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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 239, 270, 274 and 279

Release No. 33-9616, IA-3879; IC-31166; FR-84; File No. S7-03-13

RIN 3235-AK61

Money Market Fund Reform; Amendments to Form PF

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange Commission (“Commission” or “SEC”) is adopting

amendments to the rules that govern money market mutual funds (or “money market funds”)

under the Investment Company Act of 1940 (“Investment Company Act” or “Act”). The

amendments are designed to address money market funds’ susceptibility to heavy redemptions in

times of stress, improve their ability to manage and mitigate potential contagion from such

redemptions, and increase the transparency of their risks, while preserving, as much as possible,

their benefits. The SEC is removing the valuation exemption that permitted institutional nongovernment money market funds (whose investors historically have made the heaviest

redemptions in times of stress) to maintain a stable net asset value per share (“NAV”), and is

requiring those funds to sell and redeem 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), i.e.,

transact at a “floating” NAV. The SEC also is adopting amendments that will give the boards of

directors of money market funds new tools to stem heavy redemptions by giving them discretion

to impose a liquidity fee if a fund’s weekly liquidity level falls below the required regulatory

threshold, and giving them discretion to suspend redemptions temporarily, i.e., to “gate” funds,

under the same circumstances. These amendments will require all non-government money

market funds to impose a liquidity fee if the fund’s weekly liquidity level falls below a

designated threshold, unless the fund’s board determines that imposing such a fee is not in the

best interests of the fund. In addition, the SEC is adopting amendments designed to make money

market funds more resilient by increasing the diversification of their portfolios, enhancing their

stress testing, and improving transparency by requiring money market funds to report additional

information to the SEC and to investors. Finally, the amendments require investment advisers to

certain large unregistered liquidity funds, which can have many of the same economic features as

money market funds, to provide additional information about those funds to the SEC.

DATES:

Effective Date: October 14, 2014

Compliance Dates: The applicable compliance dates are discussed in section

III.N. of the Release titled “Compliance Dates.”

FOR FURTHER INFORMATION CONTACT: Adam Bolter, Senior Counsel; Amanda

Hollander Wagner, Senior Counsel; Andrea Ottomanelli Magovern, Senior Counsel; Erin C.

Loomis, Senior Counsel; Kay-Mario Vobis, Senior Counsel; Thoreau A. Bartmann, Branch

Chief; Sara Cortes, Senior Special Counsel; or Sarah G. ten Siethoff, Assistant Director,

Investment Company Rulemaking Office, at (202) 551-6792, Division of Investment

Management, Securities and Exchange Commission, 100 F Street, NE, Washington, DC

20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to rules

419 [17 CFR 230.419] and 482 [17 CFR 230.482] under the Securities Act of 1933 [15 U.S.C.

77a – z-3] (“Securities Act”), rules 2a-7 [17 CFR 270.2a-7], 12d3-1 [17 CFR 270.12d3-1], 18f-3

[17 CFR 270.18f-3], 22e-3 [17 CFR 270.22e-3], 30b1-7 [17 CFR 270.30b1-7], 31a-1 [17 CFR

270.31a-1], and new rule 30b1-8 [17 CFR 270.30b1-8] under the Investment Company Act of

1940 [15 U.S.C. 80a], Form N-1A under the Investment Company Act and the Securities Act,

Form N-MFP under the Investment Company Act, and section 3 of Form PF under the

Investment Advisers Act [15 U.S.C. 80b], and new Form N-CR under the Investment Company

Act. 1

TABLE OF CONTENTS

II.

III.

