On July 23, 2014, the Securities and Exchange Commission (SEC) adopted new rules related to the governance of money market mutual funds regulated under rule 2a-7 of the Investment Company Act of 1940. This category includes registered money market mutual funds, generally those with ticker symbols for trading, not bank money market funds. These SEC rule amendments are designed to reduce money market fund liquidity risk during times of market stress—as witnessed most dramatically in 2008—and are a follow-up to the money market reforms issued in January 2010.
You may recall that money market funds have been the subject of legislative and regulatory scrutiny and action since 2008 when the Reserve Primary Money Market Fund “broke the buck,” meaning its net asset value (NAV) fell below $1. To date, government intervention has ranged from a temporary guaranteed program in 2008 to SEC reform in January 2010 which set tighter parameters for money market mutual funds related to portfolio liquidity, diversification, and credit quality.
The money market rules passed on July 23 are intended to further bolster money market fund liquidity by mandating the following:
• Floating NAV. All institutional, prime money market funds (including institutional municipal money market mutual funds) must switch to a floating NAV share price rather than a fixed $1. Prime money market funds are funds that invest in short-term obligations including debt issued by corporations and banks and asset-backed commercial paper, in addition to U.S. government securities. Their share prices must be rounded to the fourth decimal place (e.g. $1.0000). Prior to these amendments, under rule 2a-7, money market mutual funds were allowed to maintain a $1 NAV as long as the market price did not fluctuate more than half of a cent (e.g. $0.9950 would be reported as $1).
– Government money market funds will be exempt from this requirement. A government money market fund is defined as any money market fund that holds at least 99.5 percent of its assets in cash, securities backed by the full faith and credit of the U.S. government, or repurchase agreements collateralized with government securities.
– Retail money market funds are also exempt from this requirement. A retail money market fund is a money market fund that is reasonably designed for the sole benefit of “natural persons,” rather than corporations, trusts, or other institutional investors.