subscriptions and redemptions, and
ownership type and concentration. This
information may be used to analyze
funds’ liquidity and susceptibility to the
risk of runs, which may give rise to
systemic risk concerns. In addition, the
information can be used for identifying
trends in the liquidity fund industry
during normal market conditions and
for assessing deviations that may serve
as signals for changes in short-term
funding markets. These amendments
also are designed to improve data
quality and comparability. Together, the
492 See Better Markets Comment Letter on File
No. S7–01–22.
493 See NYC Bar Comment Letter on File No. S7–
01–22.
494 See Reporting by Investment Advisers to
Private Funds and Certain Commodity Pool
Operators and Commodity Trading Advisors on
Form PF, Investment Advisers Act Release No. 3308
(Oct. 31, 2011) [76 FR 71128 (Nov. 16, 2011)]
(‘‘2011 Form PF Adopting Release’’), at sections II
and V; see also Amendments to Form PF to Require
Event Reporting for Large Hedge Fund Advisers and
Private Equity Fund Advisers and to Amend
Reporting Requirements for Large Private Equity
Fund Advisers, Advisers Act Release No. 6297 (May
3, 2023) [88 FR 38146 (June 12, 2023)] (‘‘2023 Form
PF Adopting Release’’).
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Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
amendments are intended to enhance
investor protection efforts and systemic
risk assessment and, further, are
consistent with the original intent of
Form PF.
Our Form PF amendments apply only
to large liquidity fund advisers, which
generally are SEC-registered investment
advisers that advise at least one
liquidity fund and manage, collectively
with their related persons, at least $1
billion in combined liquidity fund and
money market fund assets.495 Large
liquidity fund advisers today are
required to file information on Form PF
quarterly, including certain information
about each liquidity fund they manage.
Under our final amendments, we are
amending the reporting requirements for
section 3 of Form PF as follows:
• Operational Information. We are
adopting as proposed amendments to
revise how advisers report operational
information about their liquidity funds.
Under current Form PF, advisers must
report whether the liquidity fund uses
certain methodologies to compute its
net asset value.496 These questions
sought to determine how the fund might
try to maintain a stable net asset
value.497 The final amendments replace
these questions with a requirement for
advisers to report the information more
directly, by requiring advisers to report
whether the liquidity fund seeks to
maintain a stable price per share and, if
so, to provide the price it seeks to
maintain.498 As proposed, the final
amendments also remove current
Question 54 of Form PF, which requires
advisers to report whether the liquidity
fund has a policy of complying with
certain provisions of rule 2a–7, as we
can use portfolio information we collect
in section 3, Item E, to determine
whether the liquidity fund is complying
with rule 2a–7, regardless of whether it
has a policy or not.
• Assets and portfolio information.
We are adopting largely as proposed
amendments to how advisers report
assets and portfolio information in
section 3. With respect to fund assets, as
proposed, the final amendments will
require advisers to report cash
separately from other categories when
reporting assets and portfolio
information concerning repo
ddrumheller on DSK120RN23PROD with RULES2
495 See
Instruction 3 to Form PF.
496 See current Form PF, section 3, Item A,
Questions 52 and 53.
497 See Reporting by Investment Advisers to
Private Funds and Certain Commodity Pool
Operators and Commodity Trading Advisors on
Form PF, Release No. 3145 (Jan. 26, 2011) [76 FR
8068 (Feb. 11, 2011)], at n.133 and accompanying
text.
498 See amended Form PF, section 3, Item A,
Question 52.
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20:11 Aug 02, 2023
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collateral.499 Currently, there is not a
distinct category for cash for reporting
fund assets.500 We are also adopting as
proposed an amended definition of the
term ‘‘weekly liquid assets’’ to specify
that the term includes ‘‘daily liquid
assets.’’ 501
As proposed, the final amendments
also will require advisers to report
additional identifying information about
each portfolio security, including the
name of the counterparty of a repo.502
Currently, section 3 requires advisers to
name the issuer. However, for repos, it
is not clear whether advisers should
report the name of the counterparty of
the repo, the name of the clearing
agency (in the case of centrally cleared
repos), or both. The final amendments
will address this ambiguity.503 In
addition, under the final amendments, if
an adviser reports an ‘‘other unique
identifier’’ in identifying a portfolio
security, the adviser will be required to
describe that identifier.504 This will
improve reported data quality and
comparability. We are also revising, as
proposed, the list of categories of
investments that advisers will use to
identify a portfolio security in Item E of
section 3.505 Accordingly, the amended
form will require advisers to distinguish
between U.S. Government agency debt
categorized as (1) a coupon-paying note
and (2) a no-coupon discount note.
These changes will provide more
granular information and will enhance
the Commission and FSOC’s assessment
of systemic risk and the Commission’s
investor protection oversight efforts.
Consistent with the proposed
amendments to Form N–MFP, the
Commission had proposed to require
large liquidity fund advisers to provide
information separately for initial and
subsequent transactions relating to
securities purchased or sold by their
liquidity funds during the reporting
period.506 As discussed in section
II.F.2.b above, we are not adopting such
lot level requirements in Form N–MFP
and, accordingly, we are not adopting
the proposed lot level reporting
requirements for Form PF at this time.
The form as amended will continue to
require an adviser to report the coupon,
499 See, e.g., amended Form PF, section 3, Item B,
Question 53(j).
500 See current Form PF, section 3, Item B,
Question 55.
501 See amended Form PF Glossary of Terms.
502 See amended Form PF, section 3, Item E,
Question 62.
503 See id.
504 See amended Form PF, section 3, Item E,
Question 62(e).
505 See amended Form PF, section 3, Item E,
Question 62(f).
506 See Form PF Proposing Release, supra note 14,
at section II.C.
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51449
if applicable, when reporting the title of
the issue.507 We proposed to remove
this requirement in connection with the
addition of lot level reporting.
• Additional Repo Reporting. In
addition to the changes discussed
above, we are adopting further
amendments to how advisers report
information about repos, largely as
proposed. The final amendments will
require advisers to provide clearing
information for repos to inform the
Commission and FSOC about liquidity
fund activity in various segments of the
market.508 However, in a change from
the proposal and consistent with the
final amendments discussed above,
amended Form PF will continue to
permit the advisers to aggregate certain
information if multiple securities of an
issuer are subject to a repo.509 This
change from the proposal aligns with
comparable reporting requirements
under amended Form N–MFP.
• Subscriptions/Redemptions. We are
adopting, as proposed, an amendment to
Item B of section 3 that will require
information about subscriptions and
redemptions. Specifically, under the
final amendments, advisers must report
the total gross subscriptions (including
dividend reinvestments) and total gross
redemptions for each month of the
reporting period.510
• Financing information. We are
adopting, as proposed, amendments to
revise how advisers report financing
information to indicate whether a
creditor is based in the United States
and whether it is a ‘‘U.S. depository
institution,’’ rather than a ‘‘U.S.
financial institution,’’ as section 3
currently providers.511 As amended,
advisers will also be required to indicate
whether a creditor is based outside the
U.S., but will not have to indicate
whether that non-U.S. creditor is a
depository institution. This amendment
is designed to make the categories in
section 3 more consistent with the
categories the Federal Reserve Board
uses in its reports and analysis.512
• Investor information. We are
adopting, largely as proposed,
amendments to how advisers report
investor information. As proposed,
instead of requiring advisers to report
507 See amended Form PF, section 3, Item E,
Question 62(b).
508 See amended Form PF, section 3, Item E,
Question 62(g)(ii) through (iv).
509 See amended Form PF, section 3, Item E,
Question 62(g).
510 See amended Form PF, section 3, Item B,
Question 53(k) and (l).
511 See amended Form PF, section 3, Item C,
Question 54(b).
512 The Chairman of the Federal Reserve Board is
a member of FSOC.
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how many investors beneficially own
five percent or more of the liquidity
fund’s equity, section 3 will require
advisers to provide the following
information for each investor that
beneficially owns five percent or more
of the reporting fund’s equity: (1) the
type of investor; and (2) the percent of
the reporting fund’s equity owned by
the investor.513 This information will
help inform the Commission and FSOC
of the liquidity and redemption risks of
liquidity funds, because different types
of investors may pose different types of
redemption risks. For example, if a
market event results in a certain type of
investor exercising redemption rights,
liquidity funds with a homogenous
investor base composed of that type of
investor could face greater redemption
risks, which could raise systemic risk
implications, as compared to liquidity
funds with a more diversified investor
base.
However, we are adopting these
amendments with one modification
from the proposal. Where an adviser
selects ‘‘other’’ as an investor category
in response to this question, unlike the
proposal, the final amendments will
require the adviser to describe the
investor further in its response to
section 1, Question 4.514 This
modification is designed to provide the
Commission and FSOC with greater
transparency into the investor base of
such funds. In addition, we are adopting
as proposed a new question requiring
advisers to report whether the liquidity
fund is established as a cash
management vehicle for other funds or
accounts that the adviser or the
adviser’s affiliates manage that are not
cash management vehicles.515
• Disposition of portfolio securities.
We are adopting, largely as proposed,
new Item F (Disposition of Portfolio
Securities) to section 3 of Form PF.
Under the amendments, advisers will
report information about the portfolio
securities the liquidity fund sold or
disposed of during the reporting period
(not including portfolio securities that
the fund held until maturity). Advisers
will report the gross market value sold
or disposed of for each category of
investment.516 We are also making a
formatting change to improve the table
presentation of the requirements for
reporting the disposition of portfolio
securities under section 3, Question 64,
Item F, without altering the information
reported thereunder.
• Weighted average maturity and
weighted average life. In addition, we
are adopting, as proposed, revisions to
the definitions of ‘‘WAM’’ and ‘‘WAL’’
to include an instruction to calculate
these figures with the dollar-weighted
average based on the percentage of each
security’s market value in the
portfolio.517 This change will help
ensure advisers calculate WAM and
WAL using a consistent approach across
both Form PF and Form N–MFP, which
will improve data quality and
comparability and in turn will enhance
investor protection efforts and systemic
risk assessment.
As discussed in the 2022 Form PF
Proposing Release, together these
amendments will improve the
transparency of liquidity fund activities
and risks and help the Commission and
FSOC in developing a more complete
picture of the short-term financing
markets where liquidity funds
operate.518 In turn, this will enhance the
Commission’s and FSOC’s ability to
assess the potential systemic risks
presented by liquidity funds’ activities
and inform the Commission’s investor
protection efforts. In addition, the
amendments will, among other things,
improve data comparability across
liquidity funds and money market
funds, which will assist regulators with
oversight and assessment of short-term
financing markets and their
participants.
513 See amended Form PF, section 3, Item D,
Question 58.
514 See amended Form PF, section 3, Item D,
Question 58(b).
515 See amended Form PF, section 3, Item D,
Question 57.
516 Under the final amendments, advisers will be
required to report the gross market value of
portfolio securities sold or disposed of, rather than
the ‘‘amount’’ of such securities as proposed, for
consistency with Form N–MFP as adopted. See
amended Form PF, section 3, Item F, Question 63;
Item D.1 of amended Form N–MFP.
517 See amended Form PF Glossary of Terms. This
calculation methodology is consistent with
amended rule 2a–7’s definitions of WAM and WAL.
518 See Form PF Proposing Release, supra note 14,
at section II.C.
519 See Tailored Shareholder Reports Adopting
Release, supra note 347. In this release, the
Commission adopted amendments under which
open-end funds’ financial statements will no longer
appear in their annual and semi-annual shareholder
reports, but instead will be filed on Form N–CSR
(under amended Item 7 of Form N–CSR). Pursuant
to Instruction 2 to Item 27(b)(1) of Form N–1A, as
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G. Technical Amendments to Form N–
CSR and Form N–1A
We are adopting amendments to two
Commission forms to correct technical
errors resulting from recent Commission
rulemakings. First, we are adopting an
amendment to Form N–CSR to retain an
exception addressing money market
funds’ financial statements that was
inadvertently omitted as a result of
amendments adopted in the Tailored
Shareholder Reports Adopting
Release.519 Second, we are adopting
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amendments to Item 27A(i) of Form N–
1A and the corresponding instructions
to correct an error resulting from the
Commission’s 2022 rulemaking on
enhanced reporting of proxy votes by
registered management investment
companies.520
Under the Administrative Procedure
Act (‘‘APA’’), notice of proposed
rulemaking is not required when the
agency, for good cause, finds ‘‘that
notice and public procedure thereon are
impracticable, unnecessary, or contrary
to the public interest.’’ 521 These
amendments are ministerial in nature.
Accordingly, we find good cause that
publishing the amendments for
comment is unnecessary.522 These
ministerial amendments do not make
any substantive modifications to any
existing collection of information
requirements or impose any new
substantive recordkeeping or
information collection requirements
within the meaning of the Paperwork
this item appeared prior to the amendments in the
Tailored Shareholder Reports Adopting Release, a
money market fund was permitted to omit Schedule
I—Investments in securities of unaffiliated issuers—
from its annual report under specified
circumstances. This exception was omitted
inadvertently in the corresponding Item 7 of the
amended Form N–CSR in the Tailored Shareholder
Reports Adopting Release. We did not intend to
remove this exception, and therefore are amending
the instruction to Item 7 of Form N–CSR to add
language mirroring the parallel exception that
formerly appeared in Form N–1A as Instruction 2
to Item 27(b)(1).
520 See Enhanced Reporting of Proxy Votes by
Registered Management Investment Companies;
Reporting of Executive Compensation Votes by
Institutional Investment Managers, Investment
Company Act Release No. 34745 (Nov. 2, 2022) [87
FR 78770 (Dec. 22, 2022)] (‘‘2022 Form N–PX
Release’’). The Tailored Shareholder Reports
Adopting Release included amendments to Form
N–1A that moved certain content requirements for
funds’ shareholder reports from Item 27 of Form N–
1A to new Item 27A of Form N–1A. New Item
27A(i) addresses the website availability of
additional fund information, including proxy voting
information. The 2022 Form N–PX Release, which
the Commission issued after it issued the Tailored
Shareholder Reports Adopting Release, erroneously
included amendments to Form N–1A Item 27—
rather than new Item 27A—that address disclosure
of the website availability of a fund’s proxy voting
record in the fund’s annual and semi-annual
shareholder reports, and the provision of this
information to investors upon request. Accordingly,
we are adopting amendments to incorporate into
Item 27A(i) the requirement, pursuant to the 2022
Form N–PX Release, that the proxy voting
information whose website availability funds
disclose in their shareholder reports includes the
fund’s proxy voting record. These amendments also
incorporate into Item 27A(i) the same instructions
about the provision of this information upon
request that the Commission adopted in the 2022
Form N–PX Release in Item 27.
521 5 U.S.C. 553(b).
522 The amendments also do not require analysis
under the Regulatory Flexibility Act (‘‘RFA’’). See
5 U.S.C. 601(2) (for purposes of RFA analysis, the
term ‘‘rule’’ generally means any rule for which the
agency publishes a general notice of proposed
rulemaking).
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Reduction Act of 1995 (‘‘PRA’’).523
Accordingly, we are not revising any
burden and cost estimates in connection
with these amendments.
H. Effective and Compliance Dates
We are adopting a tiered approach to
the transition periods for the final
amendments.524 The tiered approach to
effective and compliance dates is
designed to provide affected funds with
appropriate transition periods in which
to prepare to comply with certain
aspects of the final amendments, such
as the amendments to rule 2a–7’s
mandatory and discretionary liquidity
fee frameworks, without unnecessarily
delaying the full scope of the
amendments. The effective date for the
final amendments to rule 2a–7, rule
31a–2, and Form N–1A is 60 days after
publication in the Federal Register,
with applicable compliance dates for
mandatory and discretionary liquidity
fees, liquidity-related amendments,
website posting requirements, and
WAM and WAL calculations described
below. The effective date for the
technical amendments to Form N–CSR
and Form N–1A also is 60 days after
publication in the Federal Register. For
the final amendments to Forms N–MFP,
N–CR, and PF, we are adopting a
delayed effective and compliance date
of June 11, 2024.
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Effective Date for Forms N–MFP, N–CR,
and PF and Compliance Date for
Website Posting Requirement Under
Rule 2a–7
The Commission proposed a sixmonth compliance period following the
effective date for the Forms N–MFP and
N–CR amendments, except for the
existing fee and gate reporting
requirements in Form N–CR. In a
change from the proposal, rather than
permit filers additional time to comply
with the amendments to Forms N–MFP
and N–CR following the effective date of
such amendments, we are adopting a
simultaneous delayed effective and
compliance date for these form
amendments to provide time for affected
funds and advisers to prepare to comply
with the form amendments and provide
for a uniform transition to the updated
reporting requirements. For example,
having separate effective and
compliance dates for Form N–MFP
could cause reporting that is
inconsistent across filers because some
523 44
U.S.C. 3501 through 3521.
Proposing Release, supra note 6, at section
524 See
II.G.
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filers might voluntarily provide newly
required information after the effective
date of the amendments but before the
compliance date, while other filers
might wait until the compliance date to
provide the new information. We
therefore are adopting a delayed
effective and compliance date of June
11, 2024, for the amendments to Forms
N–MFP, N–CR, and PF. We are also
adopting the same compliance date of
June 11, 2024, for the amendment to
rule 2a–7 regarding how funds
categorize their portfolio investments
for purposes of website disclosures, as
this change in categorization aligns with
amendments to Form N–MFP.525
A few commenters recommended an
implementation period of at least twelve
months for any new and revised
reporting requirements.526 In addition,
one commenter recommended an 18 to
24 month compliance period for all
aspects of the proposed amendments.527
We are not persuaded that this amount
of additional time is needed for affected
funds and advisers to comply with the
amended reporting requirements
because, as discussed above, we are not
adopting certain proposed reporting
requirements, such as lot-level reporting
and disaggregated reporting for
repurchase agreements, which will
significantly reduce the compliance
burden on filers relative to the proposal.
In addition, several of the amendments
to Form N–MFP will require funds to
report daily data points they already
publish on their websites, including
liquidity levels and net asset values.
Considering the more tailored scope
of the final amendments and funds’
experience collecting the same or
similar data in several cases, we believe
the delayed effective date of June 11,
2024, will provide adequate time for
affected funds and advisers to compile
and review the information that must be
disclosed. As a result, all reports on
Forms N–MFP, N–CR, and PF filed on
or after June 11, 2024, must comply
with the amendments.528
We are adopting the same delayed
effective and compliance date for Form
PF as for Form N–MFP because the
amendments to Form PF are designed in
part to require large liquidity fund
525 See
amended rule 2a–7(h)(10)(i)(B)(2).
e.g., ICI Comment Letter; Invesco
Comment Letter; State Street Comment Letter.
527 See T. Rowe Comment Letter.
528 For example, a money market fund’s report on
Form N–MFP for the month of June 2024 that is due
no later than the fifth business day of July 2024
must comply with the amended reporting
requirements.
51451
advisers to report substantially the same
information that money market funds
would report on Form N–MFP.
Accordingly, adopting the same delayed
effective and compliance date for
amendments to Form N–MFP and PF
will result in a uniform transition to the
enhanced reporting obligations.
Compliance Dates for Mandatory and
Discretionary Liquidity Fee Frameworks
We are adopting a compliance date for
the mandatory liquidity fee framework
that is twelve months after the effective
date of the final amendments to rule 2a–
7. This transition period is designed to
provide institutional prime and
institutional tax-exempt money market
funds with an appropriate amount of
time to comply with the new
requirements. The Commission
proposed a twelve-month transition
period for the proposed swing pricing
requirements in rule 2a–7. Under the
final amendments, we are adopting a
mandatory liquidity fee framework in
place of the proposed swing pricing
requirements and believe institutional
prime and institutional tax-exempt
money market funds should receive a
comparable amount of time in which to
comply with these requirements as were
proposed for the swing pricing
requirements.
Generally commenters advocated for a
longer compliance period for the
proposed swing pricing requirements,
with most of these commenters
suggesting 2 years.529 These
commenters frequently cited operational
challenges and systems changes,
including coordination with third party
vendors, which would necessitate more
time to adopt and implement swing
pricing. A few commenters
recommended longer for the swing
pricing compliance period than
proposed, but did not suggest a specific
length of time.530
The adopted mandatory liquidity fee
framework in rule 2a–7 will require
institutional prime and institutional taxexempt money market funds to update
policies and procedures, implement
operational and systems changes, and
coordinate with third party vendors,
among other things. As affected
526 See,
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529 See, e.g., SIFMA AMG Comment Letter; ICI
Comment Letter; Invesco Comment Letter; State
Street Comment Letter; Bancorp Comment Letter;
Federated Hermes Comment Letter I; Capital Group
Comment Letter; CCMR Comment Letter.
530 See IIF Comment Letter; Dechert Comment
Letter.
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institutional prime and institutional taxexempt money market funds currently
are permitted to impose liquidity fees
and are subject to a default liquidity fee
when a fund’s weekly liquid assets fall
below 10%, we believe that many funds
and their intermediaries likely will be
better positioned to comply with the
amended liquidity fee framework than
to the proposed swing pricing
requirements within 12 months
following the effective date.
Accordingly, we are not persuaded by
the concerns raised by commenters
regarding the proposed twelve-month
transition period and are adopting a
compliance date for the new mandatory
liquidity fee framework that is twelve
months after the effective date of the
rule amendments.
Separately, we are adopting a sixmonth compliance date for nongovernment money market funds to
comply with the amended discretionary
liquidity fee framework. Similar to the
mandatory liquidity fee framework, all
money market funds seeking to rely on
the discretionary liquidity fee
framework will need to update policies
and procedures, implement operational
and systems changes, and coordinate
with third party vendors, among other
things. However, the discretionary
liquidity fee framework is similar to the
current liquidity fee provisions in rule
2a–7 without the tie between liquidity
fees and weekly liquid assets and
provides money market fund boards
with additional discretion in
implementing these fees. Accordingly,
we believe that non-government money
market funds will require a shorter
transition period than the transition
period provided for the new mandatory
liquidity fee framework and believe a
six-month transition period is
appropriate for these amendments.
Affected money market funds,
including government money market
funds that choose to rely on the
discretionary liquidity fee framework,
may begin to rely on the mandatory and
discretionary liquidity fee provisions
after the amendment’s effective date and
prior to the applicable compliance date.
Compliance Date for Liquidity and
Maturity-Related Amendments to Rule
2a–7
We are adopting a compliance date
that is six months after the effective date
of the amendments to rule 2a–7 for the
following amendments:
• Amendments to rule 2a–7’s
portfolio liquidity requirements
discussed in section II.C; and
• Amendments to specify the
calculation of WAM and WAL
discussed in section II.E.
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The Commission proposed a
compliance date for the increased daily
liquid asset and weekly liquid asset
minimum liquidity requirements of six
months after the effective date. Some
commenters recommended a longer
compliance period for the proposed
liquidity changes, generally twelve
months.531 We are not persuaded that
additional time is needed for affected
funds to comply with the amended
minimum liquidity requirements. These
amendments merely increase an existing
framework, and many funds already
maintain liquidity close to the newly
adopted minimums. Accordingly, we
continue to believe a six-month
transition period should be sufficient for
funds to implement the increased
liquidity requirements. We believe that
a six-month transition period provides
sufficient time for funds to update their
stress testing procedures and begin to
notify their boards of significant
liquidity events. Money market funds
are currently required to engage in
periodic stress testing so these changes
will represent updates to an existing
framework. In addition, we understand
that many funds already notify their
boards of certain declines in liquidity.
Accordingly, six months is an adequate
amount of time for funds to implement
these procedural changes. In addition,
six months is sufficient for funds to
update their WAM and WAL
calculations, as needed. As recognized
above, funds already have the market
values they need for purposes of the
amended WAM and WAL calculations,
and many funds already compute these
figures in accordance with the approach
the final rule specifies.
No Separate Compliance Date for
Remaining Amendments to Rule 2a–7,
Rule 31a–2, and Form N–1A
The amendments to rule 2a–7 and
Form N–1A that are not subject to
additional compliance periods above,
which includes removal of redemption
gates, removal of the tie between
liquidity fees and liquidity thresholds,
and the new provision allowing share
cancellation under certain
circumstances, will go into full effect 60
days after publication in the Federal
Register with no separate compliance
date. As a result, funds will no longer
be permitted to impose redemption
gates under rule 2a–7 as of this date.
Similarly, the connection between
liquidity fees and weekly liquid asset
thresholds will be removed at that time.
The Commission proposed that the
amendments to remove liquidity fee and
531 See, e.g., ICI Comment Letter; State Street
Comment Letter.
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redemption gate provisions in rule 2a–
7, as well as the associated disclosure
requirements, would be effective, if
adopted, when the final rule became
effective. Several commenters expressly
supported the immediate effective date
to remove these provisions.532 We
believe that this approach is appropriate
since, as discussed, these tools did not
provide the benefit intended when
adopted and likely contributed to
investors’ decisions to redeem their
shares in money market funds in March
2020. In addition, the amendments to
permit the use of share cancellation in
a negative interest rate environment,
subject to certain conditions, will
become effective 60 days after
publication in the Federal Register. As
a result, funds could begin to use share
cancellation, as appropriate, after this
date, provided they meet the rule’s
conditions for using share cancellation.
Further, the amendments to rule 31a–
2 to require money market funds to
preserve records regarding their
liquidity fee computations will become
effective 60 days after publication in the
Federal Register. Money market funds
are not required to comply with the
amended liquidity fee requirements in
rule 2a–7 until after that date, but the
earlier effectiveness of the
recordkeeping requirement will require
that funds preserve records for any
liquidity fees they may apply prior to
the end of the compliance period for the
liquidity fee requirements.
III. Other Matters
Pursuant to the Congressional Review
Act, the Office of Information and
Regulatory Affairs has designated the
final amendments as a ‘‘major rule’’ as
defined by 5 U.S.C. 804(2). If any of the
provisions of these rules, or the
application thereof to any person or
circumstance, is held to be invalid, such
invalidity shall not affect other
provisions or application of such
provisions to other persons or
circumstances that can be given effect
without the invalid provision or
application.
IV. Economic Analysis
A. Introduction
The Commission is mindful of the
economic effects, including the costs
and benefits, of the final amendments.
Section 2(c) of the Investment Company
Act provides that when the Commission
is engaging in rulemaking under the Act
and is required to consider or determine
532 See, e.g., Federated Hermes Comment Letter I
(supporting the immediate effectiveness of
delinking liquidity fees and redemption gates from
liquidity thresholds); State Street Comment Letter.
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whether an action is consistent with the
public interest, the Commission shall
also consider whether the action will
promote efficiency, competition, and
capital formation, in addition to the
protection of investors. Section 202(c) of
the Advisers Act provides that when the
Commission is engaging in rulemaking
under the Act and is required to
consider or determine whether an action
is necessary or appropriate in the public
interest, the Commission shall also
consider whether the action will
promote efficiency, competition, and
capital formation, in addition to the
protection of investors. The analysis
below addresses the likely economic
effects of the final amendments,
including the anticipated and estimated
benefits and costs of the amendments
and their likely effects on efficiency,
competition, and capital formation. The
Commission also discusses the potential
economic effects of certain alternatives.
Money market funds serve as
intermediaries between investors
seeking to manage cash and receive a
return on their savings, and issuers
seeking to raise capital. Specifically,
money market funds pool a diversified
portfolio of short-term debt instruments
(such as government and municipal
debt, repurchase agreements,
commercial paper, certificates of
deposit, and other short-term debt
instruments), and sell shares to end
investors, who use money market funds
to manage liquidity needs. Money
market funds play an important role in
investors’ savings and liquidity
management and serve as a source of
short-term funding to financial and nonfinancial companies and governments.
However, funding of money market
funds is subject to daily and intraday
redemptions.533
As discussed in detail in the sections
that follow, the final amendments seek
to address liquidity externalities in
money market funds. Under some
circumstances, redeeming investors
impose negative liquidity externalities
on investors remaining in the fund.
Should redemptions lead to dilution,
they may amplify a first-mover
advantage, further incentivizing
redemptions. For example, when early
redemptions force a money market fund
to draw down on liquid assets, they
reduce overall fund liquidity available
for future redemptions. By reducing
liquidity externalities in money market
funds, the final amendments may
dampen the risk of runs on money
market funds.
533 See Proposing Release at 7292–7294 for an
analysis of portfolio holdings of different types of
money market funds.
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The final amendments may mitigate
liquidity externalities and run risk in
money market funds in three ways.
First, the removal of the tie between
weekly liquid assets and the potential
imposition of liquidity fees and the
elimination of redemption gates under
rule 2a–7 may reduce incentives of
investors to redeem early to avoid losing
liquidity during a potential gating
period.534 Second, the increases in
minimum liquidity requirements may
support funds’ ability to meet
redemptions from cash or securities
convertible to cash, which may reduce
transaction costs associated with
redemptions and corresponding dilution
borne by remaining investors. This may
be especially important in market
conditions in which money market
funds cannot rely on a secondary or
dealer market to provide liquidity.
Third, the liquidity fee framework is
intended to require redeeming investors
to absorb the liquidity costs they impose
on the fund, protecting non-transacting
investors from being diluted by
redeeming investors.535 Moreover, to the
degree that dilution may contribute to a
first mover advantage in investor
redemptions the liquidity fee framework
may reduce such incentives. These
effects may be especially significant in
times of stress, when liquidity
externalities of money market fund
redemptions may be more significant.
In addition, the Commission is
adopting amendments to Form N–CR
and Form N–MFP, which may enhance
Commission oversight over redemption
activity and liquidity risks in money
market funds. Similarly, the
Commission is finalizing amendments
to Form PF to require generally parallel
reporting requirements for liquidity
funds. These amendments may improve
the transparency of liquidity fund
activities and risks and help the
Commission and FSOC in developing a
more complete picture of short-term
financing markets, in which money
market funds and liquidity funds
operate.
Finally, the final amendments related
to negative yields will provide an
additional mechanism that government
and retail money market funds could
use to handle a negative interest rate
scenario, while offering valuable
534 See, e.g., Northern Trust Comment Letter; CFA
Comment Letter; Western Asset Comment Letter;
Allspring Funds Comment Letter; IIF Comment
Letter; SIFMA AMG Comment Letter.
535 Factors other than dilution costs—such as
falling asset prices and potential differences
between a fund’s net asset value and execution
prices—may also contribute to runs. These and
other considerations are discussed in greater detail
in section IV.B below.
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51453
flexibility to funds and enhancing
transparency about this decision to
investors. Similarly, as discussed in
greater detail below, the amendments to
specify the method of calculation of
weighted average maturity and weighted
average life will enhance comparability
of these metrics across affected funds
and increase transparency to the
Commission and investors.
In response to comment regarding the
assumptions underlying the proposal’s
cost-benefit analysis,536 we note that the
economic analysis discusses, among
other considerations, how the final
rule’s costs and benefits reflect current
liquidity management practices of
money market funds, incentives of fund
managers, and run risk. In addition, as
discussed in section II above, the final
rule has been modified in many
significant ways relative to the proposal
to reflect commenter feedback. For
example, the final rule imposes a
liquidity fee framework in lieu of the
proposed swing pricing requirement,
modifies amendments related to
potential negative interest rates relative
to the proposal, and tailors disclosure
requirements to reduce burdens on
money market funds.
Many of the benefits and costs
discussed below are difficult to
quantify. For example, we lack data to
quantify how funds currently below the
new liquidity thresholds may adjust the
liquidity of their portfolios and how this
may impact fund yields in different
interest rate environments; the extent to
which investors may move capital from
institutional prime to government
money market funds; or the reductions
in dilution costs to investors as a result
of the final amendments (which will
depend on investor redemption activity,
the liquidity risk of underlying fund
assets, and market conditions). Many of
these effects will depend on how
affected funds and investors may react
to the final amendments. In addition,
we cannot quantify how large private
liquidity fund advisers may adapt
existing systems and levels of
technological expertise in response to
the final rule. Data needed to quantify
these economic effects are not currently
available and the Commission does not
have information or data that would
allow such quantification. While we
have attempted to quantify economic
effects where possible, much of the
discussion of economic effects is
qualitative in nature.
536 See,
e.g., Federated Hermes Comment Letter
IV.
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B. Baseline
1. Money Market Funds
a. Money Market Funds: Affected
Entities
The final amendments would directly
affect money market funds registered
with the Commission. From Form N–
MFP data, there are a total of 294 funds
with approximately $5.7 trillion in total
net assets that may be affected by
various aspects of the final
amendments.537 Table 3 and Table 4
below estimate the number and total net
assets of funds by fund type as of the
end of March 2023. Prime money
market funds account for approximately
20% of the total net assets in the
industry, whereas tax-exempt money
market funds account for approximately
2%.
TABLE 3—NUMBER OF MONEY MARKET FUNDS BY FUND TYPE, AS OF MARCH 2023
Share
(%)
Category
Fund type
Prime ............................................................................
Institutional Public .........................................................
Institutional Nonpublic ..................................................
Retail .............................................................................
Institutional ....................................................................
Retail .............................................................................
Government ..................................................................
Treasury ........................................................................
31
9
20
12
39
133
50
11
3
7
4
13
45
17
Total .......................................................................
294
100
Tax-exempt ...................................................................
Government & Treasury ...............................................
Total .......................................................................
Count
Source: Form N–MFP.
TABLE 4—MONEY MARKET FUND NET ASSETS BY FUND TYPE ($ BILLIONS), AS OF MARCH 2023
Fund type
Prime ............................................................................
Institutional Public .........................................................
Institutional Nonpublic ..................................................
Retail .............................................................................
Institutional ....................................................................
Retail .............................................................................
Government ..................................................................
Treasury ........................................................................
311.8
332.8
505.8
14.7
103.8
2,961.0
1,474.4
5
6
9
0
2
52
26
Total .......................................................................
5,704.3
100
Tax-exempt ...................................................................
Government &Treasury ................................................
Total .......................................................................
Net assets
Share
(%)
Category
Source: Form N–MFP.
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b. Money Market Fund Investors
Several features of money market
funds can create an incentive for their
investors to redeem shares heavily in
periods of market stress. As in the
Proposing Release, we consider these
factors below, as well as the adverse
impacts that can result from such heavy
redemptions out of money market
funds. Moreover, this section provides
updated information about trends in the
money market fund sector in light of the
recent banking stress of 2023.
As discussed in the Proposing
Release,538 money market fund
investors have varying investment goals
and risk tolerances. Many investors use
money market funds for principal
preservation and as a cash management
tool. Such investors may be risk averse
and averse to losing access to liquidity
for many reasons, including general risk
tolerance, legal or investment policy
restrictions, or short-term cash needs.
537 See, e.g., Money Market Fund Statistics,
released 4/25/2023, available at https://
www.sec.gov/files/mmf-statistics-2023-03.pdf.
538 See, e.g., 87 FR 7289.
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These overarching considerations may
create incentives for money market fund
investors to redeem—incentives that
may persist regardless of market
conditions and even if the other
dilution-related incentives discussed
below are addressed by the final
amendments.
The desire to avoid loss and access to
liquidity may cause investors to redeem
from certain money market funds in
times of stress. For example, heavy
redemptions from prime money market
funds and subscriptions in government
money market funds during the 2008
financial crisis pointed to a flight to
quality, given that most of the assets
held by government money market
funds have a lower default risk than the
assets of prime money market funds.539
As another example, during peak market
stress in March 2020, investor
redemptions may have been driven by
539 Id.
540 Id.
541 See, e.g., Lei Li, et al., Liquidity Restrictions,
Runs, and Central Bank Interventions: Evidence
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liquidity considerations, among other
things.
In addition, under the baseline, as
long as investors consider their money
market investments as relatively liquid
and low risk, the possibility that a fund
may impose gates or fees when a fund’s
weekly liquid assets fall below 30%
under rule 2a–7 may contribute to the
risk of triggering runs, particularly from
institutional investors that commonly
monitor their funds’ weekly liquid asset
levels.540 As discussed above, some
research suggests that, during peak
market volatility in March 2020,
institutional prime money market fund
outflows accelerated as funds’ weekly
liquid assets went closer to the 30%
threshold.541 In order to avoid
approaching or breaching the 30%
weekly liquid asset threshold for the
possible imposition of redemption gates,
money market fund managers may also
From Money Market Funds, 34 Rev. Fin. Stud. 5402,
5402–5437 (2021). See also, e.g., Morgan Stanley
Comment Letter; ICI Comment Letter; Northern
Trust Comment Letter; Fidelity Comment Letter.
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choose to sell less liquid portfolio
securities during times of stress.542
Finally, investors in different types of
money market funds may behave
differently under stress, and fund
portfolios may interact with investor
behavior to impact systemic run risk. As
discussed in section I.B, institutional
fund investors may monitor economic
developments more closely than retail
investors and may be more prone to
running in times of market stress. In
addition, prime funds tend to invest in
riskier securities that may suffer losses
in crises. For instance, prime funds held
Lehman Brothers debt when it defaulted
in 2008 and had exposure to Eurozone
banks in 2011.543 Moreover, during both
the global financial crisis of 2008 and
the market dislocation of 2020, prime
funds held commercial paper, the
market for which froze.544 Tax-exempt
money market funds may also
experience redemption pressures in
times of market stress. Government
money market funds, in contrast, tend to
have counter-cyclical flows.
Specifically, during times of market
turmoil and volatility, investors—
particularly institutional investors—
tend to shift their investments to
government money market funds.545
These money market funds offer
investments with high credit quality
and liquidity, as well as an explicit
guarantee for certain government
securities (e.g., Treasuries) and a
perceived implicit guarantee for others
(e.g., Federal Home Loan Bank
securities). As shown below, these
funds experienced inflows during the
global financial crisis of 2008, Euro debt
crisis of 2011, Covid–19 pandemic of
2020 and the bank crisis in 2023.
Most recently, the money market fund
sector experienced significant inflows
during stress in the banking sector
between February and April of 2023.
For example, between February 1 and
March 15, 2023, $201 billion in bank
deposits left the banking sector and
$191 billion flowed into money market
funds. The rate at which deposits left
the banking sector and flowed into the
money market fund sector accelerated in
March: between March 1 and April 5,
2023, $362 billion flowed into money
market funds, primarily into Treasury
retail ($54 billion), Treasury
institutional ($122 billion), government
agency institutional ($161 billion), and
government agency retail ($41 billion)
funds. To the degree that some of the
same market participants may allocate
across asset classes, there may be
spillovers in run risk between money
market funds and the banking system,
which may enhance the importance of
mitigating run risk in money market
funds.
542 Some commenters indicated that, on
aggregate, prime money market funds pulled back
little from commercial paper markets as they were
largely unable to resell commercial paper and CDs
to issuing banks and such securities lack a liquid
secondary market. See, e.g., ICI Report, Experiences
of U.S. Money Market Funds During the Covid–19
Crisis (Nov. 2020) (‘‘ICI MMF Report’’), available at
https://www.sec.gov/comments/credit-marketinterconnectedness/cll10-8026117-225527.pdf.
543 See, e.g., Response to Questions Posed by
Commissioners, Aguilar, Paredes, and Gallagher,
Division of Risk, Strategy, and Financial
Innovation, U.S. Securities and Exchange
Commission, Nov. 30, 2012, available at https://
www.sec.gov/news/studies/2012/money-marketfunds-memo-2012.pdf.
544 See, e.g., President’s Working Grp. On Fin.
Mkts., Overview of Recent Events and Potential
Reform Options for Money Market Funds (2020),
available at https://home.treasury.gov/system/files/
136/PWG-MMF-report-final-Dec-2020.pdf.
545Id.
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Figure 1—Trends in Net Asset Values of
Different Types of Money Market Funds
Figure 2—Trends in Total Bank
Deposits and Money Market Fund
Assets During the Banking Stress of
2023
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Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
c. Liquidity Externalities and Dilution
Costs
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Money market fund investors can
incur dilution costs. Specifically, the
value of shares held by investors staying
in the fund may be diluted if other fund
investors transact at a NAV that does
not fully reflect the ex post realized
costs of the fund’s trading induced by
fund flows. Shareholders in floating
NAV and stable NAV funds may bear
dilution costs in different forms. In
floating NAV funds, dilution is reflected
in the NAV received by remaining
shareholders. In stable NAV funds,
dilution costs can accrue until the
fund’s shadow price declines below
$0.995, which may result in the fund
breaking the buck and re-pricing its
shares below $1.00. Fund sponsors can
also choose to absorb some or all of the
dilution costs for reputational reasons
but are not obligated to do so. In both
types of funds, redemptions can deplete
liquidity, increasing the potential for
future dilution.
Several factors can contribute to the
dilution of investors’ interests in money
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market funds. First, trading costs can
lead to dilution. Trading activity and
other changes in portfolio holdings
associated with meeting redemptions
may impose costs, including trading
costs and costs of depleting a fund’s
daily or weekly liquid assets. If these
costs are realized prior to the time the
fund strikes the NAV, they are
distributed across both transacting and
non-transacting investors. However, if
these costs are realized after NAV strike,
they are borne solely by non-transacting
shareholders that remain in the fund.
For low levels of net redemptions or
subscriptions, the difference between
the two scenarios for non-transacting
shareholders is low; however, for large
net redemptions, the difference in
dilution costs borne by non-transacting
shareholders can be stark.
Using a stylized example, Figure 3
compares the dilution attributed to
trading costs that occurs when a fund
trades to meet redemptions after NAV is
struck (as is currently the case in the
U.S.) with the dilution attributed to
trading costs that occurs if a fund is able
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to trade to accommodate investor
redemptions/subscriptions prior to the
NAV strike (dotted straight line). This
stylized example assumes that a fund
holds a single asset whose value is
constant, but liquidating the asset incurs
a spread/haircut of 10%. The haircut
assumption in this stylized example is
used purely for illustrative purposes;
haircuts on assets in money market
funds tend to be much smaller.
However, this example demonstrates
that larger redemptions can contribute
nonlinearly to higher dilution for
remaining shareholders when a fund
trades after the NAV is struck compared
to a scenario in which the fund trades
before the NAV is struck.546
Figure 3—Dilution Effects of Different
Trading Timelines Over 1 Day
546 To the degree that some funds may determine
their NAV using holdings as of the prior trading
day, such practices may also exacerbate dilution. In
Figure 3, if funds strike their NAV using current
trading day holdings, the dotted line would not be
decreasing.
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547 See,
e.g., ICI MMF Report, supra note 542.
e.g., Jaewon Choi, et al., Sitting Bucks:
Stale Pricing in Fixed Income Funds, 145 J. Fin.
Econ. 296, 296–317 (Aug. 2022).
549 For example, market risk may contribute to
dilution costs. If a fund redeems investors at a given
NAV, but must raise funds to meet those
redemptions on a subsequent trading day during
which the value of the fund’s holdings declines
significantly, non-transacting shareholders will be
diluted. Conversely, non-transacting money market
548 See,
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money market fund investors may have
an incentive to redeem quickly in times
of stress to avoid realizing potential
dilution, an effect exacerbated if they
believe other investors will redeem.550
Some research in a parallel open end
fund setting suggests that liquidity
externalities may create a ‘‘first-mover
advantage’’ that may lead to cascading
anticipatory redemptions akin to
traditional bank runs.551 There is a
fund investors can benefit if assets are sold at a
price higher than NAV. While the value of the
fund’s holdings can go both up and down, such
market risk amplifies the risk fund shareholders
would otherwise experience. However, since true
market prices may be very difficult to forecast, the
degree to which such dilution contributes to the
first-mover advantage is unclear.
550 Run dynamics in banking contexts have been
subject of extensive research. See, e.g., Douglas
Diamond & Philip Dybvig, Bank Runs, Deposit
Insurance and Liquidity, J. Pol. Econ. 401, 401–419
(1983). However, we recognize that this and related
bank run models may have less applicability for the
money market fund context due to differences
between banks and money market funds in, among
others, the amount of maturity, liquidity, and credit
risk transformation, leverage, and transparency
about portfolios. See, e.g., Federated Hermes 11/22
Comment Letter.
551 This research generally models an exogenous
response to negative fund returns and not trading
costs. However, these results may extend to trading
costs to the degree that cost based dilution may
reduce subsequent fund returns, which would
trigger runs in these models. See, e.g., Qi Chen, et
al., Payoff Complementarities and Financial
Fragility: Evidence From Mutual Fund Outflows, 97
J. Fin. Econ. 239, 239–262 (2010). See also Itay
Goldstein, et al., Investor Flows and Fragility in
Corporate Bond Funds, 126 J. Fin. Econ. 592, 592–
613 (2017). See also Stephen Morris, et al.,
Redemption Risk and Cash Hoarding by Asset
Managers, J. Monetary Econ. 71, 71–87 (2017). See
also Yao Zeng, A Dynamic Theory of Mutual Funds
and Liquidity Management (ESRB working paper
no. 2017/42, Apr. 2017), available at https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=3723389 (retrieved from SSRN Elsevier
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dearth of academic research about the
degree to which dilution costs alone
may trigger money market fund runs. In
addition, theoretical models of such
first-mover advantage typically rely on
some exogenous mechanism to generate
initial redemptions from funds.552
While stale NAV and trading costs can
create incentives for early redemptions,
redemptions also occur for reasons that
are not strategic, such as a desire to
rebalance portfolios and investors’
immediate need for liquidity.
Regardless of the reason for a fund
experiencing net redemptions on any
given day, such redemptions impose a
cost on investors remaining in the fund
in the absence of measures to take
trading costs into account. In addition,
since money market funds can trade
portfolio holdings to meet redemptions
or subscriptions, money market fund
liquidity management can both dampen
and magnify disruptions in underlying
securities markets.
In addition, trends in composition of
money market fund portfolios, NAV and
price volatility, as well as liquidity
management practices of money market
database). See also Yiming Ma, et al., Mutual Fund
Liquidity Transformation and Reverse Flight to
Liquidity, 35 Rev. Fin. Stud. 4674, 4674–4711
(2022). See also Yiming Ma, et al., Bank Debt
Versus Mutual Fund Equity in Liquidity Provision
(Jacobs Levy Equity Mgmt. Ctr. Quantitative Fin.
Rsch. Paper, Dec. 2019, last revised Dec. 16, 2022),
available at https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3489673 (retrieved from
SSRN Elsevier database).
552 For example, one model assumes that
investors redeem from funds following poor
performance. See Qi Chen, et al., Payoff
Complementarities and Financial Fragility:
Evidence From Mutual Fund Outflows, 97 J. Fin.
Econ. 239, 239–262 (2010).
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Second, stale prices could contribute
to dilution, especially during times of
market stress. Some assets that money
market funds hold may become illiquid
and stop trading during times of market
stress.547 In such events, the only
available prices for these assets are
prices realized during pre-stress market
conditions, i.e., stale prices. If a floating
NAV fund’s NAV on a given date is
based on stale prices, net redemptions at
that NAV can dilute non-transacting
fund shareholders when assets are
eventually sold at prices that reflect
their true value. Since funds with a
stable NAV have a fixed share price at
$1, stale prices only affect the shadow
price per share and the probability that
a fund breaks the buck and potentially
leads to sponsor support. The stale
pricing phenomenon has been
documented in fixed income funds 548
and not specifically in money market
funds. However, money market funds
hold significant amounts of commercial
paper, certificates of deposit, and other
assets that do not have an active and
robust secondary market, making them
similarly opaque and difficult to
accurately price, especially during times
of market stress.
Knowing that these and other
factors 549 may contribute to dilution,
51457
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funds form a part of the baseline against
which we are assessing the effects of the
final rule. A detailed quantitative
analysis of these issues can be found in
the Proposing Release.553
Finally, as a baseline matter, money
market funds in the U.S. have not
experienced persistent negative yields.
Thus, stable NAV funds have not
implemented reverse distribution
mechanisms or conversions to a floating
NAV in response to negative yields.
However, as discussed in section II, the
Commission has received comment that
reverse distribution mechanisms may be
a more cost efficient measure for funds
to deploy in the event of persistent
negative yields given their baseline fund
management practices.554 These and
related economic effects are discussed
in greater detail in section IV.C.5.
d. Regulatory Baseline
The Commission is assessing the
economic effects of the final
amendments relative to a regulatory
baseline, which reflects rules and forms
imposed on affected money market
funds currently in effect. Specifically,
for the purposes of this economic
analysis, the regulatory baseline
includes, among others, rule 2a–7, rule
22c–2, and rule 22e–3, and existing
Forms PF, N–MFP, N–CR, and N–1A, as
discussed in greater detail in section II.
2. Large Liquidity Funds and Form PF
Some of the final amendments impact
the reporting by investment advisers on
Form PF regarding private liquidity
funds. The Commission adopted Form
PF in 2011, with additional
amendments made to section 3 along
with certain money market fund reforms
in 2014. Form PF complements the
basic information about private fund
advisers and private funds reported on
Form ADV.555 Unlike Form ADV, Form
553 See
87 FR 7292 through 7298.
e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I; Allspring Funds Comment Letter; Fidelity; BNY
Mellon Comment Letter; State Street Comment
Letter; Sen. Toomey Comment Letter; Americans for
Tax Reform Comment Letter; Dechert Comment
Letter; CCMR Comment Letter; IDC Comment
Letter.
555 Investment advisers to private funds report on
Form ADV general information about private funds
that they advise. This includes basic organizational,
operational information, and information about the
fund’s key service providers. Information on Form
ADV is available to the public through the
Investment Adviser Public Disclosure System,
which allows the public to access the most recent
Form ADV filing made by an investment adviser.
See, e.g., Form ADV, available at https://
www.investor.gov/introductioninvesting/investingbasics/glossary/form-adv. See also Investment
Adviser Public Disclosure, available at https://
adviserinfo.sec.gov/. Some private fund advisers
that are required to report on Form ADV are not
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PF is not an investor-facing disclosure
form. Information that private fund
advisers report on Form PF is provided
to regulators on a confidential basis and
is nonpublic.556 The purpose of Form
PF is to provide the Commission and
FSOC with data that regulators can
deploy in their regulatory and oversight
programs directed at assessing and
managing systemic risk and protecting
investors both in the private fund
industry and in the U.S. financial
markets more broadly.
Currently, liquidity fund advisers
with between $150 million and $1
billion in assets file Form PF annually,
which contains general information
about funds they manage. Large
liquidity fund advisers with at least $1
billion in combined regulatory assets
under management attributable to
liquidity funds and money market funds
are required to file Form PF quarterly
and provide more detailed data on the
liquidity funds they manage (section 3
of Form PF).557 In the third quarter of
2022, there were 79 liquidity funds
reported on Form PF with $336 billion
in gross assets under management.558 Of
those, 51 funds were large liquidity
funds with $331 billion in gross assets,
which represented approximately 99
percent of the reported liquidity fund
assets.559
Liquidity funds are a relatively
small 560 category of private funds, that
required to file Form PF (for example, exempt
reporting advisers). Other advisers are required to
file Form PF and are not required to file Form ADV
(for example, commodity pools that are not private
funds). Based on the staff review of Form ADV
filings and the Private Fund Statistics, less than
10% of funds reported on Form ADV but not on
Form PF in 2020.
556 Commission staff publish quarterly reports of
aggregated and anonymized data regarding private
funds on the Commission’s website. See Private
Fund Statistics, Securities and Exchange
Commission: Division of Investment Management,
available at https://www.sec.gov/divisions/
investment/private-funds-statistics.shtml.
557 Item A of section 3 of Form PF collects certain
information for each liquidity fund the adviser
manages, such as information regarding the fund’s
portfolio valuation methodology. This item also
requires information regarding whether the fund, as
a matter of policy, is managed in compliance with
certain provisions of rule 2a–7 under the
Investment Company Act. Item B requires the
adviser to report information regarding the fund’s
assets, while Item C requires the adviser to report
information regarding the fund’s borrowings.
Finally, Item D asks for certain information
regarding the fund’s investors, including the
concentration of the fund’s investor base and the
liquidity of its ownership interests. See Form PF.
558 See Division of Investment Management,
Private Fund Statistics (Apr. 6, 2023), available at
https://www.sec.gov/divisions/investment/privatefunds-statistics.shtml.
559 Id.
560 According to the Private Fund Statistics
Report, in the third quarter of 2023, liquidity fund
assets accounted for 1.5% of the gross asset value
($0.3/$19.9 trillion) and 2.2% of the NAV ($0.3/
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plays a similar role to money funds.561
Liquidity funds follow similar
investment strategies as money market
funds, but are not registered as
investment companies under the Act.562
Similar to money market funds,
liquidity funds are managed with the
goal of maintaining a stable net asset
value or minimizing principal volatility
for investors.563 These funds typically
achieve these goals by investing in highquality, short-term debt securities, such
as Treasury bills, repurchase
agreements, or commercial paper, that
fluctuate very little in value under
normal market conditions.564 Also,
similar to money market funds, liquidity
funds are sensitive to market conditions
and may be exposed to losses from
certain of their holdings when the
markets in which the funds invest are
under stress. Compared to money
market funds, liquidity funds may take
on greater risks and, as a result, may be
more sensitive to market stress, as they
are not required to comply with the risklimiting conditions of rule 2a–7, which
place restrictions on the maturity,
diversification, credit quality, and
liquidity of money market fund
investments.565
3. Other Affected Entities
As discussed above, some of the final
amendments may indirectly affect a
large group of intermediaries and
service providers. Specifically, as a
result of the liquidity fee requirement,
certain money market funds may seek to
receive more timely flow information
and streamline the assessment of fees to
end investors down the intermediary
chain. As discussed in greater detail
below, this may affect all market
participants sending orders to relevant
money market funds, including brokerdealers, registered investment advisers,
retirement plan record-keepers and
administrators, banks, other registered
investment companies, and transfer
agents that receive flows directly. In
addition, amendments related to stable
NAV money market funds in the event
of a negative rate environment may
affect intermediaries sending flows to
such funds.
In addition, the final amendments
may indirectly affect issuers of
$13.8 trillion) of all private funds reported on Form
PF.
561 See Daniel Hiltgen, Private Liquidity Funds:
Characteristics and Risk Indicators, DERA White
Paper (Jan. 2017) (‘‘Hiltgen Paper’’), available at
https://www.sec.gov/files/2017-03/
Liquidity%20Fund%20Study.pdf.
562 Id.
563 See section II above.
564 See Hiltgen Paper.
565 See section II above.
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securities that are held by affected
funds, including issuers of certificates of
deposit and commercial paper, and
municipalities. While nothing in the
final amendments imposes any
requirements on issuers, to the degree
that the final amendments may
influence affected funds’ willingness to
hold such securities, they may influence
the ability of such issuers to raise debt
financing, the terms of such financing,
or the type of investors that provide
debt financing to such issuers. These
and other effects are discussed in greater
detail in sections IV.C and IV.E.
C. Costs and Benefits of the Final
Amendments
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1. Removal of the Tie Between the
Weekly Liquid Asset Threshold and
Liquidity Fees and Redemption Gates
a. Benefits
The final amendments remove the tie
between money market funds’ weekly
liquid assets and the discretionary
imposition of liquidity fees, as well as
eliminate gate provisions from rule 2a–
7. In addition, the final rule removes the
tie between the 10% weekly liquid asset
threshold and the imposition of default
liquidity fees. Commenters generally
supported these proposed revisions.566
These amendments may benefit
money market fund investors by
reducing liquidity costs borne by
investors remaining in the fund, and
money market funds and their investors
by reducing the risk of runs, especially
during times of liquidity stress.
First, these amendments may benefit
money market fund investors. Money
market fund redemptions can impose
liquidity externalities on shareholders
remaining in the fund, as discussed in
section IV.B.1. The possibility of a
redemption gate or a redemption fee
when linked to a weekly liquid asset
threshold can magnify those incentives
and externalities. The Commission
continues to believe that the weekly
liquid asset triggers for the possible
imposition of redemption fees or gates
create incentives for investors to redeem
first, at the expense of investors
remaining in the fund who experience
further dilution during the gating
period, and for fund managers to use
less liquid assets to meet redemptions
which imposes liquidity costs on nontransacting investors. Thus, the removal
566 See, e.g., Americans for Tax Reform Comment
Letter; Profs. Ceccheti and Schoenholtz Comment
Letter; CCMR Comment Letter; Federated Hermes I
Comment Letter; Western Asset Comment Letter;
Morgan Stanley Comment Letter; Vanguard
Comment Letter; CFA Comment Letter; Fidelity
Comment Letter; SIFMA Comment Letter; T.Rowe
Price Comment Letter.
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of the tie between the weekly liquid
asset trigger and the possible imposition
of liquidity fees as well as the
elimination of redemption gates outside
of liquidation may reduce the liquidity
costs borne by investors remaining in
the fund. This aspect of the final
amendments may increase the
attractiveness of money market funds as
a low risk cash management tool and
sweep investor account to risk averse
investors.
Second, these amendments may
benefit money market funds by reducing
the risk of runs. As discussed in the
introduction, money market funds are
subject to daily redemptions and invest
in short-term debt instruments that are
not perfectly liquid, which renders them
susceptible to a first-mover advantage in
investor redemptions.567 Under the
current baseline, money market funds
may impose redemption fees or gates if
their weekly liquid assets are below
30% of their total assets. Thus, because
weekly liquid assets tend to be
persistent over time, as funds approach
the 30% threshold, investors seeking to
avoid a redemption gate or fee are
incentivized to redeem before other
redemptions further deplete a fund’s
liquid assets.568 For example, we have
received comment that daily and weekly
liquid asset balances became a closely
watched metric for institutional
investors worried about preserving
access to their invested funds, and that,
for a large majority of institutional
investors that had reduced their
investments in prime money market
funds in March 2020, gates were an
important factor in deciding to
redeem.569 The final amendments are
expected to reduce such incentives to
redeem, especially in times of stress.570
Moreover, as discussed in section II.A.1,
the link between the 30% weekly liquid
asset threshold and the possibility of the
imposition of fees or gates did not serve
as a useful liquidity management tool in
March 2020 (no fund imposed fees or
567 See, e.g., Lawrence Schmidt et al., Runs on
Money Market Mutual Funds, 106 Am. Econ. Rev.
2625, 2625–57 (2016). Run dynamics in funds have
been explored in a large body of finance research,
including, for example: Yao Zeng, A Dynamic
Theory of Mutual Funds and Liquidity Management
(ESRB working paper no. 2017/42, Apr. 2017),
available at https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3723389 (retrieved from
SSRN Elsevier database). See also Qi Chen et al.,
Payoff Complementarities and Financial Fragility:
Evidence from Mutual Fund Outflows, 97 J. Fin.
Econ. 239, 239–262 (2010).
568 See, e.g., Fidelity Comment Letter; Northern
Trust Comment Letter; IIF Comment Letter; ICI
Comment Letter.
569 See, e.g., CFA Comment Letter.
570 See, e.g., Americans for Tax Reform Comment
Letter; Profs. Ceccheti and Schoenholtz Comment
Letter; CFA Comment Letter.
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51459
gates). However, available evidence
suggests that such a link may have
incentivized funds to preserve their
weekly liquid assets instead of using
them to absorb redemptions, in order to
stay above the 30% threshold.571 The
removal of redemption gates and the tie
between weekly liquid assets and
liquidity fees reduces disincentives for
funds to absorb large redemptions out of
liquid assets.
As a result, the removal of redemption
gates and the tie between weekly liquid
assets and the discretionary and default
imposition of liquidity fees may better
enable funds to use their daily and
weekly liquid assets to meet
redemptions in times of stress without
giving rise to risk of runs.572 This
benefit may be strongest for money
market funds that have weekly liquid
assets close to the minimum threshold
during times of liquidity stress, as they
are currently most susceptible to runs.
Moreover, money market fund investors
would no longer face the possibility of
the imposition of gates outside of
liquidations, enhancing the
attractiveness of money market funds as
a highly liquid investment product.
Overall, we believe that the final rule,
including the liquidity fee framework
and the raised liquidity requirements,
will provide more efficient tools for
managing liquidity risk than the current
baseline approach tying the potential
imposition of fees to weekly liquid asset
thresholds while reducing incentives for
strategic redemptions, as discussed in
greater detail in the sections that follow.
b. Costs
As discussed in section II.A, the final
amendments will not only remove the
tie between fund weekly liquid assets
and the possibility of gating and fees,
but will also eliminate gate provisions
from rule 2a–7. As a result, money
market funds will only be able to
impose gates in the event of liquidation
under rule 22e–3. To the degree that
temporary redemption gates may serve
as a useful redemption management tool
during times of stress, the amendment
would reduce the scope of tools
available to money market funds to
manage their liquidity risk in times of
stress. For example, some commenters
suggested that fund boards should have
the ability to impose gates at their
discretion.573 One of these commenters
indicated that retaining a board’s ability
to implement either a gate in its
571 See,
e.g., supra note 56.
e.g., Federated Hermes Comment Letter I.
573 See, e.g., Federated Hermes Comment Letter I;
Federated Hermes Board Comment Letter; Cato Inst.
Comment Letter.
572 See,
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discretion could provide directors with
additional liquidity management tools
in times of market stress.574 Another of
these commenters suggested that boards
should be given maximum discretion as
to the fund’s design and operation,
including the discretion to implement
redemption gates.575
Four factors may mitigate these
economic costs. First, no money market
fund imposed a gate under the rule
during the market stress of 2020, and
investors exhibited anticipatory
redemptions when funds approached
the 30% weekly liquid threshold for the
potential imposition of gates. In light of
these factors, money market funds may
be unlikely to impose redemption gates
outside of fund liquidation, even if we
retained a redemption gate provision in
rule 2a–7. As discussed in section II.A,
the possibility that a money market fund
would impose redemption gates may
influence investment and redemption
decisions, which could trigger runs.576
Second, the final rule includes a
liquidity fee framework, encompassing
mandatory and discretionary liquidity
fees, as discussed in greater detail in
section I and section II.B, but an
amended framework where the
imposition of fees is not tied to weekly
liquid assets. The final rule includes
both a discretionary fee framework 577
and a mandatory liquidity fee
framework. Mandatory liquidity fees
will be tied to a fund’s same-day net
redemptions, and funds will be able to
assess discretionary liquidity fees, as
discussed in section II.B. As discussed
above, we believe that the final rule will
provide more efficient tools for
managing liquidity risk than the current
baseline approach tying the potential
imposition of fees to weekly liquid asset
thresholds while reducing incentives for
strategic redemptions. Moreover,
increases to daily and weekly liquidity
thresholds may increase fund liquidity
buffers that can be used to manage
liquidity costs of redemptions.
Third, money market funds will
continue to be able to suspend
redemptions under rule 22e–3 in
anticipation of fund liquidation.
Specifically, a money market fund will
be able to suspend redemptions if its
weekly liquid assets decline below 10%
574 See, e.g., Federated Hermes Comment Letter I.
As discussed in section II and in section IV.C.4
below, the final rule would include a discretionary
liquidity fee framework that affected money market
funds could employ in times of stress.
575 See Cato Inst. Comment Letter.
576 See, e.g., State Street Comment Letter.
577 The Commission received comment that
liquidity fees are one of the tools that, if fully
discretionary, could be very valuable to money
market funds in future stressed markets. See, e.g.,
Federated Hermes Comment Letter I.
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or, in the case of a government or retail
money market fund, if its market-based
price has deviated or is likely to deviate
from its stable price, and in each case
if the board also approves liquidation of
the fund.578 Thus, money market funds
will still have access to a form of gating
during large liquidity shocks in
connection with a fund liquidation.