INTRODUCTION .................................................................................................................... 6

BACKGROUND .................................................................................................................... 15

Role of Money Market Funds ................................................................................15

Certain Economic Features of Money Market Funds ............................................16

Money Market Fund Investors’ Desire to Avoid Loss .............................. 17

Liquidity Risks........................................................................................... 18

Valuation and Pricing Methods ................................................................ 19

Investors’ Misunderstanding about the Actual Risk of Investing in Money

Market Funds ............................................................................................ 22

Effects on Other Money Market Funds, Investors, and the ShortTerm Financing Markets ........................................................................................25

The Financial Crisis ...............................................................................................29

Examination of Money Market Fund Regulation since the

Financial Crisis ......................................................................................................33

The 2010 Amendments .............................................................................. 33

The Eurozone Debt Crisis and U.S. Debt Ceiling Impasses of 2011 and

2013........................................................................................................... 35

Continuing Consideration of the Need for Additional Reforms................ 37

DISCUSSION ....................................................................................................................... 39

Liquidity Fees and Redemption Gates ...................................................................39

Analysis of Certain Effects of Fees and Gates .......................................... 41

Terms of Fees and Gates........................................................................... 77

Exemptions to Permit Fees and Gates .................................................... 112

Amendments to Rule 22e-3...................................................................... 114

Unless otherwise noted, all references to statutory sections are to the Investment Company Act, and all

references to rules under the Investment Company Act, including rule 2a-7, will be to Title 17, Part 270 of

the Code of Federal Regulations, 17 CFR Part 270.

Operational Considerations Relating to Fees and Gates ....................... 116

Tax Implications of Liquidity Fees ......................................................... 129

Accounting Implications ......................................................................... 133

Floating Net Asset Value .....................................................................................135

Introduction............................................................................................. 135

Summary of the Floating NAV Reform ................................................... 142

Certain Considerations Relating to the Floating NAV Reform .............. 144

Money Market Fund Pricing................................................................... 157

Amortized Cost and Penny Rounding for Stable NAV Funds ................. 168

Tax and Accounting Implications of Floating NAV Money Market Funds

................................................................................................................. 171

Rule 10b-10 Confirmations ..................................................................... 179

Operational Implications of Floating NAV Money Market Funds ......... 182

Transition ................................................................................................ 199

Effect on Certain Types of Money Market Funds and Other

Entities .................................................................................................................202

Government Money Market Funds ......................................................... 202

Retail Money Market Funds.................................................................... 213

Municipal Money Market Funds ............................................................. 243

Implications for Local Government Investment Pools............................ 258

Unregistered Money Market Funds Operating Under Rule 12d1-1 ....... 261

Master/Feeder Funds – Fees and Gates Requirements .......................... 267

Application of Fees and Gates to Other Types of Funds and Certain

Redemptions ............................................................................................ 268

Guidance on the Amortized Cost Method of Valuation and Other

Valuation Concerns ..............................................................................................277

Use of Amortized Cost Valuation............................................................ 278

Other Valuation Matters ......................................................................... 281

Amendments to Disclosure Requirements ..........................................................288

Required Disclosure Statement ............................................................... 288

Disclosure of Tax Consequences and Effect on Fund Operations—

Floating NAV .......................................................................................... 300

Disclosure of Transition to Floating NAV .............................................. 302

Disclosure of the Effects of Fees and Gates on Redemptions ................. 302

Historical Disclosure of Liquidity Fees and Gates................................. 306

Prospectus Fee Table .............................................................................. 314

Historical Disclosure of Affiliate Financial Support .............................. 315

Economic Analysis .................................................................................. 325

Website Disclosure.................................................................................. 335

Form N-CR ..........................................................................................................374

Introduction............................................................................................. 374

Part B: Defaults and Events of Insolvency ............................................. 376

Part C: Financial Support ...................................................................... 379

Part D: Declines in Shadow Price .......................................................... 393

Parts E, F, and G: Imposition and Lifting of Liquidity Fees and Gates. 398

Part H: Optional Disclosure................................................................... 407

Timing of Form N-CR ............................................................................. 408

Economic Analysis .................................................................................. 413

Amendments to Form N-MFP Reporting Requirements .....................................435

Amendments Related to Rule 2a-7 Reforms ............................................ 437

New Reporting Requirements ................................................................. 443

Clarifying Amendments ........................................................................... 458

Public Availability of Information .......................................................... 462

Operational Implications of the N-MFP Amendments ........................... 464

Amendments to Form PF Reporting Requirements .............................................466

