SEC Passes New Money Market Fund Rules: Swing Pricing is Out and Mandatory Liquidity Fees are In

By: Max Black, Michael Davalla and Cal Gilmartin

On July 12, 2023 the SEC adopted rules applicable to money market funds (“MMFs”). The new rules change: (i) liquidity thresholds; (ii) liquidity fees and redemption gates; (iii) options for responding to negative interest rate environments; and (iv) reporting obligations. Importantly, the SEC declined to impose swing pricing mechanisms on MMFs depending on their net redemptions. The new rules institute mandatory liquidity fees for institutional prime funds and institutional tax exempt funds.

Under the new rules, MMFs must hold at least 25% of their assets in daily liquid assets and 50% of their assets in weekly liquid assets, as opposed to the current requirements of 10% and 30%, respectively. In addition, the link between weekly liquid assets and liquidity fees and redemption gates has been removed. The SEC also removed the ability to impose temporary gates to suspend redemptions. The SEC has acknowledged that these “fees and gates” contributed to heavy fund outflows during times of market stress.

Furthermore, institutional prime and institutional tax-exempt money market funds will now be required to impose liquidity fees when a fund has daily net redemptions that exceed 5% of net assets (unless liquidity costs are de minimis). For non-government MMFs, liquidity fees may be imposed if the fund’s board determines that a fee is in the best interest of the fund. The SEC has adopted these liquidity fee requirements in lieu of imposing swing pricing as was originally proposed.

In addition, in a negative interest rate environment, the new rules allow a stable NAV MMF to convert to a floating NAV MMF or reduce the number of outstanding shares if the fund’s yield becomes negative. This is in contrast to the proposed rule which would have required funds to convert to a floating share price and prohibited the use of such mechanisms to maintain a stable net asset value per share.

Finally, the new rules amend Forms N-CR, N-MFP, and PF to improve the availability and reporting of information related to MMFs.

K&L Gates will be publishing additional alerts providing a more detailed analysis of the final rules. For further information, reach out to Jon-Luc Dupuy at Jon-Luc.Dupuy@klgates.com. Here is a link to the final rule.