Fourth, as a result of the run
dynamics described above, the tie
between weekly liquid assets and the
potential imposition of fees and gates
may have contributed to incentives for
money market fund managers to
preserve their weekly liquid assets
during liquidity stress, rather than using
them to meet redemptions.579 Therefore,
the tie between weekly liquid assets and
the possibility of fees and gates may
magnify liquidity stress because it
incentivizes money market funds to sell
less-liquid assets with higher liquidity
costs rather than absorb redemptions
out of liquid assets. Thus, the removal
of gates under rule 2a–7 and the tie
between weekly liquid asset thresholds
and the imposition of liquidity fees may
reduce run risk and liquidity
externalities in money market funds.
2. Raised Liquidity Requirements
a. Benefits
The final amendments increasing
daily and weekly liquid asset
requirements to 25% and 50%
respectively may reduce run risk in
money market funds. Commenters
generally supported increasing the
minimum daily and weekly liquidity
requirements for money market funds,
and some commenters supported the
final thresholds being adopted.580
As discussed in the Proposing
Release, early redemptions can deplete
a fund’s daily or weekly liquid assets,
which reduces liquidity of the
remainder of the fund’s portfolio and
increases the risk that a fund may need
to sell less-liquid assets into a stressed
market. Higher levels of daily and
weekly liquid assets in a fund may
reduce trading costs and the first-mover
advantage during a wave of
redemptions, potentially disincentivizing runs. When money market
funds experience runs, funds with
higher daily and weekly liquid assets
may experience lower liquidity costs as
578 See
17 CFR 270.22e–3.
e.g., Federated Hermes Comment Letter I.
580 See, e.g., Fidelity Comment Letter; Schwab
Comment Letter; Vanguard Comment Letter; CCMR
Comment Letter; Americans for Financial Reform
Comment Letter; Better Markets Comment Letter.
See also Prof. Hanson et al. Comment Letter;
Systemic Risk Council Comment Letter (suggesting
that the proposed liquidity thresholds may be too
low).
579 See,
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they may be more likely to be able to
use their liquid assets to meet
redemptions rather than be forced to sell
assets during liquidity stress.581 In the
open-end fund context, some research
shows that fund illiquidity can
contribute to run dynamics, as
discussed in section IV.B.1.c. Other
work shows that less-liquid open-end
bond funds suffered more severe
outflows during the COVID–19 crisis
than liquid funds, and that less-liquid
funds experienced redemptions well
before more-liquid funds.582 Other
research shows that runs were more
likely in less liquid funds for both U.S.
and European institutional prime
money market funds.583
A number of commenters indicated
that raised liquidity requirements are
critical to improving the resilience of
money market funds in periods of
market stress, as higher amounts of
liquidity allow funds to manage through
periods of higher redemptions and delay
the point at which funds must access
the secondary market to generate
liquidity.584 We continue to believe that
increases in minimum liquidity
requirements may help funds absorb
redemptions and reduce the likelihood
that funds need to sell portfolio
securities during periods of market
stress. This may enhance the resilience
of money market funds in times of stress
and may reduce the potential effect of
redemptions from money market funds
on short-term funding markets during
times of stress. As discussed in the
Proposing Release, there may be varying
interpretations of the effects of fund
outflows in March 2020 on the prices of
assets held by money market funds and,
thus, the degree to which the liquidity
requirements may reduce the
transaction costs and losses money
market funds would face when selling
portfolio securities into stressed
markets. One commenter indicated that
the proposal relied on a false
assumption that all redemptions should
be met using weekly liquid assets.585
581 See Prime MMFs at the Onset of the Pandemic
Report, supra note 41, at 4. According to Form N–
MFP filings, no prime money market fund reported
daily liquid assets declining below the 10%
threshold in Mar. 2020.
582 See Antonio Falato et al., Financial Fragility
in the COVID–19 Crisis: The Case of Investment
Funds in Corporate Bond Markets, 123 J. Monetary
Econ. 35, 35–52 (2021).
583 See Cipriani, Marco and Gabriele La Spada,
Sophisticated and Unsophisticated Runs. FRB of
New York Staff Report No. 956 (2020). See also
Anadu, Kenechukwu et al., The Money Market
Mutual Fund Liquidity Facility, FRB of New York
Staff Report No. 980. (2021).
584 See, e.g., Systemic Risk Council Comment
Letter; Fidelity Comment Letter; Schwab Comment
Letter; Vanguard Comment Letter.
585 See Federated Hermes Comment Letter I.
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While funds may sell other securities to
meet redemptions during times of stress,
selling portfolio securities into stressed
markets is not only costly, but also
might not always be feasible during
significant stress events that impair the
ability of dealers to supply such
liquidity.586 The Commission continues
to believe that increased liquidity
requirements may enhance the ability of
funds to meet large redemptions and
reduce the dilution of remaining fund
shareholders which will protect
investors, particularly in times of stress.
Some commenters indicated that
increases in the weekly liquid asset
threshold would not necessarily result
in enhanced money market fund
liquidity because fund managers would
treat a fund’s liquid assets as a
regulatory minimum and not use them
to fulfill redemptions.587 Funds may,
indeed, choose between drawing down
on daily or weekly liquid assets and
selling less liquid assets in distressed
markets to meet redemptions. As
discussed above, the final rule removes
the tie between weekly liquid assets and
the potential imposition of redemption
fees and gates. As discussed in the
Proposing Release, before the
introduction of fees and gates in the
2014 amendments, the only
consequence to a money market fund of
having the percentage of its weekly
liquid assets fall below the 30%
threshold was that the fund could not
acquire any security other than a weekly
liquid asset until its investments were
above the 30% threshold. As a result,
funds were more comfortable using their
weekly liquid assets and dropping
below the 30% threshold.588 For
example, at the peak of the Eurozone
sovereign crises in the summer of 2011
the lowest reported weekly liquid asset
value was approximately 5%.589 In
combination with the elimination of the
tie between weekly liquid assets and
potential imposition of liquidity fees as
well as the elimination of redemption
gates, the liquidity requirements may
similarly increase the reliance of money
market funds on daily and weekly
liquid assets in meeting redemptions.
The Commission received comment
that a prescriptive regulatory minimum
liquidity mandate may offer few benefits
586 See, e.g., ICI Comment Letter, BlackRock
Comment Letter.
587 See, e.g., SIFMA AMG Comment Letter;
BlackRock Comment Letter.
588 See, e.g., Federated Hermes Comment Letter I
(citing to ICI data and stating that ‘‘even before the
linkage was introduced, funds utilized their weekly
liquid assets as necessary and then in accordance
with the rule procured only weekly liquid assets
until the regulatory thresholds were once again
met’’).
589 87 FR 7300.
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because funds have a current obligation
to hold sufficient liquidity to meet
reasonably foreseeable shareholder
redemptions and that properly
considered know your customer
requirements (e.g., investor type and
concentration) are adequate.590 As
discussed in section II.C.1, this current
obligation may not be sufficient, since
investors have unpredictable cash flow
needs that are exacerbated in stress
events, markets can rapidly and
unforeseeably become illiquid during
stress events, and requiring an
appropriate level of liquidity at all times
may be more effective than waiting until
the stress event.
The Commission has also received
comments that the removal of the tie
between weekly liquid assets and gates
and fees would have been sufficient,
and that other amendments are
unnecessary.591 In general, investors
may have cash needs that can be hard
to predict for investors, and even more
so for fund managers.592 Moreover, we
understand that large scale redemptions
akin to those experienced by some
funds in March 2020 are rare, and
estimating the risk of such rare and large
scale redemptions is inherently
difficult. Finally, because dilution costs
are borne by remaining investors and
not money market funds, funds do not
bear the cost of liquidity externalities
that money market fund liquidity
management practices may impose on
market participants transacting in the
same asset classes. We continue to
believe that there are benefits to
increased liquidity requirements. As
discussed in greater detail below, we
also believe that the final liquidity fee
framework would give rise to additional
benefits by reducing liquidity
externalities of redemptions that can
contribute to run incentives and by
seeking to ensure that the costs
stemming from redemptions in stressed
market conditions are more fairly
allocated to redeeming investors.
We acknowledge that, as discussed in
the Proposing Release, the anticipated
benefits of the final rule may be partly
reduced to the extent that money market
funds already voluntarily hold daily and
weekly liquid assets in excess of the
regulatory minimum thresholds due to
other regulatory obligations or
prevailing market conditions. For
example, the asset weighted average
daily and weekly liquid assets for
publicly offered institutional prime
money market funds between October
590 See, e.g., Federated Hermes Comment Letter I;
Sen. Toomey Comment Letter.
591 See, e.g., Federated Hermes Comment Letter I.
592 See HSBC Comment Letter.
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51461
2016 and February 2020 was 33% and
48% respectively.593 After the peak
volatility in March 2020, money market
funds generally increased their daily
and weekly liquidity, initially to meet
further redemptions and subsequently
to take advantage of rising interest rates
since March 2022. Consequently, the
asset weighted average daily and weekly
liquid assets for publicly offered
institutional prime money market funds
rose to 43% and 56% respectively by
March 2023.594 Additionally, the
distributions of daily and weekly liquid
assets have different amount of
skewness, with approximately 45% of
publicly offered institutional prime
funds holding below average (43%) in
daily liquid assets and 40% of funds
holding below average (less than 56%)
in weekly liquid assets. As a result,
fewer prime funds may be affected by
the higher daily liquid asset threshold
than the higher weekly liquid asset
threshold. Specifically, as of March 31,
2023, approximately 8% of all prime
funds were below the 25% daily liquid
asset threshold and approximately 20%
of all prime funds were below the 50%
weekly liquid asset threshold. Out of all
public institutional prime funds, 8%
were below the final daily liquid asset
threshold and 18% were below the
weekly liquid asset threshold. This may
reduce both costs and benefits of the
final amendments against the current
regulatory baseline.
We have received comment that the
proposed increases in liquidity
requirements rely on false assumptions,
including the assumption that failure of
a single money market fund to ensure
proper liquidity will lead to a run
impacting all money market funds
because transparency about liquidity
levels of different funds can prevent or
limit contagion.595 Daily and weekly
liquid assets of money market funds are,
indeed, publicly disclosed under the
current baseline, and this baseline
reduces spillovers of run risk on more
liquid money market funds. However, in
the event of a run on a money market
fund with lower liquidity buffers,
investors may also optimally seek to
redeem out of funds that are similar to
the fund experiencing a run (in their
portfolio exposures, liquidity
characteristics, or institutional
593 Averages were calculated by dividing the
aggregate amount of daily (weekly) liquid assets
from all funds by the aggregated amount of assets
from all funds.
594 According to one commenter, between 2010
and 2021, institutional prime money market funds
held, on average, 45% in weekly liquid assets, and
retail prime money market funds held, on average,
42% in weekly liquid assets. See ICI Comment
Letter.
595 See, e.g., Federated Hermes Comment Letter I.
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clientele).596 Higher liquidity
requirements may reduce such
spillovers of run risk across funds.
To the degree that raised liquidity
requirements reduce run risk in money
market funds, they may enhance the
resilience of affected funds and reduce
the risk that money market funds rely
on government backstops. Moreover,
this may benefit investors to the degree
that increasing the liquidity of money
market fund portfolios would allow
funds to meet large redemptions from
liquidity buffers more easily. For
example, after the March 2020 market
dislocation, some prime money market
funds voluntarily shifted their portfolios
by moving out of longer maturity
commercial paper and certificates of
deposit in favor of more liquid
Treasuries, allowing them to meet any
future redemptions better. Raising
liquidity thresholds may have a similar
benefit.
The magnitude of the above economic
benefits is likely to depend on the way
in which money market funds respond
to the final amendments. Specifically,
some affected money market funds (i.e.,
money market funds with less than 25%
in daily and 50% in weekly liquid
assets) may react to the final
amendments by increasing the maturity
of the remainder of their portfolios 597
(within the constraints on the maturity
and weighted average life of the assets
they hold), potentially reducing their
liquidity to the extent that it is tied to
maturity.
b. Costs
The final amendments will impose
indirect costs on money market funds,
investors, and issuers. Because less
liquid assets are more likely to yield
higher returns in the form of a liquidity
premium,598 to the degree that the
amendments improve the liquidity of
money market fund portfolios, it may
lower expected returns of those funds to
investors. Thus, an increase in weekly
liquid assets may decrease money
market fund yields and make them less
attractive to some investors 599 and may
reduce entry.600 One commenter
estimated that the proposed
amendments will narrow the spread in
yield between prime and government
money market funds to less than 10
basis points.601 We do not agree that
this would necessarily be the case.
Notably, any changes to such yield
spread would vary depending on the
degree to which some money market
funds may choose to extend the
maturities of their assets that do not fall
into the weekly liquid asset category 602
(while staying under the regulatory caps
on portfolio weighted average maturity
and weighted average life) in response
to the amendments, as well as on the
prevailing interest rate environment and
the steepness of the yield curve that
reflects interest rates across maturities.
Reduced investor demand may lead to
a decrease in the size of assets under
management of affected money market
funds and the wholesale funding
liquidity they provide to other market
participants. Investors that prefer to use
money market funds as a cash
management tool, giving them the
ability to preserve the value of their
investments and receive a small yield,
may move out of prime money market
funds and into government money
market funds which deliver lower
yields, but have lower risk to the value
of the investment.603 At the same time,
investors reaching for yield may move
to non-money market fund alternatives,
including more opaque or less regulated
investment products.604 Moreover, to
the degree that some investors view
money market funds as cash
equivalents, this amendment may result
in better matching of investors to funds
that meet their risk tolerance and yield
expectations, mitigating the above costs.
The final amendments may require
some affected funds to increase their
daily liquid assets or weekly liquid
assets. However, as of March 2023, an
average institutional prime fund had
54.9% of assets in daily liquid assets
and an average retail prime fund had
50.5% of assets in daily liquid assets;
similarly, institutional prime funds had
an average of 67.9% in weekly liquid
assets and retail prime funds averaged
61.5% in weekly liquid assets.605 As can
be seen from Table 5 below, we
understand that many funds are already
in compliance or close to compliance
with the final liquidity requirements
under the current baseline, mitigating
some of the above costs (and benefits) of
the final amendments.
TABLE 5—DISTRIBUTION OF DAILY LIQUID ASSETS (DLA) AND WEEKLY LIQUID ASSETS (WLA) BY FUND TYPE, AS OF
MARCH 2023
Prime
institutional
DLA
(%)
%-ile
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Min ...................................................................................................................
10th ..................................................................................................................
25th ..................................................................................................................
50th ..................................................................................................................
75th ..................................................................................................................
90th ..................................................................................................................
596 See Proposing Release, supra note 5, at Table
2 and accompanying text (discussing outflows from
money market funds with different fund
characteristics).
597 See, e.g., Federated Hermes Comment Letter I.
Notably, longer maturity of portfolio assets does not
always imply lower liquidity. For example, the
liquidity stress in 2020 was so severe that
commercial paper across a variety of maturities
became illiquid.
598 See, e.g., Lee, Kuan-Hui, The World Price of
Liquidity Risk, 99 J. Fin. Econ. 136, 136–161 (2011).
See also Acharya, Viral, and Lasse Pedersen, Asset
Pricing with Liquidity Risk, 77 J. Fin. Econ. 375,
375–410 (2005). See also Lubos Pastor & Robert
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Jkt 259001
20.7
28.8
40.1
47.3
57.2
90.3
Stambaugh, Liquidity Risk and Expected Stock
Returns, 111 J. Polit. Econ. 642, 642–685 (2003).
599 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; BlackRock Comment Letter;
Federated Hermes Comment Letter I; Dechert
Comment Letter; Americans for Tax Reform
Comment Letter.
600 For example, one commenter that closed
prime and tax-exempt money market funds in 2020
asserted that the regulatory burdens, including
increased liquidity requirements, make it unlikely
that they will reenter the prime money market fund
market. See Northern Trust. For a discussion of the
potential effects of the final amendments on
competition, efficiency, and capital formation, see
section IV.E.
PO 00000
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Fmt 4701
Sfmt 4700
Prime retail
DLA
(%)
15.2
22.1
30.4
43.9
50.9
58.0
601 See
Prime
institutional
WLA
(%)
Prime retail
WLA
(%)
37.5
43.9
52.6
58.7
67.7
92.3
34.9
42.2
47.4
57.1
60.3
72.9
Federated Hermes Comment Letter I.
602 Id.
603 Government money market funds must invest
99.5% or more of their assets in cash, government
securities, and/or repurchase agreements that are
collateralized fully.
604 See, e.g., Federated Hermes Comment Letter I;
ICI Comment Letter; Dechert Comment Letter;
CCMR Comment Letter.
605 See Money Market Fund Statistics, Division of
Investment Management Analytics Office, 4/25/
2023, available at https://www.sec.gov/files/mmfstatistics-2023-03.pdf. The weighted average values
equal the aggregated daily or weekly liquid assets
divided by the total assets of the funds.
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51463
TABLE 5—DISTRIBUTION OF DAILY LIQUID ASSETS (DLA) AND WEEKLY LIQUID ASSETS (WLA) BY FUND TYPE, AS OF
MARCH 2023—Continued
Prime
institutional
DLA
(%)
%-ile
Max ..................................................................................................................
Prime retail
DLA
(%)
100.0
67.5
Prime
institutional
WLA
(%)
100.0
Prime retail
WLA
(%)
76.0
Source: Form N–MFP filings.
ddrumheller on DSK120RN23PROD with RULES2
Nevertheless, to the extent that some
funds have to increase their liquidity
levels to comply with the final
amendments, these amendments may
increase the demand of money market
funds for liquid assets, such as repos. To
the degree that this results in a decline
in yield spreads between prime and
government money market funds, some
investments may flow into government
money market funds or, alternatively,
banking entities. To the extent that the
liquidity in overnight funding markets
may flow to banking entities, and
through them to leveraged market
participants, such as hedge funds, the
amendments may reduce the liquidity
risk borne by some money market funds,
but may result in a concentration of risk
taking among leveraged and less
regulated market participants. At the
same time, investors reaching for yield
may flow out of money market funds
and into other more speculative
vehicles, unregulated and less
transparent products.
The final amendments may also
impose indirect costs on issuers.
Specifically, money market funds are
holders of commercial paper and
certificates of deposit, as described in
the baseline,606 and most of the
commercial paper they hold is issued by
banks, including foreign bank
organizations.607 Therefore, issuers of
commercial paper and certificates of
deposit are likely to experience
incrementally reduced demand for their
securities from money market funds,
particularly demand for debt that would
fall outside of the weekly liquid assets
category,608 however any such effects
may be mitigated by the factors
discussed below. We have received
comment that raised liquidity
requirements may reduce issuers’ access
to capital and increase the cost of
capital, negatively affecting capital
formation in commercial paper and
606 To
the degree that some money market funds
hold significant quantities of commercial paper
issued by foreign banks seeking dollar funding,
such issuer costs may have a greater effect on
foreign issuers.
607 See ICI MMF Report, supra note 542.
608 See, e.g., Allen Kyle, et al., Money Market
Reforms: The Effect on the Commercial Paper
Market, 154 J. Banking and Finance 106947 (2023).
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certificates of deposit.609 Issuers may
respond to such changes by reducing
their issuance of commercial paper and
certificates of deposit and increasing
issuance of longer-term debt. In a
somewhat analogous setting, some
research explores the effects of the 2014
money market fund reforms, which may
have resulted in asset outflows from
prime money market funds into
government money market funds and
affected funding for large foreign
banking organizations in the U.S., on
bank business models.610 One paper
found that banks were able to replace
some of the lost funding, but reduced
arbitrage positions that relied on
unsecured funding, rather than reducing
lending.611 Another paper found that
money market fund reforms led to an
increase in the relative share of lending
in bank assets and concludes that
reduction in unstable funding can
discourage bank investments in illiquid
assets.612 Other research examined the
effects of decreased holdings of
European bank debt by money market
funds during the Eurozone sovereign
crisis in 2011. One paper found that
reduced wholesale dollar funding from
money market funds during this period
led to a sharp reduction in dollar
lending by Eurozone banks relative to
euro lending, which reduced the
borrowing ability of firms reliant on
609 See, e.g., ICI Comment Letter; Dechert
Comment Letter; CCMR Comment Letter.
610 These outflows around the Oct. 2016
compliance date for the 2014 reforms, for example,
led to reduced money market funds purchases of
commercial paper with other entities like mutual
funds eventually picking up the shortfall and an
approximately 30 basis point spike in 90-day
financial commercial paper rates for about three
months.
611 See, e.g., Alyssa Anderson et al., Arbitrage
Capital of Global Banks (Finance and Economics
Discussion Series 2021–032. Washington: Board of
Governors of the Federal Reserve System, May
2021), available at https://doi.org/10.17016/
FEDS.2021.032.
612 See Thomas Flanagan, Funding Stability and
Bank Liquidity (Working Paper, Mar. 2020),
available at https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3555346 (retrieved from
SSRN Elsevier database).
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Eurozone banks prior to the sovereign
debt crisis.613
These potential costs of the final
amendment to issuers may be mitigated
by three potential factors. First, as
discussed above and in the proposal,
money market funds may respond to a
higher weekly liquid asset threshold by
increasing the maturity and liquidity
risk in their non-weekly liquid asset
portfolio allocations. This effect may
dampen the adverse demand shock for
commercial paper, but also dampen the
reductions in the portfolio risk of
affected money market funds. However,
for the past several years prime money
market funds have maintained levels of
liquidity that are close to or that exceed
the final thresholds, without offsetting
the low yield of shorter-term securities
with significant holdings of riskier
longer-term securities (‘‘barbelling’’).614
Second, as discussed in the proposal,
money market funds hold less than a
quarter of outstanding commercial
paper, which could limit the impact of
the final amendments on commercial
paper issuers and markets. If money
market funds pull back from
commercial paper markets and
commercial paper prices decrease as a
result, other investors may be attracted
to commercial paper, absorbing some of
the newly available supply, as observed
after the 2016 reforms. Third, the
amendments to liquidity requirements
may increase some money market funds’
liquidity buffers, which may enable
such funds to meet large redemptions
from liquid assets and reduce the need
to sell commercial paper to meet large
redemptions during stress periods.615
This may enhance the stability of
commercial paper markets during times
of market stress—an effect that is also
limited by the relative size of money
613 See Victoria Ivashina et al., Dollar Funding
and the Lending Behavior of Global Banks, 130 Q.J.
Econ. 1241, 1241–1281 (2015).
614 Fund incentives to barbell may be stronger in
higher interest rate environments or when the yield
curve for short-term securities is steeper.
615 See, e.g., Fidelity Comment Letter (stating that
higher weekly liquid assets allowed the commenter
to avoid selling commercial paper into frozen
markets in Mar. 2020).
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market fund holdings of commercial
paper.
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3. Stress Testing Requirements
a. Benefits
The final amendments will also alter
stress testing requirements for money
market funds. Under the baseline,
money market funds are required to
stress test their ability to maintain 10%
weekly liquid assets under the specified
hypothetical events described in rule
2a–7 since breach of the 10% weekly
liquid asset threshold would impose a
default liquidity fee. The amendments
will eliminate the default liquidity fee
triggered by the 10% threshold and the
corresponding stress testing requirement
around the 10% weekly liquid asset
threshold. Instead, the amendments will
require funds to determine the
minimum level of liquidity they seek to
maintain during stress periods and to
test whether they are able to maintain
sufficient minimum liquidity under
such specified hypothetical events,
among other requirements. We believe
that the final stress-testing approach
will allow for better tailoring of stresstesting results to individual fund
characteristics, which may enhance the
manager and the board’s understanding
of the risks to the fund portfolio under
extreme and plausible market
conditions, as well as enhance liquidity
management and the ability of funds to
meet redemptions.
Most commenters generally supported
the proposed amendments to the
liquidity stress testing requirements,616
but one commenter supported the
existing stress testing framework.617
Different money market funds have
different optimum levels of liquidity
under times of stress. Therefore, the
final amendments to stress testing
requirements reflect our continuing
belief that many factors influence
optimum levels of minimum liquidity
during stress periods, including the type
of money market fund, investor
concentration, investor composition,
and historical distribution of
redemption activity under stress. As
such, we continue to believe that a more
principles-based approach may improve
the utility of stress testing as part of
fund liquidity management.
Specifically, the final amendments may
allow funds to tailor their stress testing
to the fund’s relevant factors, which
may enhance the fund managers’ and
the board’s understanding of the risks to
616 See,
e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; T. Rowe Comment Letter; Schwab
Comment Letter.
617 See Federated Hermes Comment Letter I;
Federated Hermes Comment Letter IV.
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the fund portfolio under extreme and
plausible market conditions, as well as
enhancing liquidity management and
the funds’ ability to meet redemptions.
b. Costs
Amendments to fund stress testing
requirements may impose direct and
indirect costs. Under the final
amendments, a fund will be required to
determine the minimum level of
liquidity it seeks to maintain during
stress periods, identify that liquidity
level in its written stress testing
procedures, periodically test its ability
to maintain such liquidity level, and
provide the fund’s board with a report
on the results of the testing.
As a baseline matter, funds are
already subject to stress testing
requirements, which may reduce some
of the burdens of the final amendments.
Money market funds have also
established written stress testing
procedures to comply with existing
stress testing requirements and report
the results of the testing to the board.
Thus, such funds may experience costs
related to altering existing stress testing
procedures as the final amendments
would move from bright-line
requirements to a principles based
approach, as well as costs related to
board reporting and recordkeeping.618
In addition, to the degree that funds
do not have sufficient incentives to
manage liquidity to meet redemptions,
they may choose insufficiently low
minimum levels of liquidity for stress
testing, which may reduce the value of
stress testing and corresponding
reporting for board oversight of fund
liquidity risk. However, funds may have
significant reputational incentives to
manage liquidity costs: incentives that
have, for example, led many funds to
voluntarily provide sponsor support.
While most commenters generally
supported the principles-based
approach, one commenter opposed the
change, stating that stress testing was
not effective in March of 2020 as
markets were frozen.619 The final stresstesting approach would allow for better
tailoring of stress-testing results to
individual fund characteristics, which
may enhance the manager and the
board’s understanding of the risks to the
fund portfolio under extreme and
plausible market conditions, as well as
enhance liquidity management and the
ability of funds to meet redemptions.
618 The Commission estimates one-time costs of
$125,832 for all affected funds to amend stress
testing procedures, and these costs have been
amortized over three years in section V.B for
purposes of the PRA.
619 See Federated Hermes Comment Letter I.
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4. Liquidity Fees
a. Benefits and Costs of the Mandatory
Liquidity Fee Amendments
i. Benefits
As discussed in section II, the final
amendments include both mandatory
and discretionary liquidity fee
provisions intended to reduce liquidity
externalities in money market funds.
Specifically, as discussed in the
baseline, money market fund investors
transacting their shares typically do not
incur the costs associated with their
transaction activity. Instead, these
liquidity costs may be borne by
shareholders remaining in the fund,
which may contribute to a first-mover
advantage and run risk.620 Moreover, as
discussed in the baseline, liquidity
management by money market funds
may impose negative externalities on all
participants investing in the same asset
classes, and this effect may be magnified
if there are large-scale net redemptions
during times of market stress. As
discussed in further detail below, we
anticipate the final liquidity fee
framework will reduce the negative
externalities that redeemers impose on
non-transacting investors, protect nontransacting investors from dilution, and
reduce run risk in money market funds.
The final liquidity fee framework will
require institutional prime and
institutional tax-exempt money market
funds that experience daily net
redemptions in excess of 5% of their net
assets to assess liquidity fees so as to
charge redeeming shareholders for the
liquidity costs they impose on the fund.
Specifically, the fee amount would
reflect the fund’s good faith estimate of
the spread, other transaction costs, as
well as market impact costs the fund
would incur if it were to sell a pro rata
amount (a vertical slice) of each security
in its portfolio to satisfy the amount of
net redemptions. The Commission
anticipates that, under normal market
conditions, it is likely that the fee
amount would generally be de minimis,
since money market funds already hold
relatively high quality and liquid
investments and will hold even higher
levels of liquidity under the final
amendments, which may reduce
liquidity costs associated with a vertical
slice assumption. In the event of de
minimis costs (costs that are less than
0.01% of the value of the shares
redeemed), a fund will not be required
to impose a liquidity fee. If the fund is
620 As discussed in the baseline, dilution costs
most directly impact shareholders in floating NAV
funds through changes to the NAV. In stable NAV
funds, dilution costs can make the fund more likely
to breach the $1 share price if dilution costs are
large.
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not able to make a good faith estimate
of its liquidity costs based on the sale
of a vertical slice, the fund will use a
default liquidity fee, as discussed in
section II.B.2. In addition, the final
amendments will allow affected money
market funds to assess discretionary
liquidity fees if the board or its delegate
determines that fees would be in the
best interest of the fund.
We anticipate the final liquidity fee
framework will reduce dilution of nonredeeming shareholders in the face of
net redemptions. As discussed in greater
detail in section IV.C.4.b.i below,
redeeming investors will bear the fee.
As a result, it may dampen any firstmover advantage, thus reducing the
incentive to redeem early, the resulting
fund outflows, and dilution resulting
from these outflows. By reducing
dilution, liquidity fees are also expected
to protect investors that remain in a
fund, for instance, during periods of
high net redemptions. By protecting
non-transacting investors from dilution
costs of redemptions, the liquidity fee
framework may also incentivize
investors to stay in funds experiencing
large redemptions, reducing run risk.
Moreover, the liquidity fee framework
may attract some investors (such as
investors that redeem infrequently) to
prime and tax-exempt money market
funds.
The above economic benefits of
liquidity fees may be influenced by
several factors. First, under the final
amendments, liquidity fees are triggered
by same-day net redemptions—a
threshold that we believe makes the
final liquidity fee framework less
susceptible to run risk than fees
conditioned on weekly liquid assets. In
general, if investors expect an indicator
that triggers the fee (e.g., weekly liquid
assets or same-day net redemptions) to
be below the fee threshold on a given
day, but above the fee threshold on
subsequent days, they are incentivized
to redeem early, before the liquidity fee
applies. Therefore, the ability of
investors to accurately forecast an
indicator that triggers the fee over
subsequent days may give rise to
incentives for strategic redemptions. A
day of relatively low weekly liquid
assets combined with significant
redemptions may be more likely than
otherwise to be followed by a day with
even lower weekly liquid assets, due to
the need to absorb the trading costs of
redemptions. This makes declines in
weekly liquid assets more forecastable.
By contrast, changes in net redemptions
from one day to the next are more
difficult to predict accurately because
net flows aggregate orders from a large
number of investors that may be
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redeeming and subscribing based on
their cash needs, interest rate
expectations, and risk tolerances, among
other things. Investors may still seek to
redeem during a redemption wave based
on observation of prior days’ net
redemptions out of the fund or similar
funds. However, such anticipatory
redemptions run the risk that a liquidity
fee would be applied on that day. In
such a scenario, however, to the degree
that fees accurately reflect liquidity
costs, investors know that they would
not be diluted if they stay in the fund,
reducing their incentives to exit in
anticipation of the application of a
liquidity fee and corresponding run risk.
Second, under normal market
conditions, investor dilution may not be
significant and liquidity fees may not be
charged or the fees charged may be
small. However, the final rule is
intended to address the dilution that
can occur when a money market fund
experiences large net redemptions and
is not intended to result in significant
fees unless there is significant net
redemption activity leading to large
liquidity costs, such as in times of stress
in short-term funding market. As
discussed in section II, funds are
expected to charge larger fees in times
of stress, when the benefits of protecting
investors from dilution are higher.
Third, as discussed in greater detail in
section II, the final liquidity fee
framework will require affected funds to
calculate fees based on, among other
things, an assessment of the market
impacts of selling a vertical slice of the
fund portfolio. To the degree that the
costs of selling a pro rata amount of
each portfolio security cannot be
estimated in good faith and supported
by data, funds will use the default
liquidity fee prescribed in the rule. This
default liquidity fee is a proxy for true
liquidity costs of redemptions in times
of stress,621 and may over-estimate or
under-estimate the liquidity costs of
different funds. In addition, differences
in fund portfolio composition may
allow some funds to estimate liquidity
fees under stress, while other affected
funds may be unable to do so and may
simply charge the default fee. This may
decrease the ex-ante benefit of increased
comparability of liquidity costs across
affected money market funds.
Fourth, the final liquidity fee
framework addresses only the portion of
dilution costs related to trading costs
621 As
discussed elsewhere, to the degree that
discounts experienced by ultra-short bond exchange
traded funds in the peak market stress of March
2020 may serve as a proxy for liquidity costs of
money market funds, the default liquidity fee is
generally consistent with the range of money
market fund liquidity costs during the same period.
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51465
and market impacts, and will not
address other sources of dilution
discussed in section IV.B. Thus, the
requirement may only partly reduce the
dilution costs that redemptions impose
on non-transacting investors and the
related liquidity externalities.
The final amendments will require
affected funds to implement liquidity
fees when faced with redemptions in
excess of the 5% threshold. While
money market funds may have
reputational incentives to manage
liquidity to meet redemptions,622
affected funds also face collective action
problems and disincentives stemming
from investor behavior. Specifically, to
the degree that institutional investors
may use institutional prime and
institutional tax-exempt funds for cash
management and their flows are
sensitive to liquidity fees, funds may be
dis-incentivized to implement liquidity
fees until the fund is under severe and
prolonged stress. For example, even if
all institutional money market funds
recognized the benefits of charging
redeeming investors for the liquidity
costs of redemptions, no fund may be
incentivized to be the first to adopt such
an approach as a result of the collective
action problem. By making liquidity
fees in the face of large outflows
mandatory, rather than optional, the
final amendments are intended to
ensure that funds assess liquidity fees to
capture the dilution costs of net
redemptions. Moreover, it may be
suboptimal for an individual money
market fund to implement liquidity fees
frequently under normal market
conditions, as the operational costs of
doing so are immediate and certain,
while the benefits are largest in
relatively rare times of liquidity stress.
The final rule’s application of liquidity
fees by all institutional prime and
institutional tax-exempt funds faced
with large outflows is intended to
ensure that liquidity fees are deployed
in times of stress by all affected funds,
protecting remaining fund investors
from dilution costs when liquidity costs
are highest.
The Commission has also received
comments that the removal of the tie
between weekly liquid assets and gates
and fees would have been sufficient,
and that other amendments are
unnecessary.623 We note that for reasons
622 One commenter stated that a fund’s board of
independent directors would have reputational and
legal incentives to apply a discretionary fee to
prevent shareholder dilution regardless of whether
other funds’ boards apply fees. See Federated
Hermes Comment Letter V.
623 See, e.g., Federated Hermes Comment Letter I;
ICI Comment Letter.
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discussed throughout, the Commission
is adopting all of the amendments,
which we believe can work in
complementary ways to reduce liquidity
externalities and run risk in money
market funds, although each element of
the final rule may have lower
incremental benefits. The Commission
has also received comments questioning
whether any meaningful dilution occurs
in money market funds.624 For example,
one commenter stated that, from their
own data and industry experience, no
dilution was actually experienced and
that, if dilution occurred, it would have
been observable in a declining NAV
during the stressed period in which
money market funds experienced net
redemptions.625 The Proposing Release
documented declines in the distribution
of money market fund NAVs during
peak market stress of March 2020.626
However, because investors can redeem
in response to anticipated or realized
NAV dips, it is difficult to disentangle
such effects from the dilution that
results from forced sales to meet
redemptions. Moreover, dilution costs
exist—and are borne by remaining
investors—even if funds do not fully
exhaust their liquidity buffers and
experience NAV dips from forced sales,
and anti-dilution mechanisms are
intended to address dilution costs that
stem from a fund’s liquidity becoming
depleted, rather than necessarily fully
exhausted. Finally, we do not observe
dilution costs that would have occurred
in absence of the Federal Reserve’s
facilities that may have prevented
substantial declines in fund NAVs from
forced sales to meet redemptions.
Another commenter estimated the
impact of swing pricing on its money
market fund on March 16, 2020, and
seemed to suggest that the impact would
have been slightly more than 1 basis
point.627 Another commenter analyzed
the size of a swing factor adjustment if
a fund held 50% of its assets in weekly
liquid assets and applied a 100-basis
point upward move in market yield for
all other holdings (a historically large
move, according to the commenter) as a
proxy of market impact. The commenter
stated that, in this analysis, a fund’s
NAV would only move down by
$0.0007.628 Importantly, this comment
addresses the hypothetical impacts of
specific interest rate shocks (rather than,
for example, large firm-specific or
sector-wide credit shocks) and do not
revalue the entire fund portfolio based
on market impacts of the liquidation of
a pro-rata slice of the fund portfolio
using transaction or quotation data.
While dealer accommodation may allow
money market funds to transact at bid
or mid prices under normal market
conditions, historical bid and mid
estimates from pricing vendors may not
reflect prices at which money market
funds are able to transact when markets
are under stress.629 In addition,
627 See,
e.g., Capital Group Comment Letter.
Fidelity Comment Letter (stating that if the
fund had 30% WLA and the market impact factor
was 150 basis points, the NAV would decline by
$0.0014).
629 For example, many dealers may not bid on
certain issuer names altogether to avoid a flood of
sell orders from prime money market funds and
628 See
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624 See, e.g., Federated Hermes Comment Letter I;
SIFMA AMG Comment Letter; Capital Group
Comment Letter; JP Morgan Comment Letter;
Fidelity Comment Letter.
625 See Federated Hermes Comment Letter II.
626 See 87 FR 7297.
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evidence from the commercial paper
market suggests that, during the
liquidity stress of 2020, the commercial
paper market exhibited a significant
amount of stress reflected in spikes in
the yield spread between commercial
paper and Treasuries and in the
commercial paper bid-ask spread, as can
be seen in Figure 4. For example, bidask spreads of highly rated dealerplaced commercial paper reached
between approximately 25 and 55 basis
points at the height of the stress in
March and April 2020 depending on
maturity.630 In addition, we are aware of
research showing that ultra-short bond
exchange traded funds exhibited
significant NAV discounts during the
peak of market stress in March 2020.631
To the degree that ultra-short bonds may
be somewhat comparable to the debt
instruments held by money market
funds, and to the extent that the
magnitude of exchange traded fund
discounts may proxy for liquidity costs
of money market funds that hold similar
assets, this could suggest nontrivial
dilution costs during market stress.
other short-term credit investors. See, e.g.,
Blackrock Comment Letter.
630 See Capital Advisors Group, Institutional Cash
Investments in the COVID–19 New Reality,
available at https://www.capitaladvisors.com/wpcontent/uploads/2020/05/Institutional-CashInvestments-in-the-COVID-19-New-Reality.pdf. The
negative bid/ask spread seen during Mar. 2020 may
reflect a dealer’s willingness to bid on liquid CP
and to sell more illiquid CP at a lower price.
631 See Kenechukwu Anadu et al., Swing Pricing
Calibration: A Simple Thought Exercise Using ETF
Pricing Dynamics to Infer Swing Factors for Mutual
Funds (SRA Note, Issue Number: 2022–06),
available at https://www.bostonfed.org/-/media/
Documents/Workingpapers/PDF/2022/sra-note2206.pdf.
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Commercial paper is just one group of
money market fund portfolio holdings,
and data on certificates of deposit and
municipal securities is scarce.
Moreover, we do not have granular data
about daily money market fund
holdings and quotation data that would
enable us to estimate the amount of
dilution that could have been
recaptured in March 2020 or the
prevalence of other sources of dilution
discussed in section IV.B. To the best of
our knowledge, such data are not
publicly available. In addition, order
sizes, fund portfolio holdings, the
liquidity management strategy used to
meet redemptions, and execution
quality may impact the precise dilution
costs experienced by each fund.
However, from the above data on
short-term commercial paper and ultrashort bond exchange traded funds, in
times of stress in short-term funding
markets, liquidity costs of money
market funds can spike. To the degree
that money market funds absorb
redemptions out of liquid assets, and are
unable to perfectly anticipate daily
redemptions and ladder portfolio
maturities accordingly, redemptions
dilute investors remaining in the fund
by reducing the amount of liquidity
available to meet future redemptions.
Moreover, the final rule would require
funds to estimate market impact factors
using the assumption of the sale of the
pro-rata share of the fund portfolio
holdings. Thus, had the final liquidity
fee framework been in effect during
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market stress in March 2020, we believe
that many affected money market funds
would have charged liquidity fees on
redemptions, thereby reducing dilution
of non-transacting shareholders and the
impact of redemptions on affected
funds.
ii. Costs
Broadly, the final liquidity fee
requirements may impose three groups
of costs. First, as analyzed in section V,
affected money market funds would
bear reporting and recordkeeping
burdens arising out of the final liquidity
fee requirements.632 For money market
fund boards that delegate liquidity fee
determinations to the fund’s adviser or
officer, funds would also have burdens
associated with establishing boardapproved written guidelines for
determining the application and size of
liquidity fees, as well as the burdens of
periodic board oversight of the
delegate’s determinations. Money
632 As discussed in section V.B, the Commission
estimates the total annual costs attributable to the
information collection requirements of the liquidity
fee amendments under rule 2a–7 will be
$1,228,659. This cost estimate includes both initial
and ongoing costs with the former being amortized
over three years. The estimated initial costs of the
website disclosure amendments under rule 2a–7 is
$84,966 for all affected funds, amortized over three
years. As discussed in section V.E, the Commission
estimates a total initial cost of updating disclosures
to comply with the amendments to Form N–1A of
$59,682 for all affected funds, amortized over three
years. As discussed in section V.G, the Commission
estimates a total annual cost of preserving records
of liquidity fee computations of $97,347, which
includes both internal and external costs.
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market funds generally already have
playbooks or other written materials
related to the circumstances in which a
fund’s board may consider liquidity fees
under the current rule. Funds may
update these materials to conform to the
final rule’s requirements. The costs of
board oversight of the delegate may
include costs of preparing materials in
advance of board meetings to describe
any instances in which the delegate
determined to impose a fee, as well as
the factors the delegate considered in
determining to impose a fee and the size
of the fee.
Second, affected money market funds
may incur costs related to implementing
an analytical framework required to
implement the final liquidity fee
requirements, including costs of
estimating dilution under the vertical
slice assumption. Section II discusses
how affected money market funds may
choose to comply with the vertical slice
requirement. One commenter
questioned the feasibility of estimating
market impact using the vertical slice
approach.633 Another commenter
estimated their initial costs of
implementing all parts of the proposal
at between $10 to $20 million, with $2
to $4 million in annual ongoing costs
(including staffing and personnel costs,
legal fees, printing and mailing costs
and fees to custodians).634 The
commenter indicated that
approximately two-thirds of these
633 See
634 See
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by Maturity and Type
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estimated costs would be necessary to
implement the swing pricing,
disclosures and negative interest rate
aspects of the proposal. The commenter
also indicated that these expenses will
be somewhat larger for larger fund
families and their services providers,
and somewhat smaller for smaller fund
families and their services providers,
but will not vary exactly in proportion
to the size of the money market fund
family. As discussed above, the
Commission is modifying its approach
to the negative interest rate aspects as
proposed, is scaling back some of the
more costly parts of the disclosure
requirements, and is adopting a
liquidity fee framework (which we
believe may be less costly) in lieu of the
proposed swing pricing requirement.
However, if costs of the liquidity fee
framework are of a comparable order of
magnitude to the costs of the proposed
swing pricing requirement at the fund
level, an estimate of the initial
compliance costs of the final liquidity
fee framework based on that
commenter’s assumptions may therefore
be between $6.7 million and $13.4
million, with between $1.3 and $2.7
million in annual ongoing costs.635
However, as discussed throughout the
release, a number of commenters
indicated that liquidity fees may be far
less costly and operationally complex
than the proposed swing pricing
requirement,636 and thus, these figures
may overestimate the costs of the final
liquidity fee framework.
Third, the liquidity fee amendments
would require intermediaries and
service providers (such as brokerdealers, registered investment advisers,
retirement plan record-keepers and
administrators, banks, other registered
investment companies, and transfer
agents) that receive flows directly to
apply fees to investors’ redemptions and
submit the proceeds to the fund, which
may increase operational complexity
and cost for intermediaries. While
intermediaries and service providers to
non-government money market funds
should be equipped to impose liquidity
fees under the current regulatory
baseline, the final amendments will
likely result in more frequent
application of fees than what is
635 These ranges correspond to two–thirds of the
corresponding ranges provided by the commenter.
636 See, e.g., ICI Comment Letter; Invesco
Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; Federated
Hermes Comment Letter II; Invesco Comment
Letter; Schwab Comment Letter; Morgan Stanley
Comment Letter; JP Morgan Comment Letter;
BlackRock Comment Letter; State Street Comment
Letter; Western Asset Comment Letter; IIF Comment
Letter; Allspring Funds Comment Letter; Dechert
Comment Letter.
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observed currently given that no money
market funds have imposed liquidity
fees under the current rule. As
discussed in section II.B., there are also
differences between the current
liquidity fee framework and the new
mandatory liquidity fee framework that
may affect how intermediaries apply
fees, such as the requirement to apply
fees based on same day net
redemptions, and the likelihood such
fees would vary day to day under
stressed conditions. As a result,
intermediaries may need to develop or
modify policies, procedures, and
systems designed to apply fees to
individual investors and submit
liquidity fee proceeds to the fund. In
addition, liquidity fees may require
more coordination with a fund’s
intermediaries and service providers,
since each of them needs to impose fees
on an investor-by-investor basis, which
may be more difficult with respect to
omnibus accounts. Moreover, some
funds may choose to develop or modify
policies and procedures reasonably
designed to ensure intermediaries are
appropriately and fairly applying the
fees. Finally, to determine the liquidity
fee amount, funds would need to
receive information from intermediaries
about gross redemptions for a given day.
To the degree that some intermediaries
may currently provide only net flow
information to funds, intermediaries
may need to update their arrangements
with funds to send the gross amount of
redemptions in a timely manner. Due to
the costs that the liquidity fee
amendments may impose on
intermediaries and distribution
networks of affected funds, money
market funds may alter their
intermediary distribution contracts,
networks, and flow aggregation
practices.
The magnitude of such costs would
depend on, among other things,
intermediaries’ current policies and
procedures related to the imposition of
liquidity fees under the current rule;
future redemption patterns out of
affected money market funds under
normal conditions and under stress, and
the liquidity costs thereof (which would
affect how frequently fees would be
applied under the final rule); how
affected money market funds choose to
structure their relationships with
service providers and intermediaries;
and the way in which affected funds
may choose to alter their intermediary
contracts, networks, and flow
aggregation practices in response to the
final rule. In the Proposing Release, the
Commission was unable to quantify
such burdens and costs and solicited
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comment and data that would inform
this analysis. While commenters did not
provide estimates or data that could
inform estimates of such costs, a large
number of commenters suggested that a
liquidity fee framework would be far
less costly and operationally complex
than the proposed swing pricing
requirement.637
The costs of the final liquidity fee
amendments may be passed along in
part or in full to institutional money
market fund investors in the form of
higher expense ratios or fees. In
addition, to the degree that the final
amendments result in liquidity fees
being charged to redeemers (relative to
the baseline of funds being able to
assess the fees but not being required to
assess them and never having assessed
them), the final liquidity fee
requirement will increase the variability
of realized returns for redeeming
investors in affected money market
funds, particularly in times of market
stress. Thus, these amendments may
reduce demand of some investors for
institutional prime and institutional taxexempt money market funds. However,
they may smooth NAV returns for nonredeeming investors as transactions
costs would no longer detract from the
fund NAV. Hence, as discussed above,
the liquidity fee framework may also
attract new investors, such as investors
that tend to redeem infrequently, to
prime and tax-exempt money market
funds.
If the final amendments reduce
investor demand in some funds, they
would lead to a decrease in assets under
management of these money market
funds, thereby potentially reducing the
wholesale funding liquidity they
provide to other market participants. A
reduction in the number of money
market funds and/or the amount of
money market fund assets under
management as a result of the final
liquidity fee requirements would have a
greater negative impact on money
market fund sponsors whose fund
groups consist primarily of money
market funds, as opposed to sponsors
that offer a more diversified range of
mutual funds or engage in other
financial activities (e.g., brokerage).
However, the final amendments may
also lead to an increase in demand for
government money market funds, which
637 See, e.g., ICI Comment Letter; Invesco
Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; Federated
Hermes Comment Letter II; Invesco Comment
Letter; Schwab Comment Letter; Morgan Stanley
Comment Letter; JP Morgan Comment Letter;
BlackRock Comment Letter; State Street Comment
Letter; Western Asset Comment Letter; IIF Comment
Letter; Allspring Funds Comment Letter; Dechert
Comment Letter.
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could dampen or offset the potential
adverse effects of the final rule on the
availability of short-term funding
liquidity, and on fund sponsors whose
fund groups consist primarily of
government money market funds.
In addition, the liquidity fee
framework may reduce the willingness
of some investors to hold prime and taxexempt money market funds due to the
possibility of a liquidity fee being
applied. Such investors may reallocate
capital into, for example, government
money market funds. If the final
amendments result in a shift in assets
under management out of prime and
tax-exempt money market funds and
into government money market funds,
they may influence costs of capital for
issuers, such as municipalities and
corporate issuers due to the need to
raise capital from, for example, bank
and bond financing. While we cannot
estimate the magnitude of such
potential impacts under the final rule,
in the swing pricing context, one
commenter estimated that the shift of
balances out of prime money market
funds would result in lost income and
higher borrowing costs of roughly 2% to
3% per annum on the aggregate amount
of prime money market fund balances
shifted to alternative forms of
intermediation, such as banks.638
Although swing pricing and liquidity
fees can both charge redeeming
investors for the liquidity costs they
impose on a fund’s non-redeeming
investors, the final liquidity fee
framework is tailored to reduce costs on
funds and investors relative to the
proposed swing pricing approach, as
discussed in detail in sections II and
IV.D, which may mitigate these effects.
Moreover, liquidity fees may increase
the variability of realized returns of
institutional investors especially during
times of stress, which can reduce the
attractiveness of such funds to such
investors. Importantly, under the
baseline, institutional funds experience
NAV volatility and money market funds
are already able to assess fees. Riskaverse investors that prefer to be able to
redeem at NAV and without fees may
have already shifted to government
money market funds or bank accounts,
for example, around the 2016
implementation of money market fund
reforms. The final liquidity framework
has been designed to mitigate these
economic costs in several ways. First,
the final liquidity fee requirements are
tailored to the level of net redemptions.
When daily net redemptions are low (at
or below 5%), affected money market
638 See,
e.g., Federated Hermes Comment Letter I.
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funds will not be required to assess
liquidity fees.
Second, as discussed in section II.B.2,
affected money market funds will not be
required to assess liquidity fees if a
calculated fee is less than 0.01% of the
value of shares redeemed, even if daily
net redemptions exceed the 5%
threshold. Thus, under normal market
conditions, affected money market
funds will not need to assess liquidity
fees if their estimated liquidity costs are
de minimis.
Third, the 5% net redemption
threshold for the application of
mandatory liquidity fees will be applied
on a daily basis, rather than on a pricing
period basis as with the proposed swing
pricing requirement. To the degree that
affected money market funds may
experience systematic intraday patterns
of large redemptions and large
subscriptions, this aspect of the final
amendments may reduce the frequency
with which funds must estimate
liquidity costs, and the frequency with
which intermediaries and service
providers must assess and pass along
the proceeds from liquidity fees.
Further, we recognize that, while not
required, some funds may choose to
reduce the number of NAV strikes they
offer or no longer offer multiple NAV
strikes for operational ease. As
discussed in section II, funds and
intermediaries may also develop other
approaches to address this issue.
Depending on a given fund’s approach,
a redeeming investor may experience a
reduction in its access to liquidity
relative to current practices. In addition,
different approaches may have differing
effects on investors or raise tax or other
considerations. Overall, we believe it is
unlikely that the mandatory liquidity
fee would result in a redeeming investor
being unable to access same-day
liquidity.
The liquidity fee requirement may
impose costs on investors seeking to
redeem shares in funds they no longer
wish to hold, such as in response to
poor fund management, poor
performance, or for other reasons. Under
the final amendments, all redemptions
out of an affected fund on a day the
fund has net redemptions in excess of
5% of net assets, regardless of the cause
for the redemption, will result in a
liquidity fee being calculated and
assessed, unless the fund’s liquidity
costs are de minimis. However, we
believe that such a fee would be
unlikely to affect an investor’s decision
to redeem from a fund the investor no
longer wishes to hold for reasons that
are persistent characteristics of a fund,
such as the ability of an individual fund
manager, and thus is less likely to be
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51469
prone to a sudden wave of redemptions
on a particular day. As such, we believe
that the effect of the liquidity fee
requirement on efficiency via market
discipline will be limited. Moreover, the
liquidity fee framework is intended to
capture any liquidity costs that
redemptions impose on affected funds
and protect non-transacting investors
from dilution costs.
In addition, we believe that the final
liquidity fee framework is a less costly
anti-dilution tool relative to the
proposal. Specifically, as discussed in
section II, the costs of the liquidity fee
framework are expected to be lower
than those of the proposed swing
pricing requirement. For example, many
commenters stated that liquidity fees
would be easier for money market funds
to implement.639 Some commenters
suggested that funds would be able to
leverage and build off of their existing
experience with liquidity fees under the
current regulatory baseline,640 while
commenters indicated that swing
pricing is ill-suited for money market
funds given the general lack of
experience with swing pricing in the
money market fund industry.641
b. Benefits and Costs of Specific Aspects
of the Final Implementation of the
Liquidity Fee Amendments
The final liquidity fee requirement for
institutional prime and institutional taxexempt funds is characterized by six
features. First, if a fund has net
redemptions exceeding 5% on a given
day, the fund must estimate the
liquidity costs associated with those
redemptions and assess a fee (unless the
fee would be de minimis). Second,
funds will use order flow information
available within a reasonable period
after the last NAV strike of the day to
determine whether the 5% net
redemption threshold has been reached.
Third, the liquidity fee amount will be
an estimate of the costs of selling a
vertical slice of the fund’s portfolio to
meet the net redemptions. Fourth, if the
fund cannot determine that amount
based on current market conditions, a
set default fee of 1% will apply. Fifth,
639 See, e.g., Federated Hermes Comment Letter II;
Invesco Comment Letter; SIFMA AMG Comment
Letter; Schwab Comment Letter; IIF Comment
Letter; BlackRock Comment Letter.
640 See, e.g., Federated Hermes Comment Letter II;
Invesco Comment Letter; SIFMA AMG Comment
Letter; Schwab Comment Letter; IIF Comment
Letter.
641 See Morgan Stanley Comment Letter; SIFMA
AMG Comment Letter; IIF Comment Letter;
Federated Hermes Comment Letter I; Federated
Hermes Comment Letter II; Comment Letter of
Senator Pat Toomey (Apr. 12, 2022) (‘‘Senator
Toomey Comment Letter’’); Mutual Fund Directors
Forum Comment Letter; see also Profs. Ceccheti and
Schoenholtz Comment Letter.
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the mandatory liquidity framework
would not cap mandatory liquidity fees
triggered by the 5% net redemption
threshold. Sixth, all non-government
money market funds could assess
discretionary liquidity fees if the board
(or its delegate) determines that fees are
in the best interest of the fund, which
may include situations in which net
redemptions are at or below the 5%
threshold. These features of the final
rule aim to address the liquidity
externalities that redeemers impose on
investors remaining in the fund in a
tailored manner and are expected to
result in reductions in the first-mover
advantage and run risk in institutional
money market funds.
i. Fee Threshold: 5% Net Redemption
Threshold
Under the final amendments, when
daily net redemptions exceed 5% of the
fund’s net assets, funds will be required
to assess a liquidity fee (unless the fee
would be de minimis), with the fee
amount reflecting the fund’s good faith
estimate of the spread, other transaction
(i.e., any charges, fees, and taxes
associated with portfolio security sales),
and market impact costs the fund would
incur if it were to sell a pro rata share
of each security in its portfolio to satisfy
the amount of net redemptions (i.e.,
vertical slice). The final amendments
may, thus, allow funds to recapture the
liquidity costs of large redemptions,
benefitting non-transacting shareholders
and reducing liquidity externalities
redeemers impose on other fund
investors.
The final framework will require
funds to charge liquidity fees that
include the spread cost. Relative to a
model-generated mid price, striking a
NAV at a model-generated bid price
may result in less dilution of existing
shareholders on days with net
redemptions. To the degree that most
funds are using model-generated bid
prices from pricing vendors to strike the
NAV, and assuming that these bid
prices accurately reflect the bid price in
the market, the primary benefit of the
final liquidity fee requirements would
operate through the market impact.
Market impact costs are likely to be
significant during periods in which
funds face large redemptions and shortterm funding markets are under stress,
such that market impact costs are
significant. These are also periods in
which dilution costs and run risk in
affected money market funds, and,
hence, the benefits of liquidity fees, may
be highest.
Based on an analysis of historical
daily redemptions out of institutional
prime and institutional tax-exempt
money market funds between December
2016 and October 2021 and as discussed
in greater detail in section IV.D.4, net
fund flows on most days are low. For
example, Table 6 shows that an average
of 3.2% of the 47 institutional prime
and institutional tax-exempt money
market funds that operated during that
time period would have exceed the 5%
net redemption threshold on any given
day.
TABLE 6—AVERAGE PERCENTAGE OF INSTITUTIONAL MONEY MARKET FUNDS PER DAY ABOVE A GIVEN THRESHOLD
Institutional funds
Net redemption threshold
Average
fund count
Prime Only .......................
Prime + Tax-exempt ........
4%
37
47
5%
3.4
4.4
6%
7%
2.4
3.2
1.7
2.4
8%
1.3
1.8
9%
0.9
1.4
10%
0.8
1.1
0.6
0.9
Source: CraneData.
Importantly, the 5% net redemption
threshold may allow funds to recapture
spread and market impact costs, and
potentially prevent more of the dilution
from large redemptions, as compared to
higher thresholds. For example, as can
be seen from Table 7, an analysis of
CraneData on outflows during the week
ending March 20, 2020, suggests that
approximately 31% of ‘‘fund days’’ 642
for institutional prime and institutional
tax-exempt funds exceeded the 5%
threshold. In contrast, only 11% of the
fund days were in excess of 10%. This
analysis suggests that the final rule’s 5%
threshold would have triggered
mandatory liquidity fees for
approximately one third of the time
during the week of March 20, 2020.
Relative to a higher net redemption
threshold, under the final rule, the
liquidity fee would trigger more often,
potentially recapturing more dilution
costs and having a greater effect on
redemption incentives.
TABLE 7—PERCENTAGE OF FUND DAYS ABOVE A REDEMPTION THRESHOLD DURING THE WEEK OF MARCH 20, 2020
Net redemption threshold
Institutional funds
Fund count
4%
Prime Only .......................
Prime + Tax-exempt ........
35
43
5%
43
39
6%
34
31
7%
31
28
8%
25
21
9%
19
17
10%
16
14
12
11
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Source: CraneData.
Overall, the net redemption threshold
for the mandatory liquidity fee
framework influences the number of
funds that experience significant
redemptions that generally would be
required to assess a liquidity fee during
severe market stress. In the swing
pricing context, several commenters
suggested the proposed 4% redemption
threshold for applying a market impact
factor was too low.643 Below we present
additional analysis to further quantify
the effects of the redemption threshold.
Specifically, we conducted an analysis
of the fraction of funds that would have
dropped below certain liquid asset
thresholds and would have been
required to assess a liquidity fee during
market stress of March 2020, had the
final amendments been in place. This
analysis may shed light on the fraction
642 ‘‘Fund days’’ refers to observations that consist
of the set of daily redemptions for the funds in our
sample. For example, a sample of 35 funds observed
over 5 days produces a sample of 175 fund days.
643 See, e.g., IIF Comment Letter; ICI Comment
Letter.
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of funds that would have been required
to assess liquidity fees under different
redemption thresholds.
First, we combine daily redemption
patterns from 42 public institutional
prime funds during the week ending
March 20, 2020, with 20 equally sized
bins representing different weekly
liquid asset distributions maturing
across days 2 through 5 of the week
(e.g., one such distribution would be
characterized by 30% of weekly liquid
assets maturing on day 2, 25% on day
3, 25% on day 4, 20% on day 5).644 This
combination results in 840 series
corresponding to hypothetical paths of
liquidity during a period of stress.645
Given these paths, we determine the
proportion of days on which a fee
would be triggered as a percentage of
days on which funds experience various
declines in levels of liquidity. For
example, Figure 5 plots the results for
the paths for all funds starting with 25%
in daily liquid assets and 50% in
weekly liquid assets, with the fraction of
Next, we extend a model employed by
one commenter 647 and conduct a
similar analysis for more prolonged
periods of stress, such as 3 to 5 weeks
of sustained redemptions using the
weekly redemptions seen for the crisis
week ending March 20, 2020, which
could occur absent government
intervention. Specifically, we combine
weekly redemption patterns from 42
public institutional prime funds during
the week ending March 20, 2020, with
1,744 public institutional prime
portfolios observed in the monthly Form
N–MFP filings over a period spanning
October 2016 to February 2020.648 The
portfolio assets are binned according to
their maturities (ranging from 1 week to
more than 10 weeks). This combination
results in 73,248 series corresponding to
hypothetical paths of weekly liquidity
during a hypothetical period of
sustained stress.649 All funds enter the
stress period with over 50% in weekly
644 See section III.D.2.a and section III.D.2.a of the
Proposing Release where the Commission used the
same models to quantify the potential effect of
various liquidity thresholds on the probability that
money market funds would confront liquidity
stress.
645 Applying the 42 redemptions paths to
different day 2 through 5 weekly liquid asset
distributions allows us to consider how funds’
liquidity would have fared under alternate
portfolios during the week of Mar. 20, 2020, while
increasing the number of data points for the
analysis.
646 Additional models with higher levels of initial
liquidity produced higher percentages of fund days
for which funds that eventually dropped below a
given threshold would have been required to apply
liquidity fees as a function of the net redemption
threshold.
647 See ICI Comment Letter.
648 See section IV.D.2.a for additional model
details. To address the robustness of the results,
different model scenarios, which removed
redemption patterns associated with funds with
weekly liquid assets below 35% that may have
exasperated redemptions, did not change the result
significantly.
649 The redemption thresholds are adjusted so
that weekly outflows are comparable to daily
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51471
days funds would generally have been
required to assess a liquidity fee on the
vertical axis, as a function of various
levels for the net redemption threshold
on the horizontal axis.646
Figure 5—One Week of Stress:
Percentage of Fund Days That Drop
Below a Given Daily Liquid Asset
Threshold That Would Have Been
Required To Apply a Liquidity Fee as
a Function of the Redemption
Threshold
liquid assets. Figure 6 plots the results
for a 3-week stress period, while Figure
7 plots the results for a 5 week stress
period.650
Figure 6—Three Weeks of Stress:
Percentage of Weeks During Which
Funds That Dropped Below a Given
Weekly Liquid Asset Threshold Would
Have Been Required To Apply a
Liquidity Fee as a Function of the
Redemption Threshold
redemption thresholds. For instance, a 4% daily
outflow sustained for a five day trading week
implies a weekly outflow of about 18.5%.