Overview of Proposed Amendments to Form PF ................................... 469

Utility of New Information, Including Benefits, Costs, and Economic

Implications............................................................................................. 475

Diversification......................................................................................................486

Treatment of Certain Affiliates for Purposes of Rule 2a-7’s Five Percent

Issuer Diversification Requirement ........................................................ 488

ABS – Sponsors Treated as Guarantors ................................................. 506

The Twenty-Five Percent Basket ............................................................ 517

Amendments to Stress Testing Requirements .....................................................552

Overview of Current Stress Testing Requirements and Proposed

Amendments ............................................................................................ 553

Stress Testing Metrics ............................................................................. 556

Hypothetical Events Used in Stress Testing............................................ 566

Board Reporting Requirements............................................................... 583

Dodd-Frank Mandated Stress Testing ................................................... 587

Economic Analysis .................................................................................. 588

Certain Macroeconomic Consequences of the New Amendments ......................593

Effect on Current Investors in Money Market Funds ............................. 596

Efficiency, Competition and Capital Formation Effects on the Money

Market Fund Industry ............................................................................. 616

Effect of Reforms on Investment Alternatives, and the Short-Term

Financing Markets .................................................................................. 622

Certain Alternatives Considered ..........................................................................643

Liquidity Fees, Gates, and Floating NAV Alternatives........................... 644

Alternatives in the FSOC Proposed Recommendations.......................... 665

Alternatives in the PWG Report .............................................................. 687

Clarifying Amendments .......................................................................................701

Definitions of Daily Liquid Assets and Weekly Liquid Assets ................ 703

Definition of Demand Feature ................................................................ 707

Short-Term Floating Rate Securities ...................................................... 709

Second Tier Securities............................................................................. 712

Compliance Dates ................................................................................................713

Compliance Date for Amendments Related to Liquidity Fees and Gates713

Compliance Date for Amendments Related to Floating NAV................. 715

Compliance Date for Rule 30b1-8 and Form N-CR ............................... 716

Compliance Date for Diversification, Stress Testing, Disclosure, Form

PF, Form N-MFP, and Clarifying Amendments ..................................... 718

IV.

PAPERWORK REDUCTION ACT ......................................................................................... 720

Rule 2a-7 ..............................................................................................................722

Asset-Backed Securities .......................................................................... 723

Retail and Government Funds ................................................................ 727

Board Determinations – Fees and Gates ................................................ 730

Notice to the Commission ....................................................................... 733

Stress Testing .......................................................................................... 734

Website Disclosure.................................................................................. 740

Total Burden for Rule 2a-7 ..................................................................... 754

Rule 22e-3 ............................................................................................................755

Rule 30b1-7 and Form N-MFP ............................................................................757

Discussion of Final Amendments ............................................................ 757

Current Burden ....................................................................................... 759

Change in Burden ................................................................................... 759

Rule 30b1-8 and Form N-CR...............................................................................763

Discussion of New Reporting Requirements ........................................... 763

Estimated Burden .................................................................................... 765

Rule 34b-1(a) .......................................................................................................779

Rule 482 ...............................................................................................................780

Form N-1A ...........................................................................................................782

Advisers Act Rule 204(b)-1 and Form PF ...........................................................791

Discussion of Amendments ..................................................................... 792

Current Burden ....................................................................................... 793

Change in Burden ................................................................................... 794

REGULATORY FLEXIBILITY ACT CERTIFICATION ............................................................ 797

VI.