650 Since these figures chart weekly redemption
rates, this analysis does not capture instances where
net redemptions exceed a given redemption
threshold on a single day, but the average weekly
net redemption does not. Additional models
extending the stress period out to 10 weeks
produced lower percentages of weeks for which
funds that dropped below a given threshold would
have been required to apply liquidity fees as a
function of the net redemption threshold.
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Figure 7—Five Weeks of Stress:
Percentage of Weeks During Which
Funds That Dropped Below a Given
Weekly Liquid Asset Threshold Would
Have Been Required To Apply a
Liquidity Fee as a Function of the
Redemption Threshold
The above analyses show that, as the
net redemption threshold rises, the
frequency with which funds
experiencing severe declines in their
liquid assets would have been required
to apply a liquidity fee declines. This
analysis may be interpreted as
quantifying the impact of the
redemption threshold on how many
funds with various levels of liquidity
would have been required to apply a
liquidity fee had the final amendments
been in place under various durations of
stress.
Alternatively, we can examine the
impact of the redemption threshold by
analyzing fund outflows during the
worst days of market stress in March
2020. This analysis may shed light on
how the redemption threshold
influences the scope of the liquidity fee
requirements on days with the largest
outflows out of all funds. Specifically,
Table 8 and Figure 8, using CraneData,
quantify the average percentage of fund
days for which outflows exceeded
various threshold levels over multiple
time periods, including the worst 3, 5,
and 10 days, measured by aggregate net
redemptions, in March 2020.
Average
fund count
Worst 3 days ....................
Worst 5 days ....................
Worst 10 days ..................
March 2020 ......................
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35
35
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48
43
34
19
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38
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TABLE 8—PERCENTAGE OF FUND DAYS FOR INSTITUTIONAL PRIME FUNDS ABOVE A GIVEN THRESHOLD
Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
51473
TABLE 8—PERCENTAGE OF FUND DAYS FOR INSTITUTIONAL PRIME FUNDS ABOVE A GIVEN THRESHOLD—Continued
Dates
Net redemption threshold
Average
fund count
5 years Excl. March 2020
4%
37
5%
3.2
6%
7%
2.2
1.6
8%
1.2
9%
0.9
10%
0.7
0.5
Source: CraneData.
Figure 8—Percentage of Fund Days for
Institutional Prime Funds Above a
Given Threshold
The final net redemption threshold
impacts the number of funds that will
be required to calculate liquidity fees
under both normal and stressed
conditions when faced with large
outflows. Outflows in excess of the 5%
net redemption threshold occur with
some regularity even outside of stressed
market environments. Accordingly, we
consider the extent to which various
redemption thresholds were crossed in
recent years outside of the March 2020
stress event. We first conduct this
analysis at the fund level for each year
from 2017 to 2020. Table 9 and Figure
9, using CraneData, report the
percentage of funds that, in a given year,
would have exceeded a given
redemption threshold on at least one
day. This analysis helps inform the
extent to which funds would have had
to calculate a liquidity fee at least once
in a given year had the final liquidity
fee framework been in place and, thus,
reflecting associated fixed costs.
TABLE 9—PERCENTAGE OF INSTITUTIONAL PRIME FUNDS THAT WOULD HAVE EXCEED THE NET REDEMPTION THRESHOLD
AT LEAST ONE DAY IN A GIVEN YEAR
Year
2017
2018
2019
2020
Net redemption threshold
Average
fund count
.................................
.................................
.................................
.................................
4%
33
31
32
35
5%
79
84
72
100
6%
79
81
69
100
7%
76
74
63
97
8%
70
68
53
89
9%
64
58
47
83
10%
55
52
38
74
52
42
31
63
Source: CraneData.
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Figure 9—Percentage of Institutional
Prime Funds That Would Have Exceed
the Net Redemption Threshold at Least
One Day in a Given Year
51474
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Next, Table 10 and Figure 10, using
CraneData, report the distribution of
fund day percentages that would have
exceeded a given redemption threshold
over 5 years (excluding March 2020).
This analysis reflects the distribution of
period when liquidity costs are likely
very low or zero.651 For example, net
redemptions exceeded the 5%
redemption threshold on 7.1% of fund
days during this period.
percentages on which the fee would
have been charged industry-wide (as a
percentage of fund-days over the 5-year
period) and, thus, reflects the variable
cost associated with crossing the
redemption threshold outside of a crisis
TABLE 10—DISTRIBUTION OF FUND DAYS PERCENTAGES ON WHICH A FEE WOULD HAVE BEEN IMPLEMENTED OVER 5
YEARS
[Excluding March 2020]
Net redemption threshold
Percentile
0%
Max ........................................
75th .......................................
Median ...................................
25th .......................................
Min .........................................
1%
74
53
49
46
22
2%
32
27
20
8.1
1.0
3%
21
15
10
3.7
0.8
4%
14
8.7
5.5
1.5
0.4
5%
9.0
5.3
3.3
1.0
0.0
6%
7.1
3.8
2.2
0.5
0.0
7%
5.2
2.6
1.3
0.5
0.0
8%
4.4
1.7
1.0
0.3
0.0
9%
3.1
1.1
0.9
0.2
0.0
10%
3.0
1.0
0.5
0.0
0.0
2.4
0.9
0.3
0.0
0.0
Source: CraneData.
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observations. A value on the Max curve (red line)
of around 7.1% on the y-axis for a 5% threshold
on the x-axis then means that net redemptions
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exceeded 5% threshold on 7.1%-or 87 (= 7.1% ×
1,228) in total—fund days.
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651 To illustrate the analysis, we observed around
37 funds over 1,228 trading days over five years. We
thus have around 45,436 (= 37 × 1,228) fund-day
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Figure 10—Distribution of Fund Days
Percentages on Which a Fee Would
Have Been Implemented Over 5 Years
(Excluding March 2020)
51475
In addition, large fund outflows may
be seasonal. To quantify potential
seasonality in fund outflows, we
analyzed daily data from CraneData
covering outflows out of institutional
prime and institutional tax-exempt
funds between December 1, 2016, and
October 28, 2021.652 The discussion
below shows that there are significant
outflow patterns by day of week and day
of month among others. First,
institutional prime funds tend to have
more large outflows on Fridays, while
institutional tax-exempt funds tend to
Second, Figure 12 below shows that
the last day of the month accounts for
some of the largest outflows in excess of
5%.
Figure 12—Percentage of Funds With
Outflows Above a Given Threshold as
a Function of Days From the End of the
Month
The above patterns are consistent
with institutional investors relying on
money market funds as a cash
management tool (for example, to meet
payroll, tax, and other obligations).
Moreover, large fund outflows may be at
least partly seasonal and unrelated to
stress in underlying asset markets.
Under the final rule, outflows in excess
of 5% would trigger the compliance
costs related to the liquidity fee
requirement and the market impact
factor analysis on each day with large
outflows.
As discussed in the prior section, the
implementation of liquidity fees is
expected to give rise to compliance
burdens and other costs on money
market funds. These costs may be
mitigated by four factors. First, many
affected money market funds may
already be using bid prices to strike the
NAV. Second, the rule does not require
a daily recalculation of market impact
factors. As discussed in section II, in
order to establish a good faith estimate
of the market impact of selling a vertical
slice of the fund’s portfolio to meet net
redemptions, a fund may document its
estimates of the effect of selling different
amounts of its portfolio securities on
each security’s price into pricing grids
for different market conditions (such as
periods of credit stress, liquidity rate
stress, interest rate stress, or a
combination of such stresses). The fund
would refer to the appropriate grid that
reasonably approximates current market
conditions on days when its net
redemptions exceed 5% to identify the
market impact for the assumed amount
to be sold under the required vertical
652 This analysis uses daily flows reported in
CraneData on 1,228 days between Dec. 2016 and
Oct. 2021. As of Sept. 2021, CraneData covered 87%
of the funds and 96% of total assets under
management. Flows at the class level were
aggregated to the fund level. Flows of feeder funds
were aggregated for an approximation of flows for
the corresponding master fund. For the purposes of
this seasonality analysis, outflows during Mar. 2020
were omitted, because they may have been driven
by stress and the purpose of the analysis is to
examine seasonality of routine fund flows under
normal market conditions.
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have more large outflows on Thursdays,
as can be seen from Figure 11.
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Figure 11—Percentage of Institutional
Prime Funds With Outflows Above a
Given Threshold as a Function of the
Day of the Week
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slice analysis. This may reduce the
marginal costs of market impact factor
calculations on days when funds
experience net redemptions above 5%.
Third, as discussed in section II, funds
would not be required to perform a
security-by-security pricing analysis,
and would be able to pool similar
securities into categories for purposes of
the market impact analysis. Fourth, as
discussed in section II, under normal
market conditions, the calculated
liquidity fee amount generally is likely
to be de minimis, mitigating the costs to
redeeming shareholders on days of
predictably large outflows when market
conditions are normal and markets
impacts (and, thus, liquidity
externalities) are near zero.
Finally, the Commission has
considered how the net redemption
threshold for the mandatory liquidity
fees may interact with the final 25%
daily and 50% weekly liquid asset
requirements. Specifically, Table 11
below illustrates a theoretical
relationship between constant daily
outflow and the implied weekly outflow
after 5 days. If a fund experiences 5
consecutive days of 5% outflows, it
would experience cumulative 23%
outflows by the end of the week. By
contrast, if a fund experiences 5
consecutive days of 10% outflows, it
would experience cumulative 41%
outflows by the end of the week. While
the final 50% weekly liquid asset
requirement could be enough to cover
the outflows for that week, depending
on the maturity structure of weekly
liquid assets, the fund may not have
enough liquidity to cover redemptions
over the course of the week. In that case,
the liquidity fee may be useful to
recapture liquidity costs and disincentivize any redemptions driven by a
first-mover advantage as the wave of
redemptions grows and the markets
come under stress. Notably, this is a
numerical example, and future patterns
of redemptions under stress and
portfolio maturity structures of affected
funds, particularly the maturity
structure of weekly liquid assets, as well
as the way in which investors and
money market funds respond to various
provisions of the final rule, may
influence the ability of funds to absorb
redemptions out of daily or weekly
liquidity. However, this analysis
suggests that a higher redemption
threshold for liquidity fees may reduce
the amount of dilution costs recaptured
by funds during redemption waves.
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TABLE 11—CUMULATIVE WEEKLY OUT- assessed to their redemption. Further, to
FLOWS AFTER 5 DAYS OF OUT- the degree that institutional investors
FLOWS
Cumulative
weekly
outflows
(%)
Daily outflows
4% .............................................
5% .............................................
6% .............................................
7% .............................................
8% .............................................
9% .............................................
10% ...........................................
18
23
27
30
34
38
41
Overall, the 5% net redemption
threshold may result in some instances
of the imposition of fees during normal
market conditions, and funds would be
required to estimate liquidity fees when
the liquidity costs of large redemptions
are very small. However, the 5% net
redemption threshold may enhance the
benefits of liquidity fees for nontransacting investors during redemption
waves and under stressed conditions,
which may serve to reduce self-fulfilling
run incentives, protect non-transacting
investors, and improve the resilience of
money market funds.
The Commission proposed a swing
pricing requirement, under which, if net
redemptions exceeded 4% divided by
the number of pricing periods per day,
the swing factor would be required to
include not only the spread costs and
other transaction costs, but also good
faith estimates of the market impact of
net redemptions. The Commission
received comments stating that the
threshold could act as a ‘‘bright line’’
that could actually lead to runs.653
While the final amendments replace the
proposed swing pricing requirement
with a liquidity fee framework and
utilize a higher 5% net redemption
threshold for the imposition of liquidity
fees, the Commission has considered
whether such a threshold in the
liquidity fee framework could lead to
run risk.
However, several aspects of the final
rule are intended to mitigate any such
incentives. The net redemption
threshold for mandatory liquidity fees is
based on same-day fund flows. As
discussed in the prior section, we
believe that the net redemption
threshold is less susceptible to run risk
than a weekly liquid asset threshold.
Moreover, because mandatory liquidity
fees are based on same-day net
redemptions, an investor’s decision to
redeem directly influences the
probability that a liquidity fee will be
653 See, e.g., IIF Comment Letter; Federated
Hermes Comment Letter I.
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expect other investors have similar
expectations of net redemptions from a
fund, the incentive to strategically
redeem shares ahead of other investors
is diminished. Finally, under the final
rule and as discussed in greater detail in
section II.B and section IV.C.4.b.vi,
funds may assess discretionary liquidity
fees on days when net redemptions are
at or below the 5% threshold. To the
degree that fund boards (or their
delegates) determine to apply
discretionary fees, this element of the
final rule may further reduce the ability
of redeeming investors to strategically
redeem ahead of the likely imposition of
a liquidity fee. However, we recognize
that funds may face disincentives to
apply these liquidity fees and money
market fund boards have not historically
applied liquidity fees when they had the
discretion to do so, which may reduce
the effectiveness of this mitigating
factor.
ii. Fee Threshold: Using Fund Flows
Received Within a Reasonable Period
After the Last NAV Strike Each Day
In response to the proposed swing
pricing requirement for money market
funds, some commenters discussed
difficulties in obtaining timely flow
information to enable same-day NAV
adjustments. While the final rule
imposes a liquidity fee framework,
rather than swing pricing, comments
concerning flow timing and flow
aggregation practices by money market
funds informed the design of the
redemption threshold for the liquidity
fee framework. Specifically, some
commenters indicated that institutional
money market funds that offer same-day
settlement may receive some flows
overnight that will settle on a T+1 basis,
and thus some of these funds do not
have final order flow information until
the following morning. One commenter
stated that one of its former institutional
prime funds offered same-day
settlement and therefore imposed order
cut-off times, and these cut-off times
were the same as the NAV strike
time.654 Another commenter stated that
its privately offered money market
funds, in which other funds invest, do
not have sufficient flow data because
the flow data from the underlying
investing funds is only available on a
T+1 basis.655 Another commenter stated
that, over a representative period, one of
its institutional prime funds received
35.7% of trade notices after the fund’s
NAV calculation time of 3 p.m. ET, with
654 See,
655 See,
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these trades receiving that day’s NAV,
but settling on a T+1 basis.656 A few
commenters requested that the
Commission provide guidance that if a
NAV is adjusted based on reasonable
inquiry and estimates, a later
determination that a fund did not have
net redemptions for the pricing period
would not constitute a NAV error.657
As discussed in section II,
institutional money market funds often
impose order cut-off times to be able to
offer same-day settlement, which
requires that funds complete Fedwire
instructions before the Federal Reserve’s
6:45 p.m. ET Fedwire cut-off time.
Therefore, many institutional funds
would have a sizeable portion of their
daily flows within a reasonable period
of time after the last pricing time of the
day. However, complete flow
information may not always be available
to affected money market funds on the
same day, and the availability of flow
information may depend on fund
intermediaries, how the fund set up
custodian and omnibus accounts, and
the timing for batching of orders and
transmitting them, among other things.
For example, funds may receive
cancellations, or corrections of
intermediary or investor errors, which
modify the flows. In addition, funds or
some fund share classes may settle some
transactions on T+1 and still receive
flow information from intermediaries
that is eligible to receive the NAV as of
the last pricing time. Thus, there will be
circumstances in which the flow
information a fund uses to determine
whether it has crossed the net
redemption threshold does not reflect
the fund’s full flows for that day.
As discussed in section II.B.2.a, funds
would be able to use flows received
within a reasonable period after the last
pricing time to determine whether the
fund has crossed the 5% threshold. To
the extent that a fund received
additional flow information after
determining that it crossed the 5%
threshold, but before applying a
liquidity fee, the fund could take the
additional flow information into
account when determining the amount
of the liquidity fee. This element of the
final liquidity fee framework will enable
funds to assess liquidity fees without
requiring costly changes to
intermediaries’ technological systems
and order batching, validation, and
transmission practices, earlier order
cutoff times, fund distribution networks,
or the reduction in the number of NAV
strikes a day funds are able to offer.
656 See,
e.g., Federated Hermes Comment Letter II.
e.g., Capital Group Comment Letter; IDC
Comment Letter.
Moreover, as a result of this element
of the final rule, liquidity fees will be
assessed based on same-day outflows,
rather than the previous day’s flows.
Information about historical flows may
be generally available in, among others,
subscription databases and other data
feeds, while same-day flows are not
predictable by investors at the time they
place their orders. This reduces the risk
that investors would be able to predict
whether a liquidity fee will not apply on
a given day and time redemptions
accordingly to avoid the liquidity fee. In
addition, under the final rule, redeemers
will be charged for the liquidity costs of
their redemptions, rather than for the
costs of redemptions made by other
investors on the previous day. Finally,
this element of the final rule may allow
funds to recapture more of the dilution
costs of large redemptions on a given
day, regardless of whether a fund
experiences a wave of redemptions or
individual days of large redemptions.
Thus, this element of the final rule may
enhance the benefits of the liquidity fee
framework for dilution costs and run
incentives.
Fund flow information that is
available within a reasonable period
after the last pricing period of the day
may under or overestimate ex post net
redemptions on a given day. The
direction and magnitude of the
difference between ex ante estimated
fund flows and ex post fund flows
would depend on intraday redemption
and subscription patterns of fund
investors, a fund’s reliance on various
distribution channels, the timing of
intermediaries’ batch processing orders,
including omnibus accounts, and the
propensity of intermediaries and
investors to preview delayed
redemptions or subscriptions to fund
managers. Thus, this element of the
final rule may result in some instances
of liquidity fees not being charged based
on available flows when they would
have been based on ex post flows, and
vice versa. While institutional investors
may theoretically have incentives to
delay the submission of large
redemption orders after the NAV is
struck to reduce the likelihood that a
liquidity fee is charged, an institutional
investor must submit its orders before
the fund calculates its NAV to receive
that price.658 In addition, intermediaries
face no such incentives. Crucially,
intermediaries commonly have cutoff
times to receive same day settlement,
and it is intermediary technological
systems and flow aggregation and
transmission practices that may drive
when funds receive orders. This may
657 See,
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51477
reduce the risk of strategic delays in the
submissions of redemption flows.
Moreover, as discussed in the previous
sections, the Commission expects that
any liquidity fees under normal market
conditions will be very low, further
reducing incentives for strategic order
flow delays. Finally, as discussed in
greater detail below, the final rule will
also allow funds to charge discretionary
fees even if same day outflows are
below the 5% threshold, further
reducing certainty about the imposition
of liquidity fees around the threshold
and mitigating the risk of strategic
redemptions or order flow delays.
The final rule will require affected
funds to apply a liquidity fee to all
shares redeemed on the day the
mandatory liquidity fee is triggered,
which may impose some costs on funds
currently offering multiple NAV strikes
per day. Specifically, investors may
redeem in earlier pricing periods, before
the fund knows that it has crossed the
net redemption threshold triggering the
liquidity fee requirement for the day. In
such circumstances, funds offering
multiple NAV strikes would be required
to develop a method for applying the fee
to shares redeemed in earlier pricing
periods on that day. Section II.B.2.a
discusses various approaches funds may
take to address this issue. In addition,
some funds may choose to reduce the
number of NAV strikes they offer or no
longer offer multiple NAV strikes for
operational reasons. Depending on how
different funds respond to these
amendments, redeeming investors may
experience a reduction in their access to
liquidity relative to the current baseline.
However, the mandatory liquidity fees
are unlikely to result in a redeeming
investor being unable to access sameday liquidity.
iii. Fee Amount: Costs of Selling the
Pro-Rata Share of Fund Holdings
The costs and benefits of the final
rule’s requirements concerning the fee
amount are informed by two sets of
considerations.
First, liquidity fees charged by a
money market fund are intended to
make investors indifferent between
selling shares in the fund and selling the
underlying assets if they were held by
investors directly. The liquidity fee is
not intended to disproportionally
discourage sales out of money market
funds relative to underlying assets, but
rather to reduce dilution that may arise
out of the fund structure.
Second, smaller fees may preserve a
first-mover advantage in redemptions
out of money market funds suffering
from short-term stress, while larger fees
may lock investors into failing funds if
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underlying portfolio holdings do not
retain their value in the medium and
long term. If a liquidity crunch is
temporary and underlying fund
holdings retain their value in the
medium and long term (such as during
March 2020, when issuers were not
defaulting and redemptions were driven
by a dash for cash), funds lose value
primarily when they sell securities into
stressed markets to meet redemptions.
If, however, underlying fund holdings
lose their value in the medium- and
long-term, investors may run because of
uncertainty about the extent of their
fund’s exposures to defaulting assets
(such as during the 2008 financial
crisis). To the degree that money market
fund investors face uncertainty about
the underlying source of stress, they
have an incentive to redeem in a flight
to safety. In this setting, a fee that makes
money market fund investors indifferent
between redeeming or remaining in the
fund is ex-post efficient in cases of
liquidity stress, but ex-post inefficient
in the latter scenario, as it is more likely
to incentivize investors to stay in a
failing fund. In sum, higher fees may
slow redemptions out of money market
funds, but the ex-post efficiency of such
effects may depend on the nature of the
crisis.
Under the final amendments, if an
affected fund experiences net
redemptions of more than 5% on a
given day, it would be required to assess
a liquidity fee that includes not only the
spread costs and other transaction costs,
but also good faith estimates of the
market impact of sales to meet net
redemptions. To the extent funds are
able to estimate or forecast market
impact costs accurately, the requirement
to assess the market impact of sales to
meet net redemptions when daily net
redemptions exceed 5% would result in
redeeming investors bearing not only
the direct spread and transaction costs
from their redemptions, but also the
impact of their redemptions on the
market value of the fund’s holdings.
This may allow shareholders remaining
in the fund to capture more of the
dilution cost of redemptions, which
includes not only direct transaction
costs and near-term price movements,
but the impact of the redemptions on
the fund’s portfolio as a whole.
However, the magnitude of this benefit
may be reduced by the fact that the final
amendments would only require the
imposition of liquidity fees when an
affected fund’s daily net redemptions
exceed 5%.659
659 See section IV.C.4.b.i. and section IV.D.4. for
a quantitative analysis of the frequency with which
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Importantly, the mandatory liquidity
fee framework will require funds to
calculate the liquidity fee as if the fund
were selling the pro-rata share of all of
the fund’s holdings, rather than, for
example, assuming the fund would
absorb redemptions out of daily liquid
assets. If a fund were to absorb large
redemptions out of daily or weekly
liquid assets—and their ability to do so
may be enhanced by the final
amendments’ increased liquidity
requirements—the immediate
transaction costs imposed on the funds
would be lower. However, the fund
would have less remaining daily and
weekly liquidity and transacting
shareholders would be diluting
remaining investors in a manner not
captured by estimated transaction costs.
Thus, this aspect of the final
amendments will make redeeming
investors bear not just the immediate
costs of covering redemptions, but also
the costs of rebalancing the fund
portfolio to the pre-redemption levels of
liquid asset holdings.
However, this element of the final
rule will require redeeming
shareholders to bear liquidity costs
larger than the direct liquidity costs
they may impose on the fund. Some
commenters stated that this approach is
fundamentally inconsistent with how
money market funds operate because,
given the nature of money market fund
holdings, money market funds typically
absorb redemptions out of daily and
weekly liquid assets.660 However, assets
other than daily and weekly liquid
assets—such as municipal securities
and commercial paper that do not
mature in the near term—may become
illiquid in times of stress and may need
to be held to maturity by the fund. Thus,
the realized transaction costs of most
redemptions may be zero as funds
absorb them out of daily liquidity, while
the true liquidity costs of redemptions
may consist of the depletion of daily
and weekly liquidity during times of
stress (when rebalancing is especially
expensive) rather than the sale of
illiquid assets. While there is a lack of
research on portfolio rebalancing by
money market funds, some research in
a parallel open end fund context shows
that funds may optimally rebuild cash
buffers after outflows to prevent future
forced sales of illiquid assets.661 To the
affected money market funds may be expected to
exceed the 5% daily net redemption threshold.
660 See, e.g., ICI Comment Letter; State Street
Comment Letter.
661 See, e.g., Yao Zeng, A Dynamic Theory of
Mutual Funds and Liquidity Management (ESRB
working paper no. 2017/42, Apr. 2017), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_
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degree that money market funds may
also seek to rebalance liquid assets after
large outflows, this may suggest that
liquidity costs should be measured
using a vertical slice assumption due to
the cost of rebuilding liquidity after
redemptions that deplete liquid assets.
To the degree that this aspect of the
final amendments could impose a cost
on redeemers that is larger than the
realized trading cost of their
redemptions, it may reduce the
attractiveness of affected money market
funds to some investors. Importantly,
when direct trading costs of
redemptions are zero because
redemptions are absorbed out of weekly
liquid assets, redemptions still dilute
non-transacting investors by leaving the
fund depleted of liquidity. This aspect
of the final amendments would require
redeemers to internalize a greater share
of the liquidity externalities that they
impose on non-transacting investors. In
addition, liquidity costs paid by
redeemers under the liquidity fee
requirement would flow back to
remaining shareholders, disincentivizing redemptions and reducing
the first-mover advantage during times
of stress. This may attract longer-term
investors into affected money market
funds.
The Commission has also received
comments that market impact factors
may be too difficult or costly to estimate
and that this may give rise to errors in
assessed fees.662 As discussed in section
II, the final rule is tailored to address
these concerns and reduce such costs in
six ways. First, section II provides
guidance on one method funds could
use to make a good faith estimate of the
costs of selling a vertical slice of the
fund’s portfolio to meet net redemptions
using pricing grids relying on historical
data. Second, consistent with the
proposal, the final rule permits a fund
to estimate liquidity costs for each type
of security with the same or
substantially similar characteristics,
rather than analyze each security
separately. Third, as discussed in
section II and consistent with the
proposal, it would be reasonable to
assume a market impact of zero for the
fund’s daily and weekly liquid assets,
since a fund could reasonably expect
such assets to convert to cash without
a market impact to fulfill redemptions
(e.g., because the assets are maturing
shortly).663 Fourth, since market impact
costs of a transaction can be difficult to
id=3723389 (retrieved from SSRN Elsevier
database).
662 See, e.g., ICI Comment Letter.
663 See Proposing Release, supra note 6, at section
II.B.1.
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estimate with certainty before a
transaction occurs, the rule requires
good faith estimates of these costs. Fifth,
the final rule provides that if an
institutional fund makes a good faith
estimate that the amount of the liquidity
fee would be below one basis point of
the value of the shares redeemed, then
the fund is not required to charge a
liquidity fee.664 Sixth, where a fund is
unable to produce good faith estimates
of the costs of selling a vertical slice, for
example, when underlying security
markets are frozen and transactions are
scarce, the fund would use a default
liquidity fee, as discussed in greater
detail in the section that follows.
iv. Fee Amount: Default Fee When the
Costs of Selling the Pro-Rata Share of
Fund Holdings Cannot Be Calculated
As a baseline matter, rule 2a–7
includes a default liquidity fee
provision for non-government money
market funds with weekly liquid assets
falling below 10% of their total assets.
Under the final rule, if affected money
market funds are unable to estimate the
costs of selling the pro-rata share of
fund holdings in good faith and
supported by data, they would assess a
default liquidity fee of 1%.
In the swing pricing context, the
Commission received comments about
difficulties in calculating transaction
costs and market impact factors under
tightly compressed timelines.665 In
addition, one commenter referenced a
lack of, or narrow, bid-ask spreads,
making calculation particularly
difficult.666 Another commenter
questioned the feasibility of estimating
market impact using the vertical slice
approach.667
While the final rule imposes a
liquidity fee framework, rather than a
swing pricing requirement, the
Commission has considered how
difficulties in calculating the costs of
selling the pro-rata share of fund
holdings may impact operational
feasibility of the liquidity fee
requirement. Specifically, market
impact factors and spread costs may be
difficult to estimate precisely when
many of the assets money market funds
hold lack a liquid secondary market.
This effect may be particularly acute in
times of stress in short-term funding
markets when transaction activity may
freeze and trade and quotation data
necessary for an accurate estimate of
market impact factors may not be
664 Amended
rule 2a–7(c)(2)(iii)(D).
e.g., SIFMA AMG Comment Letter;
BlackRock Comment Letter; Capital Group
Comment Letter.
666 See, e.g., BlackRock Comment Letter.
667 See, e.g., ICI Comment Letter.
665 See,
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available. The ability of affected money
market funds to assess a default
liquidity fee under the final rule may
enable affected money market funds to
overcome these operational difficulties.
Thus, the default liquidity fee may serve
as an additional tool for affected money
market funds facing redemption waves,
and may reduce dilution of nontransacting shareholders and the firstmover advantage in redemptions.
The default liquidity fee is fixed at
1% and does not vary depending on the
size of redemption flows, conditions in
short-term funding markets, or
characteristics of a fund’s portfolio
holdings. Thus, the default liquidity fee
may, under some circumstances, exceed
the liquidity cost of redemptions, which
poses a cost to redeemers; or fall short
of accurately capturing the liquidity cost
of redemptions, thereby failing to
recapture the dilution costs of
redemptions faced by non-transacting
shareholders. However, to the degree
that discounts experienced by ultrashort bond exchange traded funds in the
peak market stress of March 2020 may
serve as a proxy for liquidity costs of
money market funds, the liquidity fee is
generally consistent with the range of
money market fund liquidity costs
during the same period.668 Importantly,
the default liquidity fee is not intended
to precisely measure the liquidity cost
of redemptions, but may enhance the
ability of affected funds facing large
redemptions to manage their liquidity in
times of stress, reduce dilution costs
borne by non-transacting investors, and
decrease run risk. The final rule does
not alter the amount of the default
liquidity fee currently in effect under
rule 2a–7, but provides for a different
scope of application of the default fee
that is not tied to publicly observable
levels of weekly liquid assets.
To the degree that investors may
perceive the default liquidity fee to be
large, they may seek to redeem out of
affected money market funds earlier
during the onset of stress, which may
accelerate redemptions during milder
periods of stress in short-term funding
markets. However, affected money
market funds may have strong
reputational incentives to compete on
fees and may limit the application of the
default fee to rare times of severe market
stress. Importantly, the baseline
application of the default fee under rule
2a–7 is tied to a fund’s publicly
observable level of weekly liquid assets,
v. Fee Caps
The final rule would not cap
mandatory liquidity fees triggered by
the 5% net redemption threshold.
Under the final rule, if an affected
fund’s good faith estimate of the
liquidity cost of large redemptions,
including spread and other transaction
costs as well as market impact factors of
the hypothetical sale of a pro-rata share
of portfolio holdings, exceeds, for
instance 2%, that larger fee would be
assessed to redeeming investors on days
on which a fund experiences net
redemptions in excess of 5%. This
element of the final rule will allow
funds to recapture a greater share of the
dilution costs of large redemptions and
may reduce corresponding run risk,
especially in times of stress.
Some commenters suggested that a
liquidity fee framework should include
a cap on liquidity fees,669 for example,
because a cap could provide investors
with confidence that a fee would not
exceed a specific threshold.670 We
acknowledge that the possibility of a
large uncapped liquidity fee being
applied to redemptions may reduce the
attractiveness of affected money market
funds for some investors. However, the
possibility of large uncapped fees may
also attract other investors into money
market funds because non-transacting
shareholders benefit from larger
liquidity fees being charged to
redeemers.
Commenters indicated that it is
difficult to imagine any scenario where
the cost of liquidity would exceed 2%,
given the nature of money market fund
portfolio holdings and limits on
weighted average maturity and weighted
average life, as well as historical price
movements within affected funds.671
We agree that funds are unlikely to
charge fees in excess of 2% for three
primary reasons. First, given the
portfolio composition of affected money
668 See Anadu, Kenechukwu, et al., Swing Pricing
Calibration: A Simple Thought Exercise Using ETF
Pricing Dynamics to Infer Swing Factors for Mutual
Funds (Jan 21, 2022), available at https://ssrn.com/
abstract=4014689 (retrieved from SSRN Elsevier
database).
669 See, e.g., ICI Comment Letter; Morgan Stanley
Comment Letter; SIFMA AMG Comment Letter; see
also Federated Hermes Board Comment Letter.
670 See, e.g., Federated Hermes Comment Letter I;
Western Asset Comment Letter.
671 Id.
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whereas liquidity fees under the final
rule are triggered by same day net
redemptions and a fund’s assessment of
the liquidity costs of such redemptions.
This is expected to reduce run risk in
affected funds relative to the current
baseline. Crucially, any liquidity fee,
including the default fee, accrues to the
fund’s non-transacting shareholders and
enhances fund performance, which can
incentivize some investors to invest in
affected money-market funds,
particularly during times of stress.
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market funds, market impact factors are
extremely unlikely to exceed 2% even
under times of severe stress. For
example, as discussed in section
IV.C.4.a, during the market stress of
March 2020, commercial paper spreads
generally ranged between 20 and 50
basis points across maturities, far lower
than the 2% level. As another example,
one commenter indicated that their
transaction costs during the crisis week
of September 2008 were less than
0.6%.672 Second, if short-term funding
markets are under severe stress, there
may be little transaction activity and
funds may be unable to provide good
faith estimates of the costs of selling the
pro-rata slice of the fund portfolio,
leading them to charge the default fee of
1%. Third, if funds are able to provide
good faith estimates, but there is
significant uncertainty about the costs of
the vertical slice, for example, during
severe stress, funds may face incentives
from private party litigation to charge
the default fee.
Thus, large liquidity fees (potentially
in excess of 2%) are likely to be charged
only when funds do not have sufficient
liquid assets to absorb redemptions, are
unable to roll down assets into weekly
liquid assets given expected future
outflows, and have transaction data
from liquidating portfolio securities to
support a higher fee. If a fund board’s
(or its delegate’s) good faith estimates of
liquidity costs do exceed 2%, then the
lack of a cap for mandatory liquidity
fees will allow funds to recapture more
of the dilution of redemptions and
manage liquidity to meet future
redemptions. This aspect of the final
rule may provide affected funds with
flexibility to impose larger fees in crisis
conditions when liquidity costs are
high, which may enhance their
resilience to stress.
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vi. Discretionary Fees
Some commenters suggested that fund
boards should have discretion to impose
liquidity fees when in the best interest
of the fund and its investors.673 The
final amendments retain a discretionary
liquidity fee provision, allowing nongovernment funds to charge
discretionary liquidity fees when the
672 See, e.g., Comment Letter of Fidelity
Investments on File No. S7–03–13 (Apr. 22, 2014),
available at https://www.sec.gov/comments/s7-0313/s70313-339.pdf (Exhibit 4). Importantly, this is
an estimate of actual transaction costs incurred by
the market participant and does not include market
impact or the vertical slice assumption.
673 See, e.g., ICI Comment Letter; Schwab
Comment Letter; Federated Hermes Comment Letter
I; Federated Hermes Comment Letter II; Federated
Hermes Board Comment Letter; Invesco Comment
Letter; SIFMA AMG Comment Letter; Americans for
Tax Reform Comment Letter.
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majority of the fund board of directors
(or its delegate) determine it to be in the
best interest of the fund. The
discretionary liquidity fee provision
provides more discretion to fund boards
(or their delegates) for determining
when to impose fees and in what
amount in comparison to the mandatory
liquidity fee provision. While this
discretion is generally consistent with
the baseline, the final rule removes the
regulatory weekly liquid asset
threshold, which created incentives to
redeem as funds approached the
regulatory weekly liquid asset
threshold.
This aspect of the final rule may
involve several benefits. First, it may
provide a broader scope of money
market funds, including retail and
government funds, flexibility in using
liquidity fees as an anti-dilution tool.674
Moreover, it may allow institutional
prime and institutional tax-exempt
funds to charge liquidity fees earlier in
the redemption wave or when liquidity
costs of even smaller redemptions are
particularly high. Thus, it may enhance
the ability of money market funds to
manage their liquidity and protect nontransacting shareholders by reducing the
dilution costs of redemptions that they
bear. Second, it may reduce the ability
of redeeming investors to predict
whether a liquidity fee would apply on
any given day and strategically time
redemptions around the likely
application of liquidity fees. To the
degree that affected money market funds
will compete on liquidity fees and may
face collective action problems,
discretionary liquidity fees may be
infrequently applied, reducing the
above benefits of this element of the
final amendments.
Since liquidity fees charged to
redeemers benefit non-transacting
shareholders and may enhance reported
fund performance, some fund managers
may be incentivized to frequently
charge discretionary liquidity fees.
However, this incentive may be
dampened or altogether outweighed by
competitive pressures on reported fees
and the sensitivity of fund flows to fees.
In addition, the frequent assessment of
discretionary fees would increase the
variability of realized returns for
redeemers and reduce the attractiveness
of such funds for investors that rely on
money market funds for cash
management, which can create a
counterbalancing market disincentive to
the frequent application of discretionary
fees. Moreover, the final rule would cap
674 Like the current rule 2a–7, a government
money market fund may choose to rely on the
ability to impose liquidity fees. See section II.
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discretionary fees at 2%, which may
reduce the ability of affected money
market funds to overcharge redeemers
for liquidity costs. Finally, the final rule
requires fund boards or a delegate
overseen by the board to make a
determination that it is in the best
interest of shareholders to assess such a
fee.
5. Amendments Related to Potential
Negative Interest Rates
As discussed in the proposal, in the
event stable NAV funds begin to
experience negative yields, they will be
able to convert to a floating NAV.675 As
modified in this release, funds also will
be able to engage in share cancellation
(sometimes referred to as reverse
distribution mechanism, or ‘‘RDM’’) in
the event of negative yields. Funds
engaging in share cancellation would be
required to comply with specified
conditions in the final rule, including
that the fund provide timely, concise,
and plain-English disclosure to
investors.
Allowing stable NAV funds to use a
reverse distribution mechanism in the
event of negative fund yields would
reduce NAV fluctuations in a negative
yield environment, which may preserve
the use of stable NAV funds for sweep
accounts. In the event money market
fund yields turn negative, this
amendment may, thus, allow more types
of investors to continue to use these
products than would be the case if the
rule required all stable NAV money
market funds to convert to a floating
NAV. The Commission has received a
number of comments in support of
providing the flexibility of stable NAV
funds to use an RDM or similar
mechanism, in addition to the proposed
conversion to a floating NAV.676 The
Commission also recognizes that an
RDM is economically equivalent to a
floating NAV, and that many investors
may prefer a stable NAV.
As discussed in section II, under an
RDM, investors would observe a stable
share price but a declining number of
shares for their investment when a fund
generates a negative gross yield. This
may decrease the transparency and
675 As discussed in section V.B, the Commission
estimates the total annual costs attributable to the
information collection requirements in the
amendments allowing share cancellation will be
$969,722 for all affected funds. This cost estimate
includes both initial and ongoing costs with the
former being amortized over three years.
676 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I; Allspring Funds Comment Letter; Fidelity
Comment Letter; BNY Mellon Comment Letter;
State Street Comment Letter; Sen. Toomey
Comment Letter; Americans for Tax Reform
Comment Letter; Dechert Comment Letter; CCMR
Comment Letter; IDC Comment Letter.
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salience of negative fund yields to
investors, particularly for less
sophisticated retail investors.677
Importantly, many stable NAV funds
(government funds) are offered to a mix
of more sophisticated institutional and
retail clientele. This may give rise to
informational asymmetries about the
performance of the same stable NAV
funds across investors and reduce
comparability of performance across
stable NAV funds. Crucially, these
informational asymmetries may be
mitigated by the final rule’s requirement
that stable NAV funds seeking to use an
RDM provide timely, concise, and plainEnglish disclosures, including in
prospectuses and in account statements
or in a separate writing accompanying
the account statements. While stable
NAV funds seeking to use an RDM
would bear costs of producing such
disclosures, they would only choose to
do so if the costs of disclosures arising
out of the use of an RDM are lower than
the costs of floating the NAV. Overall,
as discussed in section II, investors may
benefit from the ability to continue to
invest in stable NAV funds when
interest rates are negative, and the
required disclosures may help inform
investors about differences between an
RDM and a floating NAV.
In contrast with the proposal, the final
amendments do not require stable NAV
money market funds to keep records
identifying which intermediaries they
were able to identify as being able to
process orders at a floating NAV and to
no longer transact with those
intermediaries who are not able to
process orders at a floating NAV. This
aspect of the final rule obviates the need
for intermediaries to upgrade their
systems if they are unable to process
transactions in stable NAV funds at a
floating NAV. This may avoid
disruptions to distribution networks of
stable NAV funds if some of their
intermediaries would be unable or
unwilling to upgrade systems to process
transactions at a floating NAV.
The magnitude of these economic
effects may be significantly attenuated
by two factors. First, negative interest
rates have not occurred in the United
States, and persistent gross negative
yields may be unlikely to occur.678
Hence, money market funds are not
currently implementing RDMs and both
the benefits and the costs of these
amendments may not materialize.
677 See, e.g., Northern Trust Comment Letter; CFA
Comment Letter.
678 The weighted average maturity (weighted
average life) of money markets funds must be 60
(120) days or less, meaning it may take several
weeks before securities with a positive yield mature
and gross yields turn negative.
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Second, stable NAV funds may not
experience the same magnitude of
redemptions observed in public
institutional prime and institutional taxexempt funds, for example in March
2020.679 Notably, in the long run, the
initial shock of negative rates that leads
to redemptions from money market
funds might reverse due to the lack of
alternative vehicles to store cash for a
short term.
6. Disclosures
a. Benefits and Costs of the Prompt
Notice of Liquidity Threshold Events on
Form N–CR and Board Reporting
The final amendments will require
money market funds to file a Form N–
CR report whenever a fund has invested
less than 25% of its total assets in
weekly liquid assets or less than 12.5%
of its total assets in daily liquid assets.
As a baseline matter, daily and
weekly liquid assets are currently
required to be disclosed on fund
websites on a daily basis. Relative to
that baseline, the primary benefits of the
final Form N–CR reporting requirement
may be in providing additional
information about the circumstances of
a fund’s significantly reduced liquidity
levels. Information about the
circumstances of a fund’s significantly
reduced liquidity levels may help
investors better analyze a fund’s
liquidity management strategies and
assess risks of dilution. The
Commission has received comments
that public reporting of liquidity
threshold events can increase
transparency of money market fund
liquidity management practices to
investors and may help increase the
salience of a fund’s daily and weekly
liquid assets to investors, especially to
less active and less sophisticated
investors.680 Some commenters
suggested this reporting should be
confidential.681 As discussed in section
II, we believe investors would benefit
from having contextual information to
understand the cause of a fund’s
declining liquidity, which may facilitate
their assessment of a fund’s risks and
ability to meet redemptions. This
requirement may enhance transparency
about money market fund liquidity
during times of stress.
Publication of notices surrounding
liquidity threshold events may inform
679 See, e.g., ICI Comment Letter; Morgan Stanley
Comment Letter.
680 See, e.g., CFA Comment Letter; Better Markets
Comment Letter.
681 See, e.g., ICI Comment Letter; Federated
Hermes Comment Letter I; Invesco Comment Letter;
Schwab Comment Letter (expressing support for
ICI’s perspective); SIFMA AMG Comment Letter;
Bancorp Comment Letter.
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51481
investors about the reasons behind the
threshold event. To the degree that some
funds’ liquidity threshold events may be
indicative of persistent liquidity
problems or mismanagement of
liquidity risk, and to the extent that
notices may better inform investors
about such causes (relative to baseline
website disclosures of liquidity levels),
publication of such notices may trigger
investor redemptions out of the most
distressed funds. While it is difficult to
predict investor behavior, the final
disclosure requirements may reduce
information asymmetries between
investors and funds about their liquidity
management, and would provide funds
with liquidity fees as a tool to manage
redemptions, such that redeemers
would be charged for the true liquidity
cost of their redemptions. In addition,
funds with lower weekly and daily
liquid assets would charge higher fees
due to higher market impact costs, and
the liquidity fee under the vertical slice
assumption would charge redeemers the
liquidity costs they impose on the fund,
further dis-incentivizing strategic
redemptions.
The final amendments will also
require money market funds to notify
their boards when they drop below the
12.5% daily and 25% weekly liquidity
asset thresholds, as discussed in section
II. Since the final amendments will
require that liquidity threshold events
are reported on Form N–CR, funds will
likely routinely notify the board of such
events without an explicit board
notification requirement. One
commenter noted that the current
policies and procedures of its members
typically include provisions to report to
the board at specified levels of liquidity,
thus suggesting that the proposed board
reporting is already occurring in
practice.682 To the degree that board
reporting is already a part of best
practices for fund managers, this would
reduce the magnitude of the benefits
and costs of this final requirement.
However, to the degree that some fund
boards may not be notified of some
events subject to Form N–CR reporting
or of significant declines in liquidity,
the board notification requirement
could enhance the oversight of fund
boards over liquidity management,
particularly during periods of stress.
The final amendments to Form N–CR
will impose direct compliance costs by
imposing reporting burdens discussed
in section V.D.683 While we
682 See,
e.g., SIFMA AMG Comment Letter.
discussed in section V.D, the Commission
estimates a total internal time cost of the
information collection requirements associated with
683 As
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acknowledge that Form N–CR filers may
bear some additional reporting costs as
a result of the amendments, as one
commenter suggested, we believe these
costs will generally be related to funds
adjusting their systems to a different
data language. Due to economies of
scale, such costs may be more easily
borne by larger fund families. In
addition, the prompt notice requirement
may give rise to two sets of costs. First,
the requirement may lead fund
managers to manage their portfolios
specifically to try to avoid a reporting
event, rather than in a way that is most
efficient for fund shareholders. Second,
this aspect of the final rule may result
in money market fund managers
spending compliance resources on
amending Form N–CR to describe the
circumstances of the liquidity threshold
event, which may divert managerial
resources away from managing
redemptions in times of stress. Costs
borne by money market funds may be
passed along to investors in the form of
higher fees and expenses. However, as
discussed above, we believe such costs
are justified by the promptness of the
notice requirement which may enhance
Commission oversight and transparency
to investors, incentivize funds to closely
monitor their liquidity levels, and
ultimately better protect investors.
b. Benefits and Costs of the Form N–
MFP Amendments
Final amendments to Form N–MFP
will require reporting of certain daily
data points on a monthly basis, of
securities that prime funds have
disposed of before maturity, of the
concentration of money market fund
shareholders and the composition of
institutional money market funds’
shareholders, and of additional
information about repurchase agreement
transactions, among other changes. In
addition, we are amending Form N–
MFP to require money market funds to
report the date on which the liquidity
fee was applied and the amount of the
liquidity fee applied by the fund.
Broadly, the final amendments to
Form N–MFP may make the form more
usable by filers, regulators, and
investors, and may increase
transparency around money market
fund activities in three ways. First, the
requirement that the funds report daily
information about their daily and
weekly liquid assets, flows, and NAV
will reduce costs of accessing this
information relative to the baseline of
routinely accessing and downloading
the amendments to Form N–CR of $8,244 and total
annual external cost burden of $1,187 for all
affected funds.
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information across many fund websites
and will provide a long-term repository
of this information for all funds.
Second, additional information about
fund repo activities will enable
investors and the Commission to better
assess fund liquidity risks and oversee
the industry. Third, information about
shareholder concentration and
composition can help the Commission
and investors understand and evaluate
potential redemption and liquidity
risks.
In addition, the final amendments add
disclosure requirements to Form N–
MFP to capture information about the
relevant funds’ use of liquidity fees.
These amendments are expected to
benefit investors in money market funds
by reducing information asymmetries
between funds and investors about these
funds’ liquidity fee practices. Since
liquidity fees have not been broadly
used by U.S. money market funds, the
purpose of the disclosure requirement
is, thus, to inform investors about the
manner in which affected money market
funds implement the liquidity fee
framework. Such transparency may
result in greater allocative efficiency as
investors with low tolerance of liquidity
risk and costs may choose to reallocate
capital to money market funds that have
lower liquidity risk and costs. In
addition, to the degree that uncertainty
about the final liquidity fee framework
may reduce the attractiveness of affected
money market funds to investors, the
final amendments requiring disclosures
about liquidity fees may reduce
information asymmetries between
money market funds and their investors,
which may dampen those adverse
effects.
The final amendments to Form N–
MFP will impose initial and ongoing
PRA costs, as discussed in section V
below.684 The Commission continues to
believe that money market funds
generally already maintain the
information they will be required to
report on Form N–MFP pursuant to
other regulatory requirements or in the
ordinary course of business. However,
the Commission continues to recognize
that affected funds would incur some
costs in reporting the information,
particularly costs of reporting certain
information with more frequency.685
Due to economies of scale, such costs
684 As discussed in section V.C, the Commission
estimates a total annual internal time cost of the
information collection requirements of the
amendments to Form N–MFP of $601,002 and total
annual external cost burden of $268,128 for all
affected funds. The cost estimates include both
initial and ongoing costs with the former being
amortized over three years.
685 See, e.g., Federated Hermes Comment Letter I.
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may be more easily borne by larger fund
families, and costs borne by money
market funds may be passed along to
investors in the form of higher fees and
expenses. The Commission also
received comments that the proposed
requirements related to reporting of
shareholder concentration and
composition, as well as lot-level
reporting may give rise to privacy and
related costs,686 as well as predatory
trading costs.687 As discussed in greater
detail in section II, to reduce such costs
and concerns, the final rule does not
require money market money market
funds to disclose the names of beneficial
or record owners who hold 5% or more
of the shares outstanding in the relevant
class, but only the type of owner, as
suggested by some commenters.688 In
addition, as discussed in section II, the
final rule does not impose lot-level
reporting requirements.
One commenter opposed the proposal
to require liquidity, net asset value, and
flow data to be reported as of the close
of business on each business day of each
month on the basis that it would be
unduly burdensome and without any
added benefit.689 As discussed in the
proposal, daily data based on
information collected from funds’
websites provided by private data
vendors can be incomplete, and may
have limited utility for Commission
oversight and analysis. Moreover,
money market funds are, in general,
already required to provide on their
websites the same data that we are
requiring be reported on Form N–MFP.
Thus, we believe that the burdens of the
proposed changes on money market
funds may be small or de minimis. In
addition, the final disclosures
concerning liquidity fees may create
incentives for money market funds to
compete on this dimension.
Specifically, institutional investors that
use institutional money market funds
for cash management and prefer lower
or zero liquidity fees may move capital
from money market funds that charged
higher historical fees to funds with
lower fees or those that have never
charged fees. This may incentivize fund
managers to manage their liquidity so as
to avoid charging mandatory or
discretionary fees. However, while
686 See, e.g., CFA Comment Letter; Federated
Hermes Comment Letter I; Invesco Comment Letter;
Dechert Comment Letter; Schwab Comment Letter;
ICI Comment Letter; Bancorp Comment Letter;
SIFMA AMG Comment Letter; Northern Trust
Comment Letter; CCMR Comment Letter.
687 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; BlackRock Comment Letter; CCMR
Comment Letter.
688 See, e.g., Federated Hermes Comment Letter I;
BlackRock Comment Letter.
689 See Federated Hermes Comment Letter I.
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liquidity fees charge redeemers, they
benefit investors remaining in the fund,
which may make funds actively using
liquidity fees more attractive to some
investors.
c. Benefits and Costs of Requirements
Related to Identifying Information on
Form N–CR and Form N–MFP
The final amendments will also
require the registrant name, series name,
related definitions, and LEIs for the
registrant and series on Form N–CR. In
addition, the final amendments will
require money market funds to report
LEIs for the series on Form N–MFP. The
LEI is used by numerous domestic and
international regulatory regimes for
identification purposes.690 As such,
requiring these additional disclosures
could enable data users such as
investors and regulators to crossreference the data reported on Form N–
CR with data reported on Form N–MFP
and with data received from other
sources more easily, thereby expanding
the scope of information available to
such data users in their assessments.691
All money market funds are already
required to have registrant and series
LEIs due to baseline Form N–CEN
reporting requirements, as discussed in
section II.F. The final amendments to
Form N–MFP will also require other
information to better identify different
types of money market funds, such as
amendments to better identify Treasury
funds and funds that are used solely by
affiliates and other related parties.
These amendments will help the
Commission and market participants to
identify certain categories of money
market funds more efficiently. However,
the final requirements to improve
identifying information may give rise to
direct compliance costs associated with
amending reporting on Forms N–CR and
N–MFP, as discussed in section V.
In addition to the entity identification
information (e.g., registrant name, series
name, related definitions, and LEIs)
discussed above, the final amendments
will also expand security identification
information by adding a CUSIP
requirement for collateral securities that
money market funds report on Form N–
MFP. CUSIP numbers are proprietary
security identifiers and their use
(including storage, assignment, and
distribution) entails licensing
restrictions and fees that vary based on
690 Other regulators with LEI requirements
include the U.S. Federal Reserve, European Union’s
(E.U.’s) MiFid II regime, and Canada’s IIROC; the
LEI is also used by private market participants for
risk management and operational efficiency
purposes. See https://www.leiroc.org/lei/uses.htm.
691 Fees and restrictions are not imposed for the
usage of or access to LEIs.
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factors such as the number of CUSIP
numbers used.692 Money market funds
are currently required to disclose CUSIP
numbers for each holding they report on
Form N–MFP.693 As such, the
incremental compliance cost on money
market funds associated with the CUSIP
requirement, compared to the baseline,
will be limited to those costs, if any,
incurred by money market funds as a
result of storing additional CUSIP
numbers (to the extent money market
funds do not already store CUSIP
numbers for their collateral
securities).694
As discussed in section II, one
commenter supported the CUSIP
requirement and agreed that money
market fund managers will not incur
additional costs or burden due to the
CUSIP requirement.695 By contrast, one
commenter opposed the CUSIP
requirement due to its limited utility
and the costs involved.696 However, we
believe the CUSIP requirement will be
useful, because it will provide more
precise and consistent identification of
the securities that money market funds
use as collateral, thus facilitating staff
and public analysis of money market
fund activity. Also, as noted, we do not
believe the CUSIP requirement will
cause money market funds to incur
incremental additional costs, because
they are subject to existing CUSIP
reporting obligations.
d. Benefits and Costs of Structured Data
Requirement for Form N–CR
The final amendments will require
money market funds to submit reports
on Form N–CR using a structured,
692 The CUSIP system (formally known as CUSIP
Global Services) is owned by the American Bankers
Association and managed by FactSet Research
Systems Inc. See CGS History, available at https://
www.cusip.com/about/history.html, and License
Fees, available at https://www.cusip.com/services/
license-fees.html.
693 See Item C.3 of Form N–MFP.
694 CUSIP license costs vary based upon, among
other factors, the quantity of CUSIP numbers to be
used, on a tiered model, with the lowest tier being
up to 500 CUSIP numbers. See CGS License
Structure, available at https://www.cusip.com/
services/license-fees.html#/licenseStructure. Based
on our understanding of current CUSIP licenses and
usage among money market funds, we do not
believe the CUSIP reporting requirement for
collateral securities is likely to impose incremental
compliance costs on money market funds by
moving them into a new CUSIP license pricing tier.
695 See ABA Comment Letter II. This commenter
additionally asserted that a discussion of licensing
restrictions is not relevant to the added CUSIP
requirement under final amendments, and that the
concept of CUSIP being proprietary has never
applied to transactional use or regulatory reporting.
However, the commenter did not specify which
particular provisions in the license agreement set
forth exceptions for regulatory reporting and
transactional use.
696 See Federated Hermes Comment Letter I.
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machine-readable data language—
specifically, in an XML-based language
created specifically for Form N–CR (‘‘N–
CR-specific XML’’).697 Currently, money
market funds submit reports on Form
N–CR in HTML or ASCII, neither of
which is a structured data language.698
As discussed in section II, the
Commission received one comment that
viewed the final structured data
requirement as a reporting enhancement
that will increase transparency for
institutional and retail investors, and
allow regulators and policymakers to
better assess the state of the financial
system.699 By contrast, one commenter
opposed this requirement, indicating
that a structured data language
requirement is costly and not used by
investors.700 This aspect of the final
amendments may facilitate the use and
analysis, both by the public and by the
Commission, of the event-related
disclosures reported by money market
funds on Form N–CR, as compared to
the current baseline. The improved
usability of Form N–CR could enhance
market and Commission monitoring and
analysis of reported events, thus
providing greater transparency into
potential risks associated with money
market funds on an individual level and
a population level.
Importantly, the incremental costs
associated with requiring money market
funds to submit reports on Form N–CR
in N–CR-specific XML, compared to the
baseline of submitting Form N–CR in
HTML or ASCII, may be low given that
money market funds already utilize
XML-based languages to meet similar
requirements in their other reporting,
and can utilize their existing
capabilities for preparing and
submitting Form N–CR.701 In addition,
money market funds will be given the
option of filing Form N–CR using a
fillable web form that will render into
N–CR-specific XML in the Electronic
Data Gathering, Analysis, and Retrieval
(‘‘EDGAR’’) system, rather than filing
directly in N–CR-specific XML using the
technical specifications published on
the Commission’s website. However,
under the final rule, money market
funds that choose to submit Form N–CR
directly in N–CR-specific XML (rather
than use the fillable web form) will
697 This would be consistent with the approach
used for other XML-based structured data languages
created by the Commission for certain specific
EDGAR Forms, including Form N–CEN and Form
N–MFP. See Current EDGAR Technical
Specifications, available at https://www.sec.gov/
edgar/filer-information/current-edgar-technicalspecifications.
698 See supra note 400.
699 See, e.g., Western Asset Comment Letter.
700 See Federated Hermes Comment Letter I.
701 See supra note 400.
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incur the incremental compliance costs
of updating their existing preparation
and submission processes to incorporate
the new technical schema for N–CRspecific XML.702
7. Calculation of Weighted Average
Maturity and Weighted Average Life
The Commission is adopting
amendments to rule 2a–7 to specify that
WAM and WAL must be calculated
based on percentage of each security’s
market value in the portfolio, rather
than based on amortized cost of each
portfolio security. These amendments
will enhance consistency and
comparability of disclosures by money
market funds in data reported to the
Commission and provided on fund
websites and, as discussed in section II,
commenters generally supported these
amendments.703 One commenter
indicated that the fractional difference
between the weighted average maturity
and weighted average life calculated
with amortized cost versus market value
would not meaningfully impact a fund’s
weighted average maturity or weighted
average life.704 As discussed above,
while the difference between a fund’s
weighted average maturity or weighted
average life calculated using amortized
cost versus market value is likely to be
small in many circumstances, it may be
more significant when a security’s
issuer experiences a credit event, during
periods of market stress, or when
interest rates rise rapidly, particularly
for assets with longer maturities. The
Commission continues to believe that a
consistent definition of WAM and WAL
across funds can enhance transparency
for investors seeking to assess the risk
of various money market funds and may
increase allocative efficiency. Moreover,
greater comparability of WAM and WAL
across money market funds may benefit
investors and enhance Commission
oversight of risks in money market
funds.
In the Proposing Release, the
Commission stated that these
amendments are not expected to give
rise to direct compliance costs. One
commenter indicated that funds may be
required to make additional operational
changes to comply with the proposed
calculation,705 but did not provide any
estimates of related costs. The
Commission is unable to quantify the
costs of such potential operational
changes because they may depend on
the extent to which funds and fund
702 See
infra section V.
e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Capital Group Comment Letter.
704 See Federated Hermes Comment Letter I.
705 Id.
703 See,
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families that use amortized cost in their
WAM and WAL calculations are already
equipped to use market value in such
calculations and, if they are already
equipped to do so, whether the ability
to instead use market value is
automated or requires manual
involvement in the calculation.706
However, as discussed in section II, the
Commission continues to believe that a
majority of money market funds already
calculate WAM and WAL based on the
percentage of each security’s market
value in the portfolio and all types of
money market funds determine the
market values of their portfolio holdings
for other purposes, which may limit the
extent of operational changes needed.707
Importantly, these amendments may
enhance the consistency of WAM and
WAL calculations across funds, which
may better inform investors and
enhance Commission oversight.
Commission continues to believe that
additional and more granular
information in the final amendments
will enable the Commission and FSOC
to better assess liquidity funds’ asset
turnover, liquidity management and
secondary market activities,
subscriptions and redemptions, and
ownership type and concentration. This
information may be used to analyze
funds’ liquidity and the susceptibility of
funds with specific characteristics to the
risk of runs, which may give rise to
systemic risk concerns. In addition, the
information can be used for identifying
trends in the liquidity funds industry
during normal market conditions and
for assessing deviations from those
trends that could potentially serve as
signals for changes in the short-term
funding markets. Also, amendments to
section 3 of Form PF will improve
comparability of data across liquidity
funds and money market funds, which
8. Form PF Requirements for Large
may further enhance oversight.
Liquidity Fund Advisers
These additional tools and data may
enable the Commission and FSOC to
As discussed in section II, the
better anticipate and deal with potential
amendments to section 3 of Form PF
include requirements for additional and systemic and investor harm risks
associated with activities in the
more granular information that large
liquidity funds industry and overall
advisers to private liquidity funds will
markets for short-term financing. This
have to provide regarding operational
may increase the resilience of short-term
information and assets, as well as
financing markets and enhance investor
portfolio holdings, financing, and
confidence in the U.S. markets for shortinvestor information.
term financing, which could facilitate
The amendments will require large
capital formation.
liquidity funds to report substantially
The final amendments to Form PF
the same information that money market
will
lead to certain additional costs for
fund will report on Form N–MFP. Thus,
advisers of large liquidity funds. While
in combination with the final Form N–
we are unable to quantify the full costs
MFP amendments, Form PF
of the final Form PF amendments for
amendments will help provide a more
advisers of large liquidity funds, we are
complete picture of the short-term
able to estimate some of the costs,
financing markets, in which liquidity
specifically the costs related to
funds and money market funds invest.
information collection requirements as
In turn, they may enhance the
defined by the PRA. The information
Commission’s and FSOC’s ability to
costs are quantified in section
assess the potential market and systemic collection
710 Advisers may pass along all or
V.F.
risks presented by liquidity funds’
activities.708 One commenter questioned a portion of these costs to large liquidity
fund investors, and the degree to which
the value added of the data.709 The
investors may ultimately bear such costs
may depend on, among others, how
706 For example, the commenter stated that its
advisers choose to comply with the final
retail and government money market funds
currently use amortized cost in their WAM and
WAL calculations but are equipped to immediately
shift to using market value if an issuer of portfolio
securities had a credit problem. See Federated
Hermes Comment Letter I.
707 Money market funds that use a floating NAV
use market values when determining a fund’s NAV,
while money market funds that maintain a stable
NAV are required to use market values to calculate
their market-based price at least daily.
708 See, e.g., Better Markets Comment Letter on
File No. S7–01–22; Loubriel Comment Letter on
File No. S7–01–22.
709 See NYC Bar Comment Letter on File No. S7–
01–22. For more general criticism of benefits of
Form PF, see, e.g., Comment Letter of Alternative
Investment Management Association and
Alternative Credit Council on File No. S7–01–22
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(Mar. 21, 2022); Comment Letter of Teachers
Insurance and Annuity Association of America on
File No. S7–01–22 (Mar. 21, 2022) (‘‘TIAA
Comment Letter on File No. S7–01–22’’); Comment
Letter of Real Estate Board of New York (Mar. 21,
2022). Some commenters argued that sophisticated
investors do not require monitoring of their private
fund investments, see, e.g., Comment Letter of
Center for Capital Markets Competitiveness, U.S.
Chamber of Commerce on File No. S7–01–22 (Mar.
21, 2022); Comment Letter of SIFMA on File No.
S7–01–22 (Feb. 11, 2022).
710 As discussed in section V.F, the Commission
estimates a total cost increase associated with the
information collection requirements of amended
Form PF of $9,931 per initial filing and $3,331 per
quarterly filing.
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amendments, competition among large
liquidity fund advisers, and competition
between large liquidity funds relative to
money market funds, among others.
The costs to advisers of large liquidity
funds may include both direct
compliance costs and indirect costs,
which may be relatively larger for
smaller advisers.711 The final
amendments aimed at improving data
quality and comparability, such as
requiring advisers to identify any ‘‘other
unique identifier’’ they use to identify
portfolio securities, may impose limited
direct costs on advisers given that
advisers already accommodate similar
requirements in their current Form PF
and Form ADV reporting and can utilize
their existing capabilities for preparing
and submitting an updated Form PF.
Most of the costs are likely to arise from
the requirements to report additional
and more granular information on Form
PF, such as requiring advisers to
distinguish between U.S. Government
agency debt categorized as a couponpaying note and a zero-coupon note. For
existing section 3, the direct costs
associated with the final amendments to
section 3 will mainly include an initial
cost to set up a system for collecting and
verifying additional more granular
information, and limited ongoing costs
associated with periodic reporting of
this additional information.712
Indirect costs for advisers will include
the costs associated with other actions
that advisers may decide to undertake in
light of the additional reporting
requirements. Specifically, to the extent
that the final amendments provide an
incentive for advisers to improve
internal controls and devote additional
time and resources to managing their
risk exposures and enhancing investor
protection, this may result in additional
expenses for advisers, some of which
may be passed on to the funds and their
investors.
Form PF collects confidential
information about private funds and
their trading strategies, and the
inadvertent public disclosure of such
competitively sensitive and proprietary
information could adversely affect the
711 Some commenters emphasized, generally,
disproportionate costs of Form PF to smaller
advisers. See, e.g., Comment Letter of Managed
Funds Association on File No. S7–01–22 (Mar. 21,
2022); TIAA Comment Letter on File No. S7–01–22;
Comment Letter of Real Estate Roundtable on File
No. S7–01–22 (Mar. 21, 2022).
712 Section V estimates direct internal compliance
costs for existing section 3 filers associated with the
preparation and reporting of additional and more
granular information by large liquidity fund
advisers. It is estimated that there will be no
additional direct external costs and no changes to
filing fees associated with the proposed
amendments to section 3.
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funds and their investors. However, we
anticipate that these adverse effects will
be mitigated by certain aspects of the
Form PF reporting requirements and
controls and systems designed by the
Commission for handling the data. For
example, with the exception of select
questions, such as those relating to
restructurings/recapitalizations of
portfolio companies and investments in
different levels of the same portfolio
company by funds advised by the
adviser and its related person, Form PF
data generally could not, on its own, be
used to identify individual investment
positions. The Commission has controls
and systems for the use and handling of
the modified and new Form PF data in
a manner that reflects the sensitivity of
the data and is consistent with the
maintenance of its confidentiality. The
Commission has substantial experience
with the storage and use of nonpublic
information reported on Form PF.
D. Alternatives 713
1. Alternatives to the Removal of
Temporary Redemption Gates
The final amendments could have
replaced the 30% weekly liquid asset
threshold for the discretionary
imposition of temporary redemption
gates with a different threshold. This
alternative would allow money market
funds to impose gates during large
redemptions to reduce some of the
dilution costs during large redemptions.
However, as discussed above, we
believe that a weekly liquid asset
threshold for gates could trigger runs on
money market funds in times of stress.
Under the final amendments, money
market funds are still able to reduce
dilution costs during large redemptions.
Under current rule 22e–3, money
market funds are permitted to impose
permanent suspensions of redemptions
where a fund’s weekly liquid assets
drop below 10% and the fund
determines to liquidate the fund. In
addition, institutional prime and
institutional tax-exempt money market
funds are required to charge mandatory
liquidity fees based on a same day net
redemption threshold that may be less
susceptible to run risk, and money
market funds retain broad flexibility
with respect to the imposition of
discretionary liquidity fees without any
regulatory thresholds.
The final amendments could also
have modified the trigger for
redemption gates. The final rule could
have eliminated the tie between the
possible imposition of gates and a
713 This discussion supplements the discussion of
alternatives in other sections of the release.
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weekly liquid asset threshold without
eliminating funds’ ability to impose
gates outside of liquidation, for
example, by allowing boards complete
discretion in imposing gates.714
Alternatively, the final rule could have
permitted funds to impose redemption
gates after confidentially seeking
regulatory approval. Under these
alternatives, investors could, at any
time, find themselves subject to a gate
which would mean they would be
unable to access their funds for cash
management purposes. As a result, these
alternatives would significantly reduce
the usefulness of these funds for
investors, as they function as a means of
cash management. Moreover, there
would be few if any offsetting benefits
of these alternatives in terms of
discouraging runs relative to the final
rule.
2. Alternatives to the Removal of the Tie
Between Weekly Liquid Assets and
Discretionary Liquidity Fees
The final amendments could have
replaced the 30% weekly liquid asset
threshold for the imposition of
discretionary liquidity fees with a
different weekly liquid asset threshold.
This alternative would allow money
market funds to impose discretionary
liquidity fees during redemption waves
to reduce some of the dilution costs of
large redemptions. However, as
discussed above, we believe that,
compared to net redemption thresholds,
weekly liquid asset thresholds leave
funds more vulnerable to strategic
redemptions. The mandatory and
discretionary fees under the final rule
are expected to provide tools for money
market funds to address dilution while
reducing incentives for strategic
redemptions and corresponding run
risk.
3. Alternatives to the Final Increases in
Liquidity Requirements
a. Alternative Thresholds
The final amendments could have
included a variety of alternative daily
and weekly liquid asset thresholds.
More specifically, the Commission
could have increased minimum
liquidity thresholds to 20% daily liquid
assets and 40% weekly liquid assets
thresholds.715
714 See, e.g., Federated Hermes Comment Letter I;
Federated Hermes Board Comment Letter; Cato Inst.
Comment Letter; Dechert Comment Letter.
715 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; BlackRock Comment Letter; JP
Morgan Comment Letter; State Street Comment
Letter; Western Asset Comment Letter; Invesco
Comment Letter; Healthy Markets Association
Comment Letter.
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In the Proposing Release, the
Commission quantified the potential
effect of various liquidity thresholds on
the probability that money market funds
would confront liquidity stress,
modeling stress in publicly offered
institutional prime fund portfolios using
the distribution of redemptions
observed during the week of March 16
to 20, 2020, (‘‘stressed week’’) at various
starting levels of daily and weekly
liquid assets.716 Using the same
methodology (and subject to the same
caveats), Figure 13 below plots the
probability that a fund will run out of
daily liquid assets on a given day of the
stressed week for a variety of thresholds,
including those suggested by
commenters.717 For the final thresholds
of weekly liquid assets at 50% and daily
liquid assets at 25%, Figure 13 shows
that about 8.4% of funds would deplete
daily liquid assets and be unable to
absorb redemptions out of daily liquid
assets on at least one of the five stressed
days. By contrast, a threshold of 20%
daily liquid assets and 40% weekly
liquid assets would approximately
double the estimate of funds that would
deplete daily liquidity to meet
redemptions on at least one of the days
of a stressed week (to approximately
15.4%). As referenced above, the largest
weekly and daily redemption during the
week of March 16 to 20, 2020, was
approximately 55% and 25%
respectively. Thus, an approach aimed
at eliminating the risk of funds having
insufficient liquid assets to absorb
redemptions (using redemption data
from March 16 to 20, 2020) would
require funds to hold more than 55% of
weekly and at least 25% of daily liquid
assets. Lower thresholds increase the
probability that some funds may deplete
their liquid assets to meet redemptions,
but also reduce the adverse impacts
described above.
Similarly, Table 12 quantifies the
daily probability that a publicly offered
institutional prime fund depletes daily
liquid assets to meet redemptions under
four scenarios: the current baseline
daily and weekly liquid asset
thresholds, thresholds based on the
largest daily and weekly redemption
during the stressed week; proposed
daily and weekly liquid assets
thresholds; and several alternatives
suggested by commenters.718 The
baseline scenario would require no
change for money market funds; the
‘‘biggest redemptions’’ alternative
would require approximately 8% of all
prime funds (including both
institutional and retail prime funds) to
increase their daily liquid assets and
approximately 34% of all prime funds
to increase their weekly liquid assets.
718 See, e.g., IIF Comment Letter (suggesting 20%
daily liquid asset and 30% weekly liquid asset
thresholds); Bancorp Comment Letter (suggesting
25% daily liquid asset and 40% weekly liquid asset
thresholds); Morgan Stanley Comment Letter
(suggesting 25% daily liquid asset and 45% weekly
liquid asset thresholds). Several commenters
suggested thresholds of 20% daily liquid assets and
40% weekly liquid assets. See, e.g., ICI Comment
Letter; SIFMA AMG Comment Letter; BlackRock
Comment Letter; JP Morgan Comment Letter; State
Street Comment Letter; Western Asset Comment
Letter; Invesco Comment Letter; Healthy Markets
Association Comment Letter.
716 87
FR 7310.
supra note 715. See also IIF Comment
Letter (suggesting 20% daily liquid asset and 30%
weekly liquid asset thresholds); Bancorp Comment
Letter (suggesting 25% daily liquid asset and 40%
weekly liquid asset thresholds); Morgan Stanley
Comment Letter (suggesting 25% daily liquid asset
and 45% weekly liquid asset thresholds).
717 See
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Figure 13—The Probability That a Fund
Will Run Out of Daily Liquid Assets
Under Different Minimum Liquidity
Thresholds
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TABLE 12—PROBABILITY A PUBLICLY OFFERED INSTITUTIONAL PRIME FUND RUNS OUT OF LIQUIDITY UNDER THE
BASELINE, PROPOSED THRESHOLD, BIGGEST REDEMPTIONS AND 4 ALTERNATIVE THRESHOLDS
Starting liquidity
Model
DLA
(%)
Current Threshold .............................................
Proposed Threshold ..........................................
Biggest Redemptions ........................................
Alternative 1 ......................................................
Alternative 2 ......................................................
Alternative 3 ......................................................
Alternative 4 ......................................................
Probability that a fund depletes available liquidity on a given day
WLA
(%)
10
25
25
20
20
25
25
Day 1
(%)
30
50
55
30
40
40
45
Day 2
(%)
9.5
2.4
2.4
2.4
2.4
2.4
2.4
21.5
1.8
1.4
5.7
3.1
2.3
1.8
Day 3
(%)
Day 4
(%)
22.3
4.8
3.6
19.9
12.0
7.5
5.7
18.6
4.8
3.6
19.6
10.6
9.3
6.5
At least one
day
(%)
Day 5
(%)
3.3
1.2
0.0
6.2
2.5
3.0
2.5
32.3
8.5
6.5
22.3
15.4
12.3
10.4
Source: Form N–MFP and CraneData.
ddrumheller on DSK120RN23PROD with RULES2
The above estimates rely on a number
of modeling assumptions. First,
institutional prime fund redemptions
were historically higher than
redemptions out of retail funds, which
may bias the analysis to overestimate
the probability a retail or private
institutional prime fund runs out of
liquidity on a given day. Second, the
analysis assumes that assets maturing
on a given business day will be
available at the end of that day. Third,
the analysis assumes no assets are sold
into a distressed market and
redemptions are absorbed fully out of a
fund’s liquid assets. Fourth, the models
do not include government agency
securities with a maturity in excess of
seven days, and assume Treasury
securities have daily liquidity regardless
of maturity and can be sold without any
loss. Fifth, the analysis assumes that
funds would go below the current rule’s
30% weekly liquid asset minimum,
continuing to meet redemptions out of
liquid assets, rather than hold on to the
weekly liquid assets as occurred in
March 2020. As discussed above, the
removal of the potential imposition of
redemption gates from rule 2a–7, and
the removal of the current use of weekly
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liquid asset thresholds for redemption
gates and liquidity fees in the rule, may
increase the willingness of money
market funds to meet redemptions with
daily and weekly liquid assets. Sixth,
these estimates are based on redemption
patterns in March 2020 and the
distribution of future redemptions may
differ, in part, as a result of the
proposed amendments.
In addition, this analysis does not
capture the extent to which fund
managers may be able to anticipate
redemptions and pre-position fund
liquidity ahead of time.719 However,
their ability to do so may be hampered
in times of severe stress when
redemption patterns are more volatile
and less predictable, and costs of
portfolio rebalancing are higher.
Specifically, we have analyzed aggregate
portfolios of institutional prime and
retail prime funds during market stress
719 See, e.g., Federated Hermes Comment Letter I.
The commenter also indicated that the analysis
relies on a false assumption that there are no
inflows into the fund which could be utilized to
offset redemptions. Since this analysis uses net
rather than gross redemption patterns during March
2020, historical subscription activity is captured in
the stressed fund paths analyzed here.
PO 00000
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in March 2020. As can be seen from
Figure 14 and Figure 15 below,
institutional prime funds increases their
daily liquid assets the week after peak
market stress (week of March 27), rather
than during the week of peak market
stress (week of March 20) when they
experienced large net redemptions. By
contrast, retail prime funds experienced
less net redemptions and were able preposition their portfolios during peak
stress week by increasing their daily
liquid assets.720
Figure 14—Aggregate Asset Changes of
Institutional Prime Funds During 2020,
by Liquidity Bins
720 In general, prime funds increased their
liquidity after the Mar. 2020 market dislocation by
purchasing Treasury securities from inflows,
maturing assets or selling longer-dated assets. For
instance, between Feb. 28, 2020 and Aug. 31, 2020,
retail prime money market funds decreased their
portfolio percentage of commercial paper and
certificates of deposit from 64% to 38%, while the
percentage of Treasury debt and repos increased
from 14% to 34%. Similarly, institutional prime
money market funds decreased their portfolio
percentage of commercial paper and certificates of
deposit from 50% to 38%, while the percentage of
Treasury debt and repos increased from 18% to
33%.
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721 See,
e.g., ICI Comment Letter.
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funds experiencing outflows double or
triple the average redemption rate;
portfolios reported on Form N–MFP
exhibited less frontloaded maturity
structures than the commenter assumed;
and heterogeneity in portfolio
constructions mean that funds with
longer dated securities would have less
liquidity to meet redemptions.
Additional analysis, described in greater
detail below, aims to extend the
commenter’s modeling framework to
take into account variations in
redemption patterns and portfolio
construction across funds.
Out of the sample of 42 prime money
market funds, we removed four funds
with weekly liquid assets below 35%,
following the commenter’s methodology
to account for the possibility that
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redemptions out of those funds were
exacerbated by the threat of gates and
fees as weekly liquid asset levels
approached 30%.722 The average
redemption rate for these four funds was
approximately 28%, with the remaining
38 funds having an average redemption
rate of 16%. Importantly, as can be seen
from Figure 16, there were a number
funds with weekly liquid assets in
excess of 35% that had redemptions
double and triple the 16% average.
Figure 16—Weekly Redemptions in
Prime Money Market Funds During the
Week of March 20, 2020
722 Additional models without removing the four
funds with weekly liquid assets below 35% were
constructed to compare with the commenter’s
results and to test the robustness of the models.
E:\FR\FM\03AUR2.SGM
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ER03AU23.014</GPH>
The Commission has received
comments 721 that, under certain
assumptions, a 20% daily and 40%
weekly liquid asset threshold may be
sufficient for funds to meet redemptions
even if the stress lasts 10 weeks. One
commenter’s analysis in support of
these thresholds assumed that funds
face a redemption rate of 16% and that
fund portfolios have somewhat
frontloaded maturity laddering. In
addition, the analysis did not take into
account how heterogeneity in portfolio
construction across funds may influence
the levels of liquidity available to meet
redemptions. Notably, during the stress
of March 2020, funds exhibited a
distribution of outflows with some
ER03AU23.013</GPH>
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Figure 15—Aggregate Asset Changes of
Retail Prime Funds During 2020, by
Liquidity Bins
51489
Next, we examined 1,744 public
institutional prime fund portfolios that
filed on Form N–MFP between October
2016 and February 2020 and placed
every security in the 1,744 portfolios
into maturity bins by week (from 1 week
to >10 week maturity). Setting initial
weekly liquid assets for each portfolio
based on a given fund’s weekly liquid
assets provided on Form N–MFP and
assuming no gates or fees, we then
stressed each portfolio for 10 weeks
using weekly redemption rates of 38
prime money market funds observed
during the stress week. Similar to the
commenter’s analysis, we assumed that
each portfolio started with $10 billion in
total assets. Each week we calculated a
new weekly liquid asset level for each
portfolio based on the weekly liquid
asset level the week before, the amount
of assets that rolled over into the weekly
liquid asset bin, and the weekly
redemption rates. If the portfolio did not
have enough weekly liquid assets to
meet the weekly redemptions, then we
assumed the longest dated assets were
sold first with no haircuts. Under these
assumptions, Figure 17 reports
simulated changes in money market
fund total assets after 10-weeks of
redemptions. Figure 17 shows that,
considering the entire distribution of
redemption rates in March 2020 rather
than the average redemption rate of
16%, a number of funds run out of
assets well before the 10 week mark.
To further quantify these effects,
Table 13 shows the distribution of
weekly liquid assets in fund portfolios
with starting weekly liquid assets of
40% when stressed with up to 10 weeks
of redemptions using 38 historical
prime money market fund redemption
rates in the stress week. As can be seen
from Table 13, after one week of
redemptions, 10% of fund portfolios
with starting weekly liquid assets of
40% had less than or equal to 9% of
weekly liquid assets remaining. By
contrast, 10% of fund portfolios with
starting weekly liquid assets of 50% had
less than or equal to 28% of weekly
liquid assets remaining. As another
example, if fund portfolios enter the
stress week with 40% in weekly liquid
assets, a fifth have run out of weekly
liquid assets to meet redemptions by
week 2. At the same time, if fund
portfolios enter the stress week with
50% in weekly liquid assets, a fifth of
funds has 23% of weekly liquid assets
remaining to meet redemptions.
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E:\FR\FM\03AUR2.SGM
03AUR2
ER03AU23.016</GPH>
Figure 17—Simulated Changes in Prime
Money Market Fund Total Assets
Under 10 Weeks of Stress, Using
Historical Distribution of Redemption
Rates for the Week of March 20, 2020
ER03AU23.015</GPH>
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51490
Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
TABLE 13—DISTRIBUTION OF WEEKLY LIQUID ASSETS (WLA) IN STRESSED PRIME MONEY MARKET FUND PORTFOLIOS
AFTER 5 WEEKS OF STRESS, USING HISTORICAL DISTRIBUTION OF REDEMPTION RATES IN MARCH 20, 2020 AND
PORTFOLIO COMPOSITION DATA FROM FORM N–MFP
Week
ddrumheller on DSK120RN23PROD with RULES2
1
2
3
4
5
1
2
3
4
5
....................................................
....................................................
....................................................
....................................................
....................................................
....................................................
....................................................
....................................................
....................................................
....................................................
WLA
start
Distribution of WLA
Min
40%
40
40
40
40
50
50
50
50
50
Table 13 demonstrates two key
results. First, when the historical
distributions in prime money market
fund redemption rates during the stress
week in March 2020 and fund portfolio
compositions are taken into account, a
large share of stressed funds would run
out of liquidity well before the 10 week
mark suggested by some commenters.
Second, funds that enter stress with
50% in weekly liquid assets have more
weekly liquid assets to meet
redemptions and are more likely survive
a period of prolonged stress than funds
that enter stress with 40% in weekly
liquid assets.
Some commenters indicated that the
proposed changes to the current fee and
gate framework would allow funds to
more freely use existing liquid assets to
meet redemptions and, thus supported a
more modest increase to the liquidity
requirements.723 The analysis presented
above excludes from the distribution of
historical redemption rates funds that
entered the stress week with less than
35% of weekly liquid assets. Since those
funds were more likely to approach the
30% weekly liquid asset threshold for
the imposition of gates and fees,
redemptions out of those funds were
more likely to have been triggered by
the risk of gating or fees. Thus, weekly
liquid assets may remain crucial for the
ability of money market funds to meet
redemptions during times of stress even
in the absence of gating.
More broadly, as can be seen from the
above, lower liquidity thresholds
relative to the final amendments would
allow funds to hold less liquid assets,
increasing fund liquidity risks.
However, lower thresholds would
decrease the number of money market
funds having to restructure their
portfolios; would reduce the incentives
of funds to take larger risks in the less
723 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I; T. Rowe Price Comment Letter; Invesco Comment
Letter.
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5%
0%
0
0
0
0
6
0
0
0
0
10%
3
0
0
0
0
22
0
0
0
0
20%
9
0
0
0
0
28
0
0
0
0
20
0
0
0
0
38
23
6
0
0
30%
40%
27
13
0
0
0
42
32
20
11
3
30
19
6
0
0
44
38
31
26
21
liquid portion of their portfolios; and
would reduce the concentration of
liquidity in repos that are used by
leveraged market participants for
funding liquidity.
Similarly, alternatives imposing
higher minimum daily and weekly
liquidity thresholds relative to the final
amendments would require funds to
hold more liquid assets, reducing the
risk of fund liquidations or selloffs that
may necessitate future government
backstops. However, higher minimum
liquidity thresholds would require a
larger number of money market funds to
reallocate their portfolios towards lower
yielding investments. In addition,
higher liquidity thresholds may lead
funds to increase the risk in the
remainder of their portfolios to attract
investor flows or to keep fund yields
from sliding below zero and ensure the
viability of the asset class (the latter risk
may be more pronounced in very low
interest rate environments). Moreover,
higher liquidity requirements may
increase the availability of funding
liquidity through repos to leveraged
market participants, resulting in a
higher levels of risk taking in less
transparent and less regulated sectors of
the financial system. The Commission
continues to believe that the final
liquidity thresholds balance these
effects and are likely to allow more
funds to have sufficient liquidity to
meet redemptions during periods of
liquidity stress.
b. Caps on Fund Holdings of Certain
Assets
As an alternative to increasing the
minimum daily and weekly liquid asset
requirements, the Commission
considered adopting caps on money
market fund holdings of certain assets,
such as commercial paper and
certificates of deposit. Commercial
paper and certificates of deposit lack an
actively traded secondary market and
are difficult to value or sell during times
PO 00000
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50%
33
25
16
8
1
47
44
41
41
39
60%
35
31
25
23
19
50
49
50
52
53
70%
38
37
36
37
37
52
53
55
58
60
80%
40
42
42
45
46
54
58
61
66
68
90%
42
45
47
51
54
59
67
73
80
84
Max
60%
66
79
100
100
69
84
90
100
100
of liquidity stress. As discussed in the
Proposing Release, limiting money
market fund holdings of such
instruments may reduce run risk to the
degree that the illiquidity of all or a
portion of a fund’s portfolio may create
externalities from redeeming investors
borne by investors remaining in the
fund, which may incentivize early
redemptions.
However, this alternative relies on the
assumption that commercial paper and
certificates of deposit homogeneously
reduce the liquidity of a fund’s portfolio
by more than other money market fund
holdings across maturities. The
Commission continues to recognize that
these assumptions may not always hold
for different money market funds and
over different time horizons. Moreover,
to the degree that investors prefer funds
that deliver higher returns and money
market funds benefit from investor
expectations of implicit government
backstops during times of liquidity
stress, money market funds may react to
this alternative by changing the maturity
structure of their portfolios and
reallocating into other securities with
potentially higher liquidity risk. For
example, money market funds may
substitute short-term commercial paper
and certificates of deposit that are
classified as daily or weekly liquid
assets with longer term commercial
paper and certificates of deposit that
would not be classified as daily or
weekly liquid assets. Finally, because
this alternative would involve defining
the types of instruments subject to the
cap, issuers may be able to create new
financial instruments that are similar,
and perhaps synthetically identical, to
commercial paper and certificates of
deposit along risk and return
dimensions, but that would not be
subject to the caps. The final approach,
which would increase minimum daily
and weekly liquid asset requirements,
may reduce liquidity and run risk in
money market funds without such
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Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
potential drawbacks, while ensuring
funds have minimum liquidity to meet
large redemptions.
As another alternative, the final
amendments could have replaced the
minimum daily and weekly liquid asset
thresholds with asset restrictions, such
as imposing a minimum threshold for
holdings of government securities 724
and repos backed by government
securities. Under the baseline, such
assets are generally categorized as daily
liquid assets. Thus, such an approach
would have the effect of replacing
minimum daily and weekly liquid asset
thresholds with a single daily liquid
asset threshold, and restricting the types
of assets that would qualify as daily
liquid assets. This alternative would
reduce the liquidity risk of liquid assets
held by money market funds, which
may help them meet redemptions
without transaction costs. However,
waves of redemptions as experienced in
2008 and 2020 occur over multiple
days, suggesting that money market
funds need to have both daily and
weekly liquidity to meet redemptions.
Moreover, asset restrictions imposing
large minimum thresholds for holdings
of government securities would
decrease not only the risk, but also the
yield of money market funds and their
attractiveness to investors, reducing the
viability of the asset class in low interest
rate environments. This approach
would also further concentrate money
market fund holdings in specific types
of assets, which may increase the
likelihood of funds selling the same
assets to meet redemptions in times of
stress.
Finally, under the baseline, funds
falling below minimum liquid asset
thresholds may not acquire any assets
other than daily or weekly liquid assets,
respectively, until funds meet those
minimum thresholds. The final
amendments will retain this baseline
approach, while increasing the absolute
daily and weekly liquid asset
thresholds. As an alternative, the final
amendments could have imposed
penalties on funds or fund sponsors
upon dropping below the required
minimum liquidity threshold. Similarly,
the final amendments could have
imposed a minimum liquidity
maintenance requirement, which would
require that a money market fund
maintain the minimum daily liquid
asset and weekly liquid asset thresholds
at all times instead of the current
requirement to maintain the minimums
immediately after the acquisition of an
724 See,
e.g., CCMR Comment Letter.
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51491
asset. During the market stress in 2020,
funds experiencing large redemptions
were reluctant to draw down on weekly
liquid assets due to the existence of the
threshold for the potential imposition of
redemption fees and gates. Such
alternatives may have a similar effect of
penalizing money market funds for
using liquidity when liquidity is most
scarce, which may make money market
funds reluctant to use daily and weekly
liquid assets to meet large redemptions
during market stress. As a result, money
market funds would be incentivized to
sell less liquid assets, such as longer
maturity commercial paper, into
distressed markets, rather than risk
penalties and dropping below minimum
liquidity maintenance requirements.
This may increase transaction costs
borne by redeeming investors and may
result in money market fund
redemptions magnifying liquidity stress
in underlying securities markets.
The Commission also could have
required stress testing results to be
disclosed to investors.726 This
alternative could enable investors to
better assess money market fund
liquidity management and the
vulnerability of various money market
funds to liquidity stress. However, this
alternative may also trigger selffulfilling runs on more vulnerable
money market funds, particularly in
times of stress. Moreover, to the degree
that funds anticipate the results of stress
testing to become publicly disclosed,
they may alter stress testing design,
reducing its usability for board and
Commission oversight.
4. Alternative Stress Testing
Requirements
As described in section II.B above, the
final amendments will require
institutional funds to apply liquidity
fees when they experience large net
redemptions. Specifically, if daily net
redemptions exceed 5% of the fund’s
net assets, funds are required to assess
liquidity fees that reflect the fund’s good
faith estimate of the costs the fund
would incur if it sold a pro rata amount
of each security in its portfolio to satisfy
the amount of net redemptions,
including spread costs, other transaction
costs (i.e., any other charges, fees, and
taxes associated with portfolio security
sales), and market impact costs the fund
would incur if it were to sell a pro rata
amount of each security in its portfolio
to satisfy the amount of net redemptions
(i.e., vertical slice). If the fund is not
able to make a good faith estimate
supported by data of its liquidity costs
based on the sale of a vertical slice (e.g.,
if reliable transaction or quotation data
for portfolio holdings are not available
due to a freeze in short-term funding
market activity), the fund would use a
default liquidity fee of 1% of the value
of share redeemed.
As an alternative to the final
amendments to stress testing
requirements, the final amendments
could have modified weekly liquid asset
thresholds that funds must use for stress
testing. For example, the final
amendments could have required
money market funds to perform stress
testing using 15%, 20%, or 30%
minimum weekly liquid asset
thresholds. As another example, the
final amendments could have required
money market funds to use specific
minimum daily and weekly liquid asset
thresholds. Similarly, the Commission
could have imposed explicit
requirements regarding who would be
responsible for determining the
sufficient minimum level of liquidity for
stress tests.725 These alternatives may
reduce the discretion of boards and fund
managers in stress testing. The
Commission continues to recognize that
stress testing design and optimum levels
of liquidity will vary depending on the
type of money market fund, investor
concentration, investor composition,
and historical distribution of
redemption activity under stress, among
other factors. Thus, alternatives
establishing bright line thresholds for
stress testing or limiting the ability of
fund boards to delegate stress testing
responsibilities could reduce the
efficiency of the stress testing process
and the usability of stress testing results
for board and Commission oversight.
725 See,
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5. Alternative Implementations of
Liquidity Fees
a. Alternative Net Redemption
Thresholds for Mandatory Liquidity
Fees
The final amendments could have
used a different net redemption
threshold for the application of
mandatory liquidity fees. As shown in
the Proposing Release, Table 14
demonstrates that 5% of institutional
prime and institutional tax-exempt
money market funds had outflows that
exceeded 3.7%.
726 See, e.g., Systemic Risk Council Comment
Letter.
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Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
TABLE 14—DAILY FLOWS OF INSTITUTIONAL MONEY MARKET FUNDS
Percentiles
Average
fund count
Institutional funds
Prime Only ........................................................
Prime + Tax-exempt .........................................
5%
37
47
10%
¥3.5
¥3.7
¥1.9
¥2.1
25%
¥0.5
¥0.5
50%
75%
0.0
0.0
90%
0.6
0.6
95%
2.2
2.3
3.9
4.1
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Notes: This table reports the results of an analysis of daily flows reported in CraneData on 1,228 days between Dec. 2016 and Oct. 2021. As of Sept. 2021,
CraneData covered 87% of the funds and 96% of total assets. Flows at the class level were aggregated to the fund level. Flows of feeder funds were aggregated for
an approximation of flows for the corresponding master fund.
In the Proposing Release, the
Commission proposed a swing pricing
requirement, with a 4% net redemption
threshold for market impact
calculations, assessed on a pricing
period rather than a daily basis. The
Commission has received comment that
the 4% threshold for applying a market
impact factor was too low, particularly
where the NAV is struck multiple times
a day.727 The final amendments could
have required a lower net redemption
threshold, such as 4%, or a higher
threshold, such as 8% or 10% for the
liquidity fee threshold. Alternatively,
the final amendments could have used
different redemption thresholds for the
liquidity fee requirement for
institutional prime and institutional taxexempt funds. Section IV.C.4.b.i
quantifies how alternative redemption
thresholds would influence the scope of
the liquidity fee framework and
associated benefits and costs. For
example, Table 7 shows the average
percentage of funds per month that
would exceed a certain net redemption
threshold. For instance, on average, we
would expect approximately 1.4% of
institutional prime or institutional taxexempt funds to exceed the 8%
redemption threshold on any given day,
while approximately 4.4% of
institutional prime or institutional taxexempt funds would exceed the 4%
redemption threshold on any given day.
Higher (lower) net redemption
thresholds for mandatory liquidity fees
would reduce (increase) the number of
days on which affected money market
funds must estimate liquidity fees for
portfolio securities, reducing
(increasing) related costs and
operational challenges. However, higher
(lower) net redemption thresholds
would also reduce (increase) the amount
of dilution from redemptions that is
recaptured by money market funds and
accrue to non-transacting shareholders,
especially in times of severe and/or
prolonged stress. In addition, as
discussed in section II.B.2.a, a higher
redemption threshold for the imposition
of liquidity fees may lead investors to
expect that they will not incur a fee as
727 See, e.g., IIF Comment Letter; Bancorp
Comment Letter.
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long as they redeem early enough in a
crisis, which may provide an incentive
to redeem earlier in a redemption wave
and contribute to the first-mover
advantage. As discussed above, we
believe that the final liquidity
thresholds balance these effects and are
likely to allow more funds to have
sufficient liquidity to meet redemptions
during periods of liquidity stress.
As another alternative, the final
amendments could have required funds
to set their own net redemption triggers
on a fund-by-fund basis, with reference
to each fund’s historical flows.728 For
example, each fund could have been
required to determine the trading days
for which it had its highest flows over
a set time period, and set its net
redemption threshold based on the 5%
of trading days with the highest
redemptions.729 Such alternatives could
allow funds to customize their liquidity
fee thresholds to their historical
redemption flows. However, they may
also result in under-application of fees
by funds with higher run risk and overapplication of fees by funds with lower
run risk. For example, funds with
volatile redemption histories and high
investor concentration could avoid the
application of liquidity fees in times of
stress if they have had large historical
redemptions, whereas funds with
smooth redemption histories and low
investor concentration would have to
apply fees even in the face of low
redemptions in absolute terms. In
addition, these alternatives may reduce
the comparability of money market fund
returns for investors because liquidity
728 As another possibility, the final amendments
could have allowed funds discretion over which
historical period could be chosen. However,
because money market funds may not internalize
the externalities that their liquidity management
imposes on investors in the same asset class, they
may not be incentivized to use such discretion in
a way that mitigates those externalities. For
example, some affected funds may choose a
historical time period that results in liquidity fee
thresholds that are too high, so that liquidity fees
are rarely applied. Moreover, because liquidity fees
would influence reported returns, the alternative
may reduce the comparability of money market
fund returns for investors.
729 As another alternative, the rule could have
required policies and procedures regarding the
choice of a threshold percent level based on
historical data.
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fees, including the associated market
impact calculations, influence reported
fund returns. Finally, such alternatives
may create strategic incentives for fund
complexes to open and close funds
depending on historical redemption
activity. For example, to the degree that
the estimation of liquidity fees may be
burdensome or to the extent that there
may be incentives from fund flows not
to apply liquidity fees, fund families
may choose to close funds that
experienced high redemptions to avoid
the application of liquidity fees.
b. Alternative Allowing the Exclusion of
Pre-Announced Redemptions From the
Net Redemption Threshold for
Mandatory Liquidity Fees
Under the final amendments, all
institutional prime and institutional taxexempt money market funds will be
required to apply liquidity fees during
days with net redemptions in excess of
5% of fund net assets, unless the
estimated liquidity fee is below 1 basis
point. In addition to the final rule’s de
minimis exception, the final rule could
have allowed funds to exclude from the
5% net redemption threshold
redemption requests that were preannounced by investors to a fund a
reasonable period in advance. To the
degree that fund managers are able to
pre-position their portfolio liquidity to
meet anticipated large redemptions, this
alternative could result in fewer
instances in which funds would be
required to estimate liquidity fees when
liquidity costs are de minimis.
Moreover, this alternative would
incentivize investors to pre-announce
their large redemption requests to fund
managers in order to reduce the
possibility of a liquidity fee, and these
pre-announced redemption requests
may enhance efficiency of liquidity
management by money market funds. At
this time, we believe that the final rule
may result in similar benefits because,
under normal market conditions, the
liquidity costs of a fund with prepositioned liquidity meeting anticipated
redemptions generally would be de
minimis. However, unlike the
alternative, if a fund is not able to preposition its daily or weekly liquidity in
anticipation of pre-announced
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redemptions and liquidity costs are
above de minimis (for example, in
stressed market conditions), preannounced redemptions could still
dilute non-transacting investors, and
funds would be required to charge a
liquidity fee to redeemers under the
final rule.
The final rule could have allowed
funds to exclude from the 5% net
redemption threshold redemption
requests that were pre-announced by
investors to funds a reasonable period in
advance instead of the final rule’s de
minimis exception. At this time, we
believe that such an alternative may be
more costly to funds and investors than
the de minimis exception in the final
rule, as an exception for pre-announced
redemptions could increase uncertainty
about when the exception applies (e.g.,
what period of time before the day of
redemption is reasonable and provides
sufficient time for the fund to preposition itself) and may incentivize
investors to pre-announce redemptions
that they may not ultimately carry
through, which would create
inefficiencies in the fund’s liquidity
management. Moreover, the final rule’s
de minimis exception may be more
efficient than the pre-announced
redemption exception because money
market fund investors may face
unexpected cash needs and may be
unable to pre-announce their large
redemptions.
c. Greater Discretion in the Liquidity
Fee Framework
Under the final amendments, all
institutional prime and institutional taxexempt money market funds would be
required to apply liquidity fees during
days with net redemptions in excess of
5% of fund net assets. The Commission
has considered several alternatives that
would give funds greater discretion over
both the triggers for liquidity fees,
liquidity fee amounts, and potential
caps. For example, the rule could
require funds to adopt specific
procedures regarding the potential
imposition of liquidity fees.730
Similarly, the final rule could have left
the application and calculation of
liquidity fees to fund discretion, while
requiring fund boards to consider
certain specified factors when
determining whether to implement a
liquidity fee.731 As a related alternative,
the final rule could have provided
institutional fund boards broad
discretion to impose liquidity fees when
730 See, e.g., Federated Hermes Comment Letter I;
ICI Comment Letter; Americans for Tax Reform
Comment Letter; CFA Comment Letter.
731 See, e.g., ICI Comment Letter.
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in the best interest of the fund and its
investors.732 As another alternative, the
final rule could have made the
application of liquidity fees optional.
These alternatives may allow
institutional funds not to implement
liquidity fees or to implement a
liquidity fee framework with higher
liquidity fee thresholds and lower
liquidity fee amounts (for example,
without estimating market impacts of a
hypothetical sale of the vertical slice).
Relative to the final amendments, these
alternatives may allow funds to better
tailor their liquidity management and
liquidity fee design to investor
composition, portfolio and asset
characteristics, and prevailing market
conditions. This alternative may also
avoid operational costs and challenges
of liquidity fees for some funds. To the
degree that the implementation of
mandatory liquidity fees under the final
rule may result in higher fees charged to
redeemers, which can reduce the
attractiveness of affected funds to
investors, these alternatives may
decrease potential adverse impacts of
liquidity fees on the size of the
institutional money market fund sector,
the number of institutional money
market funds available to investors, and
the availability of wholesale funding
liquidity in the financial system.
However, these alternatives would
decrease comparability of fund returns
and benefits of the liquidity fee
framework.
The operational costs of
implementing liquidity fees are
immediate and certain, while the
benefits are largest in relatively rare
times of liquidity stress. Moreover,
affected funds may not internalize the
externalities that they impose on
investors in the same asset classes or the
externalities that redeeming investors
impose on investors remaining in the
fund. While money market funds may
have governance structures in place and
reputational incentives to manage
liquidity to meet redemptions—and
fund sponsors may have chosen to
provide sponsor support in the past—
institutional money market funds also
face disincentives from investor
behavior and collective action problems.
Specifically, to the degree that
institutional investors may use
institutional prime and institutional taxexempt funds for cash management and
may be sensitive to liquidity fees, funds
that start charging liquidity fees on large
732 See ICI Comment Letter; Schwab Comment
Letter; Federated Hermes Comment Letter I;
Federated Hermes Comment Letter II; Federated
Hermes Board Comment Letter; Invesco Comment
Letter; SIFMA AMG Comment Letter; Americans for
Tax Reform Comment Letter.
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redemptions when other funds are not
may experience follow-on redemption
waves. As a result, institutional money
market funds may be reluctant to be the
first to start charging liquidity fees, even
if all such funds recognize the value of
charging redeeming investors for the
liquidity costs of redemptions.
Thus, these alternatives could reduce
the likelihood that funds use liquidity
fees as an anti-dilution tool. This may
reduce or eliminate important benefits
of the final liquidity fee requirement,
including protecting non-transacting
investors from dilution, reducing firstmover advantage and run risk, and
reducing liquidity externalities money
market funds may impose on market
participants transacting in the same
asset classes. In addition, relative to the
final amendments, these alternatives
would increase fund manager discretion
over the choice of liquidity fee
thresholds, size of liquidity fees, and the
application of liquidity fees in general,
which may reduce the comparability of
money market fund returns for
investors. Finally, in the absence of a
prescribed trigger for liquidity fees, fund
boards may default to relying on weekly
liquid asset thresholds to trigger
liquidity fees.733 As discussed in section
IV.C.1 above, weekly liquid asset
thresholds may magnify, rather than
dampen, liquidity externalities in
money market funds, the first-mover
advantage in investor redemptions, and
run risk in money market funds.
Importantly, as discussed in section
IV.C.4.b, the final rule would allow
institutional money market funds to
impose discretionary liquidity fees on
days with net redemptions at or below
5% of the fund’s net assets. A
combination of mandatory liquidity fees
on days with large net redemptions and
discretionary liquidity fees on days with
smaller net redemptions may reduce
dilution cost, run risk, and fund
resilience when faced with large
redemption waves and during times of
stress, while providing funds with
greater flexibility in routine liquidity
management.
As a related alternative, the final
amendments could have required
institutional funds to apply liquidity
fees as in the final rule, but without a
requirement to estimate market impact
factors. Alternatively, the final
amendments could have made the use
of market impact factors in liquidity fee
calculations less prescriptive and more
principles-based or optional in their
entirety. These alternatives would
reduce the likelihood and frequency
with which affected money market
733 See,
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funds would estimate market impacts in
their liquidity fee calculations, which
may reduce costs and operational
challenges of doing so. However, this
may reduce the frequency and size of
liquidity fees and the benefits of
liquidity fees for non-transacting
shareholders.
Increased discretion in liquidity fee
calculations may allow funds to tailor
the calculation of liquidity costs to
individual portfolio and asset
characteristics and prevailing market
conditions. This may make liquidity
fees a more precise measure of liquidity
costs assessed to redeeming investors.
However, because liquidity fees
influence reported fund returns, greater
discretion over the calculation of
liquidity fees may reduce the
comparability of money market fund
returns for investors. Moreover, because
money market funds may not internalize
the externalities that their liquidity
management practices may impose on
investors in the same asset class, they
may not be incentivized to use such
discretion in a way that mitigates those
externalities. Specifically, funds may
compete on liquidity fees and may face
flow incentives to impose lower fees,
and this alternative may result in
assessed liquidity fees being too low to
recapture the dilution costs of
redemptions.
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d. Other Liquidity Fee Thresholds,
Tiered Liquidity Fees, and Alternative
Default Fees
The Commission has considered a
variety of alternatives to the final
liquidity fee framework. For example,
given baseline delays in order flows
across various fund intermediary
networks, the final rule could have
required affected money market funds to
impose liquidity fees conditional on a
previous day’s net redemptions
exceeding 5% or some other threshold
from the previous day. This alternative
could improve precision of the
threshold determination by allowing
funds to use more complete flow
information. However, this alternative
may involve three significant groups of
costs. First, redeeming investors would
be able to more accurately predict
whether a liquidity fee would be
assessed on a particular trading day and
the following day.734 This may trigger
redemptions on days in which fees
would not be applied, magnifying the
first-mover advantage in money market
fund redemptions and reducing
734 See 17 CFR 270.2a–7(h)(10)(ii)(C) (requiring a
money market fund to update its website each
business day to provide its net inflows or outflows
as of the end of the preceding business day).
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resilience of affected money market
funds under stress. Second, days with
large net redemptions may be followed
by days with smaller net redemptions,
especially outside of redemption waves.
The alternative imposing a fee on next
day’s redemptions based on previous
day’s flows may capture less dilution
costs compared to the final rule. Third,
under this alternative, redeemers on a
given day would be charged a liquidity
fee based on the transaction activity of
redeemers on a previous day, which can
pose fairness concerns.
The final rule could have triggered
fees based on a fund’s sale of portfolio
securities, instead of the level of net
redemptions, and could have tied the
size of the fee to ex post transaction
costs and market impacts of security
sales. In the swing pricing context, one
commenter indicated that security sales
are a better barometer of dilution than
net redemptions.735 To the degree that
most affected money market funds may
meet redemptions out of daily or
maturing weekly liquid assets, this
approach could result in a less frequent
imposition of liquidity fees. However,
the final rule will allow funds to assume
that the market impact of weekly liquid
assets of zero and includes a de minimis
exception for liquidity fees. Thus, under
the final rule, most funds are also
unlikely to assess liquidity fees under
normal market conditions. To the degree
that this alternative results in less
frequent imposition of liquidity fees,
especially in times of stress, it could
involve lower costs of implementing the
liquidity fee approach for affected
money market funds—costs that are
likely to be passed along to money
market fund investors. Moreover, the
size of the fee under this alternative
would be derived from transaction data
of each fund, which may increase the
degree of precision in estimates of
spread and market impact costs of
redemptions.
However, this alternative may have
significant costs relative to the final
rule. Specifically, the alternative may
reduce the amount of dilution costs
affected money market funds recapture
for the benefit of non-transacting
shareholders relative to the final
approach. If a fund is forced to sell
portfolio securities during market stress,
they are likely to sell less illiquid
portfolio holdings first. A fee based only
on the transaction costs and market
impacts of the securities actually sold
by a fund to meet redemptions would
undercharge redeemers for the liquidity
costs they impose on the remaining
investors. Thus, relative to the final
735 See,
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rule’s requirement to estimate fees on
the assumption of the sale of the prorata slice of portfolio securities, the
alternative would reduce the benefits of
the liquidity fee framework for the
protection of non-transacting investors
and run incentives in affected money
market funds. Moreover, under stressed
conditions, short-term funding markets
may freeze and money market funds
may be unable to sell portfolio
securities, so the alternative may result
in low or zero liquidity fees being
assessed precisely when dilution costs
are greatest. The final amendments may
result in larger and more frequent
liquidity fees being assessed, less
dilution of non-transacting investors,
and overall lower run risk in affected
money market funds.
The final rule could have relied on
alternative bright line approaches,
whereby liquidity fees would trigger
automatically upon certain events. For
example, the final rule could have tied
the trigger of mandatory liquidity fees to
a specific net redemption level or
weekly liquid assets threshold. As a
related alternative, the liquidity fee
framework could have included dual
triggers based on net redemptions and
liquidity levels, with both triggers being
required for the imposition of a liquidity
fee.736 For example, the rule could have
triggered liquidity fees based on net
redemptions of more than 10% and
drops in liquidity of more than 50%
below required weekly liquid asset
levels, which could be indicative of
potential stress. As another alternative,
liquidity fees could be triggered, at least
in part, based on a specified amount of
net redemptions over multiple days.737
For example, funds could be required to
charge a 2% liquidity fee when they
experience net redemptions of 15% over
the course of two consecutive trading
days. As another example, a fee could
be triggered in the event of 5% net
redemptions over three consecutive
days, in addition to an occurrence of a
Form N–CR reportable event. These
alternatives may improve the ability of
investors to forecast whether a liquidity
fee would be imposed across time and
may reduce the incidence with which
funds would be required to impose
liquidity fees relative to the final rule.
The final rule’s same-day net
redemption trigger may be less
forecastable and less susceptible to
736 See, e.g., ICI Comment Letter; IIF Comment
Letter; BlackRock Comment Letter; JP Morgan
Comment Letter; Invesco Comment Letter; SIFMA
AMG Comment Letter.
737 See, e.g., Morgan Stanley Comment Letter;
State Street Comment Letter.
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strategic redemptions and run risk
relative to these alternatives.
The Commission also received
comments recommending tying the
application of liquidity fees to stress as
indicated, for example, by weekly liquid
assets instead of net redemptions.738
While significant declines in a fund’s
weekly liquid assets can reflect fundspecific liquidity stress and contribute
to dilution of non-transacting
shareholders, the weekly liquid asset
threshold is more susceptible to
strategic redemptions, as discussed in
section IV.C.4 above. We believe that
the final rule would result in larger
liquidity fees under stressed conditions
while reducing incentives for strategic
redemptions incentives in three ways.
First, the final rule would require that
funds calculate market impacts based on
the costs of selling the pro-rata slice of
the fund portfolio, which would be
higher under stress, as discussed in
greater detail below. Second, where
liquidity costs are below one basis point
of the value of the shares redeemed,
such as under normal conditions and
outside of stress, funds would not be
required to assess liquidity fees. Third,
if markets are so stressed that
transactions are scarce and funds are
unable to estimate the costs of selling
the pro-rata slice of the fund portfolio,
funds would apply a default liquidity
fee of 1%.
As another alternative, the
Commission could have tiered liquidity
fees depending on net redemptions and/
or liquid asset thresholds. For example,
some commenters suggested that
affected funds could be required to
charge liquidity fees of: (1) 0.25% if net
redemptions are 10% or more and
weekly liquid assets are less than 30%
but at least 20%; (2) 1% if weekly liquid
assets are less than 20% but at least
10%; and (3) 2% if weekly liquid asset
are less than 10%.739 Other commenters
suggested tiered liquidity fees based
solely on declines in liquidity.740 For
example, the final rule could have
imposed a tiered fee structure for
mandatory liquidity fees that would
range from 0.5%, 1%, or 2% depending
on whether weekly liquid assets were
20%–30%, 10%–20%, or less than 10%,
respectively. These determinations
could rely on the prior day’s weekly
liquid assets or on weekly liquid assets
as of the end-of-day NAV calculation for
these determinations.
738 See,
e.g., ICI Comment Letter.
e.g., BlackRock Comment Letter; JP
Morgan Comment Letter.
740 See, e.g., ICI Comment Letter; Western Asset
Comment Letter.
739 See,
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Relative to the final rule, these
alternatives may reduce costs of
implementing the liquidity fee
framework by eliminating costs of
estimating spread and other transaction
costs of net redemptions, as well as
market impacts of a hypothetical sale of
the vertical slice. Moreover, alternatives
that would impose tiered liquidity fees
based on daily or weekly liquid assets
(without consideration of net
redemptions) would eliminate costs of
reviewing same-day net redemptions.
Thus, these alternatives would require
funds to impose higher fees in the face
of declining liquidity and larger
redemptions, which may proxy for
larger liquidity costs of redemptions.
As discussed above, we believe that
weekly liquid asset thresholds may be
subject to greater run risk than a net
redemption threshold. Moreover, by
having solely fixed liquidity fee levels,
these alternatives may over- or undercharge redeemers for the liquidity costs
of their redemptions. In contrast, the
final rule will generally require each
fund to make a good faith estimate of
the liquidity costs of meeting each day’s
worth of net redemptions under a given
set of market conditions on that day.
This may increase the accuracy with
which liquidity fees price dilution costs,
protecting non-transacting investors
from dilution without over-charging
redeemers. Importantly, under the final
rule, the liquidity fee will be lower
when a fund’s weekly liquid assets are
higher because the rule will allow funds
to assume that weekly liquid assets have
a market impact of zero, resulting in
similar economic benefits of tiering.
Finally, the final rule could have
included different default liquidity fees
that funds would be able to charge if
they are unable to produce good faith
estimates of the liquidity costs of
redemptions. For example, the
Commission could have scaled the
default liquidity fee of 1% in the final
rule to a fund’s liquid asset levels (for
example, by multiplying it by one
minus the level of weekly liquid assets,
or by one minus the level of daily liquid
assets, at the end of the same or
previous day). Such alternatives to the
default fee may more closely resemble
the costs of a hypothetical sale of the
vertical slice, as funds with higher
liquid assets would charge lower default
fees in times of stress, when they are
better able to absorb redemptions out of
liquid assets with a zero haircut.
However, this approach could reduce
the fee that funds charge redeemers in
times of stress and, given that fund
liquidity levels are publicly disclosed,
could contribute to incentives to redeem
before a fund’s liquidity is depleted.
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Moreover, this alternative may create an
incentive for funds to hold onto weekly
liquid assets in times of stress, when the
costs of the vertical slice are difficult to
estimate and funds are most likely to
use the default fee. The final rule’s 1%
default fee is consistent with the current
baseline and is a significant fee for
money market funds that are used as
cash vehicles. Moreover, the default fee
is intended to apply precisely when
accurate data on liquidity costs for
portfolio securities is not available and
does not replace individual fund
estimates of market impacts of a
hypothetical sale of the vertical slice.
Importantly, funds may have incentives
to use default fees only in historically
rare periods of stress, when transaction
and quotation activity in short-term
funding markets freezes and data
needed to estimate liquidity costs of
redemptions are not available.
e. Other Alternative Implementations of
Liquidity Fees
The final amendments could have
required institutional funds to assess a
liquidity fee on all days with net
redemptions, rather than only on days
when net redemptions exceed 5%.
Alternatives requiring funds to apply
liquidity fees when net redemptions are
below the 5% threshold may enhance
the expected economic benefits of
liquidity fees. However, these
alternatives would impose greater costs
on institutional funds related to
calculating spread, transaction, and
market impacts when net redemptions
are low. As discussed in the baseline,
money market funds generally hold high
levels of daily and weekly liquid assets,
and the final amendments would
require money market funds to hold
even higher levels of these assets. As a
result, unless both net redemptions and
price uncertainty are large, institutional
funds may be able to absorb
redemptions of transacting investors
without imposing large liquidity costs
on the remaining investors.
The final amendments could have
allowed funds to calculate the liquidity
fees under the assumption that the fund
would absorb redemptions out of liquid
assets (the so-called horizontal slice of
the fund portfolio) or otherwise provide
funds with flexibility to determine the
costs based on how they would satisfy
redemptions on a given day. Money
market funds may manage their
liquidity so as to be able to absorb
redemptions out of daily and weekly
liquid assets, rather than having to sell
a pro-rata share of their portfolio
holdings. Moreover, the final
amendments would require money
market funds to hold higher levels of
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daily and weekly liquid assets. Assets
that are not daily and weekly liquid
assets can be less liquid and generally
may need to be held to maturity by the
fund. Thus, the alternative would allow
funds to avoid charging liquidity fees if
they are able to, for example, absorb
redemptions out of more liquid assets.
This may reduce uncertainty for
investors about the magnitude of the
potential liquidity fee, especially when
liquidity is not scarce. However, this
alternative would result in redeeming
investors not being charged for the true
liquidity costs of redemptions, which
consist not only of the immediate costs
of liquidating fund assets, but also of the
cost of leaving the fund more depleted
of liquidity and thus more vulnerable to
future redemptions.
As another alternative, the final
amendments could have required that
affected money market funds calculate
the liquidity fee based on the fund’s best
estimate of the liquidity costs of
redemptions, rather than following the
approach prescribed in the final rule.
Under this alternative, liquidity fees
may more accurately capture the costs
of redemptions as funds would be able
to tailor fees to their liquidity
management strategies (whether that is,
for example, liquidating pro-rata shares
of portfolio holdings, absorbing
redemptions out of daily or weekly
liquidity, or some other approach).
However, this alternative would
increase fund discretion in the
calculation of liquidity fees, reduce
comparability of fees across money
market funds, and fund manager
incentives may not be aligned with
incentives to accurately estimate
liquidity costs of redemptions. For
example, larger liquidity fees benefit the
fund and can improve reported fund
performance. At the same time,
disclosures about historical fees can
incentivize fund managers to apply
excessively low fees to attract investors.
6. Swing Pricing
In lieu of the final liquidity fee
framework, the Commission could have
adopted the swing pricing requirement
similar to the mandatory liquidity fee
framework, or as proposed. The swing
pricing alternative has several important
differences from the final liquidity fee
framework, and these differences give
rise to different economic benefits,
costs, and operational challenges. As
discussed in the Proposing Release and
in section II, swing pricing and liquidity
fees can both charge redeeming
investors for the liquidity costs they
impose on a fund and allow funds to
recapture the liquidity costs of
redemptions for non-redeeming
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investors. However, the swing pricing
alternative may have several effects
relative to the final liquidity fee
framework.
First, the final liquidity fee framework
may be more transparent than a swing
factor adjustment to the fund’s NAV, as
redeeming investors would more clearly
see application of a separate fee. Some
commenters stated that a liquidity fee
would be less confusing and more
transparent with respect to the liquidity
costs redeeming investors incur because
investors are more familiar with the
concept of liquidity fees (that exist in
the current rule) and because the size of
the swing factor is not readily
observable in the fund’s share price.741
Second, under the swing pricing
alternative, subscribers enter at a lower
price. This creates an incentive to
subscribe that may be important when
liquidity is scarce and a fund is facing
a wave of redemptions. However, some
commenters indicated that a liquidity
fee would be a more direct way to pass
along liquidity costs and, unlike swing
pricing, would do so without providing
a discount to subscribing investors or
adding volatility to the fund’s NAV.742
Third, there may be significant
operational challenges and time
pressures of swing pricing 743 that
reduce investor access to same day
liquidity.744 Specifically, commenters
expressed concern that swing pricing
may inhibit a fund’s ability to offer
features such as same-day settlement
and multiple NAV strikes per day due
to concerns that swing pricing would
delay a fund’s ability to determine its
NAV.745 Under the swing pricing
alternative, a fund has to analyze flows
and costs before publishing its NAV for
each pricing period. In contrast, under
the final liquidity fee framework, funds
may have more time after publishing the
NAV to finalize the liquidity fee
determination and only need to perform
the analysis once per day. One
commenter indicated that a liquidity fee
framework could better preserve sameday liquidity for investors than swing
pricing because liquidity fees are
already operationally feasible for many
741 See, e.g., Morgan Stanley Comment Letter;
SIFMA AMG Comment Letter; Federated Hermes
Comment Letter II.
742 See, e.g., ICI Comment Letter; Federated
Hermes Comment Letter II; JP Morgan Comment
Letter.
743 See, e.g., ICI Comment Letter; Northern Trust,
Capital Group Comment Letter; JP Morgan
Comment Letter.
744 See, e.g., Northern Trust Comment Letter;
BlackRock Comment Letter.
745 See, e.g., Capital Group Comment Letter; State
Street Comment Letter; ICI Comment Letter;
Federated Hermes Comment Letter II; SIFMA AMG
Comment Letter; BNY Mellon Comment Letter.
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money market funds and present fewer
implementation challenges.746 Because
institutional money market funds
typically offer same-day settlement, the
final liquidity fee framework would also
involve time pressures, albeit less acute.
Fourth, some commenters argued that
swing pricing is ill-suited for money
market funds given the general lack of
experience with swing pricing in the
money market fund industry,747 and
indicated that liquidity fees would be
easier for money market funds to
implement, allowing funds to leverage
their existing experience with liquidity
fees under current rules.748
Fifth, the Proposing Release
recognized that swing pricing may
increase costs of tax reporting.
Specifically, the swing pricing
alternative may increase tax reporting
burdens for investors if the requirement
prevents an investor from using the
NAV method of accounting for gain or
loss on shares in a floating NAV money
market fund or affects the availability of
the exemption from the wash sale rules
for redemptions of shares in these
funds. Several commenters stated that
swing pricing would increase tax
reporting burdens because wash sale
rules may apply to redemptions in
floating NAV money market funds using
swing pricing.749 In contrast, the tax
implications of liquidity fees are already
settled. In addition, liquidity fees have
fewer accounting implications for funds
because other types of mutual funds
have used fees and money market funds
are already subject to a liquidity fee
framework.750
As discussed in section II, many
commenters expressed broad concerns
about the swing pricing proposal and its
potential effect on institutional money
market funds and investors. One
commenter indicated that the swing
pricing requirement is based on false
assumptions, including the assumption
that liquidity fees did not work during
market stress of 2020, that fund boards
will not implement liquidity fees, and
746 See
IIF Comment Letter.
Morgan Stanley Comment Letter; SIFMA
AMG Comment Letter; IIF Comment Letter;
Federated Hermes Comment Letter I; Federated
Hermes Comment Letter II; Senator Toomey
Comment Letter; Mutual Fund Directors Forum
Comment Letter; see also Profs. Ceccheti and
Schoenholtz Comment Letter.
748 See, e.g., Federated Hermes Comment Letter II;
Invesco Comment Letter; SIFMA AMG Comment
Letter; Schwab Comment Letter; IIF Comment
Letter.
749 See, e.g., Northern Trust Comment Letter;
Capital Group Comment Letter; ICI Comment Letter;
SIFMA AMG Comment Letter; Federated Hermes
Comment Letter II; Americans for Tax Reform
Comment Letter.
750 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter.
747 See
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that swing pricing will not eliminate a
key tenet of money market funds
(availability of intraday and same day
liquidity), among others.751 Moreover,
the commenter stated that empirical
studies about the effects of swing
pricing on redemptions in a crisis cited
in the proposal do not support the
swing pricing requirement.752 While we
disagree with this assertion, we are not
adopting the swing pricing requirement
for money market funds. Section II,
section IV.4, and the above discussion
highlight the effects of the liquidity fees
tied to weekly liquid assets in March
2020 on redemption behavior, fund flow
disincentives to implement liquidity
fees, and the potential effects of swing
pricing on the availability of same-day
and intraday liquidity, among other
things. In light of this analysis and
commenter input,753 we believe that, on
balance, the final liquidity fee
framework may be a more operationally
feasible and efficient way to reduce
dilution of fund investors and facilitate
liquidity risk management by money
market funds while reducing costs and
unintended effects on the money market
fund industry and investors.
7. Expanding the Scope of the Floating
NAV Requirements
The final amendments could have
expanded the floating NAV
requirements to a broader scope of
money market funds. For example, the
final amendments could have imposed
floating NAV requirements on all prime
money market funds, but not on taxexempt funds. As another alternative,
the final amendments could have
imposed floating NAV requirements on
all prime and tax-exempt money market
funds.754 Finally, the final amendments
could have required that all money
market funds float their NAVs.755
Expanding the scope of the floating
NAV requirements beyond institutional
prime and institutional tax-exempt
funds would involve several benefits.
First, a floating NAV may increase
transparency about the risk of money
market fund investments. Portfolios of
751 See
Federated Hermes Comment Letter I.
Federated Hermes Comment Letter I
discussing, for example, Dunhong Jin, et al., Swing
Pricing and Fragility in Open-End Mutual Funds, 35
Rev. Fin. Stud. 1, 1–50 (2022).
753 For example, a number of commenters
indicated that swing pricing would reduce the
viability of institutional prime funds as an asset
class and that most if not all institutional investors
will abandon funds subject to swing pricing. See,
e.g., Federated Hermes Comment Letter I. Also see,
e.g., ICI Comment Letter; Capital Group Comment
Letter; JP Morgan Comment Letter; BlackRock
Comment Letter.
754 See, e.g., Schwab Comment Letter.
755 See, e.g., Americans for Tax Reform Comment
Letter; Better Markets Comment Letter.
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money market funds give rise to
liquidity, interest rate, and credit risks—
risks that are relatively low under
normal market conditions, but may be
magnified during market stress. To the
degree that investors in stable NAV
funds are currently treating them as if
they were holding U.S. dollars due to a
lack of transparency about risks of such
funds, expanding the scope of the
floating NAV requirements may
enhance investor protections and enable
investors to make more informed
investment decisions. Some
commenters indicated that such an
alternative could clarify to investors that
there is investment risk in these
products and that money market funds
differ from insured bank deposits, as
well as reduce the likelihood that
official sector interventions and
taxpayer support will be needed to halt
future runs.756
Second, these alternatives could
reduce run risk in affected stable NAV
funds.757 Specifically, floating the NAV
may reduce the first-mover advantage in
redemptions, partly mitigating investor
incentives to run. A floating NAV
requirement could discourage herd
redemption behavior across all prime
money market funds and may reduce
the advantages of sophisticated
investors that redeem quickly under
stressed conditions. Third, floating the
NAV of a broader range of money
market funds could more accurately
capture their role in asset
transformation and corresponding risks.