UPDATE TO CODIFICATION OF FINANCIAL REPORTING POLICIES ..................................... 800

VII. STATUTORY AUTHORITY ................................................................................................. 801

TEXT OF RULES AND FORMS ............................................................................................... 802

INTRODUCTION

Money market funds are a type of mutual fund registered under the Investment Company

Act and regulated pursuant to rule 2a-7 under the Act. 2 Money market funds generally pay

dividends that reflect prevailing short-term interest rates, are redeemable on demand, and, unlike

Money market funds are also sometimes called “money market mutual funds” or “money funds.”

other investment companies, seek to maintain a stable NAV, typically $1.00. 3 This combination

of principal stability, liquidity, and payment of short-term yields has made money market funds

popular cash management vehicles for both retail and institutional investors. As of February 28,

2014, there were approximately 559 money market funds registered with the Commission, and

these funds collectively held over $3.0 trillion of assets. 4

Absent an exemption, as required by the Investment Company Act, all registered mutual

funds must price and transact in their shares at the current NAV, calculated by valuing portfolio

instruments at market value or, if market quotations are not readily available, at fair value as

determined in good faith by the fund’s board of directors (i.e., use a floating NAV). 5 In 1983,

the Commission codified an exemption to this requirement allowing money market funds to

value their portfolio securities using the “amortized cost” method of valuation and to use the

“penny-rounding” method of pricing. 6 Under the amortized cost method, a money market fund’s

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)] (“1983 Adopting Release”). Most money market funds seek

to maintain a stable NAV of $1.00, but a few seek to maintain a stable NAV of a different amount, e.g.,

$10.00. For convenience, throughout this Release, the discussion will simply refer to the stable NAV of

$1.00 per share.

Based on Form N-MFP data. SEC regulations require that money market funds report certain portfolio

information on a monthly basis to the SEC on Form N-MFP. See rule 30b1-7.

See section 2(a)(41)(B) of the Act and rules 2a-4 and 22c-1. The Commission, however, has stated that it

would not object if a mutual fund board of directors determines, in good faith, that the value of debt

securities with remaining maturities of 60 days or less is their amortized cost, unless the particular

circumstances warrant otherwise. See Accounting Series Release No. 219, Valuation of Debt Instruments

by Money Market Funds and Certain Other Open- End Investment Companies, Financial Reporting

Codification (CCH) section 404.05.a and .b (May 31, 1977) (“ASR 219”). We further discuss the use of

amortized cost valuation by mutual funds in section III.B.5 below.

See 1983 Adopting Release, supra note 3. Section 6(c) of the Investment Company Act provides the

Commission with broad authority to exempt persons, securities or transactions from any provision of the

Investment Company Act, or the regulations thereunder, if, and to the extent that such exemption is in the

public interest and consistent with the protection of investors and the purposes fairly intended by the policy

and provisions of the Investment Company Act. See Commission Policy and Guidelines for Filing of

portfolio securities generally are valued at cost plus any amortization of premium or

accumulation of discount, rather than at their value based on current market factors. 7 The penny

rounding method of pricing permits a money market fund when pricing its shares to round the

fund’s NAV to the nearest one percent (i.e., the nearest penny). 8 Together, these valuation and

pricing techniques create a “rounding convention” that permits a money market fund to sell and

redeem shares at a stable share price without regard to small variations in the value of the

securities in its portfolio. 9 Other types of mutual funds not regulated by rule 2a-7 generally must

calculate their daily NAVs using market-based factors and cannot use penny rounding.

When the Commission initially established the regulatory framework allowing money

market funds to maintain a stable share price through use of the amortized cost method of

valuation and/or the penny rounding method of pricing (so long as they abided by certain risklimiting conditions), it did so understanding the benefits that stable value money market funds

provided as a cash management vehicle, particularly for smaller investors, and focused on

minimizing dilution of assets and returns for shareholders. 10 At that time, the Commission was

Applications for Exemption, SEC Release No. IC-14492 (Apr. 30, 1985).

See current rule 2a-7(a)(2). See also supra note 5. Throughout this Release when we refer to a rule as it

exists prior to any amendments we are making today it is described as a “current rule” while references to a

rule as amended (or one that is not being amended today) are to “rule.”

See current rule 2a-7(a)(20).

Today, money market funds use a combination of the two methods so that, under normal circumstances,

they can use the penny rounding method to maintain a price of $1.00 per share without pricing to the third

decimal place like other mutual funds, and use the amortized cost method so that they need not strike a

daily market-based NAV to facilitate intra-day transactions. See infra section III.A.1.a.