Retail prime and retail tax-exempt funds
have risky portfolio holdings, with some
of the underlying holdings of retail
money market funds similar to those of
institutional prime funds, which
experienced significant stress in 2020.
Expanding the floating NAV
requirements to all money market funds
would result in a consistent regulatory
treatment of money market funds and
put them on par with other mutual
funds. Moreover, it may enhance the
allocative efficiency in the money
market fund industry and may enhance
competition between floating NAV and
stable NAV funds. To the degree that the
disparate treatment of floating NAV and
stable NAV funds led to a significant
migration of institutional investments
from prime and tax-exempt money
market funds to government money
market funds, alternatives expanding
the scope of the floating NAV
requirement to all money market funds
may lead to outflows from government
756 See, e.g., Schwab Comment Letter; Better
Markets Comment Letter.
757 See, e.g., Schwab Comment Letter.
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money market funds back into prime
and tax-exempt sectors.
However, retail investors have
exhibited a lower propensity to run in
prior market stress periods than
institutional investors. Additionally,
government funds tend to receive
inflows rather than outflows during
periods of market stress. These factors
would reduce the benefits of a floating
NAV in terms of reducing run risk for
retail and government funds. Further,
the final rule’s increase in liquidity
requirements may decrease the portfolio
and redemption risks of retail funds, as
the final rule will require these funds to
maintain liquidity levels that are high in
comparison to historical redemptions
these funds have experienced, further
reducing the benefits of a floating NAV
requirement.
At the same time, the alternatives
would impose significant costs. First,
such alternatives may reduce the
attractiveness of affected money market
funds to investors and may result in
significant reductions in the size of the
money market fund sector. One
commenter noted that adopting a
floating NAV for all funds may cause
investors to reallocate capital into cash
accounts subject to deposit insurance,
with adverse effects on wholesale
funding liquidity and access to capital
for issuers.758 To the extent that retail
investors use money market funds as a
safe, cash-like product, floating the NAV
of stable NAV funds may lead investors
to reallocate capital into cash accounts
subject to deposit insurance. This would
reduce retail investors’ ability to receive
market rates for their cash management
investments.
Second, the Commission continues to
recognize that if the floating NAV
alternatives resulted in a decrease in the
size of the money market fund industry,
they would adversely impact the
availability of wholesale funding
liquidity and access to capital for
issuers. A reduction of wholesale
funding liquidity available to
arbitrageurs may magnify mispricing
across securities markets. Similarly, a
reduction in the size of affected money
market funds or the money market fund
industry as a whole may increase the
costs of or decrease access to capital for
issuers in short-term funding markets.
Third, the floating NAV alternative
may involve significant operational,
accounting, and tax challenges. In
particular, alternatives involving
switching retail funds from stable NAV
to floating NAV may create accounting
and tax complexities for some retail
investors. For instance, some retail
758 See
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investors might not use the NAV
method of accounting for gains and
losses on money market fund shares.759
In addition, a floating NAV requirement
may be incompatible with popular cash
management tools such as check-writing
and wire transfers that are currently
offered for many stable NAV money
market fund accounts, as well as the use
of stable NAV money market funds by
sweep vehicles.760
8. Countercyclical Weekly Liquid Asset
Requirements
The final rule could have imposed
countercyclical weekly liquid asset
requirements. For instance, during
periods of market stress, the minimum
weekly liquid asset threshold could
decrease, for example, by 50%. The
final amendments could have specified
the definitions of market stress that
would trigger a change in weekly liquid
asset thresholds. Alternatively, the final
amendments could have specified that
decreases in weekly liquid asset
thresholds would be triggered by
Commission administrative order or
notice.
As discussed in the Proposing
Release, such alternatives could help
clarify that money market funds’
liquidity buffers are meant for use in
times of stress and may provide
assurance to investors that funds may
utilize their liquidity reserves to absorb
redemptions. To the degree that these
alternatives may increase the
willingness of affected funds to absorb
redemptions out of daily or weekly
liquid assets during times of stress,
these alternatives may reduce liquidity
costs borne by fund investors and may
reduce incentives to redeem.
The Commission has not received
comment in support of this alternative,
but has received comment that
countercyclical liquidity requirements
are unnecessary.761 Specifically, the
commenter asserted that if there is no
regulatory link between the level of
liquidity and the potential imposition of
fees or gates, money market fund
managers will naturally be able to use
liquid assets in a countercyclical way.
The commenter further emphasized that
countercyclicality would be challenging
to administer by a regulator.
Investor redemptions out of
institutional prime and institutional taxexempt funds during market stress of
2020 demonstrated a high level of
sensitivity of redemptions to threshold
effects. The Commission continues to
759 See supra note 260 and accompanying text
(discussing the NAV method).
760 See supra paragraph accompanying note 345.
761 See Federated Hermes Comment Letter I.
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believe that any decrease in regulatory
minimum thresholds may create
investor concerns about liquidity stress
in money market funds and trigger an
increase in investor redemptions.
Moreover, under the final amendments,
affected money market funds will not be
prohibited from operating below the
daily or weekly liquid asset
requirements. Importantly, the
elimination of the tie between liquidity
thresholds and fees and gates may more
efficiently incentivize funds to use their
liquidity buffers in times of stress, while
removing threshold effects around
weekly liquid asset levels.
9. Amendments Related to Potential
Negative Interest Rates
As an alternative, the Commission
could have restricted how money
market funds may react to possible
future market conditions resulting in
negative fund yields by prohibiting, as
proposed, money market funds from
reducing the number of shares
outstanding to seek to maintain a stable
net asset value per share or stable price
per share. In tandem, the Commission
could have required, as proposed, that
government and retail money market
funds to keep records identifying
intermediaries able to process orders at
a floating NAV and to no longer transact
with intermediaries that are not able to
process orders at a floating NAV, as
proposed.
To the degree that, relative to the final
rule, a floating NAV provides greater
transparency to investors by showing
daily fluctuations in the NAV, this
alternative may increase transparency of
stable NAV performance for investors in
the event of a negative interest rate
environment.762 However, these relative
benefits may be dampened, if not
eliminated, by the final rule’s disclosure
requirements about the board’s
determination to use an RDM as well as
account statement disclosures. The
alternative requirement related to fund
intermediaries may facilitate a transition
of stable NAV funds to floating NAV in
a negative yield environment. One
commenter also indicated that this
alternative may result in greater global
consistency among money market funds
after the ultimate discontinuation of
share cancellation under the European
Money Market Funds Regulation.763
However, this alternative may impose
significant operational burdens and
costs on investors. Many investors in
stable NAV funds may prefer a stable
NAV investment even in a negative rate
762 See, e.g., Northern Trust Comment Letter; CFA
Comment Letter.
763 See, e.g., Northern Trust Comment Letter.
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environment, and this alternative would
eliminate this possibility.764 In addition,
for some investors, transitioning to a
floating NAV could be even more
complex and confusing than an RDM.765
Finally, a floating NAV requirement
may be incompatible with popular cash
management tools such as check-writing
and wire transfers that are currently
offered for many stable NAV money
market fund accounts.
The alternative requirement that
stable NAV funds determine that their
intermediaries have the capacity to
process the transactions at floating NAV
and the related recordkeeping
requirements would also impose
burdens on such funds. For example,
affected money market funds may have
to review their contracts with
intermediaries, and some contracts may
need to be renegotiated. Funds would
have flexibility in how they make this
determination for each financial
intermediary, which may reduce these
costs for some funds. Moreover,
intermediaries that are currently unable
to process transactions in stable NAV
funds at a floating NAV may need to
upgrade their processing systems to be
able to continue to transact in
government and retail funds. Many
financial intermediary platforms that
operate cash sweep programs and banklike services using an infrastructure that
does not accommodate a floating share
price may be unable or unwilling to do
so.766 To that effect, the alternative may
adversely impact the size of
intermediary distribution networks of
some funds, which can limit access or
increase the costs of investor access to
some affected funds. Thus, the
alternative may present operational
difficulties for intermediaries offering
stable NAV funds and may reduce the
ability of investors to use stable NAV
funds for sweep accounting and other
cash management services. Overall, the
final rule and its disclosure
requirements may serve to maintain
similar transparency to the alternative,
without adverse effects on the ability of
investors to have a stable NAV in the
event of negative yields.
As another alternative, the final
amendments could have mandated that
in the event of persistent negative
interest rates, all stable NAV funds must
use an RDM. Requiring stable NAV
funds to use an RDM would eliminate
764 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I; Allspring Funds Comment Letter.
765 BNY Mellon Comment Letter.
766 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter
I; Morgan Stanley Comment Letter; BNY Mellon
Comment Letter.
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NAV fluctuations in a negative yield
environment, which may preserve the
use of stable NAV funds for sweep
accounting. Such an alternative may,
thus, preserve or increase demand for
government and retail money market
funds relative to the final rule. This
alternative may also increase
comparability across stable NAV funds
relative to the final rule. However, such
an alternative would eliminate valuable
flexibility for stable NAV funds to float
the NAV, which may be optimal for
some funds given their investor
clientele and capabilities of their
intermediary networks.
10. Amendments Related to WAL/WAM
Calculation
The final rule will amend rule 2a–7 to
require that WAM and WAL are
calculated based on the percentage of
each security’s market value in the
portfolio, as proposed. The Commission
could have instead based the calculation
on amortized cost of each portfolio
security. Similar to the final
amendments, such an alternative would
also enhance consistency and
comparability of disclosures by money
market funds in data reported to the
Commission and provided on fund
websites. Thus, the alternative would
achieve the same benefits as the final
amendments in terms of enhancing
transparency for investors and
enhancing the ability of the Commission
to assess the risk of various money
market funds and increasing allocative
efficiency. However, relative to the final
amendments, the alternative may give
rise to higher compliance costs. While
all money market funds are required to
determine the market values of portfolio
holdings, no such requirement exists for
amortized costs of portfolio securities.
Thus, funds that do not currently
estimate amortized costs would be
required to do so for the WAL and
WAM calculation. Moreover, the
Commission continues to believe that
amortized cost may be a poor proxy of
a security’s value if market conditions
change drastically due to, for example,
liquidity or credit stress, and if the fund
is unable to hold the security until
maturity. This may distort WAL and
WAM calculations during market
dislocations—when comparable and
accurate information about fund risks
may be most important for investment
decisions.
While commenters generally
supported the proposed approach,767
one commenter disagreed with the
proposed changes, but also with the
767 See,
e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Capital Group Comment Letter.
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alternative calculating WAM and WAL
based on amortized cost of the portfolio
instead of market value.768 Specifically,
the commenter stated that it calculates
WAM and WAL using market value for
floating NAV money market funds and
amortized cost for retail and government
money market funds. The commenter
also stated that the only meaningful
difference in these methodologies
would be if one of the issuers of the
portfolio securities had a credit
problem, in which case the fund would
immediately shift to using market
value.769 Further, the commenter stated
that the fractional difference between
the WAM and WAL calculated with
amortized cost versus market value
would not change either number
calculated in actual days, rather than
fractions of a day, and that any changes
relative to the regulatory baseline would
necessitate operational changes.
Differences between the WAM and
WAL calculated with amortized cost
versus market value may vary across
funds and over time. As discussed
above, while the difference between a
fund’s WAM or WAL calculated using
amortized cost versus market value is
likely to be small in many
circumstances, there are also
circumstances where this difference
may be more significant, such as when
a security’s issuer experiences a credit
event, during periods of market stress,
or when interest rates rise rapidly,
particularly for assets with longer
maturities. We continue to believe that
consistency and comparability of
disclosures related to fund WAM and
WAL across different money market
funds and different types of money
market funds may enhance Commission
oversight and be valuable to investors,
and we believe that requiring funds to
use a uniform approach to the WAM
and WAL calculations at all times
mitigates any concerns about a fund not
moving, or being slow to move, to a
market-based value during times when
there could be meaningful differences.
In light of the above considerations, we
continue to believe the final approach
may be a more efficient way of
accomplishing such comparability.
11. Form PF Amendments for Large
Liquidity Fund Advisers
The Commission could have adopted
Form PF amendments for large liquidity
fund advisers with a greater level of
detail requested. Alternatively, the
Commission could have adopted the
final Form PF amendments without
including some or all of the new
768 See
Federated Hermes Comment Letter I.
769 Id.
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51499
reporting requirements. For example,
the final amendments could have
amended Form PF without requiring
new disclosures related to repurchase
agreement transactions or related to
investor information. Relative to the
final amendments, alternatives that
reduce (increase) the amount of
information required to be reported in
Form PF may have reduced (increased)
the benefits of the reporting
requirements as well as the direct and
indirect costs borne by large liquidity
fund advisers. As discussed above, one
commenter questioned the value added
of the proposed additional reporting,770
and other commenters generally
criticized the purported benefits of
enhanced Form PF reporting.771
Importantly, compliance with reporting
requirements may involve significant
fixed costs. As a result, the elimination
of one or several items from the final
amendments may not lead to a
proportional reduction in direct costs.
Moreover, these alternatives would not
align reporting of large liquidity funds
with that of money market funds, which
invest in the same short-term funding
markets. The final amendments may
present a more complete and
comparable picture of the short-term
financing markets in which liquidity
funds invest, and in turn, enhance the
Commission and FSOC’s ability to
monitor and assess short-term financing
markets and facilitate better regulatory
oversight of those markets and their
participants.
12. Disclosures
a. Eliminating Website Disclosure of
Fund Liquidity Levels
The final amendments could have
eliminated the requirement that money
market funds post their daily and
weekly liquid asset levels on their
websites. As discussed above, the
Commission understands that the public
nature of fund liquid asset disclosures,
in combination with the regulatory
thresholds for the potential imposition
of fees and gates, may have triggered a
run on institutional money market
funds and made other funds reluctant to
use liquid assets to absorb redemptions
if it meant approaching or falling below
the regulatory threshold. Commenters
have generally not discussed this
alternative, although one commenter
stated that the website disclosure
should not be eliminated because, once
the link of a potential fee or gate
imposition is removed, the incentive for
investors to monitor and redeem based
770 See supra note 709 and accompanying text;
see also NYC Bar Comment Letter on File No. S7–
01–22.
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on liquidity is mitigated. The final
amendments would partly mitigate run
incentives surrounding disclosures of
weekly liquid assets, by removing the
tie between weekly liquid assets and the
potential imposition of fees and gates,
but also increasing minimum daily and
weekly liquidity requirements and
imposing a requirement to promptly
report liquidity threshold events.
Moreover, money market funds play an
important asset transformation role and
inherently carry liquidity risks. We
continue to believe that public
disclosures of money market fund
liquidity convey important information
to investors about the liquidity risks of
their investments.
b. Alternatives to Form N–MFP
Amendments
The Commission could have adopted
Form N–MFP amendments without
including some or all of the new
reporting requirements.772 While these
alternatives may have reduced
compliance burdens compared to the
final amendments, compliance with
disclosure requirements may involve
significant fixed costs. As a result, the
elimination of one or several items from
the final amendments may not lead to
a proportional reduction in compliance
burdens. Moreover, information about
repurchase agreement transactions, fund
liquidity management, investor
concentration and composition, and
sales of securities into the market would
provide important benefits of
transparency for investors and would
enhance Commission oversight.
The final amendments will require
the disclosure of every liquidity fee in
the reporting period by date.
Alternatively, the final amendments
could have required the disclosure of
less information about when the fund
applied liquidity fees. For example, the
final amendments could have required
disclosure of the lowest, median, and
highest liquidity fee a fund applied in
a given reporting period. Commenters
did not generally discuss such
alternatives or alternatives to similar
proposed reporting requirements for
swing pricing. Alternatives involving
less information about fund liquidity fee
practices and eliminating current
website disclosures of daily fund flows
would reduce the scope of the economic
benefits and costs of the final
amendments described above. To the
degree that disclosures of liquidity fees
may make liquidity fees more salient to
investors and may lead funds to
772 See, e.g., Federated Hermes Comment Letter I;
ICI Comment Letter; SIFMA AMG Comment Letter;
BlackRock Comment Letter; CCMR Comment Letter.
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compete on fees, alternatives involving
less disclosure about liquidity fees can
reduce those effects. Moreover, to the
degree that granular disclosure about
historical liquidity fees can incentivize
or inform strategic redemption behavior,
alternatives involving less disclosure
about liquidity fees can reduce those
effects.
c. Alternatives to Form N-CR
Amendments
The final amendments could have
defined a liquidity threshold event for
purposes of board notification and/or
Form N-CR reporting to reflect a
specified percentage decline from a
fund’s preferred weekly liquid asset and
daily liquid asset.773 Relative to the
final rule, such an approach could offer
additional flexibility for funds in setting
up their board reporting and oversight
of liquidity management. The
magnitude of such benefits may be
small if board notification thresholds
are lower than Form N-CR reporting
thresholds because fund managers are
likely to keep the board apprised of any
liquidity events triggering Form N-CR
reporting. In addition, to the degree that
these alternatives would allow funds to
set up different Form N-CR reporting
thresholds, they would reduce
comparability of Form N-CR reported
events for investors. Moreover, funds
and fund managers may be incentivized
by competitive pressures to reduce the
salience of their liquidity threshold
events, leading them to select thresholds
for board and Form N-CR reporting that
are lower than those in the final rule.
The final amendments could also
have required money market funds to
make notices concerning liquidity
threshold events public with a delay
(e.g., 15, 30, or 60 days). As a related
alternative, the Commission could have
triggered the Form N-CR reporting
requirement in the final rule if a fund
is 50% below each of the daily and
weekly liquidity requirements for a
period of consecutive days.774 As
another alternative, the final
amendments could have required that
some or all information about the
liquidity threshold event be kept
confidential upon filing. Under the
baseline, such funds are required to
report daily and weekly liquid assets
daily on fund websites. Relative to the
final rule, these alternatives would
introduce delays to the reporting of
liquidity threshold events to investors
on Form N-CR, reduce the frequency of
such reporting, or decrease the amount
of information in liquidity threshold
773 See,
774 See,
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event notices available to investors. To
the degree that the publication of such
notices provides investors with
additional information about fund
liquidity management and can trigger
investor redemptions out of funds with
low levels of weekly and daily liquid
assets, the alternatives may reduce the
risk of redemptions around liquidity
thresholds and the increase the
willingness of funds to absorb
redemptions out of their weekly liquid
assets relative to the final
amendments.775 However, relative to
the final amendments, the alternatives
would reduce the availability of a
central source that investors could use
to identify when money market funds
fall more than 50% below liquidity
requirements and understand the
circumstances leading to the decline in
liquidity. The delayed reporting
alternative also would reduce the
amount of information available to
investors surrounding the context for
the liquidity threshold events as notices
are likely to clarify reasons for the
threshold event. Thus, the alternative
would reduce transparency for investors
around liquidity management of
affected money market funds, which
may reduce allocative efficiency.
Notably, a delay in publication of the
notices may increase staleness of the
information in the notices available to
investors.
In addition, the final rule could have
amended Form N-CR to include some of
the new collections of information on
Form N–MFP. For example, the final
rule could have amended Form N-CR to
include information about sales of
securities into the market of prime
funds that exceed a particular size. This
alternative would enhance the
timeliness of such reporting. Thus, the
alternative may enhance transparency
about fund liquidity management for
investors, which may enhance
informational and allocative efficiency
and Commission oversight. However,
the alternative would increase direct
reporting burdens related to the filing of
Form N-CR—costs that may flow
through in part or in full to end
investors in the form of fund expenses.
Moreover, timely reporting of prime
funds’ sales of portfolio securities may
signal fund liquidity stress to investors
even where funds may be able to
maintain their daily and weekly
liquidity levels. This may influence
investor decisions to redeem out of
reporting funds; thus, relative to the
final amendments, the alternative may
place heavier redemption pressure on
reporting funds.
775 See,
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With respect to the structured data
requirement for Form N-CR, the final
amendments could have required Form
N-CR to be submitted in the Inline
eXtensible Business Reporting Language
(Inline XBRL), rather than in N-CRspecific XML. We did not receive any
comments on this alternative. As with
N-CR-specific XML, Inline XBRL is a
structured data language and would
provide similar benefits to investors
(e.g., facilitating analysis of the eventrelated disclosures reported by money
market funds on Form N-CR and thereby
providing more transparency into
potential risks associated with money
market funds). From a filer compliance
perspective, money market funds have
experience complying with Inline XBRL
compliance requirements, because they
are required to tag prospectus risk/
return summary disclosures on Form N–
1A in Inline XBRL.776 This existing
experience would counter the
incremental implementation cost of
complying with an Inline XBRL
requirement under the alternative.
However, unlike N-CR-specific XML,
which the Commission would create
specifically for Form N-CR submissions
on EDGAR, Inline XBRL is an existing
data language that is maintained by a
public standards setting body, and it is
used for different disclosures across
various Commission filings (and for
uses outside of regulatory disclosures).
Due to the number of individual
transactions that might be reported as
Form N-CR data and the constrained
nature of the content of Form N-CR and
the absence of a clear need for the N-CR
disclosures to be used outside the Form
N-CR context, the alternative to include
an Inline XBRL requirement might
result in formatting for human
readability of tabular data within a web
browser that provides no additional
analytical insight. This would likely
include more complexity than is called
for by the disclosures on Form N-CR,
thus potentially making the disclosures
more burdensome to use for analysis
and possibly muting the benefits to
investors of a structured data
requirement, compared to the final
rule’s N-CR-specific XML requirement.
13. Sponsor Support
The final amendments could have
required money market fund sponsors to
provide explicit sponsor support to
cover dilution costs. As discussed in the
776 See Instruction C.3.g to Form N–1A; 17 CFR
232.405(b)(2). Effective July 2024, money market
funds will also be subject to Inline XBRL
requirements for shareholder reports they file on
Form N–CSR. See Tailored Shareholder Reports
Adopting Release, supra note 347; 17 CFR
232.405(b)(2).
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Proposing Release, dilution occurs
because shareholders remaining in the
fund effectively buy back shares at NAV
from redeeming investors. The assets
underlying those shares are eventually
sold at a price that may differ from that
NAV for the reasons described in the
baseline, causing dilution in some cases.
This alternative may significantly
change incentives around the liquidity
mismatch between money market fund
assets and liabilities. Specifically, this
alternative would give fund sponsors a
more direct incentive to manage the
amount of dilution risk they impose on
a fund via their choice of fund
investments.
As discussed in the Proposing
Release, directly exposing the sponsor,
rather than money market fund
investors, to the dilution risk associated
with the difference between NAV and
the ultimate liquidation value of the
fund’s underlying securities could have
several benefits. First, money market
funds may have a stronger incentive to
overcome any operational impediments
that expose them to unnecessary risk.
Second, the amount of required
operating capital to process
redemptions/subscriptions would be
higher for money market funds that held
relatively less liquid securities, and
money market funds would have to
charge higher fees to raise that capital.
Such fees would externalize the costs of
investing in less liquid assets via money
market funds. As those fees increase,
money market funds that hold less
liquid assets might become less
desirable to investors, and money
market fund investors might select into
other structures, such as closed-end
funds, that are a more natural fit with
illiquid assets. These benefits may be
reduced to the degree that the sponsor
support requirement may incentivize
money market funds to take additional
risks to recoup the sponsor’s costs or
may incentivize fund managers to
increase risk taking due to the backstop
of the sponsor support.
The effects of sponsor support on
investors may be mixed. Sponsor
support may increase the ability of
investors to redeem their shares in full
without bearing liquidity costs.
However, sponsor support could lead
some investors to believe that their
investments carry no risk and may make
investors less discerning in their choice
of money market fund allocations.
Moreover, sponsor support reduces
investor risk only to the degree that
fund sponsors are well capitalized and
easily capable of providing sponsor
support. Uncertainty surrounding the
ability of the sponsor to provide support
to the money market fund could trigger
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a wave of shareholder redemptions,
particularly during stressed conditions.
The Commission has received
comment that such an alternative
approach may significantly disrupt the
money market fund industry.777 First, it
would make sponsoring money market
funds a capital intensive business,
which may create barriers to entry into
the money market fund industry,
disadvantage smaller funds and fund
complexes, and increase concentration.
Second, it may cause fund sponsors to
opt, instead, for other open-end funds,
ETFs, or closed-end funds as vehicles
for certain less liquid assets. Third,
since the costs of sponsor support may
be passed along to investors in part or
in full in the form of, for example,
higher expense ratios, it may reduce
fund yields after expenses. These factors
are, thus, likely to reduce the
attractiveness of money market funds to
investors and the number of available
money market funds, adversely
impacting investor choice and the
efficiency of investors’ portfolio
allocations. The alternative, may thus,
significantly reduce the number of fund
sponsors offering money market funds
and the number of money market funds
available to investors. These adverse
effects may flow through to institutions,
such as banks, and to leveraged
participants, such hedge funds, that rely
on banks for liquidity and capital
formation.
14. Capital Buffers
The final amendments could have
required that money market funds
maintain a capital or ‘‘NAV’’ buffer,778
or a specified amount of additional
assets available to absorb daily
fluctuations in the value of the fund’s
portfolio securities. For example, one
option would require that stable NAV
money market funds have a risk-based
NAV buffer of up to 1% to absorb dayto-day fluctuations in the value of the
funds’ portfolio securities. Floating
NAV money market funds could reserve
their NAV buffers to absorb fund losses
under rare circumstances only, such as
when a fund suffers a large drop in NAV
or is closed. The required minimum size
of a fund’s NAV buffer could be
determined based on the composition of
the money market fund’s portfolio, with
specified buffer requirements for daily
777 See, e.g., CCMR Comment Letter, Fidelity
Comment Letter; see also 87 FR 7320.
778 Capital (or ‘‘NAV’’) buffers, which could be
structured in a variety of ways, can provide
dedicated resources within or alongside a fund to
absorb losses and can serve to absorb fluctuations
in the value of a fund’s portfolio, reducing the cost
to taxpayers in case of a run. See President’s
Working Grp. on Fin. Mkts., supra note 544.
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liquid assets, other weekly liquid assets,
and all other assets.
Some commenters supported the use
of capital buffers as a mechanism to
stabilize money market funds in times
of market stress.779 One commenter
indicated that operationalizing the
capital buffer by adding a loss-bearing,
subordinated class of liabilities would
not require changing the structure of
current money market fund shares, but
would make them less risky by
converting them into senior
liabilities.780 Some commenters
suggested the use of a bank safety
standard that would implement a
capital requirement of 3 to 4% of
unsecured, non-government assets and
suggested that such a buffer would only
depress returns by approximately 5
basis points (0.05%).781 One commenter
indicated that capital buffers would aid
money market funds by providing a
layer of protection for investors,
reducing the incentive to run in a crisis,
and reducing the incentive for prime
money market funds to take excessive
risk.782 This commenter also suggested
the use of a subordinated share class
that would absorb losses ahead of
longer-term investors and, in exchange
for bearing potential losses, the
subordinated shareholders would be
paid a risk premium.783 This commenter
also suggested an alternative approach
that would require funds to buy capital
protection from a regulated bank.784
Other commenters stated that capital
buffers would allow money market
funds to sustain broad-based declines in
asset values and to continue funding
shareholder redemptions without
resorting to fire sales that further
depress share values in times of
stress.785 One commenter suggested that
a mandatory buffer would reduce moral
hazard and increase discipline in the
management of money market funds,
increasing investor confidence that
money market funds could weather
market stress.786
The capital buffer alternative may
have four benefits. First, capital buffers
may add ex ante loss-absorption
capacity to a money market fund that
779 See, e.g., Profs. Ceccheti and Schoenholtz
Comment Letter; Prof. Hanson et al. Comment
Letter; Better Markets Comment Letter; Systemic
Risk Council Comment Letter.
780 See Profs. Ceccheti and Schoenholtz Comment
Letter.
781 See, e.g., Profs. Ceccheti and Schoenholtz
Comment Letter; Prof. Hanson et al. Comment
Letter.
782 See Prof. Hanson et al. Comment Letter.
783 Id.
784 Id.
785 See, e.g., Better Markets Comment Letter;
Systemic Risk Council Comment Letter.
786 See Better Markets Comment Letter.
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could mitigate money market fund
investors’ risk of losses.787 This may
reduce the incentive to redeem shares
quickly in response to small losses or
concerns about the liquidity of the
money market fund portfolio,
particularly during periods of severe
liquidity stress.
Second, a NAV buffer would require
money market funds to provide explicit
sponsor support rather than the implicit
and uncertain support under the current
baseline. This would require funds to
internalize some of the cost of the
discretionary capital support sometimes
provided to money market funds and to
define in advance how losses will be
allocated. In addition, a NAV buffer
could reduce fund managers’ incentives
to take risk beyond what is desired by
fund shareholders because investing in
less risky securities reduces the
probability of buffer depletion.
Third, a NAV buffer may also provide
counter-cyclical capital to the money
market fund industry because once a
buffer is funded it remains in place
regardless of redemption activity. With
a buffer, redemptions increase the
relative size of the buffer because the
same dollar buffer now supports fewer
assets. The NAV buffer, thus,
strengthens the ability of the fund to
absorb further losses, reducing
investors’ incentive to redeem shares.
Fourth, by reducing the NAV
variability in money market funds, a
NAV buffer may facilitate and protect
capital formation in short-term
financing markets during periods of
modest stress. A NAV buffer could
enable funds to absorb small losses and
thus could reduce the need to trade into
stressed markets. Thus, by adding
resiliency to money market funds and
enhancing their ability to absorb losses,
a NAV buffer may benefit capital
formation in the long term. A more
stable money market fund industry may
produce more stable short-term funding
markets, which could provide more
reliability as to the demand for shortterm credit to the economy.
The Commission has also received
comments that did not support the use
of capital buffers and suggesting that
such a mechanism would decrease the
utility and attractiveness of money
market funds and cause fund sponsors
to exit the industry.788 One commenter
suggested that capital buffers are
unnecessary and would severely and
negatively impact shareholders, stating
that capital buffers would not have been
787 See, e.g., President’s Working Grp. on Fin.
Mkts., supra note 544.
788 See, e.g., ICI Comment Letter; Fidelity
Comment Letter; CCMR Comment Letter.
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useful in March 2020 because buffers
pertain to asset quality rather than
liquidity, and noting also that
institutional prime funds already
operate with a floating NAV, which
effectively addresses asset quality in a
manner analogous to capital buffers.789
This commenter suggested that if buffers
are funded by retaining rather than
distributing income, the buffers would
take a significant amount of time to
accumulate and, if funded by fund
sponsors, managing money market
funds would no longer be economically
feasible.790 Some commenters stated
that even modestly sized capital buffers
would substantially increase the cost of
operating prime money market funds, to
an extent that would likely prevent
sponsors from offering such funds.791
The Commission continues to believe
that this alternative may give rise to
significant direct and indirect costs. In
terms of direct costs, capital buffer
requirements may be challenging to
design and administer. First, from the
standpoint of design of capital buffers,
calibrating the appropriate size of the
buffer as well as establishing the
parameters for when a floating NAV
fund should use its NAV buffer could
present operational and implementation
difficulties and, if not done effectively,
could contribute to self-fulfilling runs
on funds experiencing large
redemptions. Second, from the
standpoint of administering capital
buffers, floating NAV funds would need
to establish policies and procedures
around the use of buffers, replenishing
capital buffers when they are depleted
and raising requisite financing,
regulatory reporting, and investor
disclosures about buffers, among other
things. Depending on how a capital
buffer is structured (e.g., as sponsor
provided capital or as a subordinated
share class requiring shareholder
approval), the alternative may involve
other administrative, accounting, tax,
and legal challenges and costs for fund
sponsors and investors.
Importantly, the alternative may also
involve three sets of indirect costs. First,
the Commission continues to believe
that the alternative would result in
opportunity costs associated with
maintaining a NAV buffer. Those
contributing to the buffer would deploy
valuable scarce resources to maintain a
NAV buffer rather than being able to use
the funds elsewhere. Estimates of these
opportunity costs are not possible
because the relevant data is not
currently available to the Commission.
789 See
Fidelity Comment Letter.
790 Id.
791 See,
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Second, entities providing capital for
the NAV buffer, such as the fund
sponsor, would expect to be paid a
return that sets the market value of the
buffer equal to the amount of the capital
contribution. Since a NAV buffer is
designed to absorb the same amount of
risk regardless of its size, the promised
yield, or cost of the buffer, increases
with the relative amount of risk it is
expected to absorb (also known as a
leverage effect).
Third, money market funds with
buffers may avoid holding riskier shortterm debt securities (like commercial
paper) and instead hold a higher
amount of low yielding investments like
cash, Treasury securities, or Treasury
repos. This could lead money market
funds to hold more conservative
portfolios than investors may prefer,
given tradeoffs between principal
stability, liquidity, and yield. Moreover,
the costs of establishing and
maintaining a capital buffer would
decrease returns to fund investors. The
increased costs and decreased returns of
a capital buffer requirement may
decrease the size of the money market
fund sector, which would affect shortterm funding markets, and could lead to
increased industry concentration.
Moreover, this may alter competition in
the money market fund industry as
capital buffer requirements may be
easier to comply with for banksponsored funds, funds that are
members of large fund families, and
funds that have a large parent.
Crucially, a NAV buffer does not
protect shareholders completely from
the possibility of heightened rapid
redemption activity during periods of
market stress, particularly in periods
where the buffer is at risk of depletion,
such as during March 2020. As the
buffer becomes impaired (or if
shareholders believe the fund may
suffer a loss that exceeds the size of its
NAV buffer), shareholders have an
incentive to redeem shares quickly
because, once the buffer fails,
shareholders will experience sudden
losses. Thus, the Commission continues
to believe that capital buffers are
unlikely to have prevented the liquidity
stresses that arose in March 2020. At the
same time, capital buffers could lead
some investors to believe that their
investments carry no risk, which may
influence investor allocations and
adversely impact allocative efficiency.
15. Minimum Balance at Risk
The final amendments could have
required that a portion of each
shareholder’s recent balance in a money
market fund be available for redemption
only with a time delay. Under the
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alternative, all shareholders could
redeem most of their holdings
immediately without being restricted by
the minimum balance at risk. This
alternative also could include a
requirement to put a portion of
redeeming investors’ holdback shares
first in line to absorb losses that occur
during the holdback period. A floating
NAV fund could be required to use a
minimum balance at risk mechanism to
allocate losses only under certain rare
circumstances, such as when the fund
has a large drop in NAV or is closed.
Such an alternative could provide
some benefits to money market funds.
First, it would subordinate a portion of
redeeming investors’ shares to put them
at greater risk if the fund suffers a loss,
forcing redeeming shareholders to
absorb liquidity costs during periods of
severe market stress when liquidity is
particularly costly and allocating
liquidity costs to investors demanding
liquidity when the fund itself is under
stress.792 Redeeming shareholders
would bear first losses when the fund
first depletes its buffer and then the
fund’s value falls below its stable share
price within 30 days after their
redemption. If the fund sells assets to
meet redemptions, the costs of doing so
would be incurred while the redeeming
investor is still in the fund because of
the delay in redeeming holdback shares.
Third, it would provide the fund with
a period of time to obtain cash to satisfy
the holdback portion of a shareholder’s
redemption. This may provide time for
potential losses in fund portfolios to be
avoided since distressed securities
could trade at a heavy discount in the
market but may ultimately pay in full at
maturity.
The Proposing Release recognized
that implementing such an alternative
would involve operational challenges
and direct implementation costs. Such
costs include costs of converting
existing shares or issuing new holdback
and subordinated holdback shares;
changes to systems that would allow
record-keepers to account for and track
the minimum balance at risk and
allocation of unrestricted, holdback, or
subordinated holdback shares in
shareholder accounts; and systems to
calculate and reset average account
balances and restrict redemptions of
applicable shares. In addition,
commenters indicated that such costs
would extend to intermediaries and
service providers and would be
significant.793 Funds subject to a
minimum balance at risk may also have
51503
to amend or adopt new governing
documents to issue different classes of
shares with different rights: unrestricted
shares, holdback shares, and
subordinated holdback shares.
Moreover, this alternative would give
rise to a number of indirect costs. First,
the alternative may have different and
unequal effects on investors in stable
NAV and floating NAV money market
funds. During the holdback period,
investors in a stable NAV fund would
only experience losses if the fund breaks
the buck. Investors in a floating NAV
fund, however, are always exposed to
changes in the fund’s NAV and would
continue to be exposed to such risk for
any shares held back. These differential
effects could reduce investor demand
for floating NAV money market funds.
Second, under the MBR alternative,
there would still be an incentive to
redeem in times of fund and market
stress. The alternative could force
shareholders that redeem more than a
certain percent of their assets to pay for
any losses, if incurred, on the entire
portfolio on a ratable basis. The
contingent nature of the way losses are
distributed among shareholders forces
early redeeming investors to bear the
losses they are trying to avoid. Money
market funds may choose to meet
redemptions by selling assets that are
the most liquid and have the smallest
capital losses. Once a fund exhausts its
supply of liquid assets, it may sell less
liquid assets to meet redemption
requests, possibly at a loss. If in fact
assets are sold at a loss, the value of the
fund’s shares could be impaired,
motivating shareholders to be the first to
leave.
Third, the minimum balance at risk
alternative would involve a loss of
liquidity for redeeming investors akin to
a partial redemption gate, which may
reduce the utility of money market
funds for investors and may cause fund
sponsors to exit the industry.794
Commenters stated that the alternative
would alter money market funds
significantly and drive investors and
intermediaries away from the product to
unregulated or less-regulated
investment options, causing disruption
to the short-term financing markets.795
Another commenter also opposed the
alternative and suggested that it reduces
liquidity for retail and institutional
investors.796
Fourth, the alternative may not have
addressed the liquidity stresses that
794 Id.
792 See,
e.g., President’s Working Grp. on Fin.
Mkts., supra note 544.
793 See, e.g., Fidelity Comment Letter.
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795 Id.
796 See Americans for Tax Reform Comment
Letter.
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occurred in March 2020.797 The
minimum balance at risk alternative
generally impairs the liquidity of money
market fund investments. To the degree
that many investor redemptions in
March 2020 were driven by exogenous
liquidity needs (arising out of the Covid19 pandemic), the Commission
continues to believe that, under the
alternative, investors would still have
strong incentives to redeem assets they
could in order access liquidity.
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16. Liquidity Exchange Bank
Membership
In the Proposing Release, the
Commission discussed an alternative
requiring prime and tax-exempt money
market funds to be members of a private
liquidity exchange bank (‘‘LEB’’). The
LEB would be a chartered bank that
would provide a liquidity backstop
during periods of market stress. Money
market fund members and their
sponsors would capitalize the LEB
through initial contributions and
ongoing commitment fees, for example.
During times of market stress, the LEB
would purchase eligible assets from
money market funds that need cash, up
to a maximum amount per fund. The
intent of the LEB would be to diminish
investors’ incentive to redeem in times
of market stress while having the benefit
of pooling liquidity resources rather
than requiring each money market fund
to hold higher levels of liquidity
separately.
This alternative, as well as broader
industry-wide insurance programs,
could mitigate the risk of liquidity runs
in money market funds and their
detrimental impacts on investors and
capital formation. In the Proposing
Release, the Commission discussed how
the alternative could replace money
market funds’ historical reliance on
discretionary sponsor support, which
has covered capital losses in money
market funds in the past but, as
discussed above, also contributes to
these funds’ vulnerability to liquidity
runs. In addition, some sort of collective
emergency insurance fund could be
helpful to reduce the moral hazard of
funds that may be reliant on future
Federal Reserve facilities in times of
market stress.
The Commission has received several
comments in response to the proposal,
which discussed the LEB alternative,
and these comments did not support the
LEB alternative as a realistic solution to
improve money market funds’ resiliency
or limit future runs on money market
797 See,
e.g., Fidelity Comment Letter; ICI
Comment Letter.
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funds.798 Commenters emphasized two
key sets of costs. First, a LEB would be
complicated and require significant time
and money to develop and operate.799
Second, pooling capital from various
money market funds could raise moral
hazard and conflict of interest concerns,
because money market funds relying on
the LEB would not have an incentive to
improve their own liquidity
management.800
As discussed in the proposal, the LEB
alternative may not significantly reduce
the contagion effects from heavy
redemptions at money market funds
without undue costs. Specifically,
because of the difficulties and costs
involved in creating effective risk-based
pricing for insurance and additional
regulatory structures necessary to offset
adverse incentive effects of membership
in the LEB, this alternative has the
potential to create moral hazard and
encourage excessive risk-taking by
money market funds. If the alternative
increases moral hazard and decreases
corresponding market discipline, it may
in fact increase rather than decrease
money market funds’ susceptibility to
liquidity runs. These incentives may be
countered by imposing a very costly
regulatory structure and risk-based
pricing system; however, related costs
are likely to be passed along to investors
and may reduce the attractiveness of
money market funds relative to bank
products and other cash management
tools. Finally, it may be difficult to
create private insurance at an
appropriate cost and of sufficient
capacity for a several trillion-dollar
industry that tends to have highly
correlated tail risk.
17. Alternative Compliance and Filing
Periods
The Commission considered
alternative compliance dates for various
aspects of the final amendments. First,
the removal of the existing redemption
gate provision and the link between
weekly liquid assets and the imposition
of a liquidity fee in rule 2a–7 are
effective when the final rule is effective.
As an alternative, the Commission could
have adopted these provisions with a
longer (such as a 6 month or a 12
month) effective date. Such alternatives
would provide affected money market
funds with more time to comply with
these amendments. We believe that the
removal of these provisions will be
798 See, e.g., ICI Comment Letter; Fidelity
Comment Letter; Americans for Tax Reform
Comment Letter.
799 See, e.g., Fidelity Comment Letter; Americans
for Tax Reform Comment Letter.
800 Id.
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simple to implement.801 Moreover, as
discussed throughout this release, the
Commission understands that the tie
between weekly liquid asset thresholds
and fees and gates did not provided
intended benefits during March of 2020,
but likely contributed to investor
redemptions during the peak of market
stress. Thus, these amendments may
reduce self-fulfilling run incentives that
may arise out of the tie between weekly
liquid assets and redemption gates or
fees, and alternatives delaying the
effective date of these amendments may
contribute to run risk in affected money
market funds.
Second, the final amendments to
minimum liquidity requirements have a
compliance date that is 6 months after
the effective date. As an alternative,
these amendments could have been
adopted with a longer compliance
period, such as 12 months.802 This
alternative would provide additional
time for affected funds to comply with
the amended minimum liquidity
requirements. For example, to the
degree that some affected money market
funds would have to change their
portfolio composition by holding new
assets, such funds would be required to
make a determination that each security
is an ‘‘eligible’’ security presenting
minimal credit risk to the fund and have
corresponding written records about the
review. In addition, money market
funds typically roll over assets when
they mature and, if funds are required
to change their portfolio composition to
comply with the final rule, they may
have to adjust this rollover process in
favor of shorter-term securities of the
same or similar issuers. To the degree
that some investors may seek to
reallocate their investments out of
affected money market funds and into
other cash management tools, a longer
compliance period may allow funds
time to stabilize their portfolios in the
aftermath of potential investor
redemptions. Finally, a longer
compliance period may be especially
valuable for funds most affected by
other requirements of the final rule,
such as the liquidity fee and reporting
requirements. However, as discussed in
section II.H, amendments to the
liquidity minimums under rule 2a–7
represent increases to an existing
framework, and as quantified in sections
IV.C.2 and IV.D.2, many funds already
maintain daily and weekly liquidity
levels close to the newly adopted
minimums. Moreover, the current rising
rate environment may incentivize
801 See
State Street Comment Letter.
e.g., ICI Comment Letter; State Street
Comment Letter.
802 See,
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affected money market funds to increase
their daily and weekly liquidity and
decrease the overall fund maturity, to
take advantage of the increase in yields.
To the degree that many affected funds
may already be in compliance with the
new thresholds, the benefits of these
alternative compliance periods relative
to the final rule may be limited. For
instance, weighted average daily liquid
asset level of affected funds is currently
above 50%, with weighted average
weekly liquid asset level currently
above 60% of a fund’s portfolio, well
above the thresholds imposed by the
final rule.803
Third, the Commission could have
adopted alternative compliance dates
for the mandatory and discretionary
liquidity fee requirements. Under the
final rule, affected funds will have to
comply with the mandatory liquidity
framework within 12 months after the
effective date, and the discretionary
liquidity framework within 6 months of
that date. The Commission considered
several related alternatives. For
example, the final rule could have
included a 2-year compliance period for
the mandatory liquidity fee framework,
as recommended by commenters for the
proposed swing pricing requirement.804
As another alternative, the final rule
could have included a 1-year
compliance period for the discretionary
liquidity framework. Similarly, the final
rule could have included the same 2year or 1-year compliance period for
both the mandatory and the
discretionary liquidity frameworks.
These alternatives would provide
affected money market funds with
additional time to adapt their operations
and systems, coordinate with
intermediaries and third party vendors,
and implement the required policies
and procedures. Notably, unlike the
swing pricing framework, affected funds
may already be familiar with liquidity
fees due to their baseline ability to
impose liquidity fees when the fund’s
weekly liquid assets fall below 30%
under the current rules and the current
requirement to impose a default
liquidity fee when a fund’s weekly
liquid assets fall below 10% unless the
board determines such a fee is not in the
fund’s best interests. Thus, many funds
and their intermediaries may be
positioned to more efficiently comply
with the amended liquidity fee
803 See Money Market Fund Statistics Form N–
MFP Data, available at https://www.sec.gov/files/
mmf-statistics-2023-03.pdf.
804 See, e.g., SIFMA AMG Comment Letter; ICI
Comment Letter; Invesco Comment Letter; State
Street Comment Letter; Bancorp Comment Letter;
Federated Hermes Comment Letter I; Capital Group
Comment Letter; CCMR Comment Letter.
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framework compared to the proposed
swing pricing requirements.
Importantly, such alternatives would
delay the implementation of liquidity
fees as an anti-dilution tool and reduce
the amount of dilution recaptured by
funds benefitting non-redeeming
investors until the compliance date,
relative to the final rule.
Fourth, the Commission has
considered alternative effective dates for
the disclosure requirements in the final
rule. For example, the final rule could
have included a 12 month
implementation period for any new and
revised reporting requirements as
suggested by some commenters in
response to the proposal.805 As another
alternative, the final rule could have
included an 18 or 24 month
implementation period for all reporting
and disclosure requirements as
suggested by other commenters.806
Similar to the above alternatives
regarding longer compliance periods for
the liquidity fee framework, such
alternatives could reduce costs and
provide greater flexibility to affected
money market funds in complying with
the final amendments. However, as
discussed in section II.H, the final rule
removes several of the proposed
reporting requirements that are likely to
be among the most burdensome for
affected funds, including the proposed
requirements about lot-level reporting
and disaggregated reporting for
repurchase agreements in Form N–MFP
and Form PF. Such modifications to the
final amendments may reduce
compliance burdens on filers relative to
the proposal. While the final disclosure
and reporting requirements will still
pose cost increases on affected funds, as
estimated in section V (PRA), the
Commission continues to believe that
the final disclosure and reporting
amendments will result in important
benefits for transparency to investors
and Commission oversight. As
discussed in section II.H, we believe
that the implementation period for
amendments to disclosures in the final
rule provides adequate time for affected
funds and advisers to compile and
review the information that must be
disclosed. The Commission also could
have adopted alternative filing periods
for various forms. For example, the
Commission could have extended the
filing period for Form N–MFP to 7, 8,
or 10 business days after the end of each
month instead of the current 5 business
day filing period. Such alternatives
would increase the amount of time
805 See, e.g., ICI Comment Letter; Invesco
Comment Letter; State Street Comment Letter.
806 See T. Rowe Comment Letter.
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affected funds have to review and verify
reported data and information, which
can reduce the risk of error in the
submitted data and information to the
Commission. Importantly, as discussed
in section II, the final rule will remove
some of the most data intensive
reporting requirements of lot-level
reporting and disaggregated reporting of
repurchase agreements, which may
reduce these benefits of the alternatives
relative to the final rule. Moreover, such
alternatives would increase filing delays
and reduce the timeliness of
information available to investors and to
the Commission. These effects may be
particularly acute in times of market
stress, when there may be greater
investor scrutiny of money market funds
and their liquidity risk.
E. Effects on Efficiency, Competition,
and Capital Formation
The final amendments are intended to
reduce run risk, mitigate the liquidity
externalities transacting investors
impose on non-transacting investors,
and enhance the resilience of money
market funds, which may serve to
protect money market fund investors.
To the degree that the final amendments
would increase the resilience of money
market funds, they may also enhance
the availability of wholesale funding
liquidity to market participants and
increase their ability to raise capital,
particularly during severe market stress,
facilitating capital formation. In
addition, the final amendments may
reduce the probability that runs would
result in future government
interventions in securities markets,
inform investors about liquidity risks of
their money market fund investments,
and enhance the ability of investors to
optimize their portfolio allocations,
contributing to greater informational
and allocative efficiency.
The final amendments may enhance
the efficiency of liquidity provision.
Specifically, money market funds and
issuers of short-term debt that money
market funds hold benefit from
perceived government backstops and
the safety and soundness of the
financial system. When the liquidity of
underlying assets in money market fund
portfolios is impaired, investors benefit
from selling money market fund shares
before or instead of selling assets that
funds hold. Thus, in times of market
stress, liquidity demand may be
directed to money market funds even
though the relative cost of liquidity in
money market funds may be greater,
resulting in inefficient provision of
liquidity. While the final amendments
would not result in money market funds
fully internalizing the costs of investing
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in illiquid assets, to the degree that the
final amendments would reduce the
need for future implicit government
backstops in times of stress, the final
amendments may result in more
efficient provision of liquidity.
Moreover, the final liquidity fee
framework may enhance allocative
efficiency. To the degree that some
institutional investors may not be aware
of the dilution risk of affected money
market funds, the liquidity fee
requirement may increase investor
awareness of such risks. As discussed
above, the liquidity fee requirement
could cause some investors to move
their assets to government money
market funds to avoid the possibility of
paying liquidity costs of redemptions.
Government money market funds may
be a better match for these investors’
preferences, however, in that
government money market funds face
lower liquidity costs and these investors
may be unwilling to bear any liquidity
costs. In addition, the liquidity fee
framework may also attract new
investors, such as investors that tend to
redeem infrequently, into prime and
tax-exempt money market funds.
Moreover, this aspect of the final rule
may dampen spillovers of run risk from
money market funds to other vehicles
and markets in times of stress.
The final disclosure requirements are
expected to enhance informational
efficiency. To the degree that some
investors may currently be uninformed
about liquidity risks of money market
fund investments, the liquidity fee and
disclosure requirements may increase
transparency about liquidity costs
transacting investors impose on
remaining fund investors and liquidity
risks in money market funds. While
many investors may use money market
funds as cash equivalents, money
market funds use capital subject to daily
or intraday redemptions to invest in
portfolios that may include less liquid
assets. This gives rise to liquidity risk
and liquidity externalities between
transacting and non-transacting
investors, as discussed throughout the
release. The possibility that a fund may
charge a liquidity fee as a result of net
redemptions, as well as the final
disclosure requirements may help
inform investors about the liquidity
risks inherent in money market funds
and liquidity costs of redemptions,
particularly during times of stress. To
the degree that greater transparency
about liquidity risk of money market
funds may lead some risk averse
investors to use other instruments, such
as banking products, in lieu of money
market funds for cash management,
allocative efficiency may increase.
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The final amendments may have three
groups of competitive effects. First,
amendments to liquidity requirements
may affect competition among prime
money market funds. As discussed in
detail in section IV.C.2, many affected
funds already have liquidity levels that
would meet or exceed the final
minimum daily and weekly liquid asset
thresholds. However, other funds would
have to rebalance their portfolios to
come into compliance with the final
amendments, which may reduce the
yields they are able to offer investors.
The final amendments may, thus
improve the competitive standing of
funds that currently have higher levels
of daily and weekly liquidity relative to
funds that currently do not and may,
thus, be able to offer higher yields to
investors.
Second, the final amendments may
influence the competitive standing of
prime money market funds relative to
government money market funds. The
elimination of redemption gates and
removal of the link between weekly
liquid assets and liquidity fees may
reduce the risk of runs on prime money
market funds and may protect the value
of investments of non-transacting
shareholders. However, the final
amendment’s liquidity fee framework
may increase the variability of prime
money market funds returns, while
higher liquidity requirements may
reduce the yields they are able to offer
to investors. This may reduce their
attractiveness to investors and may
result in a greater reallocation of capital
from prime to government funds, bank
deposit accounts, and other types of
liquid vehicles.
Third, due to economies of scale,
costs of the final amendments may be
more easily borne by larger money
market fund families and their service
providers.807 To the degree that such
costs may be significant for some money
market fund families, this may
contribute to consolidation in the
money market fund industry and reduce
the number of intermediaries offering
non-government money market funds to
investors. Some or all of the costs of the
final amendments may also be passed
along to fund investors in the form of
higher expense ratios or reduced
availability of certain fund offerings.
However, as discussed throughout this
release, the final amendments have been
tailored to reduce compliance costs,
while preserving the benefits to
investors, funds, and securities markets,
which may partly mitigate these effects.
The final amendment’s increases to
the minimum liquidity thresholds may
807 See,
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reduce access to and increase costs of
raising capital for some issuers of shortterm debt, thereby potentially negatively
affecting capital formation. Moreover, to
the degree that raising liquidity
thresholds may reduce money market
fund yields and to the extent that
liquidity fees may increase uncertainty
about investors’ redemption costs, the
final amendments may reduce the
viability of prime money market funds
as an asset class. This reallocation may
be efficient to the extent that
government money market funds or
banking products, if insured and if such
insurance is correctly priced, may be
more suitable for cash management by
liquidity risk averse investors.
Moreover, banking entities insured by
the Federal Deposit Insurance
Corporation (FDIC) pay deposit
insurance assessments, whereas money
market funds do not internalize any
portion of government interventions or
externalities they impose on other
investors in the same asset classes.808
Nevertheless, potential decreases in
the size of the prime money market fund
sector may have adverse follow-on
effects on capital formation and the
availability of wholesale funding
liquidity to issuers and institutions
seeking to arbitrage mispricings across
markets. Issuers may respond to such
changes by shifting their commercial
paper and certificate of deposit issuance
toward longer maturity instruments,
which may reduce their exposure to
rollover risk.
These aspects of the final
amendments may be borne
disproportionately by global or foreign
banking organizations that rely on
money market funds for dollar funding.
Specifically, some research has explored
the effects of outflows from prime
money market funds into government
money market funds around the 2014
money market fund reforms on business
models and lending activities of foreign
banking organizations in the U.S. To the
degree that the final amendments would
result in further outflows from prime
money market funds, banking
organizations reliant on unsecured
funding from money market funds may
808 If some of the funds flow out of the money
market fund sector and into the banking sector, and
if potential future stresses in the banking sector
require government intervention, this could, under
some circumstances, increase the magnitude of
such intervention. See, e.g., Federated Hermes
Comment Letter I. However, flows between the
banking and money market fund sectors may be
highly sensitive to, among others, the spread
between money market fund and bank rates. In
addition, during the recent stresses in the banking
sector in 2023, funds flowed out of certain banks
and into certain money market funds, pointing to
a trend to diversify portfolios across asset classes,
as discussed in further detail in section IV.B.1.b.
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reduce arbitrage positions and
investments in illiquid assets, rather
than reducing lending.809 However,
reduced wholesale dollar funding from
money market funds may also lead to a
reduction in capital formation through
dollar lending by affected banks, which
may reduce the dollar borrowing ability
of firms reliant on affected banks.810
The final amendments related to the
methods of calculation of weighted
average maturity and weighted average
life may increase consistency and
comparability of disclosures by money
market funds in data reported to the
Commission and provided on fund
websites. These amendments, therefore,
may reduce informational asymmetries
between funds and fund investors about
interest rate and liquidity risk exposures
across fund portfolios. To the degree
that consistency and comparability of
WAM and WAL information may
inform investors and may influence
their capital allocation decisions, the
final amendments may improve
allocative efficiency. The final
amendments related to the calculation
of WAM and WAL are not expected to
affect competition and capital
formation.
The final amendments related to Form
PF reporting requirements for large
liquidity fund advisers may enhance the
Commission’s and FSOC’s oversight,
which may promote better functioning
and more stable short-term funding
markets and may, thus, lead to increases
in efficiency of such markets and may
facilitate capital formation in large
liquidity funds. The additional, more
granular, and timely data collected on
the amended Form PF about large
liquidity fund advisers may help reduce
uncertainty about risks in the U.S.
financial system and inform and frame
regulatory responses to future market
events and policymaking. It may also
help develop regulatory tools and
mechanisms that could potentially be
used to make future systemic crisis
episodes less likely to occur and less
costly and damaging when they do
occur. In addition, these amendments
may improve the efficiency and
effectiveness of the Commission’s and
809 See, e.g., Alyssa Anderson et al., Arbitrage
Capital of Global Banks (Finance and Economics
Discussion Series 2021–032. Washington: Board of
Governors of the Federal Reserve System, May
2021), available at https://doi.org/10.17016/
FEDS.2021.032. See also Thomas Flanagan,
Funding Stability and Bank Liquidity (Working
Paper, Mar. 2020), available at https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=3555346 (retrieved from SSRN Elsevier
database).
810 See, e.g., Victoria Ivashina, et al., Dollar
Funding and the Lending Behavior of Global Banks,
130 Q.J. Econ. 1241, 1241–1281 (2015).
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FSOC’s oversight of large liquidity fund
advisers by enabling them to manage
and analyze information related to the
risks posed by large liquidity funds
more quickly, more efficiently, and
more consistently. Form PF
amendments for large liquidity fund
advisers are not expected to have
significant effects on competition.
V. Paperwork Reduction Act
A. Introduction
Certain provisions of the final
amendments to rule 2a–7 and Forms
N–1A, N–CR, N–MFP, and PF contain
‘‘collection of information’’
requirements within the meaning of the
PRA.811 The Commission published a
request for comment on changes to these
collection of information requirements
in the Proposing Release and the Form
PF Proposing Release and submitted
these requirements to the Office of
Management and Budget (‘‘OMB’’) for
review in accordance with the PRA.812
The titles for the existing collections of
information are: (1) ‘‘Rule 2a–7 under
the Investment Company Act of 1940,
Money market funds’’ (OMB Control No.
3235–0268); (2) ‘‘Form N–1A under the
Securities Act of 1933 and under the
Investment Company Act of 1940,
registration statement of open-end
management investment companies’’
(OMB Control No. 3235–0307); (3) ‘‘Rule
30b1–8 under the Investment Company
Act of 1940, Current report for money
market funds and Form N–CR, Current
report, money market fund material
events’’ (OMB Control No. 3235–0705);
(4) ‘‘Rule 30b1–7 under the Investment
Company Act of 1940, Monthly report
for money market funds and Form N–
MFP, Monthly schedule of portfolio
holdings of money market funds’’ (OMB
Control No. 3235–0657); (5) ‘‘Form PF
and Rule 204(b)–1’’ (OMB Control
Number 3235–0679); and (6) ‘‘Rule 31a–
2: Records to be preserved by registered
investment companies, certain majorityowned subsidiaries thereof, and other
persons having transactions with
registered investment companies’’ (OMB
Control No. 3235–0179).813 An agency
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless it
displays a currently valid OMB control
number.
811 44
U.S.C. 3501 through 3521.
U.S.C. 3507(d); 5 CFR 1320.11.
813 For the Commission’s notice requesting
comment on changes to the collection of
information requirements in Form PF, see Form PF
Proposing Release, supra note 14.
812 44
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51507
B. Rule 2a–7
The final amendments to rule 2a–7
create new collection of information
requirements and modify or remove
existing requirements. These final
amendments include: (1) removing the
provisions that link liquidity thresholds
and board determinations regarding
potential imposition of redemption
gates and liquidity fees, and related
changes to website disclosure
requirements; (2) new provisions that
require institutional prime and
institutional tax-exempt money market
funds to adopt a liquidity fee framework
and allow non-government money
market funds to apply discretionary
liquidity fees, and the associated board
review, approved guidelines, and
ongoing oversight; (3) new provisions
requiring a money market fund to
identify in its written stress testing
procedures the minimum liquidity
levels for stress testing; and (4) new
provisions that permit a stable NAV
fund to engage in share cancellation in
a negative interest rate environment and
the associated board determination and
investor disclosure requirements.
The respondents to these collections
of information will be money market
funds. We estimate that there are 294
money market funds subject to rule 2a–
7, although the new collections of
information would each apply to certain
subsets of money market funds, as
reflected in the below table.814 The new
collections of information are
mandatory for the identified types of
money market funds that rely on rule
2a–7, except that the collection related
to use of share cancellation will be
necessary only for those funds seeking
to use share cancellation instead of
converting to a floating NAV. The final
amendments are designed to enable
Commission staff in its examinations of
money market funds to determine
compliance with the rule. To the extent
the Commission receives confidential
information pursuant to the collections
of information, such information will be
kept confidential, subject to the
provisions of applicable law.815
In our most recent PRA submission
for rule 2a–7, we estimated the annual
aggregate compliance burden to comply
814 Based on Form N–MFP filings, there were 294
money market funds as of Mar. 2023.
815 See, e.g., 5 U.S.C. 552. Exemption 4 of the
Freedom of Information Act provides an exemption
for trade secrets and commercial or financial
information obtained from a person and privileged
or confidential. Exemption 8 of the Freedom of
Information Act provides an exemption for matters
that are contained in or related to examination,
operating, or condition reports prepared by, or on
behalf of, or for the use of an agency responsible
for the regulation or supervision of financial
institutions.
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with the collection of information
requirement of rule 2a–7 is 293,516
burden hours with an internal cost
burden of $73,612,364 and an external
cost burden estimate of $52,300,000.816
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816 The most recent rule 2a–7 PRA submission
was approved in 2022 (OMB Control No. 3235–
0268). This includes a correction of a typographical
error regarding the currently approved external cost
estimate, which is reflected as $73,612,364 but
should have been $52,300,000 as shown in the
supporting statement. The estimates in the
Proposing Release were based on earlier approved
estimates (337,328 hours and $38,100,454 external
cost burden), and these earlier approved estimates
are reflected in the ‘‘Proposed Estimates’’ section of
Table 15.
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While the Commission did not receive
any comments specifically addressing
the estimated PRA burdens in the
Proposing Release associated with the
amendments to rule 2a–7, it did receive
comments suggesting that
implementation of some of the elements
of the proposed amendments, including
the associated collections of
information, may be more burdensome
than the Commission estimated at
proposal.817 However, several of the
revisions made to the final amendments
817 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; Western Asset Comment Letter.
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help alleviate many of the burdens
commenters discussed in relation to the
proposal, including for instance,
burdens related to the proposed swing
pricing requirements. We have adjusted
the proposal’s estimated annual burden
hours and total time costs to reflect
changes from the proposal, changes in
the number of money market funds, and
updated wage rates.
The table below summarizes our PRA
initial and ongoing annual burden
estimates associated with the
amendments to rule 2a–7.
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C. Form N–MFP
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The final amendments to Form N–
MFP include additional data collection
and certain technical improvements that
will assist our monitoring and analysis
of money market funds. We are adopting
amendments to: (1) increase the
frequency of certain data points from
weekly to daily; (2) collect new
information about securities that have
been disposed of before maturity; (3)
collect new information about the
composition and concentration of
money market funds’ shareholders; (4)
collect new information about the use of
liquidity fees and share cancellation;
and (5) collect additional information
about repurchase agreement
transactions, as well as certain other
information about the fund’s portfolio
securities. We are also adopting
amendments to improve identifying
information about the fund, including
changes to better identify different
categories of government money market
funds, changes to identify privately
offered funds that are used for internal
cash management purposes, and
amendments to provide the name and
other identifying information for the
registrant, series, and class. The final
amendments to Form N–MFP also
include several changes to clarify
current instructions or items. In a
change from the proposal, we are not
adopting amendments to require funds
to report lot-level information about
portfolio securities (e.g., the acquisition
date for each security) or report
disaggregated information about
securities subject to repurchase
agreements in all circumstances, among
other changes.
The information collection
requirements on Form N–MFP are
designed to improve the availability of
information about money market funds
and assist the Commission in analyzing
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the portfolio holdings of money market
funds, and thereby augment our
understanding of the risk characteristics
of individual money market funds and
money market funds as a group, as well
as industry trends. The final
amendments enhance our oversight of
money market funds and our ability to
monitor and respond to market events.
Preparing a report on Form N–MFP is
mandatory for money market funds, and
responses to the information collections
will not be kept confidential.
The respondents to these collections
of information will be money market
funds. The Commission estimates there
are 294 money market funds that report
information on Form N–MFP although
certain components of the proposed
new collections of information would
apply to certain subsets of money
market funds, as reflected in the below
table. We estimate that 35% of money
market funds (or 103 money market
funds) license a software solution and
file reports on Form N–MFP in house.
We estimate that the remaining 65% of
money market funds (or 191 money
market funds) retain the services of a
third party to provide data aggregation
and validation services as part of the
preparation and filing of reports on
Form N–MFP on the fund’s behalf. We
understand that the required data in the
final amendments to Form N–MFP
generally are already maintained by
money market funds pursuant to other
regulatory requirements or in the
ordinary course of business.
Accordingly, for the purposes of our
analysis, we do not believe that the final
amendments add significant burden
hours for filers of Form N–MFP.
In our most recent PRA submission
for Form N–MFP, we estimated the
annual aggregate compliance burden to
comply with the collection of
information requirement of Form
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51511
N–MFP is 44,263 burden hours with an
internal cost burden of $14,385,475 and
an external cost burden estimate of
$2,613,300.818
In the Proposing Release, we
estimated that the proposed
amendments would require a money
market fund to spend up to an
additional 9 burden hours complying
with the proposed amendments.819 The
Commission did not receive public
comment regarding the PRA estimates
for Form N–MFP in the Proposing
Release. We did, however, receive
comments suggesting that lot-level
reporting and reporting disaggregated
information about securities subject to
repurchase agreements when the
securities are issued by the same issuer
would be burdensome.820 After
considering comments, we are not
adopting those proposed requirements.
We are revising our PRA estimates for
the final amendments to reflect the
changes from the proposed
amendments, and updated data and
wage rates.
The table below summarizes our PRA
initial and ongoing annual burden
estimates associated with the
amendments to Form N–MFP.
818 This estimate is based on the last time the PRA
submission for the rule’s information collection was
approved in 2022 (OMB Control No. 3235–0657).
The estimates in the Proposing Release were based
on earlier approved estimates (64,667 hours and
$3,179,700 external cost burden), and these earlier
approved estimates are reflected in the ‘‘Proposed
Estimates’’ section of Table 16.
819 As reflected in Table 16, certain components
of the proposed amendments would apply to
certain subsets of money market funds and
therefore, the estimated additional annual hour
burdens of the full scope of the proposed new
collections of information would apply to the
subject fund.
820 See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; BlackRock Comment Letter; CCMR
Comment Letter; Federated Hermes Comment Letter
I.
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D. Form N–CR
The amendments to Form N–CR will
require a fund to file a report publicly
when its investments are more than
50% below the minimum weekly liquid
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asset or daily liquid asset requirements.
The amendments also remove the
reporting events that relate to liquidity
fees and redemption gates, as money
market funds will no longer be
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permitted to impose redemption gates
under rule 2a–7, and we believe other
disclosure about the imposition of
liquidity fees is more appropriate than
Form N–CR disclosure under the final
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rule’s amended liquidity fee framework.
In addition, the final amendments will
require money market funds to file Form
N–CR reports in a custom XML data
language. The information collection
requirements are designed to assist
Commission staff in its oversight of
money market funds and its ability to
respond to market events. We estimate
that there are 294 money market funds
subject to Form N–CR reporting
requirements, but a fund is required to
file a report on Form N–CR only when
a reportable event occurs.821
Compliance with the disclosure
requirements of Form N–CR is
mandatory for money market funds, and
on Form N–MFP filings, there were 294
money market funds as of Mar. 2023.
ddrumheller on DSK120RN23PROD with RULES2
821 Based
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the responses to the disclosure
requirements will not be kept
confidential.
In our most recent PRA submission
for Form N–CR, we estimated that we
would receive, in the aggregate, an
average of 6 reports filed on Form N–CR
per year. We also estimated the annual
aggregate compliance burden to comply
with the collection of information
requirement of Form N–CR is 51 burden
hours with an internal cost burden of
$19,839, and an external cost burden
estimate of $6,111.822
The Commission did not receive
public comment regarding the PRA
estimates for Form N–CR in the
822 The most recent Form N–CR PRA submission
was approved in 2021 (OMB Control No. 3235–
0705).
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51513
Proposing Release. We have adjusted
the proposal’s estimated annual burden
hours and total time costs, however, to
reflect updated data and wage rates.
Our most recent PRA submission for
Form N–CR based the burden estimates
on the number of Form N–CR reports
filed between 2018 and 2020, and no
funds filed reports related to liquidity
fees or suspensions of redemptions
during that period (or at any other time).
As a result, we do not believe that
removing the items from Form N–CR
related to liquidity fees and suspensions
of redemptions would affect the current
burden estimates.
The table below summarizes our PRA
initial and ongoing annual burden
estimates associated with the
amendments to Form N–CR.
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E. Form N–1A
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The final amendments to Form N–1A
modify the narrative risk disclosure that
money market funds must provide in
their summary prospectuses. The
modifications affect all types of money
market funds and include changes
pertaining to liquidity fees and
suspensions of redemptions that are
more likely to affect prime and taxexempt money market funds. Further,
the amendments streamline the
information a fund will be required to
disclose in its SAI about any liquidity
fees imposed during the prior 10 years
and removes SAI disclosure related to
the suspension of redemptions. We
estimate that streamlining the required
SAI disclosure will not affect the
current estimated burdens of Form N–
1A because while we are reducing the
amount of information a fund must
report when it has imposed a liquidity
fee, the mandatory liquidity fee
requirement in the final rule will likely
result in institutional funds imposing
liquidity fees more frequently than
under the current rule. Compliance with
the disclosure requirements of Form N–
1A is mandatory for money market
funds, and the responses to the
disclosure requirements will not be kept
confidential.
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The purpose of the information
collection requirements on Form N–1A
is to meet the filing and disclosure
requirements of the Securities Act and
the Investment Company Act and to
enable funds to provide investors with
information necessary to evaluate an
investment in the fund. The final
amendments to Form N–1A are
designed to provide investors with
information about a fund’s use of
liquidity fees, which investors can use
to inform their investment decisions.
The respondents to these collections
of information will be money market
funds. The Commission estimates there
are 294 money market funds that are
subject to Form N–1A, although aspects
of the new collections of information
related to liquidity fees and the removal
of temporary suspensions of
redemptions generally will only apply
to prime and tax-exempt money market
funds. The Commission estimates there
are 111 prime and tax-exempt money
market funds.
In our most recent PRA submission
for Form N–1A, we estimated the
annual aggregate burden to comply with
the collection of information
requirement of Form N–1A is 1,672,077
burden hours with an internal cost
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51515
burden of $474,392,078, and an external
cost burden estimate of $132,940,008.823
The Commission did not receive
public comment regarding the PRA
estimates for Form N–1A in the
Proposing Release. We have adjusted
the proposal’s estimated annual burden
hours and internal time costs, however,
to reflect changes in the final rule (e.g.,
the removal of the proposed swing
pricing requirement, which means
affected money market funds will not be
required to provide swing pricing
disclosure) and updated wage rates and
data.
The table below summarizes our PRA
initial and ongoing annual burden
estimates associated with the
amendments to Form N–1A.
823 The most recent Form N–1A PRA submission
was approved in 2019 (OMB Control No. 3235–
0307).
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F. Form PF
The final amendments to Form PF
revise existing reporting requirements
for large liquidity fund advisers. Large
liquidity fund advisers generally
include any adviser managing a
liquidity fund and having at least $1
billion in combined regulatory assets
under management attributable to
liquidity funds and registered money
market funds as of the end of any month
in the prior fiscal quarter.824
The final amendments are designed to
provide the Commission and FSOC with
a more complete picture of the shortterm financing markets in which
liquidity funds invest and, in turn,
enhance the Commission’s and FSOC’s
ability to assess the potential market
and systemic risks presented by
824 See
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Instruction 3 to Form PF.
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liquidity funds’ activities and facilitate
our oversight of those markets and their
participants. The final amendments will
update reporting requirements in
section 3 of Form PF, which relates to
reporting requirements for large
liquidity fund advisers. Therefore, the
final amendments will affect large
liquidity fund advisers and the
estimated collection of information
burdens below are limited to this
affected group of Form PF filers. The
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revised collection of information is
mandatory for large liquidity fund
advisers.
Responses to the information
collection will be kept confidential to
the extent permitted by law.825 Form PF
elicits non-public information about
private funds and their trading
strategies, the public disclosure of
which could adversely affect the funds
and their investors. The SEC does not
intend to make public Form PF
information that is identifiable to any
particular adviser or private fund,
although the SEC may use Form PF
information in an enforcement action
and to assess potential systemic risk.826
SEC staff issues certain publications
designed to inform the public of the
private funds industry, all of which use
only aggregated or masked information
to avoid potentially disclosing any
proprietary information.827 The
Advisers Act precludes the SEC from
being compelled to reveal Form PF
information except (1) to Congress,
upon an agreement of confidentiality;
(2) to comply with a request for
information from any other Federal
department or agency or self-regulatory
organization for purposes within the
scope of its jurisdiction; or (3) to comply
with an order of a court of the United
States in an action brought by the
United States or the SEC.828 Any
department, agency, or self-regulatory
organization that receives Form PF
information must maintain its
confidentiality consistent with the level
of confidentiality established for the
SEC.829 The Advisers Act requires the
SEC to make Form PF information
available to FSOC.830 For advisers that
are also commodity pool operators or
commodity trading advisers, filing Form
PF through the Form PF filing system is
filing with both the SEC and
Commodity Futures Trading
Commission (CFTC).831 Therefore, the
SEC makes Form PF information
available to FSOC and the CFTC,
pursuant to Advisers Act section 204(b),
making the information subject to the
confidentiality protections applicable to
information required to be filed under
that section. Before sharing any Form PF
information, the SEC requires that any
such department, agency, or selfregulatory organization represent to the
SEC that it has in place controls
designed to ensure the use and handling
of Form PF information in a manner
consistent with the protections required
by the Advisers Act. The SEC has
instituted procedures to protect the
confidentiality of Form PF information
in a manner consistent with the
protections required in the Advisers
Act.832
In our most recent PRA submission
for Form PF, we estimated the annual
aggregate burden to comply with the
51517
collection of information requirement of
Form PF is 409,768 burden hours and
an external cost burden estimate of
$3,628,850.833
We did not receive public comment
regarding the estimated burdens of the
proposed amendments to section 3 of
Form PF, which is the only section
affected by the final amendments.
However, in the broader context of the
Commission’s proposed amendments to
Form PF, we received general comments
indicating that we underestimated the
burdens to implement the proposed
amendments to the form.834 We are not
adjusting our estimates in response to
these comments because it is unclear
that these commenters were referring to
the proposed amendments to section 3
and, moreover, we are not adopting
certain proposed reporting
requirements, such as required lot-level
reporting and disaggregated reporting
for securities subject to repurchase
agreements in all circumstances, which
may reduce the burden for filers. We
have adjusted the proposal’s estimated
annual burden hours and total time
costs to reflect updated wage rates and
data.
The tables below summarize our PRA
initial and ongoing annual burden
estimates associated with the
amendments to Form PF.
TABLE 19—ANNUAL HOUR BURDEN PROPOSED AND FINAL ESTIMATES FOR INITIAL FILINGS
Number of
respondents
= aggregate
number of
responses 2
Respondent 1
Large Liquidity Fund Advisers:
Proposed Estimate .................................................................................................
Final Estimate ........................................................................................................
Previously Approved ..............................................................................................
Change ...................................................................................................................
Hours per
response
amortized
over 3 years 3
Hours per
response
51
61
2
(1)
202
202
200
2
÷3=
÷3=
............
............
67
67
588
(521)
Aggregate hours
amortized
over 3 years 4
67
67
1,176
(1,109)
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Notes:
1 We expect that the hourly burden will be most significant for the initial report because the adviser will need to familiarize itself with the new reporting form and
may need to configure its systems in order to efficiently gather the required information. In addition, we expect that some large liquidity fund advisers will find it efficient to automate some portion of the reporting process, which will increase the burden of the initial filing but reduce the burden of subsequent filings.
2 This concerns the initial filing; therefore, we estimate one response per respondent. The proposed and final changes are due to using updated data to estimate
the number of advisers.
3 We amortize the initial time burden over three years because we believe that most of the burden would be incurred in the initial filing. We use a different methodology to calculate the estimate than the methodology staff used for the previously approved burdens. We believe the previously approved burdens for initial filings inflated the estimates by using a methodology that included subsequent filings for the next two years, which, for quarterly filers, included 11 subsequent filings. For the
requested burden, we calculate the initial filing, as amortized over the next three years, by including only the hours related to the initial filing, not any subsequent filings. This approach is designed to more accurately estimate the initial burden, as amortized over three years. Changes are due to using the revised methodology,
and changes to section 3 of Form PF.
4 (Number of responses) × (hours per response amortized over three years) = aggregate hours amortized over three years. Changes are due to (1) using updated
data to estimate the number of advisers and (2) the new methodology to estimate the hours per response, amortized over three years.
5 In the case of the proposed estimates, Private Funds Statistics show 23 large liquidity fund advisers filed Form PF in the fourth quarter of 2020. Based on filing
data from 2016 through 2020, an average of 1.5 percent of them did not file for the previous due date. (23 × 0.015 = 0.345 advisers, rounded up to 1 adviser.)
6 In the case of the final estimates, Private Funds Statistics show 21 large liquidity fund advisers filed Form PF in the third quarter of 2022. Based on filing data
from 2017 through 2021, an average of 1.5 percent of them did not file during the prior year. (21 × 0.015 = 0.32 advisers, rounded up to 1 adviser.)
825 See
5 CFR 1320.5(d)(2)(vii) and (viii).
15 U.S.C. 80b–10(c).
827 See, e.g., Private Funds Statistics, issued by
staff of the SEC Division of Investment
Management’s Analytics Office, which we have
used in this PRA as a data source, available at
https://www.sec.gov/divisions/investment/privatefunds-statistics.shtml.
826 See
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828 See
15 U.S.C. 80b–4(b)(8).
15 U.S.C. 80b–4(b)(9).
830 See 15 U.S.C. 80b–4(b)(7).
831 See 2011 Form PF Adopting Release, supra
note 494.
832 See 5 CFR 1320.5(d)(2)(viii).
833 The most recent Form PF PRA submission was
approved in 2021 (OMB Control No. 3235–0679).
829 See
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834 See, e.g., Alternative Investment Management
Association Limited and the Alternative Credit
Council Comment Letter (Mar. 21, 2022) on File No.
S7–0122; Investment Adviser Association Comment
Letter (Mar. 21, 2022) on File No. S7–01–22; Form
PF Proposing Release, supra note 14. The comment
letters on Form PF Proposing Release (File No. S7–
01–22) are available at: https://www.sec.gov/
comments/s7-01-22/s70122.htm.
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TABLE 20—ANNUAL HOUR BURDEN PROPOSED AND FINAL ESTIMATES FOR ONGOING QUARTERLY FILINGS
Number of
respondents
(advisers) 2
Respondent 1
Large Liquidity Fund Advisers:
Proposed Estimate .............................................................................
Final Estimate ....................................................................................
Previously Approved ..........................................................................
Change ...............................................................................................
Hours per
response
Number of
responses 3
×
×
×
4 22
5 20
20
0
×
×
×
4
4
4
0
Aggregate
hours
71
71
70
1
=
=
=
6,248
5,680
5,600
80
Notes:
1 We estimate that after an adviser files its initial report, it will incur significantly lower costs to file ongoing quarterly reports, because much of the work for the initial
report is non-recurring and likely created system configuration and reporting efficiencies.
2 Changes to the number of respondents are due to using updated data to estimate the number of advisers.
3 Large liquidity fund advisers file quarterly.
4 In the case of the proposed estimates, Private Funds Statistics show 23 large liquidity fund advisers filed Form PF in the fourth quarter of 2020. We estimated that
one of them filed an initial filing, as discussed in Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings. (23 total large liquidity fund advisers—1 adviser who made an initial filing = 22 advisers who make ongoing filings.)
5 In the case of the final estimates, Private Funds Statistics show 21 large liquidity fund advisers filed Form PF in the third quarter of 2022. We estimated that one
of them filed an initial filing, as discussed in Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings. (21 total large liquidity fund advisers—1
adviser who made an initial filing = 20 advisers who make ongoing filings.)
TABLE 21—PROPOSED AND FINAL ANNUAL MONETIZED TIME BURDEN OF INITIAL FILINGS
Respondent 1
Per
Large Liquidity Fund Advisers:
Proposed Estimate .............................................................................
Final Estimate ....................................................................................
Previously Approved ..........................................................................
Change ...............................................................................................
Per response
amortized
over 3
years 3
response 2
5 $64,893
6 73,391
÷3=
÷3=
Aggregate
monetized
time burden
amortized
over 3 years
Aggregate
number of
responses 4
×
×
×
$21,631
24,644
63,460
9,931
1
1 response
2
(1)
=
=
=
$21,631
24,644
126,920
(102,276)
Notes:
1 We expect that the monetized time burden will be most significant for the initial report, for the same reasons discussed in Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings. Accordingly, we anticipate that the initial report will require more attention from senior personnel, including compliance
managers and senior risk management specialists, than will ongoing annual and quarterly filings. Changes are due to using (1) updated hours per response estimates, as discussed in Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings, (2) updated aggregate number of responses, as discussed in
Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings, and (3) updated wage estimates. Changes to the aggregate monetized time burden,
amortized over three years, also are due to amortizing the monetized time burden, which the previously approved estimates did not calculate, as discussed below.
2 For the hours per response in each calculation, see Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings.
3 We amortize the monetized time burden for initial filings over three years, as we do with other initial burdens in this PRA, because we believe that most of the
burden would be incurred in the initial filing. The previously approved burden estimates did not calculate this.
4 See Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings.
5 In the case of the proposed estimates, for large liquidity fund advisers, we estimated that for the initial report, of a total estimated burden of 202 hours, approximately 60 percent would most likely be performed by compliance professionals and approximately 40 percent would most likely be performed by programmers working on system configuration and reporting automation (that is approximately 121 hours for compliance professionals and 81 hours for programmers). Of the work performed by compliance professionals, we anticipated that it would be performed equally by a compliance manager at a cost of $316 per hour and a senior risk management specialist at a cost of $365 per hour. Of the work performed by programmers, we anticipated that it would be performed equally by a senior programmer at a
cost of $339 per hour and a programmer analyst at a cost of $246 per hour. (($316 per hour × 0.5) + ($365 per hour × 0.5)) × 121 hours = $41,200.50. (($339 per
hour × 0.5) + ($246 per hour × 0.5)) × 81 hours = $23,692.50. $41,200.50 + $23,692.50 = $64,893.
6 In the case of the final estimates, for large liquidity fund advisers, we estimate that for the initial report, of a total estimated burden of 202 hours, approximately 60
percent will most likely be performed by compliance professionals and approximately 40 percent will most likely be performed by programmers working on system
configuration and reporting automation (that is approximately 121 hours for compliance professionals and 81 hours for programmers). Of the work performed by compliance professionals, we anticipate that it will be performed equally by a compliance manager at a cost of $360 per hour and a senior risk management specialist at
a cost of $416 per hour. Of the work performed by programmers, we anticipate that it will be performed equally by a senior programmer at a cost of $386 per hour
and a programmer analyst at a cost of $280 per hour. (($360 per hour × 0.5) + ($416 per hour × 0.5)) × 121 hours = $46,948. (($386 per hour × 0.5) + ($280 per
hour × 0.5)) × 81 hours = $26,973. $46,958 + $26,973 = $73,931.
TABLE 22—PROPOSED AND FINAL ANNUAL MONETIZED TIME BURDEN OF ONGOING QUARTERLY FILINGS
Respondent 1
Large Liquidity Fund Advisers:
Proposed Estimate .................................................................................................................
Final Estimate ........................................................................................................................
Previously Approved ..............................................................................................................
Change 7 ................................................................................................................................
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Aggregate
number of
responses
Per response 2
3 $20,022
5 22,791
29,216.25
(6,425.25)
×
×
×
0
4 88
6 80
80 responses
(514,020)
Aggregate
monetized
time burden
=
=
=
$1,761,936
1,823,280
2,337,300
Notes:
1 We expect that the monetized time burden will be less costly for ongoing quarterly reports than for initial reports, for the same reasons discussed in Table 20: Annual Hour Burden Proposed and Final Estimates for Ongoing Quarterly Filings. Accordingly, we anticipate that senior personnel will bear less of the reporting burden
than they would for the initial report. Changes are due to using (1) updated wage estimates, (2) updated hours per response estimates, as discussed in Table 20: Annual Hour Burden Proposed and Final Estimates for Quarterly Filings, and (2) updated aggregate number of responses. Changes to estimates concerning large liquidity fund advisers primarily appear to be due to correcting a calculation error, as discussed below.
2 For the proposed estimates, we estimated that quarterly reports would be completed equally by (1) a compliance manager at a cost of $316 per hour, (2) a senior
compliance examiner at a cost of $243, (3) a senior risk management specialist at a cost of $365 per hour, and (4) a risk management specialist at a cost of $203 an
hour. ($316 × 0.25 = $79) + ($243 × 0.25 = $60.75) + ($365 × 0.25 = $91.25) + ($203 × 0.25 = $50.75) = $281.75, rounded to $282 per hour. For the final estimates,
we estimate that quarterly reports would be completed equally by (1) a compliance manager at a cost of $360 per hour, (2) a senior compliance examiner at a cost of
$276, (3) a senior risk management specialist at a cost of $416 per hour, and (4) a risk management specialist at a cost of $232 an hour. ($360 × 0.25 = $90) +
($276 × 0.25 = $69) + ($416 × 0.25 = $104) + ($232 × 0.25 = $58) = $321. To calculate the cost per response for each respondent, we used the hours per response
from Table 20: Annual Hour Burden Proposed and Final Estimates for Quarterly Filings.
3 In the case of the proposed estimates, cost per response for large liquidity fund advisers: $282 per hour × 71 hours per response = $20,022 per response.
4 In the case of the proposed estimates, 22 large liquidity fund advisers × 4 responses annually = 88 aggregate responses.
5 In the case of the final estimates, cost per response for large liquidity fund advisers: $321 per hour × 71 hours per response = $22,791 per response.
6 In the case of the final estimates, 20 large liquidity fund advisers × 4 responses annually = 80 aggregate responses.
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51519
7 The previously approved estimates appear to have mistakenly used a different amount of hours per response (105 hours), rather than the actual estimate for large
liquidity fund advisers (which was 70 hours per response), causing the monetized time burden to be inflated in error. Therefore, the extent of these changes are primarily due to using the correct hours per response, which we now estimate as 71 hours, as discussed in Table 20: Annual Hour Burden Proposed and Final Estimates for Quarterly Filings. Correcting for the error in the previously approved estimates would result in a prior estimate of approximately $19,460 per quarterly filing
($278 per hour × 70 hours per response = $19,460) and a change of approximately $3,331 per quarterly filing associated with the final amendments ($22,791—
$19,460 = $3,331).
TABLE 23—PROPOSED AND FINAL ANNUAL EXTERNAL COST BURDEN FOR ONGOING QUARTERLY FILINGS AS WELL AS
INITIAL FILINGS
Number of
responses per
respondent 2
Respondent 1
Large Liquidity
Fund Advisers
Proposed Estimate ........
Final Estimate ..........
Previously
Approved ..
Change .........
Total
filing
fees
Filing fee
per filing 3
External
cost of initial
filing
amortized
over 3
years 5
External
cost of
initial
filing 4
Aggregate
external
cost of initial
filing
amortized
over 3
years 7
Number of
initial
filings 6
Total
aggregate
external
cost 8
4
×
$150
=
$600
$50,000
÷3=
$16,667
×
1
=
$16,667
9 $30,467
4
×
150
=
600
50,000
÷3=
16,667
×
1
=
16,667
10 29,267
4
0
×
150
0
=
600
0
50,000
0
×
2
(1)
=
100,000
(83,333)
113,200
(83,933)
Notes:
1 We estimate that advisers would incur the cost of filing fees for each filing. For initial filings, advisers may incur costs to modify existing systems or deploy new
systems to support Form PF reporting, acquire or use hardware to perform computations, or otherwise process data required on Form PF.
2 Large liquidity fund advisers file quarterly.
3 The SEC established Form PF filing fees in a separate order. Since 2011, filing fees have been and continue to be $150 per quarterly filing. See Order Approving
Filing Fees for Exempt Reporting Advisers and Private Fund Advisers, Advisers Act Release No. 3305 (Oct. 24, 2011) [76 FR 67004 (Oct. 28, 2011)].
4 In the previous PRA submission for the rules, staff estimated that the external cost burden for initial filings would range from $0 to $50,000 per adviser. This range
reflected the fact that the cost to any adviser may depend on how many funds or the types of funds it manages, the state of its existing systems, the complexity of its
business, the frequency of Form PF filings, the deadlines for completion, and the amount of information the adviser must disclose on Form PF. We continue to estimate that the same cost range would apply.
5 We amortize the external cost burden of initial filings over three years, as we do with other initial burdens in this PRA, because we believe that most of the burden
would be incurred in the initial filing. The previously approved burden estimates did not calculate this.
6 See Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings.
7 Changes to the aggregate external cost of initial filings, amortized over three years are due to (1) using updated data and (2) amortizing the external cost of initial
filings over three years, which the previously approved PRA did not calculate.
8 Changes to the total aggregate external cost are due to (1) using updated data and (2) amortizing the external cost of initial filings over three years, which the
previously approved PRA did not calculate.
9 In the case of the proposed estimates, Private Funds Statistics show 23 large liquidity fund advisers filed Form PF in the fourth quarter of 2020. (23 large liquidity
fund advisers × $600 total filing fees) + $16,667 total external costs of initial filings, amortized over three years = $30,467 aggregate cost.
10 In the case of the final estimates, Private Funds Statistics show 21 large liquidity fund advisers filed Form PF in the third quarter of 2022. (21 large liquidity fund
advisers × $600 total filing fees) + $16,667 total external costs of initial filings, amortized over three years = $29,267 aggregate cost.
ddrumheller on DSK120RN23PROD with RULES2
G. Rule 31a–2
Section 31(a)(1) of the Investment
Company Act requires registered
investment companies and certain
others to maintain and preserve records
as prescribed by Commission rules. Rule
31a–1 specifies the books and records
that must be maintained. Rule 31a–2
specifies the time periods that entities
must retain certain books and records,
including those required to be
maintained under rule 31a–1. The
retention of records, as required by rule
31a–2, is necessary to ensure access by
Commission staff to material business
and financial information about funds
and certain related entities. This
information will be used by the
Commission staff to evaluate fund
compliance with the Investment
Company Act and regulations
thereunder. We are adopting
amendments to require money market
funds to retain books and records
containing schedules evidencing and
supporting each computation of a
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liquidity fee pursuant to rule 2a–7(c)(2).
The respondents to these collections of
information will be money market
funds. The new collections of
information are mandatory for the
money market funds subject to rule 2a–
7(c)(2). We estimate that there are 111
money market funds that will be subject
to the collection of information
requirements related to liquidity fees.
To the extent the Commission receives
confidential information pursuant to the
collections of information, such
information will be kept confidential,
subject to the provisions of applicable
law.835
In our most recent Paperwork
Reduction Act submission for rule 31a–
2, we estimated the annual aggregate
compliance burden to comply with the
collection of information requirement of
rule 31a–2 is 606,982 burden hours with
an internal cost burden of $52,200,418
835 See
PO 00000
supra note 815.
Frm 00117
Fmt 4701
Sfmt 4700
and an external cost burden estimate of
$111,751,674.836
The Commission did not receive
public comment regarding the PRA
estimates for the proposed amendments
to rule 31a–2 in the Proposing Release.
We have adjusted the proposal’s
estimated annual burden hours and
internal time costs, however, to reflect
changes in the final rule (e.g., providing
for mandatory and discretionary
liquidity fees under rule 2a–7, instead of
the proposed swing pricing
requirement, which applied to a smaller
subset of funds) and updated wage rates
and data.
The table below summarizes our PRA
annual burden estimates associated with
the proposed amendments to rule 31a–
2.
836 The most recent rule 31a–2 PRA submission
was approved in 2022 (OMB Control No. 3235–
0179). The estimates in the Proposing Release were
based on earlier approved estimates (696,464 hours
and $115,372,485 external cost burden), and these
earlier approved estimates are reflected in the
‘‘Proposed Estimates’’ section of Table 24.
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VI. Regulatory Flexibility Act
Certification
The Commission certified, pursuant
to section 605(b) of the Regulatory
Flexibility Act of 1980 (‘‘RFA’’) 837 that,
if adopted, the proposed amendments to
rule 2a–7, rule 31a–2, Forms N–MFP
and N–CR under the Investment
Company Act, Form N–1A under the
Investment Company Act and the
Securities Act, and Form PF under the
Investment Advisers Act would not
have a significant economic impact on
a substantial number of small entities.
The Commission included these
certifications in section V of the
Proposing Release and section V of the
Form PF Proposing Release and
requested comment on the
837 5
U.S.C. 605(b).
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certifications. Commenters did not
respond to the requests for comment
regarding the Commission’s
certifications, although some
commenters discussed the potential
effects of the proposed amendments on
smaller money market funds or smaller
private funds.838 While we considered
these comments, we continue to believe
that the economic impact of the
amendments on small entities will not
be significant. With respect to the
amendments for money market funds,
only one money market fund is a small
entity based on information in filings
submitted to the Commission.839 As for
838 See, e.g., Federated Hermes Comment Letter I;
IDC Comment Letter; see also 2023 Form PF
Adopting Release, supra note 494, at n.432.
839 Under the Investment Company Act, an
investment company is considered a small business
PO 00000
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Fmt 4701
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the Form PF amendments affecting large
liquidity fund advisers, by definition no
small entity on its own would be a large
liquidity fund adviser subject to
reporting on Form PF.840 Large liquidity
fund advisers that are required to report
on Form PF are SEC-registered
or small organization if it, together with other
investment companies in the same group of related
investment companies, has net assets of $50 million
or less as of the end of its most recent fiscal year.
See 17 CFR 270.0–10.
840 For purposes of the Advisers Act and the RFA,
an investment adviser generally is a small entity if
it: (1) has assets under management having a total
value of less than $25 million; (2) did not have total
assets of $5 million or more on the last day of the
most recent fiscal year; and (3) does not control, is
not controlled by, and is not under common control
with another investment adviser that has assets
under management of $25 million or more, or any
person (other than a natural person) that had total
assets of $5 million or more on the last day of its
most recent fiscal year. See 17 CFR 275.0–7.
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investment advisers that advise at least
one liquidity fund and manage,
collectively with their related persons,
at least $1 billion in combined liquidity
fund and money market fund assets.841
While the final amendments include
some modifications to the Commission’s
proposal, as discussed more fully above
in section II, we believe these
modifications generally will reduce the
burdens of the proposal. Moreover, we
do not believe that these modifications
alter the basis upon which the
certifications in the Proposing Release
and the Form PF Proposing Release
were made. Accordingly, we certify that
the final rule will not have a significant
economic impact on a substantial
number of small entities.
Statutory Authority
The Commission is adopting the rule
and form amendments contained in this
document under the authority set forth
in the Investment Company Act,
particularly sections 6, 8, 22, 24, 30, 31,
and 38 thereof [15 U.S.C. 80a–1 et seq.];
the Advisers Act, particularly sections
204(b) and 211(e) thereof [15 U.S.C.
80b–1 et seq.]; the Securities Act,
particularly sections 5, 6, 7, 10, and 19
thereof [15 U.S.C. 77a et seq.]; and the
Exchange Act, particularly section 23
thereof [15 U.S.C. 78a et seq.].
List of Subjects in 17 CFR Parts 270,
274, and 279
Investment companies, Reporting and
recordkeeping requirements, Securities.
Text of Rule and Form Amendments
For the reasons set out in the
preamble, title 17, chapter II of the Code
of Federal Regulations is amended as
follows:
PART 270—RULES AND
REGULATIONS, INVESTMENT
COMPANY ACT OF 1940
1. The general authority citation for
part 270 continues to read as follows:
■
Authority: 15 U.S.C. 80a–1 et seq., 80a–
34(d), 80a–37, 80a–39, and Pub. L. 111–203,
sec. 939A, 124 Stat. 1376 (2010), unless
otherwise noted.
*
*
*
*
*
2. Amend § 270.2a–7 by:
a. Revising paragraph (c)(2);
b. Adding paragraph (c)(3);
c. Revising paragraphs (d)(1)(ii) and
(iii) and (d)(4)(ii) and (iii);
■ d. Adding paragraph (f)(4);
■ e. In paragraphs (g)(8)(i) introductory
text and (g)(8)(ii)(A), removing the
words ‘‘have invested at least ten
percent of its total assets in weekly
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■
■
■
■
841 See
Instruction 3 to Form PF.
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liquid assets’’ and adding, in their place,
the words ‘‘maintain the sufficient
liquidity levels identified in its written
procedures’’; and
■ f. Revising paragraphs (h)(10)
introductory text, (h)(10)(i)(B)(2),
(h)(10)(iii), (iv), and (v), and (j).
The revisions and additions read as
follows:
§ 270.2a–7
Money market funds.
*
*
*
*
*
(c) * * *
(2) Liquidity fees. Except as provided
in paragraph (c)(2)(v) of this section,
and notwithstanding section 27(i) of the
Act (15 U.S.C. 80a–27(i)) and § 270.22c–
1:
(i) Discretionary liquidity fees. If the
fund’s board of directors, including a
majority of the directors who are not
interested persons of the fund,
determines that a liquidity fee is in the
best interests of the fund, the fund must
institute a liquidity fee (not to exceed
two percent of the value of the shares
redeemed).
(A) Duration and application of
discretionary liquidity fee. Once
imposed, a discretionary liquidity fee
must be applied to all shares redeemed
and must remain in effect until the
money market fund’s board of directors,
including a majority of the directors
who are not interested persons of the
fund, determines that imposing such
liquidity fee is no longer in the best
interests of the fund.
(B) Government money market funds.
The requirements of this paragraph
(c)(2)(i) do not apply to a government
money market fund. A government
money market fund may, however,
choose to rely on the ability to impose
discretionary liquidity fees consistent
with the requirements of this paragraph
(c)(2)(i) and any other requirements that
apply to liquidity fees (e.g., Item
4(b)(1)(ii) of Form N–1A (§ 274.11A of
this chapter)).
(ii) Determination, duration, and
application of mandatory liquidity fees.
If a money market fund that is not a
government money market fund or a
retail money market fund has total daily
net redemptions that exceed five
percent of the fund’s net assets, or such
smaller amount of net redemptions as
the board determines, based on flow
information available within a
reasonable period after the last
computation of the fund’s net asset
value on that day, the fund must apply
a liquidity fee to all shares that are
redeemed at a price computed on that
day, in an amount determined pursuant
to paragraph (c)(2)(iii) of this section.
(iii) Amount of mandatory liquidity
fees. The amount of a mandatory
PO 00000
Frm 00119
Fmt 4701
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51521
liquidity fee must be determined
pursuant to paragraph (c)(2)(iii)(A) of
this section, except as provided in
paragraph (c)(2)(iii)(C) or (D) of this
section.
(A) Good faith estimate of liquidity
costs. The fee amount must be based on
a good faith estimate, supported by data,
of the costs the fund would incur if it
sold a pro rata amount of each security
in its portfolio to satisfy the amount of
net redemptions, including:
(1) Spread costs, such that the fund is
valuing each security at its bid price,
and any other charges, fees, and taxes
associated with portfolio security sales;
and
(2) Market impacts for each security.
The fund must determine market
impacts by first establishing a market
impact factor for each security, which is
a good faith estimate of the percentage
change in the value of the security if it
were sold, per dollar of the amount of
the security that would be sold if the
fund sold a pro rata amount of each
security in its portfolio to satisfy the
amount of net redemptions under
current market conditions and, second,
multiplying the market impact factor by
the dollar amount of the security that
would be sold. A fund may assume a
market impact of zero for its daily liquid
assets and weekly liquid assets.
(B) Cost estimates by type of security.
For purposes of paragraph (c)(2)(iii)(A)
of this section, a fund may estimate
costs and market impacts for each type
of security with the same or
substantially similar characteristics and
apply those estimates to all securities of
that type rather than analyze each
security separately.
(C) Default fee amount. If the costs of
selling a pro rata amount of each
portfolio security cannot be estimated in
good faith and supported by data, the
liquidity fee amount is one percent of
the value of shares redeemed.
(D) De minimis exception. A fund is
not required to apply a liquidity fee if
the amount of the fee determined under
paragraph (c)(2)(iii)(A) of this section is
less than 0.01% of the value of the
shares redeemed.
(iv) Variable contracts.
Notwithstanding section 27(i) of the Act
(15 U.S.C. 80a–27(i)), a variable
insurance contract issued by a registered
separate account funding variable
insurance contracts or the sponsoring
insurance company of such separate
account may apply a liquidity fee
pursuant to paragraph (c)(2) of this
section to contract owners who allocate
all or a portion of their contract value
to a subaccount of the separate account
that is either a money market fund or
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that invests all of its assets in shares of
a money market fund.
(v) Master feeder funds. Any money
market fund (‘‘feeder fund’’) that owns,
pursuant to section 12(d)(1)(E) of the
Act (15 U.S.C. 80a–12(d)(1)(E)), shares
of another money market fund (‘‘master
fund’’) may not impose liquidity fees
under paragraph (c)(2) of this section,
provided however, that if a master fund,
in which the feeder fund invests,
imposes a liquidity fee pursuant to
paragraph (c)(2) of this section, then the
feeder fund shall pass through to its
investors the fee on the same terms and
conditions as imposed by the master
fund.
(3) Share cancellation. A money
market fund may not reduce the number
of its shares outstanding to seek to
maintain a stable net asset value per
share or stable price per share unless:
(i) The money market fund calculates
its share price pursuant to paragraph
(c)(1)(i) of this section;
(ii) The fund has negative gross yield
as a result of negative interest rates
(‘‘negative interest rate event’’);
(iii) The board of directors determines
that reducing the number of the fund’s
shares outstanding is in the best
interests of the fund and its
shareholders; and
(iv) Timely, concise, and plain
English disclosure is provided to
investors about the fund’s share
cancellation practices and their effects
on investors, including:
(A) Advance notification to investors
in the fund’s prospectus that the fund
plans to use share cancellation in a
negative interest rate event and the
potential effects on investors; and
(B) When the fund is cancelling
shares, information in each account
statement or in a separate writing
accompanying each account statement
identifying that such practice is in use
and explaining its effects on investors.
(d) * * *
(1) * * *
(ii) Maintain a dollar-weighted
average portfolio maturity (‘‘WAM’’)
that exceeds 60 calendar days, with the
dollar-weighted average based on the
percentage of each security’s market
value in the portfolio; or
(iii) Maintain a dollar-weighted
average portfolio maturity that exceeds
120 calendar days, determined without
reference to the exceptions in paragraph
(i) of this section regarding interest rate
readjustments (‘‘WAL’’) and with the
dollar-weighted average based on the
percentage of each security’s market
value in the portfolio.
*
*
*
*
*
(4) * * *
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20:11 Aug 02, 2023
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(ii) Minimum daily liquidity
requirement. The money market fund
may not acquire any security other than
a daily liquid asset if, immediately after
the acquisition, the fund would have
invested less than twenty-five percent of
its total assets in daily liquid assets.
This provision does not apply to tax
exempt funds.
(iii) Minimum weekly liquidity
requirement. The money market fund
may not acquire any security other than
a weekly liquid asset if, immediately
after the acquisition, the fund would
have invested less than fifty percent of
its total assets in weekly liquid assets.
*
*
*
*
*
(f) * * *
(4) Notice to the board of directors. (i)
The money market fund must notify its
board of directors within one business
day following the occurrence of:
(A) The money market fund investing
less than twelve and a half percent of its
total assets in daily liquid assets; or
(B) The money market fund investing
less than twenty-five percent of its total
assets in weekly liquid assets.
(ii) Following an event described in
paragraph (f)(4)(i) of this section, the
money market fund must provide its
board of directors with a brief
description of the facts and
circumstances leading to such event
within four business days after
occurrence of the event.
*
*
*
*
*
(h) * * *
(10) Website disclosure of portfolio
holdings and other fund information.
The money market fund must post
prominently on its website the
following information:
(i) * * *
(B) * * *
(2) Category of investment (indicate
the category that identifies the
instrument from among the following:
U.S. Treasury Debt; U.S. Government
Agency Debt, if categorized as couponpaying notes; U.S. Government Agency
Debt, if categorized as no-coupon
discount notes; Non-U.S. Sovereign,
Sub-Sovereign and Supra-National debt;
Certificate of Deposit; Non-Negotiable
Time Deposit; Variable Rate Demand
Note; Other Municipal Security; Asset
Backed Commercial Paper; Other Asset
Backed Securities; U.S. Treasury
Repurchase Agreement, if collateralized
only by U.S. Treasuries (including
Strips) and cash; U.S. Government
Agency Repurchase Agreement,
collateralized only by U.S. Government
Agency securities, U.S. Treasuries, and
cash; Other Repurchase Agreement, if
any collateral falls outside Treasury,
Government Agency and cash;
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Frm 00120
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Insurance Company Funding
Agreement; Investment Company;
Financial Company Commercial Paper;
Non-Financial Company Commercial
Paper; and Other Instrument. If Other
Instrument, include a brief description);
*
*
*
*
*
(iii) A schedule, chart, graph, or other
depiction showing the money market
fund’s net asset value per share (which
the fund must calculate based on
current market factors before applying
the amortized cost or penny-rounding
method, if used), rounded to the fourth
decimal place in the case of funds with
a $1.0000 share price or an equivalent
level of accuracy for funds with a
different share price (e.g., $10.000 per
share), as of the end of each business
day during the preceding six months,
which must be updated each business
day as of the end of the preceding
business day.
(iv) A link to a website of the
Securities and Exchange Commission
where a user may obtain the most recent
12 months of publicly available
information filed by the money market
fund pursuant to § 270.30b1–7.
(v) For a period of not less than one
year, beginning no later than the same
business day on which the money
market fund files an initial report on
Form N–CR (§ 274.222 of this chapter)
in response to the occurrence of any
event specified in Part C of Form N–CR,
the same information that the money
market fund is required to report to the
Commission on Part C (Items C.1, C.2,
C.3, C.4, C.5, C.6, and C.7) of Form N–
CR concerning such event, along with
the following statement: ‘‘The Fund was
required to disclose additional
information about this event on Form
N–CR and to file this form with the
Securities and Exchange Commission.
Any Form N–CR filing submitted by the
Fund is available on the EDGAR
Database on the Securities and
Exchange Commission’s internet site at
https://www.sec.gov.’’
*
*
*
*
*
(j) Delegation. The money market
fund’s board of directors may delegate
to the fund’s investment adviser or
officers the responsibility to make any
determination required to be made by
the board of directors under this section
other than the determinations required
by paragraphs (c)(1) (board findings),
(c)(3) (share cancellation), (f)(1) (adverse
events), (g)(1) and (2) (amortized cost
and penny rounding procedures), and
(g)(8) (stress testing procedures) of this
section.
(1) Written guidelines. The board of
directors must establish and
periodically review written guidelines
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(including guidelines for determining
whether securities present minimal
credit risks as required in paragraphs
(d)(2) and (g)(3) of this section and
guidelines for determining the
application and size of liquidity fees as
required in paragraph (c)(2) of this
section) and procedures under which
the delegate makes such determinations.
(2) Oversight. The board of directors
must take any measures reasonably
necessary (through periodic reviews of
fund investments and the delegate’s
procedures in connection with
investment decisions, periodic review of
the delegate’s liquidity fee
determinations under paragraph (c)(2) of
this section, and prompt review of the
adviser’s actions in the event of the
default of a security or event of
insolvency with respect to the issuer of
the security or any guarantee or demand
feature to which it is subject that
requires notification of the Commission
under paragraph (f)(2) of this section by
reference to Form N–CR (§ 274.222 of
this chapter) to assure that the
guidelines and procedures are being
followed.
3. Amend § 270.31a–2 by revising
paragraph (a)(2) to read as follows:
■
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Authority: 15 U.S.C. 77f, 77g, 77h, 77j,
77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a–8,
80a–24, 80a–26, 80a–29, and 80a–37 unless
otherwise noted.
*
*
*
*
*
5. Amend Form N–1A (referenced in
§§ 239.15A and 274.11A) by:
■ a. Revising Item 4(b)(1)(ii);
■ b. Revising Item 16(g);
■ c. Removing instructions 2 and 3 to
Item 16(g)(1); and
■ d. Revising Item 27A(i).
■
Note: Form N–1A is attached as Appendix
A to this document. Form N–1A does not
appear in the Code of Federal Regulations.
6. Amend Form N–CSR (referenced in
§§ 249.331 and 274.128) by:
■ a. Revising the header to the
instruction to paragraph (a) and (b) of
Item 7 to read ‘‘Instructions to
paragraphs (a) and (b)’’;
■ b. Redesignating the current
instruction to Item 7 as Instruction 1;
and
■ c. Adding Instruction 2 to Item 7.
■
7. Revise Form N–MFP (referenced in
§ 274.201).
■
(a) * * *
(2) Preserve for a period not less than
six years from the end of the fiscal year
in which any transaction occurred, the
first two years in an easily accessible
place, all books and records required to
be made pursuant to § 270.31a–1(b)(5)
through (12) and all vouchers,
memoranda, correspondence,
checkbooks, bank statements, cancelled
checks, cash reconciliation, cancelled
stock certificates, and all schedules
evidencing and supporting each
computation of net asset value of the
investment company shares, including
schedules evidencing and supporting
each computation of an adjustment to
net asset value of the investment
company shares based on swing pricing
policies and procedures established and
implemented pursuant to § 270.22c–
1(a)(3), all schedules evidencing and
supporting each computation of a
liquidity fee by a money market fund
pursuant to § 270.2a–7(c)(2), and other
documents required to be maintained by
§ 270.31a–1(a) and not enumerated in
§ 270.31a–1(b).
*
*
*
*
*
20:11 Aug 02, 2023
4. The general authority citation for
part 274 continues to read as follows:
■
Note: Form N–CSR is attached in
Appendix B to this document. Form N–CSR
does not appear in the Code of Federal
Regulations.
§ 270.31a–2 Records to be preserved by
registered investment companies, certain
majority-owned subsidiaries thereof, and
other persons having transactions with
registered investment companies.
VerDate Sep<11>2014
PART 274—FORMS PRESCRIBED
UNDER THE INVESTMENT COMPANY
ACT OF 1940
Note: Form N–MFP is attached as
Appendix C to this document. Form N–MFP
does not appear in the Code of Federal
Regulations.
8. Amend Form N–CR (referenced in
§ 274.222) by:
■ a. Revising the General Instructions in
Sections A, C, D, and F, and Parts A and
C;
■ b. Removing Parts E, F, and G and
replacing them with new Part E; and
■ c. Redesignating Part H to Part F.
■
Note: Form N–CR is attached as Appendix
D to this document. Form N–CR does not
appear in the Code of Federal Regulations.
PART 279—FORMS PRESCRIBED
UNDER THE INVESTMENT ADVISERS
ACT OF 1940
9. The authority citation for part 279
continues to read as follows:
■
Authority: The Investment Advisers Act of
1940, 15 U.S.C. 80b–1, et seq., Pub. L. 111–
203, 124 Stat. 1376.
10. Amend Form PF (referenced in
§ 279.9) by revising section 3 and the
Glossary of Terms.
■
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51523
Note: Form PF is attached as Appendix E
to this document. Form PF does not appear
in the Code of Federal Regulations.
By the Commission.
Dated: July 12, 2023.
Vanessa A. Countryman,
Secretary.
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendix A—Form N–1A
Form N–1A
*
*
*
*
*
Item 4. Risk/Return Summary: Investments,
Risks, and Performance
*
*
*
*
*
(b) * * *
(1) * * *
(ii)(A) If the Fund is a Money Market Fund
that is not a government Money Market
Fund, as defined in § 270.2a–7(a)(14) or a
retail Money Market Fund, as defined in
§ 270.2a–7(a)(21), include the following
statement:
You could lose money by investing in the
Fund. Because the share price of the Fund
will fluctuate, when you sell your shares they
may be worth more or less than what you
originally paid for them. The Fund may
impose a fee upon sale of your shares. The
Fund generally must impose a fee when net
sales of Fund shares exceed certain levels.
An investment in the Fund is not a bank
account and is not insured or guaranteed by
the Federal Deposit Insurance Corporation or
any other government agency. The Fund’s
sponsor is not required to reimburse the
Fund for losses, and you should not expect
that the sponsor will provide financial
support to the Fund at any time, including
during periods of market stress.
(B) If the Fund is a Money Market Fund
that is a government Money Market Fund, as
defined in § 270.2a–7(a)(14), or a retail
Money Market Fund, as defined in § 270.2a–
7(a)(21), and that is subject to the
requirements of § 270.2a–7(c)(2)(i) of this
chapter or is not subject to the requirements
of § 270.2a–7(c)(2)(i) pursuant to § 270.2a–
7(c)(2)(i)(B) of this chapter, but has chosen to
rely on the ability to impose liquidity fees
consistent with the requirements of § 270.2a–
7(c)(2)(i), include the following statement:
You could lose money by investing in the
Fund. Although the Fund seeks to preserve
the value of your investment at $1.00 per
share, it cannot guarantee it will do so. The
Fund may impose a fee upon sale of your
shares. An investment in the Fund is not a
bank account and is not insured or
guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
The Fund’s sponsor is not required to
reimburse the Fund for losses, and you
should not expect that the sponsor will
provide financial support to the Fund at any
time, including during periods of market
stress.
(C) If the Fund is a Money Market Fund
that is a government Money Market Fund, as
defined in § 270.2a–7(a)(14), that is not
subject to the requirements of § 270.2a–
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7(c)(2)(i) of this chapter pursuant to § 270.2a–
7(c)(2)(i)(B) of this chapter, and that has not
chosen to rely on the ability to impose
liquidity fees consistent with the
requirements of § 270.2a–7(c)(2)(i), include
the following statement:
You could lose money by investing in the
Fund. Although the Fund seeks to preserve
the value of your investment at $1.00 per
share, it cannot guarantee it will do so. An
investment in the Fund is not a bank account
and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any
other government agency. The Fund’s
sponsor is not required to reimburse the
Fund for losses, and you should not expect
that the sponsor will provide financial
support to the Fund at any time, including
during periods of market stress.
Instruction. If an affiliated person,
promoter, or principal underwriter of the
Fund, or an affiliated person of such a
person, has contractually committed to
provide financial support to the Fund, and
the term of the agreement will extend for at
least one year following the effective date of
the Fund’s registration statement, the
statement specified in Item 4(b)(1)(ii)(A),
Item 4(b)(1)(ii)(B), or Item 4(b)(1)(ii)(C) may
omit the last sentence (‘‘The Fund’s sponsor
is not required to reimburse the Fund for
losses, and you should not expect that the
sponsor will provide financial support to the
Fund at any time, including during periods
of market stress.’’). For purposes of this
Instruction, the term ‘‘financial support’’
includes any capital contribution, purchase
of a security from the Fund in reliance on
§ 270.17a–9, purchase of any defaulted or
devalued security at par, execution of letter
of credit or letter of indemnity, capital
support agreement (whether or not the Fund
ultimately received support), performance
guarantee, or any other similar action
reasonably intended to increase or stabilize
the value or liquidity of the fund’s portfolio;
however, the term ‘‘financial support’’
excludes any routine waiver of fees or
reimbursement of fund expenses, routine
inter-fund lending, routine inter-fund
purchases of fund shares, or any action that
would qualify as financial support as defined
above, that the board of directors has
otherwise determined not to be reasonably
intended to increase or stabilize the value or
liquidity of the fund’s portfolio.
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*
*
*
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*
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Item 16. Description of the Fund and Its
Investments and Risks
(g) Money Market Fund Material Events. If
the Fund is a Money Market Fund disclose,
as applicable, the following events:
(1) Imposition of Liquidity Fees. During the
last 10 years, any occasion on which the
Fund has imposed a liquidity fee pursuant to
§ 270.2a–7(c)(2).
the Fund’s most recently filed report on Form
N–PX must be in a human-readable format
and remain available on or through the
Fund’s website for as long as the Fund
remains subject to the requirements of rule
30b1–4 (17 CFR 270.30b1–4). A Fund may
satisfy the requirement to provide this
information in a human-readable format by
providing a direct link to the relevant HTMLrendered Form N–PX report on EDGAR.
Instructions
*
1. With respect to each such occasion,
disclose: the dates the Fund imposed a
liquidity fee pursuant to § 270.2a–7(c)(2) and
the size of the liquidity fee imposed on each
of those dates.
Appendix B—Form N–CSR
*
*
*
*
*
*
*
*
*
*
Item 27A. Annual and Semi-Annual
Shareholder Report
*
*
*
*
*
(i) Availability of Additional Information.
Provide a brief, plain English statement that
certain additional Fund information is
available on [the Fund’s] website. Include
plain English references to, as applicable, the
Fund’s prospectus, financial information,
holdings, and proxy voting information,
including the information described in
Instructions 2 and 3 to Item 17(f) of Form N–
1A. A Fund also may refer to other
information available on this website,
including the information described in
Instruction 2 to paragraphs (a) and (b) of Item
7 of Form N–CSR, if it reasonably believes
that shareholders likely would view the
information as important.
Instructions
*
*
*
*
*
3. If a Fund (or financial intermediary
through which shares of the Fund may be
purchased or sold) receives a request for the
Fund’s proxy voting record by phone or
email, the Fund (or financial intermediary)
must send the information disclosed in the
Fund’s most recently filed report on Form N–
PX in a human-readable format, within three
business days of receipt of the request, by
first-class mail or other means designed to
ensure equally prompt delivery.
4. If a Fund has a website, it must make
publicly available free of charge the
information disclosed in the Fund’s most
recently filed report on Form N–PX on or
through its website as soon as reasonably
practicable after filing the report with the
Commission. The information disclosed in
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*
*
*
*
FORM N–CSR
*
*
*
*
*
Item 7. Financial Statements and Financial
Highlights for Open-End Management
Investment Companies.
*
*
*
*
*
Instructions to paragraphs (a) and (b).
1. The financial statements and financial
highlights filed under this Item must be
audited and be accompanied by any
associated accountant’s report, as defined in
rule 1–02(a) of Regulation S–X [17 CFR
210.1–02(a)], except that in the case of a
report on this Form N–CSR as of the end of
a fiscal half-year, the financial statements
and financial highlights need not be audited.
2. In the case of a Money Market Fund,
Schedule I—Investments in securities of
unaffiliated issuers [17 CFR 210.12–12B] may
be omitted from its financial statements,
provided that: (a) the Fund states in the
report that the Fund’s complete schedule of
investments in securities of unaffiliated
issuers is available (i) without charge, upon
request, by calling a specified toll-free
telephone number; (ii) on the Fund’s website,
if applicable; and (iii) on the Commission’s
website at https://www.sec.gov; and (b)
whenever the Fund (or financial
intermediary through which shares of the
Fund may be purchased or sold) receives a
request for the Fund’s schedule of
investments in securities of unaffiliated
issuers, the Fund (or financial intermediary)
sends a copy of Schedule I—Investments in
securities of unaffiliated issuers within 3
business days of receipt by first-class mail or
other means designed to ensure equally
prompt delivery.
*
*
*
*
*
Appendix C—Form N–MFP
BILLING CODE 8011–01–P
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BILLING CODE 8011–01–C
General Instructions
Form N–MFP
A. Rule as to Use of Form N–MFP
Monthly Schedule of Portfolio Holdings
of Money Market Funds
Form N–MFP is the public reporting
form that is to be used for monthly
reports of money market funds required
by section 30(b) of the Act and rule
30b1–7 under the Act (17 CFR
270.30b1–7). A money market fund
must report information about the fund
and its portfolio holdings as of the last
business day or any subsequent
calendar day of the preceding month.
The Form N–MFP must be filed with the
Commission no later than the fifth
business day of each month, but may be
filed any time beginning on the first
business day of the month. Each money
market fund, or series of a money
market fund, is required to file a
separate form. If the money market fund
Form N–MFP is to be used by
registered open-end management
investment companies, or series thereof,
that are regulated as money market
funds pursuant to rule 2a–7 under the
Investment Company Act of 1940
(‘‘Act’’) (17 CFR 270.2a–7) (‘‘money
market funds’’), to file reports with the
Commission pursuant to rule 30b1–7
under the Act (17 CFR 270.30b1–7). The
Commission may use the information
provided on Form N–MFP in its
regulatory, disclosure review,
inspection, and policymaking roles.
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does not have any classes, the fund
must provide the information required
by Part B for the series. A money market
fund is not required to respond to an
item that is wholly inapplicable. If an
item requests information that is not
applicable (for example, a company
does not have an LEI), respond N/A.
A money market fund may file an
amendment to a previously filed Form
N–MFP at any time, including an
amendment to correct a mistake or error
in a previously filed form. A fund that
files an amendment to a previously filed
form must provide information in
response to all items of Form N–MFP,
regardless of why the amendment is
filed.
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B. Application of General Rules and
Regulations
The General Rules and Regulations
under the Act contain certain general
requirements that are applicable to
reporting on any form under the Act.
These general requirements should be
carefully read and observed in the
preparation and filing of reports on this
form, except that any provision in the
form or in these instructions shall be
controlling.
C. Filing of Form N–MFP
A money market fund must file Form
N–MFP in accordance with rule 232.13
of Regulation S–T. Form N–MFP must
be filed electronically using the
Commission’s EDGAR system.
D. Paperwork Reduction Act
Information
A registrant is not required to respond
to the collection of information
contained in Form N–MFP unless the
Form displays a currently valid Office of
Management and Budget (‘‘OMB’’)
control number. Please direct comments
concerning the accuracy of the
information collection burden estimate
and any suggestions for reducing the
burden to the Secretary, Securities and
Exchange Commission, 100 F Street NE,
Washington, DC 20549–1090.
The OMB has reviewed this collection
of information under the clearance
requirements of 44 U.S.C. 3507.
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E. Definitions
References to sections and rules in
this Form N–MFP are to the Investment
Company Act of 1940 [15 U.S.C. 80a]
(the ‘‘Investment Company Act’’), unless
otherwise indicated. Terms used in this
Form N–MFP have the same meaning as
in the Investment Company Act or
related rules, unless otherwise
indicated.
As used in this Form N–MFP, the
terms set out below have the following
meanings:
‘‘Cash’’ means demand deposits in
depository institutions and cash
holdings in custodial accounts.
‘‘Class’’ means a class of shares issued
by a Multiple Class Fund that represents
interests in the same portfolio of
securities under rule 18f–3 [17 CFR
270.18f–3] or under an order exempting
the Multiple Class Fund from sections
18(f), 18(g), and 18(i) [15 U.S.C. 80a–
18(f), 18(g), and 18(i)].
‘‘Fund’’ means the Registrant or a
separate Series of the Registrant. When
an item of Form N–MFP specifically
applies to a Registrant or a Series, those
terms will be used.
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‘‘Government Money Market Fund’’
means a money market fund as defined
in 17 CFR 270.2a–7(a)(14).
‘‘LEI’’ means, with respect to any
company, the ‘‘legal entity identifier’’
assigned by or on behalf of an
internationally recognized standards
setting body and required for reporting
purposes by the U.S. Department of the
Treasury’s Office of Financial Research
or a financial regulator.
‘‘Master-Feeder Fund’’ means a twotiered arrangement in which one or
more Funds (or registered or
unregistered pooled investment
vehicles) (each a ‘‘Feeder Fund’’) holds
shares of a single Fund (the ‘‘Master
Fund’’) in accordance with section
12(d)(1)(E) [15 U.S.C. 80a–12(d)(1)(E)].
‘‘Money Market Fund’’ means a
registered open-end management
investment company, or series thereof,
that is regulated as a money market fund
pursuant to rule 2a–7 (17 CFR 270.2a–
7) under the Investment Company Act
of 1940.
‘‘Retail Money Market Fund’’ means a
money market fund as defined in 17
CFR 270.2a–7(a)(21).
‘‘RSSD ID’’ means the identifier
assigned by the National Information
Center of the Board of Governors of the
Federal Reserve System, if any.
‘‘Securities Act’’ means the Securities
Act of 1933 [15 U.S.C. 77a–aa].
‘‘Series’’ means shares offered by a
Registrant that represent undivided
interests in a portfolio of investments
and that are preferred over all other
series of shares for assets specifically
allocated to that series in accordance
with rule 18f–2(a) [17 CFR 270.18f–
2(a)].
‘‘Value’’ has the meaning defined in
section 2(a)(41) of the Act (15 U.S.C.
80a–2(a)(41)).
*
*
*
A. Rule as to Use of Form N–CR
Form N–CR is the public reporting form
that is to be used for current reports of money
market funds required by section 30(b) of the
Act and rule 30b1–8 under the Act. A money
market fund must file a report on Form N–
CR upon the occurrence of any one or more
of the events specified in Parts B–F of this
form. Unless otherwise specified, a report is
to be filed within one business day after
occurrence of the event. A report will be
made public immediately upon filing. If the
event occurs on a Saturday, Sunday, or
holiday on which the Commission is not
open for business, then the report is to be
filed on the first business day thereafter.