See Proceedings before the Securities and Exchange Commission in the Matter of InterCapital Liquid Asset

Fund, Inc. et al., 3-5431, Dec. 28, 1978, at 1533 (Statement of Martin Lybecker, Division of Investment

Management at the Securities and Exchange Commission) (stating that Commission staff had learned over

the course of the hearings the strong preference of money market fund investors to have a stable share price

and that with the right risk-limiting conditions, the Commission could limit the likelihood of a deviation

persuaded that deviations of a magnitude that would cause material dilution generally would not

occur given the risk-limiting conditions of the exemptive rule. 11 As discussed throughout this

Release, our historical experience with these funds, and the events of the 2007-2009 financial

crisis 12, has led us to re-evaluate the exemptive relief provided under rule 2a-7, including the

exemption from the statutory floating NAV for some money market funds.

Under rule 2a-7, money market funds seek to maintain a stable share price by limiting

their investments to short-term, high-quality debt securities that fluctuate very little in value

under normal market conditions. In exchange for the ability to rely on the exemptions provided

by rule 2a-7, money market funds are subject to conditions designed to limit deviations between

the fund’s $1.00 stable share price and the market-based NAV of the fund’s portfolio. 13 Rule 2a7 requires that money market funds maintain a significant amount of liquid assets and invest in

securities that meet the rule’s credit quality, maturity, and diversification requirements. 14 For

example, a money market fund’s portfolio securities must meet certain credit quality standards,

from that stable value, addressing Commission concerns about dilution); 1983 Adopting Release, supra

note 3, at nn.42-43 and accompanying text (“[T]he provisions of the rule impose obligations on the board

of directors to assess the fairness of the valuation or pricing method and take appropriate steps to ensure

that shareholders always receive their proportionate interest in the money market fund.”).

See id., at nn.41-42 and accompanying text (noting that witnesses from the original money market fund

exemptive order hearings testified that the risk-limiting conditions, short of extraordinarily adverse

conditions in the market, should ensure that a properly managed money market fund should be able to

maintain a stable price per share and that rule 2a-7 is based on that representation).

Throughout this release, unless indicated otherwise, when we use the term “financial crisis” we are

referring to the financial crisis that took place between 2007 and 2009.

Throughout this Release, we generally use the term “stable share price” to refer to the stable share price

that money market funds seek to maintain and compute for purposes of distribution, redemption, and

repurchases of fund shares.

See current rule 2a-7(c)(2), (3), (4), and (5).

such as posing minimal credit risks. 15 The rule also places restrictions on the remaining maturity

of securities in the fund’s portfolio to limit the interest rate and credit spread risk to which a

money market fund may be exposed. A money market fund generally may not acquire any

security with a remaining maturity greater than 397 days, the dollar-weighted average maturity

of the securities owned by the fund may not exceed 60 days, and the fund’s dollar-weighted

average life to maturity may not exceed 120 days. 16 Money market funds also must maintain

sufficient liquidity to meet reasonably foreseeable redemptions, generally must invest at least

10% of their portfolios in assets that can provide daily liquidity, and invest at least 30% of their

portfolios in assets that can provide weekly liquidity, as defined under the rule. 17 Finally, rule

2a-7 also requires money market funds to diversify their portfolios by generally limiting the

funds to investing no more than 5% of their portfolios in any one issuer and no more than 10% of

their portfolios in securities issued by, or subject to guarantees or demand features (i.e., puts)

from, any one institution. 18

Rule 2a-7 also includes certain procedural standards overseen by the fund’s board of

directors. These include the requirement that the fund periodically calculate the market-based

value of the portfolio (“shadow price”) 19 and compare it to the fund’s stable share price; if the

See current rule 2a-7(a)(12), (c)(3)(i).

Current Rule 2a-7(c)(2).

See current rule 2a-7(c)(5). As we discussed when we amended rule 2a-7 in 2010, the 10% daily liquid

asset requirement does not apply to tax-exempt funds. See Money Market Fund Reform, Investment

Company Act Release No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (“2010 Adopting

Release”). See infra section III.E.3.

See current rule 2a-7(c)(4). Because of limited availability of the securities in which they invest,

tax-exempt funds have different diversification requirements under rule 2a-7 than other money market

funds.

See current rule 2a-7(c)(8)(ii)(A).

deviation between these two values exceeds ½ of 1 percent (50 basis points), the fund’s board of

directors must consider what action, if any, should be taken by the board, including whether to

re-price the fund’s securities above or below the fund’s $1.00 share price (an event colloquially

known as “breaking the buck”). 20

Different types of money market funds have been introduced to meet the different needs

of money market fund investors. Historically, most investors have invested in “prime money

market funds,” which generally hold a variety of taxable short-term obligations issued by

corporations and banks, as well as repurchase agreements and asset-backed commercial paper. 21

“Government money market funds” principally 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. Some government money

market funds limit their holdings to only U.S. Treasury obligations or repurchase agreements

collateralized by U.S. Treasury securities and are called “Treasury money market funds.”

Compared to prime funds, government and Treasury money market funds generally offer greater

safety of principal but historically have paid lower yields. “Tax-exempt money market funds”

primarily hold obligations of state and local governments and their instrumentalities, and pay

See current rule 2a-7(c)(8)(ii)(A) and (B). Regardless of the extent of the deviation, rule 2a-7 imposes on

the board of a money market fund a duty to take 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.

Current rule 2a-7(c)(8)(ii)(C). In addition, the money market fund can use the amortized cost or pennyrounding methods only as long as the board of directors believes that they fairly reflect the market-based

NAV. See rule 2a-7(c)(1).

See INVESTMENT COMPANY INSTITUTE, 2014 INVESTMENT COMPANY FACT BOOK, at 196, Table 37 (2014),

available at http://www.ici.org/pdf/2014_factbook.pdf.

interest that is generally exempt from federal income tax. 22

We first begin by reviewing the role of money market funds and the benefits they provide

investors. We then review the economics of money market funds. This includes a discussion of

several features of money market funds that, when combined, can create incentives for fund

shareholders to redeem shares during periods of stress, as well as the potential impact that such

redemptions can have on the fund and the markets that provide short-term financing. 23 We then

discuss money market funds’ experience during the financial crisis against this backdrop. We

next analyze our 2010 reforms and their impact on the heightened redemption activity during the

2011 Eurozone sovereign debt crisis and 2011 and 2013 U.S. debt ceiling impasses.

We used the analyses available to us, including the critically important analyses

contained in the report responding to certain questions posed by Commissioners Aguilar,

Paredes, and Gallagher (“DERA Study”) 24, in designing the reform proposals that we issued in

2013 for additional regulation of money market funds. 25 The 2013 proposal sought to address

certain features in money market funds that can make them susceptible to heavy redemptions, by

providing money market funds with better tools to manage and mitigate potential contagion from

Unless the context indicates otherwise, references to “prime funds” throughout this Release include funds

that are often referred to as “tax-exempt” or “municipal” funds. We discuss the particular features of such

tax-exempt funds and why they are included in our reforms in detail in section III.C.3.

Throughout this Release, we generally refer to “short-term financing markets” to describe the markets for

short-term financing of corporations, banks, and governments.

See Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher, a report by staff of

the Division of Risk, Strategy, and Financial Innovation (Nov. 30, 2012), available at

http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf. The Division of Risk,

Strategy, and Financial Innovation (“RSFI”) is now known as the Division of Economic and Risk Analysis

(“DERA”), and accordingly we are no longer referring to this study as the “RSFI Study” as we did in the

Proposing Release, but instead as the “DERA Study.”