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*
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D. Filing of Form N–CR
A money market fund must file Form N–
CR in accordance with rule 232.13 of
Regulation S–T. Reports on Form N–CR must
be filed electronically using the
Commission’s Electronic Data Gathering,
Analysis, and Retrieval (‘‘EDGAR’’) system in
accordance with Regulation S–T. Consult the
EDGAR Filer Manual and Appendices for
EDGAR filing instructions.
*
*
*
*
*
F. Definitions
References to sections and rules in this
Form N–CR are to the Investment Company
Act (15 U.S.C. 80a), unless otherwise
indicated. Terms used in this Form N–CR
have the same meaning as in the Investment
Company Act or rule 2a–7 under the
Investment Company Act, unless otherwise
indicated.
In addition, the following definitions
apply:
‘‘Fund’’ means the registrant or a separate
series of the registrant.
‘‘LEI’’ means, with respect to any company,
the ‘‘legal entity identifier’’ as assigned by a
utility endorsed by the Global LEI Regulatory
Oversight Committee or accredited by the
Global LEI Foundation.
‘‘Registrant’’ means the investment
company filing this report or on whose behalf
the report is filed.
‘‘Series’’ means shares offered by a
Registrant that represent undivided interests
in a portfolio of investments and that are
preferred over all other series of shares for
assets specifically allocated to that series in
accordance with rule 18f–2(a) (17 CFR
270.18f–2(a)).
*
*
General Instructions
*
Upon the occurrence of any one or more
of the events specified in Parts B–F of Form
N–CR, a money market fund must file a
report on Form N–CR that includes
information in response to each of the items
in Part A of the form, as well as each of the
items in the applicable Parts B–F of the form.
*
*
*
*
Part A: General Information
Form N–CR
*
C. Information To Be Included in Report
Filed on Form N–CR
*
Appendix D—Form N–CR
51539
*
*
*
*
Item A.2 Name of registrant.
Item A.3 CIK Number of registrant.
Item A.4 LEI of registrant.
Item A.5 Name of series.
Item A.6 EDGAR Series Identifier.
Item A.7 LEI of series.
Item A.8 Securities Act File Number.
Item A.9 Provide the name, email address,
and telephone number of the person
authorized to receive information and
respond to questions about this Form N–CR.
*
*
*
*
*
Part C: Provision of Financial Support to
Fund
*
*
*
*
*
Item C.6 Security supported (if
applicable). Disclose the name of the issuer,
the title of the issue (including coupon or
yield, if applicable), at least two identifiers,
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if available (e.g., CUSIP, ISIN, CIK, LEI), and
the date the fund acquired the security.
*
*
*
*
*
Part E: Liquidity Threshold Event
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If a fund has invested less than: (i) 25% of
its total assets in weekly liquid assets or (ii)
12.5% of its total assets in daily liquid assets,
disclose the following information:
Item E.1 Initial date on which the fund
invested less than 25% of its total assets in
weekly liquid assets, if applicable.
Item E.2 Initial date on which the fund
invested less than 12.5% of its total assets in
daily liquid assets, if applicable.
Item E.3 Percentage of the fund’s total
assets invested in both weekly liquid assets
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and daily liquid assets as of any dates
reported in Items E.1 or E.2.
Item E.4 Brief description of the facts and
circumstances leading to the fund investing
less than 25% of its total assets in weekly
liquid assets or less than 12.5% of its total
assets in daily liquid assets, as applicable.
Instruction. A report responding to Items
E.1, E.2, and E.3 is to be filed within one
business day after occurrence of an event
contemplated in this Part E. An amended
report responding to Item E.4 is to be filed
within four business days after occurrence of
an event contemplated in this Part E.
Part F: Optional Disclosure
If a fund chooses, at its option, to disclose
any other events or information not
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otherwise required by this form, it may do so
under this Item F.1.
Item F.1 Optional disclosure.
Instruction. Item F.1 is intended to provide
a fund with additional flexibility, if it so
chooses, to disclose any other events or
information not otherwise required by this
form, or to supplement or clarify any of the
disclosures required elsewhere in this form.
Part F does not impose on funds any
affirmative obligation. A fund may file a
report on Form N–CR responding to Part F
at any time.
*
*
*
*
Appendix E–Form PF
BILLING CODE 8011–01–P
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Federal Register / Vol. 88, No. 148 / Thursday, August 3, 2023 / Rules and Regulations
]]>Agencies
[Federal Register Volume 88, Number 148 (Thursday, August 3, 2023)]
[Rules and Regulations]
[Pages 51404-51549]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15124]
[[Page 51403]]
Vol. 88
Thursday,
No. 148
August 3, 2023
Part II
Securities and Exchange Commission
-----------------------------------------------------------------------
17 CFR Parts 270, 274, and 279
Money Market Fund Reforms; Form PF Reporting Requirements for Large
Liquidity Fund Advisers; Technical Amendments to Form N-CSR and Form N-
1A; Final Rule
Federal Register / Vol. 88 , No. 148 / Thursday, August 3, 2023 /
Rules and Regulations
[[Page 51404]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 270, 274 and 279
[Release Nos. 33-11211; 34-97876; IA-6344; IC-34959; File No. S7-22-21]
RIN 3235-AM80
Money Market Fund Reforms; Form PF Reporting Requirements for
Large Liquidity Fund Advisers; Technical Amendments to Form N-CSR and
Form N-1A
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to certain rules that govern money market funds
under the Investment Company Act of 1940. These amendments are designed
to improve the resilience and transparency of money market funds. The
amendments will revise the primary rule that governs money market funds
to remove the ability for a fund board to temporarily suspend
redemptions if the fund's liquidity falls below a threshold. In
addition, the amendments will remove the tie between liquidity
thresholds and the potential imposition of liquidity fees. The
amendments will also require certain money market funds to implement a
liquidity fee framework that will better allocate the costs of
providing liquidity to redeeming investors. In addition, the Commission
is increasing the daily liquid asset and weekly liquid asset minimum
requirements to 25% and 50%, respectively. The Commission also is
amending certain reporting requirements on Form N-MFP and Form N-CR and
making certain conforming changes to Form N-1A to reflect amendments to
the regulatory framework for money market funds. In addition, the
Commission is addressing how money market funds with stable net asset
values may handle a negative interest rate environment, including by
adopting amendments that will permit these funds to use share
cancellation, subject to certain conditions. Further, the Commission is
adopting rule amendments to specify how funds must calculate weighted
average maturity and weighted average life. In addition, the Commission
is adopting amendments to Form PF concerning the information large
liquidity fund advisers must report for the liquidity funds they
advise. Finally, the Commission is adopting two technical amendments to
Form N-CSR and Form N-1A to correct errors from recent Commission
rulemakings.
DATES: Effective dates: The rule amendments are effective October 2,
2023. The amendments to Forms N-1A and N-CSR are effective October 2,
2023 and the amendments to Forms N-CR, N-MFP, and PF are effective June
11, 2024.
Compliance dates: The applicable compliance dates are discussed in
section II.H.
FOR FURTHER INFORMATION CONTACT: Blair Burnett, Christian Corkery,
David Driscoll, or Laura Harper Powell, Senior Counsels; Angela
Mokodean, Branch Chief; or Brian M. Johnson, Assistant Director at
(202) 551-6792, Investment Company Regulation Office, Division of
Investment Management, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to the
following rules and forms:
---------------------------------------------------------------------------
\1\ 15 U.S.C. 80a-1 et seq. Unless otherwise noted, all
references to statutory sections are to the Investment Company Act,
and all references to rules under the Investment Company Act are to
title 17, part 270 of the Code of Federal Regulations [17 CFR part
270].
\2\ 15 U.S.C. 77a et seq.
\3\ 15 U.S.C. 78a et seq.
------------------------------------------------------------------------
------------------------------------------------------------------------
Commission reference CFR Citation (17
CFR)
------------------------------------------------------------------------
Investment Company Act of 1940 Rule 2a-7......... Sec. 270.2a-7.
(``Act'' or ``Investment
Company Act'') \1\.
Rule 31a-2........ Sec. 270.31a-2.
Form N-MFP........ Sec. 274.201.
Form N-CR......... Sec. 274.222.
Securities Act of 1933 Form N-1A......... Sec. Sec.
(``Securities Act'') \2\ and 239.15A and
Investment Company Act. 274.11A.
Securities Exchange Act of 1934 Form N-CSR........ Sec. Sec.
(``Exchange Act'') \3\ and 249.331 and
Investment Company Act. 274.128.
Investment Advisers Act of 1940 Form PF........... Sec. 279.9.
(``Advisers Act'').
------------------------------------------------------------------------
Table of Contents
I. Introduction
A. Role of Money Market Funds and Existing Regulatory Framework
B. March 2020 Market Events and Need for Reform
II. Discussion
A. Amendments To Remove the Tie Between the Weekly Liquid Asset
Threshold and Redemption Gates and Liquidity Fees
1. Unintended Effects of the Tie Between the Weekly Liquid Asset
Threshold and Liquidity Fees and Redemption Gates
2. Removal of Redemption Gates From Rule 2a-7
B. Liquidity Fee Requirement
1. Determination To Adopt a Liquidity Fee Requirement
2. Terms of the New Mandatory Liquidity Fee Requirement
3. The Continued Availability of Discretionary Liquidity Fees
4. Disclosure
5. Tax and Accounting Implications of Liquidity Fees
C. Amendments to Portfolio Liquidity Requirements
1. Increase of the Minimum Daily and Weekly Liquidity
Requirements
2. Consequences for Falling Below Minimum Daily and Weekly
Liquidity Requirements
3. Amendments to Liquidity Metrics in Stress Testing
D. Amendments Related to Potential Negative Interest Rates
E. Amendments to Specify the Calculation of Weighted Average
Maturity and Weighted Average Life
F. Amendments to Reporting Requirements
1. Amendments to Form N-CR
2. Amendments to Form N-MFP
3. Amendments to Form PF
G. Technical Amendments to Form N-CSR and Form N-1A
H. Effective and Compliance Dates
III. Other Matters
IV. Economic Analysis
A. Introduction
B. Baseline
1. Money Market Funds
2. Large Liquidity Funds and Form PF
3. Other Affected Entities
C. Costs and Benefits of the Final Amendments
1. Removal of the Tie Between the Weekly Liquid Asset Threshold
and Liquidity Fees and Redemption Gates
2. Raised Liquidity Requirements
3. Stress Testing Requirements
4. Liquidity Fees
5. Amendments Related to Potential Negative Interest Rates
6. Disclosures
7. Calculation of Weighted Average Maturity and Weighted Average
Life
8. Form PF Requirements for Large Liquidity Fund Advisers
D. Alternatives
1. Alternatives to the Removal of Temporary Redemption Gates
[[Page 51405]]
2. Alternatives to the Removal of the Tie Between Weekly Liquid
Assets and Discretionary Liquidity Fees
3. Alternatives to the Final Increases in Liquidity Requirements
4. Alternative Stress Testing Requirements
5. Alternative Implementations of Liquidity Fees
6. Swing Pricing
7. Expanding the Scope of the Floating NAV Requirements
8. Countercyclical Weekly Liquid Asset Requirements
9. Amendments Related to Potential Negative Interest Rates
10. Amendments Related to WAL/WAM Calculation
11. Form PF Amendments for Large Liquidity Fund Advisers
12. Disclosures
13. Sponsor Support
14. Capital Buffers
15. Minimum Balance at Risk
16. Liquidity Exchange Bank Membership
17. Alternative Compliance and Filing Periods
E. Effects on Efficiency, Competition, and Capital Formation
V. Paperwork Reduction Act
A. Introduction
B. Rule 2a-7
C. Form N-MFP
D. Form N-CR
E. Form N-1A
F. Form PF
G. Rule 31a-2
VI. Regulatory Flexibility Act Certification Statutory Authority
I. Introduction
The Commission is adopting amendments to rule 2a-7 under the
Investment Company Act of 1940. Money market funds are a type of mutual
fund registered under the Act and regulated pursuant to rule 2a-7.\4\
These funds are popular cash management vehicles for both retail and
institutional investors because they seek to provide investors with
principal stability and access to daily liquidity. In addition, money
market funds serve as an important source of short-term financing for
businesses, banks, and Federal, state, municipal, and Tribal
governments. In March 2020, in connection with an economic shock from
the onset of the COVID-19 pandemic, certain types of money market funds
had significant outflows, contributing to stress on short-term funding
markets that resulted in government intervention to enhance the
liquidity of such markets.\5\ Our historical experience with these
funds and the events of March 2020 have led us to re-evaluate certain
aspects of the regulatory framework applicable to money market funds.
Accordingly, the Commission is adopting amendments to rule 2a-7 and
certain reporting forms that are designed to improve the resilience of
money market funds during times of market stress while preserving the
benefits that investors have come to expect from these funds.
---------------------------------------------------------------------------
\4\ Money market funds are also sometimes called ``money market
mutual funds'' or ``money funds.''
\5\ See infra section I.B (discussing these events in more
detail).
---------------------------------------------------------------------------
In December 2021, the Commission proposed to amend rule 2a-7 to
remove the tie between weekly liquid asset thresholds and the potential
imposition of liquidity fees and redemption gates, since it appears
these provisions contributed to investors' incentives to redeem from
certain funds in March 2020 and affected fund managers' willingness to
use available liquidity in their portfolios to meet redemptions.\6\ For
funds that experienced the heaviest outflows in March 2020 and in prior
periods of market stress, the proposal also included a new swing
pricing requirement that was designed to mitigate the dilution and
investor harm that can occur when other investors redeem--and remove
liquidity--from these funds, particularly when certain markets in which
the funds invest are under stress and effectively illiquid. The
Commission also proposed to increase the minimum daily and weekly
liquid asset requirements to better equip money market funds to manage
significant and rapid investor redemptions. In addition, we proposed
certain form amendments to improve transparency and facilitate
Commission monitoring of money market funds. As part of the proposal,
the Commission proposed to amend rule 2a-7 to prohibit a stable net
asset value (``NAV'') money market fund from using share cancellation
or a reverse distribution mechanism in a negative interest rate
environment.
---------------------------------------------------------------------------
\6\ Money Market Fund Reforms, Investment Company Act Release
No. 34441 (Dec. 15, 2021) [87 FR 7248 (Feb. 8, 2022)] (``Proposing
Release'').
---------------------------------------------------------------------------
The Commission received comment letters on the proposal from a
variety of commenters, including funds and investment advisers, law
firms, other fund service providers, investor advocacy groups,
professional and trade associations, and interested individuals.\7\ As
discussed in greater detail throughout this release, these commenters
expressed a diversity of views. Many commenters expressed support for
aspects of the proposal, including removing the link between liquidity
thresholds and the imposition of redemption gates and liquidity fees;
increasing the minimum daily and weekly liquid asset requirements above
current minimums; and clarifying the calculation of weighted average
portfolio maturity and weighted average life maturity.\8\ Many
commenters, however, expressed concern about the consequences of the
proposed swing pricing requirement, suggesting, among other reasons,
that it would be operationally difficult and may not effectively
prevent destabilizing runs during periods of stress.\9\ Separately,
several commenters expressed that the Commission should adopt more
modest increases to the daily and weekly liquid asset requirements than
proposed.\10\ Many commenters also generally opposed the proposed
clarification of how stable net asset value money market funds should
handle a negative interest rate environment, stating that the proposed
prohibition from using share cancellation in certain negative interest
environments could be operationally burdensome and costly without clear
benefits for investors.\11\ Lastly, while some commenters were
supportive of the proposed modifications to the fund reporting
requirements, others expressed concern about the sensitivity or burdens
of reporting certain information regarding money market fund investors
or portfolios, as well as significant declines in liquidity.\12\
---------------------------------------------------------------------------
\7\ The comment letters on the Proposing Release (File No. S7-
22-21) are available at https://www.sec.gov/comments/s7-22-21/s72221.htm.
\8\ See, e.g., Comment Letter of Investment Company Institute
(Apr. 11, 2022) (``ICI Comment Letter''); Comment Letter of
Americans for Financial Reform Education Fund (Apr. 11, 2022)
(``Americans for Financial Reform Comment Letter'').
\9\ See, e.g., Comment Letter of The Asset Management Group of
the Securities Industry and Financial Markets Association (Apr. 11,
2022) (``SIFMA AMG Comment Letter''); Comment Letter of State Street
Global Advisors (Apr. 11, 2022) (``State Street Comment Letter'').
\10\ See, e.g., Comment Letter of Western Asset Management
Company, LLC (Apr. 11, 2022) (``Western Asset Comment Letter'');
Comment Letter of Healthy Markets Association (Apr. 12, 2022)
(``Healthy Markets Association Comment Letter'').
\11\ See, e.g., Comment Letter of Federated Hermes Inc. (Apr.
11, 2022) (``Federated Hermes Comment Letter I''); Comment Letter of
Allspring Funds Management, LLC (Apr. 11, 2022) (``Allspring Funds
Comment Letter''); Comment Letter of Fidelity Management Research
Company LLC (Apr. 11, 2022) (``Fidelity Comment Letter'').
\12\ See infra section II.F.
---------------------------------------------------------------------------
After considering the comments on the proposal, we are adopting
rule and form amendments to improve the resilience and transparency of
money market funds, with certain modifications.\13\ As proposed, the
final amendments will remove the redemption gate provision from rule
2a-7; increase the minimum daily and
[[Page 51406]]
weekly liquid asset requirements to 25% and 50%, respectively; specify
the weighted average portfolio maturity and weighted average life
maturity calculations; and require public reporting of significant
declines in liquidity on Form N-CR. However, we are not adopting the
proposed swing pricing requirement. Rather, the final amendments will
modify the current liquidity fee framework to require institutional
prime and institutional tax-exempt money market funds to impose a
liquidity fee when the fund experiences net redemptions that exceed 5%
of net assets, while also allowing any non-government money market fund
to impose a discretionary liquidity fee if the board determines a fee
is in the best interest of the fund. Similar to the proposed swing
pricing requirement, the liquidity fee framework is designed to better
allocate liquidity costs associated with redemptions to the redeeming
investors. In addition, in a change from the proposal, the final
amendments will permit retail and government money market funds to use
a reverse distribution mechanism if negative interest rates occur in
the future with certain conditions, including appropriate disclosure to
concisely and clearly describe to shareholders the fund's use of a
reverse distribution mechanism and its effect on investors.
---------------------------------------------------------------------------
\13\ We have consulted and coordinated with the Consumer
Financial Protection Bureau regarding this final rulemaking in
accordance with section 1027(i)(2) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
---------------------------------------------------------------------------
Moreover, while we are adopting the amended reporting requirements
for Form N-MFP largely as proposed, we are making modifications to
certain aspects of the requirements in response to commenter concerns
about the sensitivity of publicly reporting certain investor and
portfolio information. We are also adopting, largely as proposed in a
January 2022 Proposing Release, amendments to Form PF reporting
requirements for large liquidity fund advisers.\14\ The final
amendments to Form PF generally are designed to align with relevant
revisions we are making to Form N-MFP. Finally, we are adopting two
technical amendments to Form N-CSR and Form N-1A to correct errors from
recent Commission rulemakings.
---------------------------------------------------------------------------
\14\ Amendments to Form PF to Require Current Reporting and
Amend Reporting Requirements for Large Private Equity Advisers and
Large Liquidity Fund Advisers, Investment Advisers Act Release No.
5950 (Jan. 26, 2022) [87 FR 9106 (Feb. 17, 2022)] (``Form PF
Proposing Release'').
---------------------------------------------------------------------------
A. Role of Money Market Funds and Existing Regulatory Framework
Money market funds are managed with the goal of providing principal
stability by investing in high-quality, short-term debt securities--
such as Treasury bills, repurchase agreements, or commercial paper--
whose value does not fluctuate significantly in normal market
conditions. Money market fund investors receive dividends that reflect
prevailing short-term interest rates and have access to daily
liquidity, as money market fund shares are redeemable on demand. The
combination of limited principal volatility, diversification of
portfolio securities, payment of short-term yields, and liquidity has
made money market funds popular cash management vehicles for retail and
institutional investors. Money market funds also serve as an important
source of short-term financing for businesses, banks, and governments.
Different types of money market funds exist to meet differing
investor needs. ``Prime money market funds'' hold a variety of taxable
short-term obligations issued by corporations and banks, as well as
repurchase agreements and asset-backed commercial paper.\15\
``Government money market funds,'' which are currently the largest
category of money market fund, almost exclusively hold obligations of
the U.S. Government, including obligations of the U.S. Treasury and
Federal agencies and instrumentalities, as well as repurchase
agreements collateralized by government securities.\16\ Compared to
prime funds, government money market funds generally offer greater
safety of principal but historically have paid lower yields. ``Tax-
exempt money market funds'' (or ``municipal money market funds'')
primarily hold obligations of state and local governments and their
instrumentalities, and pay interest that is generally exempt from
Federal income tax for individual taxpayers.\17\ Within the prime and
tax-exempt money market fund categories, some funds are ``retail''
funds and others are ``institutional'' funds. Retail money market funds
are held only by natural persons, and institutional funds can be held
by a wider range of investors, such as corporations, small businesses,
and retirement plans.\18\
---------------------------------------------------------------------------
\15\ Commission staff regularly publish comprehensive data
regarding money market funds on the Commission's website, available
at https://www.sec.gov/divisions/investment/mmf-statistics.shtml.
This data includes information about the monthly holdings of prime
money market funds by type of security. Staff reports and other
staff documents (including those cited herein) represent the views
of Commission staff and are not a rule, regulation, or statement of
the Commission. The Commission has neither approved nor disapproved
the content of these documents and, like all staff statements, they
have no legal force or effect, do not alter or amend applicable law,
and create no new or additional obligations for any person.
\16\ Some government money market funds generally invest at
least 80% of their assets in U.S. Treasury obligations or repurchase
agreements collateralized by U.S. Treasury securities and are called
``Treasury money market funds.''
\17\ In this release, we also use the term ``non-government
money market fund'' to refer to prime and tax-exempt money market
funds.
\18\ A retail money market fund is defined as a money market
fund that has policies and procedures reasonably designed to limit
all beneficial owners of the fund to natural persons. See 17 CFR
270.2a-7(a)(21) (rule 2a-7(a)(21)).
---------------------------------------------------------------------------
To some extent, different types of money market funds are subject
to different requirements under rule 2a-7. One primary example is a
fund's approach to valuation and pricing. Government and retail money
market funds can rely on valuation and pricing techniques that
generally allow them to sell and redeem shares at a stable share price,
typically $1.00, without regard to small variations in the value of the
securities in their portfolios.\19\ If the fund's stable share price
and market-based value per share deviate by more than one-half of 1%,
the fund's board may determine to adjust the fund's share price below
$1.00, which is also colloquially referred to as ``breaking the buck.''
\20\ Institutional prime and institutional tax-exempt money market
funds, however, are required to use a ``floating'' NAV per share to
sell and redeem their shares, based on the current market-based value
of the securities in their underlying portfolios rounded to the fourth
decimal place (e.g., $1.0000). These institutional funds are required
to use a floating NAV because their investors have historically made
the heaviest redemptions in times of market stress and are more likely
to act on the incentive to redeem if a fund's stable price per share is
higher than its market-based value.\21\
---------------------------------------------------------------------------
\19\ See Proposing Release, supra note 6, at n.10 (discussing
amortized cost method and penny rounding cost method); see also 17
CFR 270.2a-7(c)(1)(i) and (g)(1) and (2). Throughout this release,
we generally use the term ``stable share price'' or ``stable NAV''
to refer to the stable share price that these money market funds
seek to maintain and compute for purposes of distribution,
redemption, and repurchases of fund shares.
\20\ These funds must compare their stable share price to the
market-based value per share of their portfolios at least daily.
\21\ See Proposing Release, supra note 6, at n.12.
---------------------------------------------------------------------------
As of March 2023, there were approximately 294 money market funds
registered with the Commission, and these funds collectively held over
$5.7 trillion of assets.\22\ The vast majority of these assets are held
by government money market funds ($4.4 trillion), followed by prime
money market funds ($1 trillion) and tax-exempt money
[[Page 51407]]
market funds ($119 billion).\23\ Of prime money market funds' assets,
approximately 44% are held by retail prime money market funds, with the
remaining assets almost evenly split between institutional prime money
market funds that are offered to the public and institutional prime
money market funds that are not offered to the public.\24\ The vast
majority of tax-exempt money market fund assets are held by retail
funds.
---------------------------------------------------------------------------
\22\ Money Market Fund Statistics, Form N-MFP Data, period
ending Mar. 2023, available at: https://www.sec.gov/files/mmf-statistics-2023-03.pdf. This data excludes ``feeder'' funds to avoid
double counting assets.
\23\ Id.
\24\ Some asset managers establish privately offered money
market funds to manage cash balances of other affiliated funds and
accounts.
---------------------------------------------------------------------------
The Commission adopted rule 2a-7 in 1983 and has amended the rule
several times over the years, including in 2010 and 2014, in response
to market events that have highlighted money market fund
vulnerabilities.\25\ Among other things, these past reforms introduced
minimum daily and weekly liquid asset requirements, provided for
redemption gates and liquidity fees as available tools when a fund's
liquidity drops below a threshold, required institutional money market
funds to use floating NAVs, and improved transparency through reporting
and website posting requirements.\26\
---------------------------------------------------------------------------
\25\ See Proposing Release, supra note 6, at n.16 and
accompanying text (providing more detail related to previous
Commission actions and government intervention following the 2008
financial crisis).
\26\ Money Market Fund Reform, Investment Company Act Release
No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (``2010
Adopting Release''); Money Market Fund Reform; Amendments to Form
PF, Investment Company Act Release No. 31166 (July 23, 2014) [79 FR
47735 (Aug. 14, 2014)] (``2014 Adopting Release'').
---------------------------------------------------------------------------
In addition to reforms for money market funds, in 2014 the
Commission introduced new reporting requirements for large advisers of
liquidity funds on Form PF to better align reporting obligations of
advisers regarding private liquidity funds to those of money market
funds, in order to help the Commission have a more complete picture of
the broader short-term financing market.\27\ Liquidity funds follow
similar investment strategies as money market funds, but investment
advisers are not required to register liquidity funds as investment
companies under the Act. Liquidity funds are a relatively small but
important category of private funds due to the role they play along
with money market funds as sources, and users, of liquidity in markets
for short-term financing.\28\ Similar to money market funds, liquidity
funds are managed with the goal of maintaining a stable net asset value
or minimizing principal volatility for investors. However, liquidity
funds are not required to comply with the risk-limiting conditions of
rule 2a-7, such as the restrictions on the maturity, diversification,
credit quality, and liquidity of investments. Consequently, liquidity
funds may take on greater risks and, as a result, may be more sensitive
to market stress relative to money market funds.
---------------------------------------------------------------------------
\27\ Generally, investment advisers registered (or required to
be registered) with the Commission with at least $150 million in
private fund assets under management must file Form PF.
\28\ As of Sept. 2022, there were 79 liquidity funds reported on
Form PF with $336 billion in gross assets under management.
---------------------------------------------------------------------------
B. March 2020 Market Events and Need for Reform
As discussed in the Proposing Release, 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.\29\ Institutional investors, in particular,
sought highly liquid investments, including government money market
funds.\30\ In contrast, institutional prime and institutional tax-
exempt money market funds experienced outflows beginning the week of
March 9, 2020, which accelerated the following week.\31\ Outflows from
retail prime and retail tax-exempt funds began the week of March 16, a
week after outflows in institutional funds began.
---------------------------------------------------------------------------
\29\ See SEC Staff Report on U.S. Credit Markets
Interconnectedness and the Effects of the COVID-19 Economic Shock
(Oct. 2020) (``SEC Staff Interconnectedness Report''), at 2,
available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf.
\30\ More specifically, government money market funds had record
inflows of $838 billion in Mar. 2020 and an additional $347 billion
of inflows in Apr. 2020. See id. at 25.
\31\ Id.
---------------------------------------------------------------------------
During the two-week period of March 11 to 24, publicly offered
institutional prime funds had a 30% redemption rate (about $100
billion), which included outflows of approximately 20% of assets during
the week of March 20 alone.\32\ In contrast, privately offered
institutional prime funds had redemptions of 3% of assets during the
week of March 20, and lost approximately 6% of their total assets ($17
billion) from March 9 through 20. Retail prime funds had outflows of
approximately 11% of their total assets ($48 billion) in the last three
weeks of March 2020. Outflows from tax-exempt money market funds, which
are mostly retail funds, were approximately 8% of their total assets
($12 billion) from March 12 through 25.
---------------------------------------------------------------------------
\32\ See Proposing Release, supra note 6, at n.30.
---------------------------------------------------------------------------
The Proposing Release discussed the potential factors that
incentivized investors to redeem from certain money market funds in
March 2020.\33\ These factors included concerns about the potential
imposition of redemption gates or liquidity fees based on observed
declines in some funds' weekly liquid assets, general concerns about
declining fund liquidity, general uncertainty related to a global
health crisis and fears of associated economic downturns, and the need
to meet near-term cash needs unrelated to the market stress. The
Proposing Release also discussed data regarding the relationship
between a fund's weekly liquid asset levels and the amount of outflows
it experienced in March 2020. The data showed that funds with lower
weekly liquid asset levels were more likely to have significant
outflows in March 2020, but some funds with higher levels of liquidity
also experienced large outflows.\34\
---------------------------------------------------------------------------
\33\ Id., at n.42 and accompanying discussion.
\34\ Id., at n.44.
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These outflows caused some money market funds to engage in greater
than normal selling activity in short-term funding markets which, when
combined with similar selling activity from other market participants
such as hedge funds and bond mutual funds, both contributed to, and was
impacted by, stress in short-term funding markets.\35\ In markets for
private short-term debt instruments, such as commercial paper and
certificates of deposit, conditions significantly deteriorated in the
second week of March 2020. These markets, in which prime money market
funds and other participants invest, essentially became ``frozen'' in
March 2020, making it more difficult to sell these instruments, which
have limited secondary trading even in normal market conditions.\36\
Similarly, stresses in short-term municipal markets contributed to
pricing pressures and outflows for tax-exempt money market funds which,
in turn, contributed to increased stress in municipal markets.\37\ One
factor that appears to have contributed to money market funds' sales of
long-term portfolio securities is the incentive fund managers had to
maintain weekly liquid assets above 30% in an effort to avoid
investors' concerns about the possibility of redemption gates or
liquidity fees under our current rule.\38\
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\35\ See Proposing Release, supra note 6, at n.54 and
accompanying discussion.
\36\ Id.
\37\ Id.
\38\ Id., at n.77 and accompanying discussion.
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[[Page 51408]]
On March 18, 2020, the Federal Reserve, with the approval of the
Department of the Treasury, broadened its program of support for the
flow of credit to households and businesses by taking steps to enhance
the liquidity and functioning of money markets with the establishment
of the Money Market Mutual Fund Liquidity Facility (``MMLF''). The MMLF
provided loans to financial institutions on advantageous terms to
purchase securities from money market funds that were raising
liquidity, thereby helping enhance overall market functioning and
credit provisions to the broader economy.\39\ MMLF utilization reached
a peak of just over $50 billion in early April 2020, or about 5% of net
assets in prime and tax-exempt money market funds at the time.\40\
Along with other Federal Reserve actions and programs to support the
short-term funding markets, the MMLF had the effect of significantly
slowing outflows from prime and tax-exempt money market funds.\41\ The
MMLF ceased providing loans in March 2021.
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\39\ Information about the MMLF is available on the Federal
Reserve's website at https://www.federalreserve.gov/monetarypolicy/mmlf.htm. The Federal Reserve Bank of Boston operated the MMLF.
\40\ See Proposing Release, supra note 6, at n.36.
\41\ Id., at n.37.
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Commenters generally agreed that the growing economic concerns
related to the impact of the COVID-19 pandemic led investors to seek
liquidity in the form of cash and short-term government securities in
March 2020, leading to outflows from prime money market funds and
significant inflows to government money market funds.\42\ Commenters
also acknowledged that the markets for private short-term debt
instruments, such as commercial paper and certificates of deposit,
significantly deteriorated during this period.\43\ However, some
commenters questioned the nexus between the liquidity crisis in the
short-term funding markets and the outflows from prime money market
funds, asserting that events in the money market fund market were not a
significant cause of the liquidity issues in the short-term funding
markets in March 2020.\44\ Accordingly, some commenters suggested that
any reform exclusive to money market funds by themselves will likely
not address the broader liquidity challenges in the short-term funding
markets.\45\ Going further, a few commenters expressed that the
proposed reforms would have negative impacts to the short-term funding
markets because they would reduce the demand for prime money market
funds, thereby reducing capacity in the short-term funding markets.\46\
Some of these commenters encouraged the Commission, and policymakers
more generally, to re-examine the short-term funding markets and the
various events surrounding the volatility in March 2020, and to
consider available tools other than reforms to the money market fund
regulatory framework, that would improve resiliency in this segment of
our markets.\47\ Conversely, other commenters asserted that liquidity
issues with money market funds served as a source of significant
contagion that imperiled the short-term markets broadly and forced
government intervention.\48\ Some of these commenters suggested that
the Commission should consider more aggressive reforms to solve the
unique problems presented by money market funds, mainly that they are
hybrid instruments that embody elements of both securities investments
and banking products that are treated as cash-like by investors.\49\
---------------------------------------------------------------------------
\42\ See, e.g., ICI Comment Letter; Comment Letter of The
Vanguard Group, Inc. (Apr. 11, 2022) (``Vanguard Comment Letter'');
Comment Letter of Professors Samuel G. Hanson, David S. Scharfstein,
and Adi Sunderam, Harvard Business School (Apr. 11, 2022) (``Prof.
Hanson et al. Comment Letter''); Comment Letter of Blackrock (Apr.
11, 2022) (``BlackRock Comment Letter''); Comment Letter of the CFA
Institute (Apr. 11, 2022) (``CFA Comment Letter'').
\43\ See, e.g., Comment Letter of Invesco Ltd. (Apr. 11, 2022)
(``Invesco Comment Letter''); Vanguard Comment Letter; BlackRock
Comment Letter (asserting that they struggled to find bids from
dealer banks in the secondary market for much of the commercial
paper, bank certificates of deposits, or municipal debt they were
holding).
\44\ See, e.g., ICI Comment Letter; Federated Hermes Comment
Letter I; Invesco Comment Letter; Vanguard Comment Letter; BlackRock
Comment Letter; Healthy Markets Association Comment Letter.
\45\ See, e.g., ICI Comment Letter; Federated Hermes Comment
Letter I; Invesco Comment Letter; Vanguard Comment Letter; BlackRock
Comment Letter.
\46\ See, e.g., SIFMA AMG Comment Letter; Comment Letter of J.P.
Morgan Asset Management (Apr. 11, 2022) (``JP Morgan Comment
Letter'').
\47\ See, e.g., JP Morgan Comment Letter; Federated Hermes
Comment Letter I; ICI Comment Letter (recommending adjusting bank
regulations to enable banks and their dealers to expand their
balance sheets to provide market liquidity during periods of market
stress without materially reducing the overall resilience of those
firms).
\48\ See, e.g., Comment Letter of Better Markets (Apr. 11, 2022)
(``Better Markets Comment Letter''); CFA Comment Letter.
\49\ See, e.g., Better Markets Comment Letter; Prof. Hanson et
al. Comment Letter.
---------------------------------------------------------------------------
We understand that money market funds are not the totality of the
short-term funding markets and that the reforms discussed in this
adopting release may not solve all future issues connected to the
short-term funding markets. However, we believe the events of March
2020 evidence that money market funds need better functioning tools for
managing through stress while mitigating harm to shareholders.
Specifically, in addition to requiring higher liquidity minimums to
prepare for significant and rapid investor redemptions, funds need to
be able to use that liquidity when such redemptions occur. In addition,
to prevent redeeming shareholders from diluting the interests of
remaining shareholders by removing liquidity from the fund in times of
market stress, when liquidity in underlying short-term funding markets
is scarce and costly, funds need tools to ensure that liquidity costs
are fairly allocated to redeeming investors. Moreover, while the period
of market stress in March 2020 was relatively brief, it is important to
consider that future stressed periods--whether specific to certain
money market funds or the short-term funding markets more generally--
may be more protracted or more severe than in March 2020, particularly
absent Federal Reserve action. We believe that these needs for better
functioning tools to manage through stress while mitigating harm to
shareholders can be met while preserving the benefits that investors
have come to expect from money market funds. Accordingly, we are
adopting amendments to rule 2a-7 and related reporting and registration
forms that are designed to achieve these key objectives and to reflect
our experience with the rule since it was initially adopted in
1983.\50\
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\50\ See generally Valuation of Debt Instruments and Computation
of Current Price Per Share by Certain Open-End Investment Companies
(Money Market Funds), Investment Company Act Release No. 13380 (July
11, 1983) [48 FR 32555 (July 18, 1983)].
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II. Discussion
A. Amendments To Remove the Tie Between the Weekly Liquid Asset
Threshold and Redemption Gates and Liquidity Fees
1. Unintended Effects of the Tie Between the Weekly Liquid Asset
Threshold and Liquidity Fees and Redemption Gates
Following amendments to rule 2a-7 in 2014, a money market fund has
the ability to impose liquidity fees or redemption gates (generally
referred to as ``fees and gates'') after crossing a specified liquidity
threshold.\51\ A money market fund may impose a liquidity fee of up to
2%, or temporarily suspend redemptions for up to 10 business days in a
90-day period, if the
[[Page 51409]]
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.\52\ Additionally, a non-government money
market fund is required to impose a liquidity fee of 1% on all
redemptions if its weekly liquid assets fall below 10% of its total
assets, unless the board of directors of the fund determines that
imposing such a fee would not be in the best interests of the fund.\53\
Separately, a money market fund is required to provide daily disclosure
of the percentage of its total assets invested in weekly liquid assets
(as well as daily liquid assets) on its website to provide transparency
to investors and increase market discipline.\54\
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\51\ Government funds are permitted, but not required, to impose
fees and gates, as discussed below. See 17 CFR 270.2a-7(c)(2); 2014
Adopting Release, supra note 26.
\52\ If, at the end of a business day, a fund has invested 30%
or more of its total assets in weekly liquid assets, the fund must
cease charging the liquidity fee (up to 2%) or imposing the
redemption gate, effective as of the beginning of the next business
day. See 17 CFR 270.2a-7(c)(2)(i).
\53\ The board also may determine that a lower or higher fee
would be in the best interests of the fund. See 17 CFR 270.2a-
7(c)(2)(ii)(A).
\54\ 17 CFR 270.2a-7(h)(10)(ii); 2014 Adopting Release, supra
note 26, at section III.E.9.a.
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Money market fund fees and gates below these thresholds were
intended to serve as redemption restrictions that would provide a
``cooling off'' period to temper the effects of a short-term investor
panic and preserve liquidity levels in times of market stress, as well
as better allocate the costs of providing liquidity to redeeming
investors.\55\ However, these provisions did not achieve these
objectives during the period of market stress in March 2020. As
discussed in the Proposing Release, evidence suggests that in March
2020, even though no money market fund imposed a liquidity fee or gate,
the possibility of their imposition after crossing the publicly
disclosed 30% weekly liquid asset threshold appears to have contributed
to investors' incentives to redeem from prime money market funds.\56\
The presence of this threshold appears to have increased investor
redemption activity as prime and tax-exempt money market funds
approached the 30% weekly liquid asset level.\57\ Further, this
liquidity threshold also appeared to affect money market fund managers'
behavior in March 2020 and contributed to incentives for money market
fund managers to maintain weekly liquid asset levels above a 30% weekly
liquid asset threshold, rather than use those assets to meet
redemptions.\58\ Thus, contrary to its intended benefit, this threshold
appeared to heighten prime and tax-exempt money market funds'
susceptibility to heavy redemptions as funds' publicly disclosed weekly
liquid assets approached it and increased the lack of liquidity in
underlying short-term funding markets in March 2020.
---------------------------------------------------------------------------
\55\ See 2014 Adopting Release, supra note 26, at section III.A.
\56\ See Proposing Release, supra note 6, at section I.B.
\57\ See id.
\58\ See id. See also ICI Comment Letter; SIFMA AMG Comment
Letter.
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In addition, as discussed in the Proposing Release, it appears that
money market fund investors are more sensitive to the possibility of
redemption gates than the possibility of liquidity fees.\59\ While
liquidity fees impose a cost for an investor to redeem, gates outright
stop redemptions for the duration of the gate. Money market fund
investors--who typically invest in money market funds for cash
management purposes--are generally sensitive to being unable to access
their investments for a period of time and have a tendency to redeem
from such funds preemptively if they fear a gate may be imposed.
---------------------------------------------------------------------------
\59\ See Proposing Release, supra note 5, at nn. 75-76 and
accompanying text (discussing comment letters that expressed views
that the possibility of redemption gates was a greater concern for
investors, particularly institutional investors, in Mar. 2020 than
the possibility of liquidity fees and that retail investors appeared
less sensitive to fees and gates than institutional investors).
---------------------------------------------------------------------------
Many commenters agreed with the Commission's assessment that the
regulatory link between a known liquidity threshold and the imposition
of fees and gates contributed to investors' incentives to redeem from
money market funds in March 2020.\60\ Many commenters also agreed with
the Commission's assessment that the weekly liquid asset threshold also
contributed to incentives for managers to avoid falling below this
threshold.\61\ One commenter suggested that removing the regulatory
link between weekly liquid assets and redemption gates (and liquidity
fees) would free up an additional 30% of liquidity that funds could use
in a crisis similar to March 2020.\62\
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\60\ See, e.g., Comment Letter of Morgan Stanley Investment
Management Inc. (Apr. 8, 2022) (``Morgan Stanley Comment Letter'');
ICI Comment Letter; Comment Letter of Northern Trust Asset
Management (Mar. 24, 2022) (``Northern Trust Comment Letter'');
Fidelity Comment Letter; see also Proposing Release, supra note 6,
at section II.A.1 (``Available evidence, supported by many comment
letters in response to the Commission's request for comment [ ]
suggested that funds' incentives to maintain weekly liquid assets
above the 30% threshold were directly tied to investors' concerns
about the possibility of redemption gates and liquidity fees under
our rules if a fund drops below that threshold.'').
\61\ See, e.g., ICI Comment Letter, Comment Letter of T. Rowe
Price (Apr. 11, 2022) (``T. Rowe Comment Letter''); JP Morgan
Comment Letter.
\62\ See Federated Hermes Comment Letter I.
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Several commenters stated that the potential imposition of
redemption gates in particular, as opposed to liquidity fees, drove
instability and redemptions in March 2020.\63\ For example, one
commenter suggested that the mere possibility that fund boards may
impose gates was a key factor that contributed significantly to the
stresses experienced by publicly offered institutional prime funds in
March 2020.\64\ Another commenter stated that, based on a survey of
institutional investor clients, investors were particularly concerned
about gates and perceived the 30% weekly liquid asset threshold as a
``bright line'' not to be crossed.\65\ An additional commenter stated
that, based on data and discussions with its member funds, the
possibility of a gate especially caused investors in March 2020 to
redeem heavily.\66\
---------------------------------------------------------------------------
\63\ See, e.g., Fidelity Comment Letter; Northern Trust Comment
Letter; Comment Letter of the Institute of International Finance
(Apr. 11, 2022) (``IIF Comment Letter''); ICI Comment Letter.
\64\ See Fidelity Comment Letter.
\65\ See JP Morgan Comment Letter.
\66\ See ICI Comment Letter.
---------------------------------------------------------------------------
Thus, based on available evidence and as suggested by many
commenters, the weekly liquid asset threshold for consideration of fees
and gates appear to have potentially increased the risks of investor
runs without providing benefits to money market funds as intended by
the Commission. In addition, money market fund investors have
demonstrated particular sensitivity to the possibility of gates and the
corresponding lack of access to their investments, and these concerns
appear to have incentivized redemptions in March 2020 more so than any
concerns about the possibility of fees. Accordingly, after considering
the comments received, we are adopting amendments to the fee and gate
provisions in rule 2a-7 to remove the regulatory link between weekly
liquid assets and fees and gates. As discussed below, we are amending
rule 2a-7 to remove gate provisions altogether and amending the
liquidity fee structure to remove weekly liquid asset-linked thresholds
and implement a modified liquidity fee framework that will provide for
both mandatory and discretionary liquidity fees. We believe these
changes will provide more effective tools for money market funds to use
to mitigate short-term investor panic and preserve liquidity levels in
times of market stress, as well as better
[[Page 51410]]
allocate the costs of providing liquidity to redeeming investors.
2. Removal of Redemption Gates From Rule 2a-7
We are adopting, as proposed, the removal of money market funds'
ability through rule 2a-7 to temporarily suspend redemptions (i.e.,
impose a ``gate'').\67\ In the Proposing Release, we discussed our
concern that gates may not be an effective tool for money market funds
to stem heavy redemptions in times of stress due to money market fund
investors' general sensitivity to being unable to access their
investments for a period of time and tendency to redeem from funds
preemptively if they fear a gate may be imposed. We believe that
removing gate provisions altogether from rule 2a-7 will reduce the risk
of investor runs on money market funds during periods of market stress.
Money market funds will continue to be able to impose permanent gates
to facilitate an orderly liquidation of a fund pursuant to 17 CFR
270.22e-3 (``rule 22e-3''), and we are not adopting any changes to that
rule.\68\
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\67\ See Proposing Release, supra note 6, at section II.A.2.
\68\ See 17 CFR 270.22e-3. Rule 22e-3 under the Act permits
money market funds to suspend redemptions and postpone the payment
of proceeds in connection with a liquidation upon certain declines
in liquidity or deviations between market-based and stable prices,
board approval of liquidation, and notice to the Commission.
---------------------------------------------------------------------------
Many commenters generally supported the proposal to remove
redemption gates in rule 2a-7.\69\ Several of these commenters stated
that use of rule 22e-3 to suspend redemptions in connection with a fund
liquidation would be sufficient to address scenarios in which a fund
may need to suspend redemptions.\70\ One such commenter suggested that
any money market fund that needed to impose a gate would likely need to
fully liquidate, making rule 22e-3 sufficient for these purposes.\71\
---------------------------------------------------------------------------
\69\ See, e.g., Western Asset Comment Letter; Morgan Stanley
Comment Letter; Vanguard Comment Letter; CFA Comment Letter; SIFMA
AMG Comment Letter; Comment Letter of the Committee on Capital
Markets Regulation (Apr. 11, 2022) (``CCMR Comment Letter''); T.
Rowe Comment Letter.
\70\ See Allspring Funds Comment Letter; CFA Comment Letter; IIF
Comment Letter; Northern Trust Comment Letter; SIFMA AMG Comment
Letter.
\71\ See Invesco Comment Letter.
---------------------------------------------------------------------------
Some commenters supported removing the tie between the weekly
liquid asset threshold and a fund's ability to impose a gate but
suggested that gates could still be a useful tool outside of a fund
liquidation. These commenters suggested that fund boards should have
broader discretion to impose gates without linkage to a weekly liquid
asset threshold.\72\ Some commenters suggested that the rule should
permit fund boards to impose a gate if the board determines a gate is
in the best interests of the fund and its shareholders, subject to
certain policies and procedures, disclosure, and reporting
requirements.\73\ Another commenter suggested that fund boards should
have complete discretion with respect to imposing gates but that the
SEC should require relevant disclosures.\74\
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\72\ See Federated Hermes Comment Letter I; Comment Letter of
Federated Hermes Funds Board of Trustees (Apr. 11, 2022)
(``Federated Hermes Fund Board Comment Letter''); Comment Letter of
the Cato Inst. (Feb. 10, 2022) (``Cato Inst. Comment Letter'').
\73\ See Federated Hermes Comment Letter I (stating that funds
should be required to report the basis for imposing temporary gates
to the Commission); Federated Hermes Fund Board Comment Letter.
\74\ See Cato Inst. Comment Letter.
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After considering these comments, we continue to believe that the
removal of money market funds' ability to impose gates through rule 2a-
7 is appropriate.\75\ By removing the gate provision, either with or
without an associated liquidity threshold, we seek to limit the
potential for investor uncertainty and de-stabilizing preemptive
investor redemption behavior related to the potential use of gates
during stress events as well as to better encourage funds to more
effectively use their existing liquidity buffers in times of stress. As
discussed above, rather than providing an effective tool for money
market funds to manage redemption pressures during a period of stress,
the potential availability of gates under prescribed parameters
exacerbated the redemption pressures experienced by some funds during
March 2020.
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\75\ As proposed, in addition to removing the gate provisions
from rule 2a-7, we are also removing associated disclosure and
reporting requirements about a fund's potential or actual imposition
of gates. See Items 4(b)(1)(ii) and 16(g) of current Form N-1A;
Parts F and G of current Form N-CR.
---------------------------------------------------------------------------
Retaining a gate provision under rule 2a-7 without an associated
liquidity threshold, as suggested by some commenters, could result in
continuing investor uncertainty and may contribute to preemptive
investor redemption behavior during stress events. In normal and
stressed markets, shareholders may need or want to access their funds
for various reasons, including to meet near-term cash needs. When in
place, a gate fully inhibits the redeemability of the money market fund
shares for the duration of the gate, thereby blocking shareholders'
access to their shares. We believe this complete halt to redemptions,
even if temporary, has the potential to significantly incentivize
preemptive redemptions. As discussed above, several commenters stated
that fear of gates in particular contributed to redemptions in March
2020. Removing the link to a publicly disclosed liquidity threshold
seemingly would expand the current gate provisions under rule 2a-7,
potentially increasing investor uncertainty regarding when a fund may
impose a gate. Even if such action by a money market fund board is
unlikely to occur, as suggested by some commenters,\76\ the mere
possibility of a gate would persist and thus investor uncertainty and
fear may remain, particularly when there are signs that a fund or
short-term funding markets are under stress. Accordingly, we are
removing the gate provision from rule 2a-7 to avoid this unintended
outcome.
---------------------------------------------------------------------------
\76\ See, e.g., Comment Letter of Mutual Fund Directors Forum
(Apr. 11, 2022) (``Mutual Fund Directors Forum Comment Letter'').
---------------------------------------------------------------------------
In light of the proposed removal of gates under rule 2a-7, some
commenters suggested additional amendments to rule 22e-3. This rule
generally allows a money market fund to suspend redemptions if, among
other conditions, (1) the fund has invested less than 10% of its total
assets in weekly liquid assets or, in the case of a government or
retail money market fund, the fund's market-based price per share has
deviated or is likely to deviate from its stable price, and (2) the
fund's board has approved the fund's liquidation. Some commenters
suggested that the SEC remove the weekly liquid asset threshold
enumerated in rule 22e-3 and give fund boards more flexibility to
approve liquidations.\77\ One of these commenters suggested that the
weekly liquid asset threshold in rule 22e-3 would not remain meaningful
because of the Commission's proposal to remove the liquidity fee
provisions from rule 2a-7, including the default liquidity fee
provision for non-government money market funds with weekly liquid
assets that fall below 10%.\78\
---------------------------------------------------------------------------
\77\ See Allspring Funds Comment Letter; Comment Letter of
Dechert LLP (Apr. 11, 2022) (``Dechert Comment Letter'').
\78\ See Dechert Comment Letter.
---------------------------------------------------------------------------
We do not agree that expanding the availability of rule 22e-3 is
appropriate. Rule 22e-3 provides a mechanism for a money market fund to
permanently suspend redemptions when the fund is under significant
stress to facilitate an orderly liquidation. While the amendments in
this release include the removal of a default liquidity fee provision
for non-government money market funds linked to a 10% weekly liquid
asset threshold, we do not agree
[[Page 51411]]
with the contention that the significance of the 10% weekly liquid
asset threshold is thereby meaningfully reduced with respect to rule
22e-3. Due to the absolute and significant nature of a permanent
suspension of redemptions and liquidation, the conditions in rule 22e-
3, including the 10% weekly liquid asset threshold, limit the fund's
ability to permanently suspend redemptions to circumstances that
present a significant risk of a run on the fund and potential harm to
shareholders.\79\ We continue to believe that where a fund's weekly
liquid assets fall below 10%, the fund is reasonably understood to be
experiencing significant stress and circumstances may present a
significant risk of a run on the fund and potential harm to
shareholders. In these circumstances, the ability of the board of
directors of such fund to suspend redemptions in light of a decision to
liquidate can help address the significant run risk and reduce
potential harm to shareholders. Where a money market fund is unable to
avail itself of a permanent suspension of redemptions under rule 22e-3,
the fund may suspend redemptions after obtaining an exemptive order
from the Commission.\80\ Accordingly, we are not adopting amendments to
rule 22e-3.
---------------------------------------------------------------------------
\79\ See 2010 Adopting Release, supra note 26, at section II.H.
\80\ 15 U.S.C. 80a-22(e).
---------------------------------------------------------------------------
B. Liquidity Fee Requirement
1. Determination To Adopt a Liquidity Fee Requirement
After considering comments, we are adopting a mandatory liquidity
fee framework for institutional prime and institutional tax-exempt
funds instead of the proposed swing pricing requirement. We believe the
mandatory liquidity fee will reduce operational burdens associated with
swing pricing while still achieving many of the benefits we were
seeking with swing pricing by allocating liquidity costs to redeeming
investors in stressed periods. In addition, we are adopting a
discretionary liquidity fee for all non-government money market funds
so that liquidity fees are an available tool for such funds to manage
redemption pressures when the mandatory fee does not apply. Whether the
fee is mandatory or discretionary, we are, as proposed, removing from
rule 2a-7 the tie between liquidity fees and a fund's weekly liquid
asset levels to avoid predictable triggers that may incentivize
investors to preemptively redeem to avoid incurring fees.\81\ This
liquidity fee framework, independent of a predictable threshold for its
application, achieves the intended benefits of the current liquidity
fee regime by allocating liquidity costs to redeeming shareholders in
times of stress while, in contrast to the current rule, avoiding
incentives for preemptive redemptions associated with weekly liquid
asset triggers. An approach solely based on liquidity fees, as opposed
to gates, does not present the same concerns about incentivizing
redemptions that exist under current rule 2a-7. As discussed, money
market fund investors seemingly have been more concerned about the
possibility of redemption gates than the possibility of liquidity
fees.\82\ This change is designed to increase the resilience of money
market funds.
---------------------------------------------------------------------------
\81\ By ``predictable,'' we mean that an investor can use
available information to predict whether a fee will apply on a given
day or on future days. In the case of weekly liquid assets, an
investor can observe the weekly liquid asset level disclosed for the
prior day and use that information to predict whether the fund will
cross the weekly liquid asset threshold in the near term. In the
case of the net redemption threshold we are adopting for mandatory
liquidity fees, while an investor can observe net flows for the
prior day, that flow information does not necessarily predict the
fund's flows for that day or future days, as net flows depend on
independent investment decisions made by a large number of investors
with differing needs and considerations. See infra section
IV.C.4.a.i.
\82\ See supra section II.A.1.
---------------------------------------------------------------------------
The Commission proposed a swing pricing requirement under which an
institutional prime or institutional tax-exempt fund would downwardly
adjust its current NAV per share by a swing factor when a fund has net
redemptions. The swing factor adjustment would reflect spread and
transaction costs and, if net redemptions exceeded 4% of the fund's net
assets, then the swing factor would also include market impact costs.
The Commission also proposed to remove the liquidity fee provision in
rule 2a-7, which conditions the use of liquidity fees upon declines in
fund liquidity below identified, predictable thresholds, and to specify
that money market funds could instead impose liquidity fees under 17
CFR 270.22c-2 (``rule 22c-2'') at their discretion.\83\
---------------------------------------------------------------------------
\83\ See 17 CFR 270.22c-2 (rule 22c-2 under the Investment
Company Act) (providing that an open-end fund may impose a
redemption fee, not to exceed 2% of the value of the shares
redeemed, upon the determination by the fund's board of directors
that such fee is necessary or appropriate to recoup for the fund the
costs it may incur as a result of those redemptions or to otherwise
eliminate or reduce so far as practicable any dilution of the value
of the outstanding securities issued by the fund).
---------------------------------------------------------------------------
Many commenters expressed broad concerns about the swing pricing
proposal and its potential effect on institutional money market funds
and investors. Several commenters stated that the proposed swing
pricing requirement was incompatible with how money market funds
operate and manage liquidity, which may limit the utility of these
funds as cash management vehicles.\84\ For instance, commenters
expressed concern that swing pricing may inhibit a fund's ability to
offer features such as same-day settlement and multiple NAV strikes per
day due to concerns that swing pricing would delay a fund's ability to
determine its NAV.\85\ Some commenters suggested that swing pricing may
assume a greater degree of liquidity costs than funds incur to meet
redemptions because money market funds generally satisfy redemptions
through maturing assets, rather than secondary market selling activity,
and are equipped to handle relatively large redemptions with available
liquidity.\86\ Some commenters stated that swing pricing would
introduce greater volatility in fund share prices and performance,
which they asserted would reduce investor demand for institutional
money market funds.\87\ In addition, some commenters indicated that the
operational costs of the proposed swing pricing requirement could cause
some sponsors to eliminate their institutional prime and institutional
tax-exempt money market funds, particularly smaller funds, and reduce
money market fund assets.\88\ In light of these considerations, some
commenters suggested that swing pricing is not an appropriate tool for
money market funds and stated that a
[[Page 51412]]
liquidity fee framework would be better suited to the structure and
characteristics of money market funds, if the Commission determines
that an anti-dilution tool is necessary for these funds.\89\
---------------------------------------------------------------------------
\84\ See, e.g., Comment Letter of Independent Directors Council
(Apr. 11, 2022) (``IDC Comment Letter''); Mutual Fund Directors
Forum Comment Letter; Comment Letter of The Bank of New York Mellon
(Apr. 11, 2022) (``BNY Mellon Comment Letter''); Fidelity Comment
Letter; Comment Letter of State Street Global Advisors (Apr. 11,
2022) (``State Street Comment Letter''); Comment Letter of Federated
Hermes, Inc. (Apr. 11, 2022) (``Federated Hermes Comment Letter
II'') (letter primarily focused on the proposed swing pricing
requirement).
\85\ See, e.g., Comment Letter of Capital Group Companies, Inc.
(Apr. 11, 2022) (``Capital Group Comment Letter''); State Street
Comment Letter; ICI Comment Letter; Federated Hermes Comment Letter
II; SIFMA AMG Comment Letter; BNY Mellon Comment Letter.
\86\ See, e.g., SIFMA AMG Comment Letter; Comment Letter of
American Bankers Association (Apr. 11, 2022) (``ABA Comment Letter
I''); Invesco Comment Letter; Fidelity Comment Letter; Allspring
Funds Comment Letter.
\87\ See SIFMA AMG Comment Letter; Western Asset Comment Letter;
see also Northern Trust Comment Letter; Federated Hermes Comment
Letter II.
\88\ See, e.g., JP Morgan Comment Letter; BlackRock Comment
Letter; IDC Comment Letter; Comment Letter of U.S. Chamber of
Commerce, Center for Capital Markets Competitiveness (Apr. 11, 2022)
(``US Chamber of Commerce Comment Letter''); CCMR Comment Letter;
Comment Letter of Americans for Tax Reform (Apr. 9, 2022)
(``Americans for Tax Reform Comment Letter''); Northern Trust
Comment Letter.
\89\ See, e.g., ICI Comment Letter (suggesting that, if data and
analysis show that an anti-dilution mechanism is necessary for
public institutional prime and tax-exempt funds, modifying and
leveraging the existing fee framework would be less problematic than
swing pricing and could serve the Commission's goals in a way that
avoids imposing unnecessary operational costs); Invesco Comment
Letter; SIFMA AMG Comment Letter (suggesting that, to the extent the
Commission continues to believe, based on data driven findings and
analysis, that an additional anti-dilution tool is necessary, the
Commission consider liquidity fees instead of swing pricing);
Federated Hermes Comment Letter I; Federated Hermes Comment Letter
II; Invesco Comment Letter; Comment Letter of The Charles Schwab
Corporation (Apr. 11, 2022) (``Schwab Comment Letter''); Morgan
Stanley Comment Letter; JP Morgan Comment Letter; BlackRock Comment
Letter; State Street Comment Letter; Western Asset Comment Letter;
IIF Comment Letter; Allspring Funds Comment Letter. Some of the
comments received with respect to the swing pricing proposal are
also relevant to issues implicated by the liquidity fee mechanism
that we are adopting. We primarily discuss those comments below in
the relevant sections addressing the amended liquidity fee
framework.
---------------------------------------------------------------------------
Commenters expressed different views on whether the proposed swing
pricing requirement would achieve the Commission's goal of ensuring
that the costs stemming from net redemptions are fairly allocated and
do not give rise to dilution or a potential first-mover advantage,
particularly in times of stress. A few commenters were supportive of
swing pricing and suggested that it would enhance the resilience of
money market funds.\90\ Many commenters, however, expressed concern
that swing pricing would not achieve the Commission's goals of
allocating liquidity costs and reducing dilution and potential first-
mover advantages. Some commenters suggested that redemptions are not
motivated by a first-mover advantage and that liquidity, rather than
avoiding dilution from other shareholders' redemptions, was the
motivation for redemptions in March 2020.\91\ Some commenters suggested
that swing pricing would not address first-mover issues because
investors would not know at the time they submitted redemptions orders
if a swing factor would apply for that pricing period.\92\ Similarly,
another commenter suggested that small adjustments to a fund's NAV
would be unlikely to affect a shareholder's decision to redeem, even
with a market impact factor.\93\ Some other commenters suggested that
uncertainty regarding the application of swing pricing may in fact
increase incentives for investors to redeem ahead of others.\94\
---------------------------------------------------------------------------
\90\ See, e.g., Americans for Financial Reform Comment Letter;
CFA Comment Letter; Comment Letter of Systemic Risk Council (Apr.
15, 2022) (``Systemic Risk Council Comment Letter''); Better Markets
Comment Letter; Comment Letter of Chris Barnard (Oct. 19, 2022)
(``Chris Barnard Comment Letter'').
\91\ See, e.g., Fidelity Comment Letter; Capital Group Comment
Letter; BlackRock Comment Letter; Americans for Tax Reform Comment
Letter; see also Federated Hermes Comment Letter I (suggesting that
the 2014 amendments that imposed a floating NAV on institutional
funds sufficiently addressed first-mover issues).
\92\ See, e.g., Capital Group Comment Letter; Dechert Comment
Letter; Schwab Comment Letter; Allspring Funds Comment Letter;
Federated Hermes Comment Letter II; JP Morgan Comment Letter;
BlackRock Comment Letter; ICI Comment Letter; SIFMA AMG Comment
Letter; see also US Chamber of Commerce Comment Letter.
\93\ See Fidelity Comment Letter.
\94\ See, e.g., CCMR Comment Letter (suggesting that swing
pricing could incentivize runs as investors seek to redeem before a
market impact factor is applied); Comment Letter of Institutional
Cash Distributors (Apr. 11, 2022) (``ICD Comment Letter''); Prof.
Hanson et al. Comment Letter; State Street Comment Letter.
---------------------------------------------------------------------------
As discussed in the Proposing Release, swing pricing and liquidity
fees can be economically equivalent in terms of charging redeeming
investors for the liquidity costs they impose on a fund.\95\ Both
approaches allow funds to recapture the liquidity costs of redemptions
to make non-redeeming investors whole. The Commission considered both
approaches in the Proposing Release and, after acknowledging that each
approach has certain advantages and disadvantages over the other, the
Commission expressed the view that swing pricing appeared to have
operational benefits relative to liquidity fees. For example, as
discussed in the proposal, the Commission believed swing pricing would
require less involvement by intermediaries in applying a charge to
redeeming investors than liquidity fees.\96\
---------------------------------------------------------------------------
\95\ See Proposing Release, supra note 6, at sections II.B.1 and
III.D.5.
\96\ See id. at paragraph accompanying n.149 and section
III.D.5.
---------------------------------------------------------------------------
Many commenters stated that liquidity fees were preferable to swing
pricing.\97\ Many of these commenters stated that liquidity fees would
be easier for money market funds to implement.\98\ For instance, some
commenters suggested that funds would be able to build on their
existing experience with liquidity fees under current rules.\99\
Similarly, some commenters raised the concern that swing pricing is
ill-suited for money market funds given the general lack of experience
with swing pricing in the money market fund industry.\100\
---------------------------------------------------------------------------
\97\ See, e.g., Invesco Comment Letter; SIFMA AMG Comment Letter
(stating that liquidity fees offer many advantages as compared to
swing pricing); Federated Hermes Comment Letter I (suggesting that a
discretionary liquidity fee would be less onerous than swing
pricing); Federated Hermes Commenter Letter II; Invesco Comment
Letter; Schwab Comment Letter; Morgan Stanley Comment Letter; JP
Morgan Comment Letter; BlackRock Comment Letter; State Street
Comment Letter; Western Asset Comment Letter; IIF Comment Letter;
Allspring Funds Comment Letter; see also Dechert Comment Letter; CFA
Comment Letter.
\98\ See, e.g., Federated Hermes Comment Letter II; Invesco
Comment Letter; SIFMA AMG Comment Letter; Schwab Comment Letter; IIF
Comment Letter; BlackRock Comment Letter.
\99\ See, e.g., Federated Hermes Comment Letter II; Invesco
Comment Letter; SIFMA AMG Comment Letter; Schwab Comment Letter; IIF
Comment Letter.
\100\ See Morgan Stanley Comment Letter; SIFMA AMG Comment
Letter; IIF Comment Letter; Federated Hermes Comment Letter I;
Federated Hermes Comment Letter II; Comment Letter of Senator Pat
Toomey (Apr. 12, 2022) (``Senator Toomey Comment Letter''); Mutual
Fund Directors Forum Comment Letter; see also Comment Letter of
Professor Stephen G. Cecchetti, Brandeis International Business
School, and Professor Kermit L. Schoenholtz, Leonard N. Stern School
of Business, New York University (Feb. 1, 2022) (``Profs. Ceccheti
and Schoenholtz Comment Letter'').
---------------------------------------------------------------------------
Several commenters stated that a liquidity fee framework would
provide benefits to investors relative to swing pricing.\101\ Some of
these commenters suggested that a liquidity fee would be less confusing
and more transparent with respect to the liquidity costs redeeming
investors incur because investors are more familiar with the concept of
liquidity fees (which exist in the current rule) and because the size
of the swing factor is not readily observable in the fund's share
price.\102\ Some commenters suggested that a liquidity fee would be a
more direct way to pass along liquidity costs and, unlike swing
pricing, would do so without providing a discount to subscribing
investors or adding volatility to the fund's NAV.\103\ Some commenters
suggested that the changes in a fund's
[[Page 51413]]
NAV caused by application of the swing factor may cause investors to
time their purchases of money market shares to attain a pricing
advantage during predictable seasonal redemption activity such as tax
payment dates or month-end.\104\ Further, one commenter indicated that
a liquidity fee framework could better preserve same-day liquidity for
investors than swing pricing because liquidity fees are already
operationally feasible for many money market funds and present fewer
implementation challenges.\105\
---------------------------------------------------------------------------
\101\ See, e.g., ICI Comment Letter; Invesco Comment Letter;
SIFMA AMG Comment Letter; Federated Hermes Comment Letter I;
Federated Hermes Commenter Letter II; Invesco Comment Letter; Schwab
Comment Letter; Morgan Stanley Comment Letter; JP Morgan Comment
Letter; BlackRock Comment Letter; State Street Comment Letter;
Western Asset Comment Letter; IIF Comment Letter; Allspring Funds
Comment Letter; see also Dechert Comment Letter; CFA Comment Letter.
\102\ See, e.g., Morgan Stanley Comment Letter (expressing the
belief that investors understand and are more comfortable with a
fee-based regime, as compared to swing pricing, because of previous
efforts of money market fund sponsors to educate fund investors on
liquidity fees, as well as investors' experiences with redemption
fees under rule 22c-2 and sales charges and deferred sales charges);
SIFMA AMG Comment Letter; Federated Hermes Comment Letter II.
\103\ See, e.g., ICI Comment Letter; Federated Hermes Comment
Letter II (``Shareholders who subscribe on days when price is swung
down will receive a windfall profit.''); JP Morgan Comment Letter
(``[R]emaining investors will not experience additional NAV
volatility as with swing pricing.'').
\104\ See Federated Hermes Comment Letter I; Federated Hermes
Comment Letter II (expressing concern about other scenarios in which
swing pricing may incentivize trading to take advantage of
fluctuations in the fund's NAV, such as incentives to purchase in
early pricing periods--when money market funds tend to have more
redemptions--and redeem in a later pricing period, when net
redemptions are less likely); Western Asset Comment Letter; Dechert
Comment Letter (suggesting that swing pricing may have a potentially
unintended dilutive effect of incentivizing investors to buy into a
fund at a lower NAV once the fund swings).
\105\ See IIF Comment Letter.
---------------------------------------------------------------------------
Commenters suggested various alternatives regarding the form and
structure of liquidity fees. Some commenters suggested that fund boards
should have discretion to determine whether to impose liquidity
fees.\106\ Some commenters suggested an approach where liquidity fees
would apply automatically upon certain events, such as upon net
redemptions exceeding an identified threshold or liquidity dropping
below a certain level.\107\
---------------------------------------------------------------------------
\106\ See, e.g., ICI Comment Letter; Schwab Comment Letter;
Federated Hermes Comment Letter I; Federated Hermes Comment Letter
II; Federated Hermes Fund Board Comment Letter; Invesco Comment
Letter; SIFMA AMG Comment Letter.
\107\ See, e.g., Morgan Stanley Comment Letter; Western Asset
Comment Letter; BlackRock Comment Letter; State Street Comment
Letter; SIFMA AMG Comment Letter; ICI Comment Letter; JP Morgan
Comment Letter; IIF Comment Letter; Invesco Comment Letter.
---------------------------------------------------------------------------
After considering these comments, we are adopting a liquidity fee
framework to better allocate liquidity costs to redeeming investors.
The proposed swing pricing requirement was designed to address
potential shareholder dilution and the potential for a first-mover
advantage for institutional funds. While we continue to believe these
goals are important, we are persuaded by commenters that these same
goals are better achieved through a liquidity fee mechanism,
particularly given that current rule 2a-7 includes a liquidity fee
framework that funds are accustomed to and can build upon.
The mandatory liquidity fee framework we are adopting is designed
to address concerns with the prior liquidity fee framework--namely the
incentives for preemptive redemptions associated with predictable
weekly liquid asset triggers. At the same time it continues to seek to
ensure that the costs stemming from redemptions in stressed market
conditions are more fairly allocated to redeeming investors.
Specifically, institutional prime and institutional tax-exempt money
market funds will be subject to a mandatory liquidity fee when net
redemptions exceed 5% of net assets.\108\ Funds will not be required to
impose this fee, however, when liquidity costs are less than one basis
point, which we anticipate will often be the case under normal market
conditions.\109\ As discussed in more detail throughout this section,
the mandatory liquidity fee we are adopting will broadly address the
concerns commenters raised about the swing pricing proposal while still
generally achieving the goals we sought in that proposal. Separately,
similar to the statements in the proposal that money market funds can
impose discretionary liquidity fees under rule 22c-2, amended rule 2a-7
will provide a discretionary liquidity fee tool to all non-government
money market funds, which a fund will use if its board (or the board's
delegate, in accordance with board-approved guidelines) determines that
such fee is in the best interests of the fund.\110\
---------------------------------------------------------------------------
\108\ See amended rule 2a-7(c)(2)(ii).
\109\ See amended rule 2a-7(c)(2)(iii)(D).
\110\ A government money market fund may elect to be subject to
the discretionary liquidity fee requirement.
---------------------------------------------------------------------------
The mandatory liquidity fee approach that we are adopting will
require redeeming investors to pay the cost of depleting a fund's
liquidity, particularly under stressed market conditions and when net
redemptions are sizeable. As discussed in the proposal, trading
activity and other changes in portfolio holdings associated with
meeting redemptions may impose costs, including trading costs and costs
of depleting a fund's daily or weekly liquid assets. These costs, which
currently are borne by the remaining investors in the fund, can dilute
the interests of non-redeeming shareholders and create incentives for
shareholders to redeem quickly to avoid losses, particularly in times
of market stress.\111\ If shareholder redemptions are motivated by this
first-mover advantage, they can lead to increasing outflows, and as the
level of outflows from a fund increases, the incentive for remaining
shareholders to redeem may also increase. Regardless of the motive for
investor redemptions, there can be significant, unfair adverse
consequences to remaining investors in a fund in these circumstances,
including material dilution of remaining investors' interests in the
fund. The mandatory liquidity fee mechanism is designed to reduce the
potential for such dilution.
---------------------------------------------------------------------------
\111\ See infra section IV.B.1.c.
---------------------------------------------------------------------------
Some commenters suggested that an anti-dilution tool is not
necessary for money market funds. Several of these commenters suggested
that money market funds do not experience dilution as a general matter
because they are able to address their liquidity needs without cost and
without selling assets by using daily liquid assets and weekly liquid
assets, which are held to maturity.\112\ Some commenters further
suggested that the Commission did not provide sufficient data analysis
to support its view that money market funds are subject to
dilution.\113\ Some commenters suggested an anti-dilution tool was
unnecessary in light of either the proposed increased daily and weekly
liquid asset requirements, the proposed removal of the tie to weekly
liquid assets, or a combination of those factors because funds would
have additional liquidity to meet redemptions and would be better able
to use that liquidity in future stress periods.\114\
---------------------------------------------------------------------------
\112\ See, e.g., Northern Trust Comment Letter; Fidelity Comment
Letter; SIFMA AMG Comment Letter; IIF Comment Letter; Federated
Hermes Comment Letter II; CCMR Comment Letter; State Street Comment
Letter; ICI Comment Letter; JP Morgan Comment Letter; Comment Letter
of Stephen A. Keen (Apr. 11, 2022) (``Keen Comment Letter'');
Comment Letter of U.S. Bancorp Asset Management (Apr. 14, 2022)
(``Bancorp Comment Letter'').
\113\ See, e.g., Morgan Stanley Comment Letter; Fidelity Comment
Letter (suggesting that the SEC lacked data to demonstrate the
significance or materiality of shareholder dilution); ICI Comment
Letter; SIFMA AMG Comment Letter; CCMR Comment Letter.
\114\ See, e.g., Schwab Comment Letter; Healthy Markets
Association Comment Letter; Allspring Funds Comment Letter; Fidelity
Comment Letter; Invesco Comment Letter; BlackRock Comment Letter;
Federated Hermes Comment Letter II; ICI Comment Letter; SIFMA AMG
Comment Letter; but see Better Markets Comment Letter (suggesting
that increasing the costs of redemptions would reduce potential
first-mover advantages).
---------------------------------------------------------------------------
After considering comments, we continue to believe that in periods
of market stress, when liquidity in underlying short-term funding
markets is scarce and costly, redeeming investors should bear liquidity
costs associated with sizeable redemption activity. While we recognize
that a fund may not incur immediate costs to meet those redemptions if
the fund can satisfy redemptions using daily liquid assets, the fund is
likely to face costs to rebalance the liquidity of its portfolio
[[Page 51414]]
over time.\115\ Moreover, if redemptions are large and ongoing, there
is an increased likelihood that the fund will need to sell less liquid
assets to satisfy redemptions, which involves greater costs. Thus,
there is a timing misalignment between an investor's redemption
activity and when the fund, and its remaining shareholders, incur
liquidity costs. The liquidity fee requirement we are adopting is
designed to protect remaining shareholders from dilution under these
circumstances and to more fairly allocate costs so that redeeming
shareholders bear the costs of removing liquidity from the fund when
liquidity in underlying short-term funding markets is costly.
---------------------------------------------------------------------------
\115\ Theoretically, a money market fund would not incur
rebalancing costs if it were able to perfectly ``ladder'' the
maturity of its portfolio structure, such that investments are
maturing in parallel with investors' redemption activities. However,
as a practical matter, perfect laddering is impossible because funds
do not have advance notice of all investor purchase and redemption
activity.
---------------------------------------------------------------------------
In response to comments suggesting that we conduct a data analysis
on the extent to which money market fund shareholders have experienced
dilution in the past, we do not have fund-specific data on dilution
because funds do not report information about their daily portfolio
holdings and transactions. However, as discussed in the Proposing
Release, in March 2020 institutional prime and institutional tax-exempt
money market funds experienced significant outflows, spreads for
instruments in which these funds invest widened sharply, and these
funds sold significantly more long-term portfolio securities (i.e.,
securities that mature in more than a month) than average.\116\ For
instance, Form N-MFP data suggests that publicly offered institutional
prime funds increased their sales of long-term securities in March 2020
to 15% of total assets, in comparison to a 4% monthly average between
October 2016 and February 2020. In addition, the March 2020 figure,
which is over three times the monthly average as compared to data from
prior years, likely understates the full extent of the selling
activity, as Form N-MFP currently does not provide insight on sales of
portfolio securities that a fund acquired during the relevant
month.\117\ As an example of widening spreads in the markets in which
prime funds invest, bid-ask spreads of highly rated dealer-placed
commercial paper reached between approximately 25 and 55 basis points
at the height of the stress in March and April 2020 depending on
maturity.\118\ Thus, available evidence indicates that money market
funds were incurring liquidity costs to meet redemptions, but these
costs generally were not borne by redeeming investors who received the
NAV at the time of their redemptions.\119\ Moreover, the dilution the
final rule is designed to address is not limited to the costs a fund
incurs in selling portfolio securities to meet redemptions. The final
rule also addresses dilution from the costs of reducing the liquidity
of a fund's portfolio, including associated rebalancing costs, which
would also require granular daily data that funds do not publicly
report.
---------------------------------------------------------------------------
\116\ See Proposing Release, supra note 6, at section I.B.
\117\ As discussed below, we are amending Form N-MFP to require
prime funds to report the value of non-maturing portfolio securities
they sold each month. See infra section II.F.2.a.
\118\ See infra paragraph accompanying note 630.
\119\ To the extent that ultra-short bonds may be somewhat
comparable to the debt instruments that money market funds hold and
the magnitude of NAV discounts that ultra-short bond exchange-traded
funds experienced in March 2020 may proxy for liquidity costs of
money market funds that hold similar assets, this could suggest that
institutional prime money market funds have nontrivial dilution
costs during market stress. See id.
---------------------------------------------------------------------------
We understand that future stress periods may not look exactly the
same as March 2020, and, as some commenters suggested, in future
periods funds may feel more comfortable drawing on available liquidity
to meet redemptions because we are removing the tie between liquidity
thresholds and fees and gates. Funds also may begin future stressed
periods with higher levels of daily and weekly liquid assets than in
March 2020, although at that time some funds had liquidity above the
minimums we are adopting. However, it is also possible that future
stress periods will be longer or otherwise more severe than March 2020,
that future stress events will have no Federal intervention to
alleviate those stresses, or that a particular fund or group of funds
will come under stress due to factors idiosyncratic to the fund(s). It
is important for funds to be able to manage through various types of
stress events and not to rely solely on liquidity buffers to manage
stress. As discussed below and in the Proposing Release, while
liquidity minimums are an important tool for managing redemptions, our
analysis suggests that some funds would run out of liquidity if faced
with the redemptions rates experienced in March 2020.\120\ Thus, we do
not agree with commenters who suggested that amendments to enhance
money market fund liquidity, and the usability of that liquidity, would
be sufficient on their own, without an available anti-dilution tool.
---------------------------------------------------------------------------
\120\ See infra sections II.C.1 and IV.C.2; Proposing Release,
supra note 6, at sections II.C.1 and III.C.2.
---------------------------------------------------------------------------
Moreover, to the extent that investors currently are incentivized
to redeem quickly during periods of market stress to avoid potential
costs from a fund's future sale of less liquid securities, the
amendments will reduce those first-mover incentives and the associated
run risk. While some academic papers support the premise that liquidity
externalities may create a first-mover advantage that may lead to
cascading anticipatory redemptions, we recognize that investors may
redeem from a fund for a variety of reasons, and these reasons may vary
among investors.\121\ Notably, we are concerned about dilution and fair
allocation of costs when a fund has sizeable net redemptions in a
stressed period regardless of the reasons for investors' redemptions.
In response to comments suggesting that an anti-dilution tool would not
address first-mover issues if an investor does not know if it will
incur liquidity costs at the time the investor submits the redemption
order, we disagree. We believe that an investor's general awareness
that it may incur liquidity costs, particularly in stressed market
conditions and when other investors may also be redeeming, is
sufficient to mitigate the first-mover advantage and reduce its
potential influence on an investor's redemption decisions. We also
disagree with commenters who suggested that an anti-dilution tool with
a net redemption trigger may increase incentives for investors to
redeem ahead of others. Investors generally will not know with
certainty if the fund's flows for any particular day will trigger a
liquidity fee since a fund's net flows are dependent on many investors'
individual investment decisions, which are not knowable in advance and
can be influenced by a multitude of different factors.\122\ While
investors may anticipate that a fund will have net redemptions during a
market stress event, the investors will also know that if they redeem,
the likelihood of incurring fees increases. This dynamic should reduce
investors' incentives to attempt to preemptively redeem to avoid
liquidity fees. We agree with commenters that suggested that a net
redemption threshold would be appropriate to avoid the threshold
effects seen in March 2020.\123\
[[Page 51415]]
Moreover, the 5% net redemption threshold is designed to help mitigate
the risk that a significant amount of redemptions could occur under
stressed market conditions before a fee is triggered, thus
incentivizing investors to redeem ahead of others.
---------------------------------------------------------------------------
\121\ See infra note 550 and accompanying text (discussing these
academic papers).
\122\ See infra section IV.C.4.b.i (further discussing how a
liquidity fee based on a net redemptions trigger may mitigate run
incentives).
\123\ See, e.g., SIFMA AMG Comment Letter; BlackRock Comment
Letter: IIF Comment Letter; Morgan Stanley Comment Letter. As
discussed further below, some of these commenters suggested a
trigger for liquidity fees that paired a net redemption threshold
with a weekly liquid asset threshold.
---------------------------------------------------------------------------
As the Commission has previously recognized, in the absence of an
exemption, imposing liquidity fees could violate 17 CFR 270.22c-1
(``rule 22c-1''), which (together with section 22(c) and other
provisions of the Investment Company Act) requires that each redeeming
shareholder receive his or her pro rata portion of the fund's net
assets.\124\ As a result, we are exercising our authority under section
6(c) of the Act to provide exemptions from these and related provisions
of the Act so that a money market fund can institute liquidity fees,
which can benefit the fund and its shareholders by providing a more
systematic and equitable allocation of liquidity costs, notwithstanding
these restrictions.\125\ We believe that such exemptions do not
implicate the concerns that Congress intended to address in enacting
these provisions, and thus they are necessary and appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the Act.
---------------------------------------------------------------------------
\124\ See 2014 Adopting Release, supra note 26, at section
III.A.3.
\125\ Section 6(c) of the Investment Company Act. In addition,
like current rule 2a-7, the final rule provides that,
notwithstanding section 27(i) of the Investment Company Act, a
variable insurance contract issued by a registered separate account
funding variable insurance contracts or the sponsoring insurance
company of such separate account may apply a liquidity fee to
contract owners who allocate all or a portion of their contract
value to a subaccount of the separate account that is either a money
market fund or that invests all of its assets in shares of a money
market fund. See 17 CFR 270.2a-7(c)(2)(iv); amended rule 2a-
7(c)(2)(iv). Section 27(i)(2)(A) makes it unlawful for any
registered separate account funding variable insurance contracts or
the sponsoring insurance company of such account to sell a variable
contract that is not a ``redeemable security.''
---------------------------------------------------------------------------
As discussed, we are adopting a mandatory liquidity fee framework
in lieu of the proposed swing pricing requirement. Table 1 below
compares the key elements of the current rule's default liquidity fee,
the proposed swing pricing requirement, and the mandatory liquidity fee
provision we are adopting. In addition, Table 2 below compares the key
elements of the current rule's discretionary liquidity fee, the
redemption fee approach contemplated by the proposal, and the
discretionary liquidity fee provision we are adopting. We discuss these
aspects of the final rule and how they relate to comments on the
proposal in the following sections.
Table 1--Comparison of the Current Rule's Default Liquidity Fee, the Proposed Rule's Swing Pricing Requirement,
and the Final Rule's Mandatory Liquidity Fee
----------------------------------------------------------------------------------------------------------------
Current rule's default Proposed rule's swing Final rule's mandatory
liquidity fee pricing requirement liquidity fee
----------------------------------------------------------------------------------------------------------------
Description of mechanism......... A default fee is charged The fund's NAV is A mandatory fee is
to redeeming investors adjusted downward by a charged to redeeming
when the fund's weekly swing factor when the investors when the fund
liquid assets decline fund has net has net redemptions
below 10%, subject to redemptions. above 5% of net assets.
certain board discretion.
Scope of affected funds.......... Prime and tax-exempt Institutional prime and Institutional prime and
money market funds. institutional tax- institutional tax-
exempt money market exempt money market
funds. funds.
Scope of affected investors...... Redeeming investors are The NAV is adjusted Redeeming investors are
charged a liquidity fee. downward for both charged a liquidity
The liquidity fee does redeemers and fee. The liquidity fee
not affect subscribing subscribers. Redeeming does not affect
investors. investors' redemption subscribing investors.
proceeds are reduced
and subscribing
investors purchase at a
discounted price,
compared to the
unadjusted NAV they
both otherwise would
have received.
Threshold for applying a charge.. If weekly liquid assets At any level of net Fees are triggered when
fall below 10%, then a redemptions for a the fund has total
default fee would apply pricing period, the daily net redemptions
to redeeming investors, swing factor includes that exceed 5% of net
unless the board spreads and certain assets based on flow
determines a fee is not other transaction costs information available
in the best interests of (i.e., brokerage within a reasonable
the fund.\1\ commissions, custody period after the last
fees, and any other computation of the
charges, fees, and fund's net asset value
taxes associated with on that day, or such
portfolio security smaller amount of net
sales). redemptions as the
board determines.
If net redemptions for a
pricing period exceed
4% of net assets
divided by the number
of pricing periods per
day, or such smaller
amount of net
redemptions as the
swing pricing
administrator
determines, the swing
factor also includes
market impact costs.
Duration and application of the The liquidity fee begins The price is adjusted The fund must apply a
charge. to apply on the business for all shareholders liquidity fee to all
day after the fund transacting in the shares that are
crosses the 10% weekly fund's shares during redeemed at a price
liquid asset threshold. the relevant pricing computed on the day the
Once imposed, the fee period. fund has total daily
must be applied to all net redemptions that
shares redeemed and exceed 5% of net
remains in effect until assets.
the fund's board,
including a majority of
directors who are not
interested persons of
the fund, determines
that imposing a fee is
not in the best
interests of the fund.
If the fund has invested
30% or more of its total
assets in weekly liquid
assets as of the end of
a business day, the fund
must cease charging a
fee effective the
beginning of the next
business day.
[[Page 51416]]
Size of the charge............... The default fee is 1%, The swing factor would The size of the fee
unless the fund's board be determined by making generally is determined
of directors, including good faith estimates of by making a good faith
a majority of the the spread, other estimate of the spread,
directors who are not transaction, and market other transaction, and
interested persons of impact costs the fund market impact costs the
the fund, determines would incur, as fund would incur if it
that a higher or lower applicable, if it were were to sell a pro rata
fee level is in the best to sell a pro rata amount of each security
interests of the fund. amount of each security in its portfolio to
in its portfolio to satisfy the amount of
satisfy the amount of net redemptions.
net redemptions.
Affected money market Affected money market
funds could estimate funds can estimate
costs and market impact costs and market
factors for each type impacts for each type
of security with the of security with the
same or substantially same or substantially
similar characteristics similar characteristics
and apply those and apply those
estimates to all estimates to all
securities of that type securities of that type
in the fund's in the fund's
portfolio, rather than portfolio, rather than
analyze each security analyze each security
separately. separately.
If the estimated
liquidity costs are
less than one basis
point (0.01%) of the
value of the shares
redeemed, a fund is not
required to apply a fee
under the de minimis
exception.
If the fund cannot
estimate the costs of
selling a pro rata
amount of each
portfolio security in
good faith and
supported by data, a
default liquidity fee
of 1% of the value of
shares redeemed
applies.
Maximum charge................... The fee cannot exceed 2% The swing factor has no The fee has no upper
of the value of the upper limit. limit.
shares redeemed.
Party who administers the The board is responsible The board must approve The board is responsible
provision. for administering the swing pricing policies for administering the
liquidity fee and procedures. The liquidity fee
requirement. The board swing pricing requirement, but the
may not delegate administrator is board can delegate this
liquidity fee charged with responsibility to the
determinations. administering the swing fund's investment
pricing requirement. adviser or officers,
The swing pricing subject to written
administrator is the guidelines established
fund's investment and reviewed by the
adviser, officer, or board and ongoing board
officers responsible oversight.\2\
for administering the
fund's swing pricing
policies and
procedures, as
designated by the
fund's board. The
administrator can be an
individual or a group
of persons.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ The board determinations this Table refers to generally must include a majority of the directors who are not
interested persons of the fund.
\2\ This approach is consistent with the operation of several other provisions of rule 2a-7.
Table 2--Comparison of the Current Rule's Discretionary Liquidity Fee, the Proposed Rule, and the Final Rule's
Discretionary Liquidity Fee
----------------------------------------------------------------------------------------------------------------
Current rule's Final rule's
discretionary liquidity Proposed rule and rule discretionary liquidity
fee 22c-2 fee
----------------------------------------------------------------------------------------------------------------
Description of mechanism......... A discretionary fee may The proposal would have Irrespective of
be charged to redeeming removed the liquidity or redemption
investors when the discretionary liquidity levels, a discretionary
fund's weekly liquid fee provision in rule fee is charged to
assets decline below 30% 2a-7 and stated that redeeming investors
and the board determines money market fund when the board
that a fee is in the boards could rely on determines that the fee
best interests of the existing rule 22c-2 if is in the best
fund.\1\ they determine interests of the fund.
redemption fees are
needed to address
dilution.
Scope of affected funds.......... Prime and tax-exempt Any money market fund Prime and tax-exempt
money market funds. may elect to rely on money market funds.
Government money market rule 22c-2 to impose Government money market
funds may opt in. fees, in which case the funds may opt in.
fund would no longer be
an excepted fund under
that rule.
Scope of affected investors...... Redeeming investors are Redeeming investors are Redeeming investors are
charged a liquidity fee. charged a liquidity charged a liquidity
The liquidity fee does fee. The liquidity fee fee. The liquidity fee
not affect subscribing does not affect does not affect
investors. subscribing investors. subscribing investors.
Threshold for applying a charge.. If weekly liquid assets The fund's board may If the board determines
fall below 30%, then a impose a redemption fee that doing so is in the
fund may institute a fee that in its judgment is best interests of the
if the board determines necessary or fund, the board must
that the fee is in the appropriate to recoup impose a liquidity fee.
best interests of the for the fund the costs
fund. it may incur as a
result of redemptions
or to otherwise
eliminate or reduce so
far as practicable any
dilution of the value
of the outstanding
securities issued by
the fund.
Duration and application of the Once imposed, the Generally subject to Once imposed, the
charge. discretionary fee must board discretion under discretionary fee must
be applied to all shares the rule. be applied to all
redeemed and remain in shares redeemed and
effect until the fund's remain in effect until
board determines that the fund's board
imposing a fee is not in determines that
the best interests of imposing such fee is no
the fund. longer in the best
interests of the fund.
If the fund has invested
30% or more of its total
assets in weekly liquid
assets as of the end of
a business day, the fund
must cease charging a
fee effective the
beginning of the next
business day.
[[Page 51417]]
Size of the charge............... The rule does not The fee must be The rule does not
prescribe the manner or necessary or prescribe the manner or
amount of the fee appropriate, as amount of the fee
calculation. The fee, determined by the calculation. The fee,
however, must be in the board, to recoup for however, must be in the
best interests of the the fund the costs it best interests of the
fund. may incur as a result fund.
of those redemptions or
to otherwise eliminate
or reduce so far as
practicable any
dilution of the value
of the outstanding
securities issued by
the fund.
Maximum charge................... The fee cannot exceed 2% The fee cannot exceed 2% The fee cannot exceed 2%
of the value of the of the value of the of the value of the
shares redeemed. shares redeemed. shares redeemed.
Party who administers the The board is responsible The fund's board........ The board is responsible
provision. for administering the for administering the
liquidity fee liquidity fee
requirement. The board requirement, but the
may not delegate board can delegate this
liquidity fee responsibility to the
determinations. fund's investment
adviser or officers,
subject to written
guidelines established
and reviewed by the
board and ongoing board
oversight.\2\
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ The board determinations this Table refers to generally must include a majority of the directors who are not
interested persons of the fund.
\2\ This approach is consistent with the operation of several other provisions of rule 2a-7.
2. Terms of the New Mandatory Liquidity Fee Requirement
The mandatory liquidity fee we are adopting, like the swing pricing
proposal, is based upon a net redemption threshold and only applies to
institutional prime and institutional tax-exempt funds.\126\ Unlike the
swing pricing proposal, however, the anti-dilution measure triggers
only when net redemptions for the business day exceed 5% of net
assets.\127\ Similar to the proposed swing pricing proposal, the fee
amount would reflect the fund's good faith estimate of liquidity costs,
supported by data, of the costs the fund would incur if it sold a pro
rata amount of each security in its portfolio (i.e., vertical slice) to
satisfy the amount of net redemptions, including: (1) spread costs and
any other charges, fees, and taxes associated with portfolio security
sales; and (2) market impacts for each security.\128\ The final rule
will not require a fund to apply a fee if the estimated costs are de
minimis, meaning that if the fee were applied, the amount of the fee
would be less than 0.01% of the value of the shares redeemed.\129\ In
addition, if a fund cannot make a good faith estimate of liquidity
costs, it will apply a default fee of 1%.\130\ This mandatory liquidity
fee regime substantially accomplishes the same goals as the proposed
swing pricing mechanism and, like swing pricing, it is designed to
ensure that the costs stemming from significant net redemptions in
periods of market stress are fairly allocated and will not give rise to
dilution or a first-mover advantage.
---------------------------------------------------------------------------
\126\ We refer to money market funds that are not government
money market funds or retail money market funds collectively as
``institutional funds'' when discussing the liquidity fee
requirement.
\127\ See amended rule 2a-7(c)(2)(ii) (allowing a fund's board
to determine to use a smaller net redemption threshold than 5%). In
contrast, the proposed swing pricing requirement would have required
an institutional fund to adjust its current NAV per share by a swing
factor reflecting spread and transaction costs, as applicable, if
the fund has net redemptions for the pricing period. If the
institutional fund experienced net redemptions exceeding 4% of the
fund's net asset value (divided by the number of pricing periods the
fund has in a business day, or such smaller amount of net
redemptions as the swing pricing administrator determines), then the
swing factor would also include market impact costs.
\128\ See amended rule 2a-7(c)(2)(iii)(A).
\129\ See amended rule 2a-7(c)(2)(iii)(D).
\130\ See amended rule 2a-7(c)(2)(iii)(C).
---------------------------------------------------------------------------
The new mandatory liquidity fee has some key differences as
compared to the current rule. For example, the mandatory liquidity fee
is triggered by net redemptions as opposed to weekly liquid
assets.\131\ In addition, unlike the current rule, but consistent with
the proposed swing pricing requirement, the amended framework does not
provide discretion to the board with respect to its application.
Rather, the fund will be required to apply a fee if it crosses the net
redemption threshold unless the fee amount is de minimis. Moreover, the
final amendments are more specific in terms of how a fund determines
the amount of the fee than the current rule and, as a result, does not
include a limit on the amount of the fee a fund can charge.\132\
---------------------------------------------------------------------------
\131\ See 17 CFR 270.2a-7(c)(2)(ii) (requiring a non-government
money market fund to impose a default liquidity fee of 1% on all
redemptions if its weekly liquid assets fall below 10% of its total
assets, unless the board of directors of the fund (including a
majority of its independent directors) determines that imposing such
a fee would not be in the best interests of the fund).
\132\ In contrast, under the current rule, a liquidity fee may
not exceed 2% of the value of the shares redeemed. See 17 CFR
270.2a-7(c)(2)(ii)(A).
---------------------------------------------------------------------------
The new mandatory liquidity fee only applies to institutional prime
and institutional tax-exempt funds. This is in contrast to the current
rule's default liquidity fees, which apply to retail funds, but is
consistent with the approach we proposed for swing pricing. We are not
requiring retail or government money market funds to implement
mandatory liquidity fees due to differences in investor behavior and,
in the case of government funds, liquidity costs. As discussed in the
proposal, retail money market funds historically have had smaller
outflows than institutional funds during times of market stress and
appear to be less sensitive to declines in a fund's liquidity.\133\ As
a consequence, we continue to believe retail fund managers may be more
comfortable drawing down available liquidity from the fund's daily
liquid assets and weekly liquid assets to meet redemptions in times of
stress, without engaging in secondary market sales that could result in
significant liquidity costs. In addition, we do not believe that retail
prime and tax-exempt money market funds need special provisions
requiring them to impose liquidity fees given both the anticipated
effect of the daily and weekly liquid asset requirement changes and, as
described below, the availability of the discretionary liquidity fee we
are adopting. As for government money market funds, investors typically
view these funds, in contrast to prime money market funds, as a
relatively safe investment during times of market turmoil, and
government money market funds have seen inflows during periods of
market instability. Government money market funds are also less likely
to incur significant liquidity costs when they purchase or sell
portfolio securities
[[Page 51418]]
due to the generally higher levels of liquidity in the markets in which
they invest.
---------------------------------------------------------------------------
\133\ See Proposing Release, supra note 6, at section II.B.1.
---------------------------------------------------------------------------
Consistent with the swing pricing proposal, the mandatory anti-
dilution mechanism (in this case a liquidity fee) applies to all
institutional funds, irrespective of whether they are offered publicly.
Some commenters suggested that privately offered institutional funds
should not be subject to a mandatory anti-dilution tool.\134\ Asset
managers typically organize privately offered institutional money
market funds to manage cash balances of other affiliated funds and
accounts. These funds operate in almost all respects as a registered
money market fund, except that their securities are privately offered
and thus not registered under the Securities Act.\135\ Some commenters
suggested privately offered institutional funds are not subject to the
same first-mover and run concerns as publicly offered institutional
funds because they serve as tools for funds within the same fund
complex and are used for internal purposes such as cash management and
investing collateral from securities lending transactions.\136\ For
example, one commenter suggested that, because of these
characteristics, such funds are focused more on liquidity than
yield.\137\ Other commenters suggested that such funds have greater
transparency into redemptions than publicly offered institutional
funds.\138\ We decline to provide an exception for these funds from the
mandatory liquidity fee requirement because we do not believe that such
funds are immune to the risks of dilution and potential first-mover
advantages that mandatory liquidity fees are designed to address. For
example, registered funds investing in a privately offered
institutional fund may have an incentive to redeem shares in times of
market stress (e.g., to raise funds to pay their own redemptions, which
may be heightened at that time), increasing the risk of dilution for
remaining registered funds. Potential first-mover incentives may also
exist, particularly if registered funds are investing in a privately
offered institutional fund in another fund complex in which the
registered funds have no greater transparency, creating a potential
incentive to redeem ahead of other investors in times of market
stress.\139\
---------------------------------------------------------------------------
\134\ See, e.g., Fidelity Comment Letter; BlackRock Comment
Letter; Capital Group Comment Letter; ICI Comment Letter; Comment
Letter of Dimensional Fund Advisors LP (Apr. 11, 2022)
(``Dimensional Fund Advisors Comment Letter''); Dechert Comment
Letter.
\135\ See 17 CFR 270.12d1-1 (generally requiring that the
acquiring fund reasonably believes that the money market fund
operates in compliance with rule 2a-7).
\136\ See, e.g., Fidelity Comment Letter; ICI Comment Letter;
BlackRock Comment Letter; Capital Group Comment Letter; ICI Comment
Letter; Dimensional Fund Advisors Comment Letter; Dechert Comment
Letter; but see 2014 Adopting Release, supra note 26, at section
III.C.5 (discussing the Commission's belief that unregistered money
market funds are not immune to the risks posed by money market funds
generally).
\137\ See Capital Group Comment Letter.
\138\ See Capital Group Comment Letter; ICI Comment Letter.
\139\ See 2014 Adopting Release, supra note 26, at section
III.C.5.
---------------------------------------------------------------------------
The final rule provides for mandatory liquidity fees for
institutional funds because institutional investors have a history of
redeeming from these funds quickly in times of stress, increasing the
risk of dilution for remaining shareholders in institutional funds. In
addition, if the liquidity fee regime for these funds were purely
voluntary, institutional funds (or their boards) may require additional
time or information to decide whether to impose fees, depending on the
considerations on which the fee is based. This could result in a delay
that creates timing misalignments between an investor's redemption
activity and the imposition of liquidity costs, thus allowing some
investors to redeem without bearing the associated liquidity costs and
contributing to dilution and a first-mover advantage. Further, some
funds (or their boards) may be reluctant to impose fees to avoid
perceived reputational or competitiveness issues associated with
imposing fees before other institutional funds, which institutional
investors may be more likely to react to than retail investors.\140\ As
a result, a purely voluntary regime may result in institutional funds
not imposing a fee unless a fund is under severe and prolonged stress,
by which point the fee's effectiveness in addressing dilution and
potential first-mover advantages would be significantly reduced.\141\
---------------------------------------------------------------------------
\140\ As discussed above and in the Proposing Release, available
evidence suggests that institutional investors were more sensitive
to the possibility of redemption gates or liquidity fees in Mar.
2020 than retail investors, and institutional prime and
institutional tax-exempt money market funds managed their portfolios
to avoid having less than 30% of their total assets invested in
weekly liquid assets, at which point a board could determine to
institute gates or fees. In addition, the one money market fund to
fall below this threshold in Mar. 2020 did not institute gates or
fees. See supra sections I.B and II.A; Proposing Release, supra note
6, at sections I.B. and II.A. While we believe that institutional
investors are more sensitive to redemption gates than to liquidity
fees, some institutional investors may prefer to avoid the
possibility of liquidity fees as well, if possible.
\141\ One commenter, suggesting that discretionary fees would be
sufficient, indicated that fund boards would have incentives to
impose fees if redemptions reduced the fund's NAV and imposed
material dilution, including due to legal and reputational risk
associated with a failure to act. See Comment Letter of Federated
Hermes, Inc. (July 5, 2023) (``Federated Hermes Comment Letter V'').
Absent persuasive information that redemptions would have these
stated effects, however, there may be contrary incentives to delay
any fee determinations to avoid reputational risk or second-guessing
associated with imposing a fee, particularly if comparable funds are
not imposing fees.
---------------------------------------------------------------------------
a. Threshold for Mandatory Liquidity Fees
We are requiring that institutional funds apply the mandatory
liquidity fee when net redemptions for the business day exceed 5% of
net assets, or such smaller amount of net redemptions as the board (or
its delegate) determines. This 5% threshold is in contrast to the swing
pricing proposal, which would have required funds to charge redeeming
investors spread and certain other transaction costs if the fund had
any net redemptions for the pricing period and to include market
impacts in the charge if net redemptions exceeded 4% of net assets, or
such smaller amount of net redemptions as the swing pricing
administrator determines. In the proposal, application of this 4%
threshold would have required funds to divide the 4% value by the
number of pricing periods (i.e., NAV strikes) the fund has each
day.\142\ In contrast, the 5% net redemption threshold is based on
flows for all pricing periods in a given day. In addition, unlike the
current rule, but consistent with the proposal, application of the
anti-dilution mechanism is not tied to a weekly liquid asset threshold.
Also, unlike the current rule, but consistent with the proposal, the
mechanism applies to redemptions on each business day a fund crosses
the net redemption threshold. This is in contrast to the current rule's
default liquidity fee, which applies to redemptions the business day
after weekly liquid assets fall below the 10% threshold and continues
to apply on subsequent days until the board determines that the
liquidity fee is no longer in the best interests of the fund. Per the
rule we are adopting, an institutional prime or institutional tax-
exempt money market fund must apply a liquidity fee if its total daily
net redemptions exceed 5% of the fund's net asset value based on flow
information available within a reasonable period after the last
computation of the fund's net asset
[[Page 51419]]
value on that day. If this threshold is crossed, the fund must apply a
liquidity fee to all shares that are redeemed at a price computed on
that day.\143\
---------------------------------------------------------------------------
\142\ The proposal defined ``pricing period'' to mean the period
of time in which an order to purchase or sell securities issued by
the fund must be received to be priced at the next computed NAV. For
example, if a fund computes a NAV as of 12 p.m. and 4 p.m., the fund
would determine if it had net redemptions for each pricing period
and, if so, apply swing pricing for the corresponding NAV
calculation.
\143\ See amended rule 2a-7(c)(2)(ii).
---------------------------------------------------------------------------
Many commenters suggested that the proposed 4% market impact
threshold was too low and that a redemption-based threshold for
applying any charge to redeeming investors should be higher than 4%.
Some commenters suggested that money market funds frequently experience
net redemptions greater than 4% in normal market conditions due to
seasonal redemption activity such as investor redemptions to fulfill
payroll or tax obligations.\144\ Some commenters suggested that money
market funds do not incur transaction costs or dilution at such low
levels of net redemptions due to the structure of these funds,
including liquidity requirements that insulate funds from transaction
costs, which allows funds to pay redemptions through maturing assets
instead of secondary market activity even during periods with high
redemption levels.\145\ Some commenters suggested that if a fund has
multiple NAV strikes per day, then the 4% threshold would be
particularly problematic because the proposal divided the 4% figure by
the number of pricing periods per day, resulting in a lower
threshold.\146\ One commenter suggested that swing pricing should be
triggered by portfolio security sales that are needed to fund
shareholder redemptions.\147\ The same commenter stated that funds
should have discretion in setting their own swing thresholds.
---------------------------------------------------------------------------
\144\ See, e.g., Morgan Stanley Comment Letter; Bancorp Comment
Letter; Federated Hermes Comment Letter I; IIF Comment Letter; SIFMA
AMG Comment Letter; BlackRock Comment Letter; Federated Hermes
Comment Letter II.
\145\ See, e.g., Allspring Funds Comment Letter; Fidelity
Comment Letter; T. Rowe Comment Letter; US Chamber of Commerce
Comment Letter; Vanguard Comment Letter; Western Asset Comment
Letter; SIFMA AMG Comment Letter; Federated Hermes Comment Letter
II.
\146\ See, e.g., Bancorp Comment Letter; ICI Comment Letter.
\147\ See Capital Group Comment Letter.
---------------------------------------------------------------------------
Many commenters suggested limiting the application of liquidity
fees to periods of market stress. Several commenters suggested that
fund boards should have discretion to determine when fees should apply,
which would effectively limit fees to times of stress.\148\ Several
commenters expressed support for requiring a fund to apply a liquidity
fee if it has net redemptions of more than 10%. These commenters
generally suggested that the rule should pair a net redemption
threshold with a weekly liquid asset threshold to ensure that the fee
would apply only when the fund is under stress.\149\ Some of these
commenters suggested that a liquidity threshold is needed because a
fund could meet net redemptions of more than 10% without dilution if it
has sufficient liquidity and because redemptions exceeding more than
10% can occur under normal market conditions, although they are rarer
than net redemptions exceeding 4% of net assets.\150\ Some commenters
suggested that pairing a weekly liquid asset threshold with a net
redemption threshold would reduce the predictability of the liquidity
fee trigger and reduce the likelihood of preemptive redemptions in
comparison to the current rule, especially considering the effect of
removing redemption gates from the rule, which commenters suggested
were more likely to incentivize investor redemptions than liquidity
fees.\151\ Some commenters suggested a tiered approach with multiple
thresholds and fee amounts, beginning with the dual threshold of 10%
net redemptions and 30% weekly liquid assets and then using weekly
liquid asset-based thresholds to determine when to increase the fee
amount.\152\ Two commenters discussed using a tiered approach with
solely weekly liquid asset thresholds.\153\ Commenters supporting a
tiered approach generally suggested that beginning with relatively
small fee amounts may reduce investor incentives to preemptively redeem
in response to declines in liquidity in an effort to avoid a fee.\154\
Separately, some commenters suggested thresholds based on the amount of
net redemptions over multiple days to identify circumstances in which a
fund is under stress.\155\
---------------------------------------------------------------------------
\148\ See, e.g., ICI Comment Letter (suggesting that the rule
require fund boards to consider certain enumerated factors when
deciding whether to implement a liquidity fee, subject to a
determination that implementing fees is in the best interests of the
fund and its shareholders and is necessary to prevent material
dilution or other unfair results); JP Morgan Comment Letter;
Federated Hermes Comment Letter II; Invesco Comment Letter; SIFMA
AMG Comment Letter.
\149\ See, e.g., Invesco Comment Letter; IIF Comment Letter;
SIFMA AMG Comment Letter (explaining that the 10% net redemption
threshold was selected because it represents half of the commenter's
preferred 20% daily liquid asset threshold and is less likely to be
triggered by routine, expected flow activity, particularly if paired
with a liquidity threshold); ICI Comment Letter.
\150\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter.
\151\ See, e.g., IIF Comment Letter; JP Morgan Comment Letter;
BlackRock Comment Letter.
\152\ See, e.g., BlackRock Comment Letter; JP Morgan Comment
Letter; IIF Comment Letter.
\153\ See Western Asset Comment Letter (suggesting a mandatory
approach to tiered fees that would first trigger when weekly liquid
assets are below 30%); ICI Comment Letter.
\154\ See, e.g., ICI Comment Letter; Western Asset Comment
Letter; JP Morgan Comment Letter.
\155\ See, e.g., Morgan Stanley Comment Letter (suggesting a
framework in which fees would apply when net redemptions are more
than 15% over two consecutive trading days); State Street Comment
Letter (suggesting that fees should trigger if net redemptions
exceed 5% for three consecutive days and the fund has experienced an
event that requires reporting on Form N-CR).
---------------------------------------------------------------------------
After considering comments, we are adopting a 5% net redemption
threshold for mandatory liquidity fees. We recognize that some funds
would trigger the proposed 4% net redemption threshold with some
frequency under normal market conditions, particularly if the fund had
multiple NAV strikes per day and therefore used a smaller threshold for
each pricing period under the proposal. Based on historical flow data,
we estimate that an average of 4.4% of institutional prime and
institutional tax-exempt money market funds would cross a 4% net
redemption threshold on a given day.\156\ To reduce the burdens of the
liquidity fee requirement and to reduce the frequency at which the
requirement may trigger under normal market conditions, when liquidity
costs and the benefits to remaining shareholders of imposing liquidity
fees are likely small, we are increasing the threshold to 5%. We
estimate that an average of 3.2% of institutional funds would cross a
5% net redemption threshold on a given day. While funds may still cross
the 5% threshold under normal market conditions, we anticipate that a
fund's liquidity costs generally will be de minimis under those
circumstances, and the final rule will not require a fund to apply a
fee when estimated costs are de minimis.\157\ We are also making other
changes to the final rule that we believe will reduce the burdens of
determining the amount of the fee, as discussed below.
---------------------------------------------------------------------------
\156\ See infra section IV.C.4.b.i (analyzing historical daily
redemptions out of institutional prime and institutional tax-exempt
money market funds between Dec. 2016 and Oct. 2021).
\157\ See amended rule 2a-7(c)(2)(iii)(D).
---------------------------------------------------------------------------
Consistent with the swing pricing proposal, the final rule permits
a fund to use a lower net redemption threshold than is required.\158\
Allowing a fund's board (or delegate) to use a net redemption threshold
below 5% for purposes of applying mandatory fees is designed to
recognize that there may be circumstances in which a smaller threshold
would be appropriate to mitigate dilution of fund shareholders. For
example, this may be the case when
[[Page 51420]]
a fund holds a larger amount of less liquid investments or in times of
stress.
---------------------------------------------------------------------------
\158\ See amended rule 2a-7(c)(2)(ii); proposed rule 2a-
7(c)(2)(vi)(B).
---------------------------------------------------------------------------
We are not adopting an even higher net redemption threshold, or a
net redemption threshold paired with a liquidity threshold, as some
commenters suggested. While a higher net redemption threshold, such as
10%, would reduce the likelihood of a fund crossing the threshold under
normal market conditions when liquidity costs are low, it likewise
would reduce the likelihood of a liquidity fee applying in the
beginning wave of redemptions in a crisis period. For example, of the
outflows from institutional prime and tax-exempt money market funds
during the week of March 20, 2020, approximately 31% of fund days were
above the 5% threshold, but only 11% of fund days were above the 10%
threshold.\159\ If investors can redeem during the beginning stages of
a crisis with a very low likelihood of incurring a fee, that may
incentivize investors to redeem early, contributing to a first-mover
advantage. In addition, we considered the effect of different net
redemption thresholds during periods of prolonged stress, which might
have occurred in March 2020 absent government intervention, by modeling
fund portfolios and liquidity levels.\160\
---------------------------------------------------------------------------
\159\ See infra section IV.C.4.b.i (discussing this analysis and
other analyses regarding net redemption thresholds for mandatory
liquidity fees). ``Fund days'' refers to observations of daily
redemptions using a sample set of funds during a particular period
of time. Here, the fund days relate to a measure of daily outflows
during the week of Mar. 20, 2020. To illustrate the analysis, we
observed 43 institutional prime and institutional tax-exempt money
market funds over the 5 days that week. This results in 215 (= 43 x
5) fund day observations. Using a net redemption threshold of 5%, we
observed that during the week of Mar. 20 funds would have exceeded
that threshold on 31% of fund days. This means that net outflows
exceeded the 5% threshold on 67 (= 0.31 x 215) fund days during the
week of Mar. 20.
\160\ See id.
---------------------------------------------------------------------------
If we were to pair a 10% net redemption threshold with a weekly
liquid asset threshold, that would further reduce the likelihood of a
liquidity fee applying to the first wave of redemptions in a stress
period. Moreover, adding a weekly liquid asset threshold to a net
redemption threshold, or using a weekly liquid asset threshold on its
own, would allow investors to better predict when a liquidity fee may
apply, which may contribute to preemptive redemptions. Incorporating a
fund's weekly liquid assets into the liquidity fee trigger also may
incentivize fund managers to maintain weekly liquid assets above the
relevant threshold, creating a disincentive for using available
liquidity to meet redemptions and potentially contributing to dilution
of remaining shareholders through the sale of longer-term portfolio
securities in a stress period. In March 2020, we observed both of these
unintended results from the tie between liquidity fees and weekly
liquid assets in the current rule. As for a tiered approach, we
understand some commenters' views that using a weekly liquid asset
threshold to trigger a very small fee amount may be less likely to
trigger preemptive runs at the outset. However, a tiered approach that
increases the fee amount according to a specific schedule as liquidity
declines below predictable thresholds has the risk of ``cliff
effects.'' Specifically, a tiered approach may incentivize investors to
redeem before a fund crosses a lower, predictable weekly liquid asset
threshold to avoid a nonlinear jump in the fee size.
We also are not adopting other liquidity fee approaches that some
commenters suggested. A net redemption threshold based on net
redemptions over multiple trading days may lead to a threshold that is
more predictable than same day net redemptions, as funds provide
information about the prior day's net flows on their websites.\161\ In
addition, a multi-day threshold would contribute to operational
complexity if the fee applied to redemptions that trigger the fee, as a
fund would need to apply a fee to redemptions that occurred on a prior
day. Alternatively, if the fee applied to redemptions occurring after
the threshold is triggered, this approach would contribute to a first-
mover advantage, as investors redeeming at the onset of market stress
would be significantly less likely to incur a fee.
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\161\ See 17 CFR 270.2a-7(h)(10)(ii)(C).
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We also are not adopting an approach that allows funds to establish
their own criteria for triggering liquidity fees or that relies on
board considerations of certain criteria. If institutional funds were
permitted to establish their own criteria for triggering liquidity
fees, we believe they may use criteria that are unlikely to trigger
liquidity fees, particularly if they perceive the potential for
reputational harm from imposing fees. With respect to board
determinations, as discussed in the Proposing Release, we do not
believe an approach that relies on board determinations would result in
timely decisions to impose liquidity fees on days when the fund has net
redemptions that, due to associated costs to meet those redemptions,
will dilute the value of the fund for remaining shareholders.\162\ For
instance, it may take time for a fund board to convene and determine
whether to apply a liquidity fee with respect to any particular stress
event. We do not believe that these discretionary approaches would
provide an effective tool for addressing institutional shareholder
dilution and potential institutional investor incentives to redeem
quickly in times of liquidity stress to avoid further losses. Finally,
we are not adopting a threshold based on when a fund must sell
portfolio securities to satisfy redemptions because, as discussed
above, we believe such an approach overlooks the costs redeeming
investors impose by removing liquidity from the fund, including
subsequent rebalancing costs, and by increasing the likelihood that the
fund will need to sell less liquid assets to satisfy future
redemptions.
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\162\ See Proposing Release, supra note 6, at n.95 and
accompanying text.
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When a fund crosses the 5% net redemption threshold, it must apply
a liquidity fee to all shares that are redeemed at a price computed on
that day. As a result, when the 5% net redemption threshold is crossed,
the fee must be applied to all shares redeemed that day, including
redemptions that are eligible to receive a NAV computed on that day
even if received by the fund after the last pricing period of the day.
This approach will require redeeming investors who cause the fund to
exceed the threshold to bear the costs of their redemption activity,
irrespective of when they redeem during the day. This approach is
different from the current rule, which provides that default liquidity
fees begin to apply on the day after the fund has crossed the 10%
weekly liquid asset threshold. Compared to the current rule, the
approach we are adopting is designed to better align the application of
liquidity fees to those investors whose redemptions result in liquidity
costs for the fund and to reduce potential first-mover advantages. We
recognize, however, that funds and intermediaries may need to update
their systems to apply fees to redemptions on the day the net
redemption threshold is crossed.\163\
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\163\ Under the current rule, the determination to apply
discretionary liquidity fees could occur at any time during the day,
meaning that funds and intermediaries would need to begin to apply
fees to redemptions on that day. See 2014 Adopting Release, supra
note 26, at n.383 and accompanying text. It is our general
understanding, in light of the current rule, that there has been an
industry expectation that a fund board would determine to impose
discretionary fees after the end of a trading day, such that
discretionary fees would begin to apply on the next morning.
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[[Page 51421]]
Consistent with the final rule, the proposed swing pricing
requirement would have applied a charge to redeeming investors who
caused the fund to have net redemptions. However, the design of the net
redemption threshold in the final rule is somewhat different from the
proposal, which would have applied a charge to redeeming investors
based on net redemption activity for each pricing period if a fund had
multiple NAV strikes per day. Some commenters expressed concern about
separately analyzing flows for each pricing period under the proposal.
For example, some commenters stated that institutional money market
fund investors tend to redeem in the morning and move remaining cash
back into the fund toward the end of the day, making it more likely
that funds would need to apply swing pricing in the morning even if
investor activity for the day, on net, would not cross a
threshold.\164\ Some commenters expressed concern about potentially
needing to calculate liquidity costs and apply a charge multiple times
a day.\165\ In addition, some commenters suggested that it would be
particularly difficult to calculate liquidity costs under a tightly
compressed timeline, which is especially a concern for funds that offer
same-day settlement since the swing pricing adjustment had to occur
before a fund published its NAV.\166\
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\164\ See, e.g., Invesco Comment Letter; Western Asset Comment
Letter; SIFMA AMG Comment Letter; BlackRock Comment Letter.
\165\ See, e.g., Northern Trust Comment Letter; U.S. Chamber of
Commerce Comment Letter; Invesco Comment Letter; ABA Comment Letter
I; IIF Comment Letter; Mutual Fund Directors Forum Comment Letter.
\166\ See, e.g., SIFMA AMG Comment Letter; BlackRock Comment
Letter; Capital Group Comment Letter.
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The final rule will not distinguish between flows for different
pricing periods during the day and, instead, will apply a fee to all
investors who redeemed on that day if the threshold is crossed. This
addresses commenters' concerns about applying a threshold to individual
pricing periods during the day and reduces burdens by requiring no more
than one liquidity fee determination per day. We recognize, however,
that the requirement to apply a liquidity fee to all shares redeemed on
the day the 5% threshold is crossed will likely require some
adjustments for funds that offer multiple NAV strikes per day.\167\
Specifically, we recognize that an investor may redeem at a pricing
period in the morning or early afternoon, before the fund knows that it
has crossed the 5% threshold for the day. Under these circumstances,
the final rule will necessitate a fund that offers multiple NAV strikes
to develop a method for applying the fee to shares redeemed in an
earlier pricing period on that day. Funds might take different
approaches to address this issue. For instance, among other potential
approaches, the fund might apply the liquidity fee charge to the
remaining balance in an investor's account if the investor did not
redeem the full amount of its shares in the fund. Another approach
would be to hold back a portion of the redemption proceeds until the
end of the day when the liquidity fee determination is made.\168\
Alternatively, a fund might develop a mechanism for taking back a
portion of redemption proceeds that the investor has already received.
Further, while not required, some funds might choose to reduce the
number of NAV strikes they offer or no longer offer multiple NAV
strikes for operational ease.\169\ Funds and intermediaries may also
develop other approaches to address this issue. Depending on a given
fund's approach, a redeeming investor may experience a reduction in its
access to liquidity relative to current practices. In addition,
different approaches may have differing effects on investors or raise
tax or other considerations. Overall, we believe it is unlikely that
the mandatory liquidity fee would result in a redeeming investor being
unable to access same-day liquidity.\170\
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\167\ See infra section IV.C.4.b.ii.
\168\ See BlackRock Comment Letter (stating that, under its
preferred liquidity fee framework, it would plan for its multi-
strike NAV funds to pay out a portion of redemption proceeds after
each intraday NAV is struck, with the remaining redemption proceeds
paid out after the close if no fee is required or reduced by the fee
if a fee is required).
\169\ See infra section IV.C.4.b.ii.
\170\ See id.
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Some commenters questioned the fairness of applying a charge to
certain types of investors who redeem on a given day. For instance,
some commenters suggested that it would be unfair to apply a charge to
investors who redeem and later purchase an identically sized investment
on the same day, because these investors would incur costs despite
having no net effect on liquidity.\171\ One commenter suggested that it
would be unfair for a shareholder redeeming a relatively small number
of shares to be charged a liquidity fee because another shareholder
redeemed a large number of shares and triggered the threshold.\172\
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\171\ See, e.g., Federated Hermes Comment Letter I; Allspring
Funds Comment Letter; Americans for Tax Reform Comment Letter.
\172\ See Dechert Comment Letter.
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With respect to the application of a fee to an investor who has
both redeemed and purchased the fund's shares on the relevant day, the
final rule would permit funds to apply liquidity fees based on an
investor's net transaction activity for that day. The current rule
likewise provides this flexibility.\173\ When the Commission adopted
the liquidity fee framework in the current rule, however, several
commenters suggested that it may be too operationally difficult and
costly for funds to apply liquidity fees to shareholders based on their
net activity for the day. As a result, while we are permitting a fund
to apply fees based on a shareholder's net activity, this approach is
not required, and a fund could instead apply liquidity fees to each
redemption separately. As for the application of a liquidity fee to
small redemptions, the final rule will require application of liquidity
fees regardless of the size of the redemption. Consistent with the
Commission's views in 2014 with respect to the current rule's liquidity
fee framework, an exception from the mandatory liquidity fee for small
redemptions would increase the cost and complexity of the amendments
and could facilitate gaming on the part of investors because investors
could attempt to fit their redemptions within the scope of an
exception.\174\
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\173\ See 2014 Adopting Release, supra note 26, at paragraph
accompanying n. 380.
\174\ See id. at section III.C.7.a (stating that such an
exception for small redemptions would add cost and complexity both
as an operational matter--for example, fund groups would need to be
able to separately track which shares are subject to a fee and which
are not, and create the system and policies to do so--and in terms
of ease of shareholder understanding).
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Under the final rule, to determine whether a fund has crossed the
5% threshold, the fund will use information about its net flows for the
day that are available within a reasonable period of time after the
last pricing time of that day.\175\ For example, if the fund's last NAV
strike is as of 3 p.m., it would calculate its net flows within a
reasonable time period thereafter such that the fund can calculate and
apply any fee as of that day. The fund's approach to determining when
to calculate net flows should be in its board-approved guidelines on
the application of liquidity fees.\176\ In determining when to
calculate its net flows, a fund should consider historical data on when
it typically receives flow
[[Page 51422]]
information and may also consider the period of time needed to
calculate and apply fees. For example, if a fund generally receives
substantially all of its flows by 5 p.m. and the process for
determining the fee amount will take up to one hour, the rule would not
require the fund to wait until 6 p.m. to calculate its net flows if, by
6 p.m., the fund typically has an even larger percentage of its flows.
Using the same example, it would not be reasonable for this fund to
calculate its net flows at 3:30 p.m., when it generally has less than a
majority of its net flows by this time, given that the fund can
reasonably expect, based on historical data, to have more net flow
information by 5 p.m. and still be able to calculate and apply any fee
as of that later time. This approach is designed to provide a fund with
flexibility to calculate daily flows using the best information
available to the fund while still being able to offer same-day
settlement. Consistent with the proposal and with 17 CFR 270.18f-3
(``rule 18f-3''), an institutional fund with multiple share classes
must include net flow activity across all share classes in the
aggregate when determining if the fund has crossed the 5% threshold,
rather than applying the threshold on a class by class basis.\177\
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\175\ See amended rule 2a-7(c)(2)(ii).
\176\ See infra section II.B.2.b (discussing liquidity fee
guidelines that the fund's board must approve if it delegates its
responsibility for liquidity fee determinations to the fund's
investment adviser or officers).
\177\ See Proposing Release, supra note 6, at n. 112 and
accompanying text.
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Some commenters stated that it may be difficult for funds to
receive sufficient flow information to implement swing pricing.\178\ A
few commenters suggested that using estimates of flows for swing
pricing would raise potential NAV error and liability concerns.\179\ A
few commenters suggested that funds may need to establish earlier cut-
off times for receiving investor orders.\180\ As discussed below, t 