See Money Market Fund Reform; Amendments to Form PF, Release Nos. 33-9408; IA-3616; IC-30551

(June 5, 2013) [78 FR 36834, (June 19, 2013)] (“Proposing Release”).

high levels of redemptions, increasing the transparency of their risks, and improving risk sharing

among investors, and also to preserve the ability of money market funds to function as an

effective and efficient cash management tool for investors,. 26

We received over 1,400 comments 27 on the proposal from a variety of interested parties

including money market funds, investors, banks, investment advisers, government

representatives, academics, and others. 28 As discussed in greater detail in each section of this

Release below, these commenters expressed a diversity of views. Many commenters expressed

concern about the consequences of requiring a floating NAV for certain money market funds,

suggesting, among other reasons, that it was a significant reform that would remove one of the

most desirable features of these funds, and would impose numerous costs and operational

burdens. However, others expressed support, noting that it was a targeted solution aimed at

curbing the risks associated with the money market funds most susceptible to destabilizing runs.

Most commenters supported requiring the imposition of liquidity fees and redemption gates in

certain circumstances, suggesting that they would prevent runs at a minimal cost. However,

commenters also noted that fees and gates alone would not resolve certain of the features of

money market funds that can incentivize heavy redemptions. Many commenters opposed

combining the two alternatives into a single package, arguing that requiring money market funds

to implement both reforms could decrease the utility of money market funds to investors.

The 2013 proposal also included amendments that would apply under each alternative, with additional

changes to money market fund disclosure, diversification limits, and stress testing, among other reforms.

See Proposing Release, supra note 25. We discuss these amendments below.

Of these, more than 230 were individualized letters, and the rest were one of several types of form letters.

Unless otherwise stated, all references to comment letters in this Release are to letters submitted on the

Proposing Release in File No. S7-03-13 and are available at http://www.sec.gov/comments/s7-0313/s70313.shtml.

Commenters generally supported many of the other reforms we proposed, such as enhanced

disclosure, new portfolio reporting requirements for large unregistered liquidity funds, and

amendments to fund diversification requirements.

Today, after consideration of the comments received, we are removing the valuation

exemption that permits institutional non-government money market funds (whose investors have

historically made the heaviest redemptions in times of market stress) to maintain a stable NAV,

and are requiring those funds 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), i.e., transact at a “floating” NAV. We also are adopting amendments that will give the

boards of directors of money market funds new tools to stem heavy redemptions by giving them

discretion to impose a liquidity fee of no more than 2% if a fund’s weekly liquidity level falls

below the required regulatory amount, and are giving them discretion to suspend redemptions

temporarily, i.e., to “gate” funds, under the same circumstances. These amendments will require

all non-government money market funds to impose a liquidity fee of 1% if the fund’s weekly

liquidity level falls below 10% of total assets, unless the fund’s board determines that imposing

such a fee is not in the best interests of the fund (or that a higher fee up to 2% or a lower fee is in

the best interests of the fund). In addition, we are adopting amendments designed to make

money market funds more resilient by increasing the diversification of their portfolios,

enhancing their stress testing, and increasing transparency by requiring them to report additional

information to us and to investors. Finally, the amendments require investment advisers to

certain large unregistered liquidity funds, which can have similar economic features as money

market funds, to provide additional information about those funds to us. 29

II.

BACKGROUND

Role of Money Market Funds

As we discussed in the Proposing Release, the combination of principal stability,

liquidity, and short-term yields offered by money market funds, which is unlike that offered by

other types of mutual funds, has made money market funds popular cash management vehicles

for both retail and institutional investors. 30 Money market funds’ ability to maintain a stable

share price contributes to their popularity. The funds’ stable share price facilitates their role as a

cash management vehicle, provides tax and administrative convenience to both money market

funds and their shareholders, and enhances money market funds’ attractiveness as an investment

option. 31 Due to their popularity with investors, money market fund assets have grown over

time, providing them with substantial amounts of cash to invest. As a result, money market

funds have become an important source of financing in certain segments of the short-term

financing markets. As a result, rule 2a-7, in addition to facilitating money market funds’

maintenance of stable share prices, also benefits investors by making available an investment

We note that 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.

See Proposing Release supra note 25, at section II.A. Retail investors use money market funds for a variety

of reasons, including, for example, to hold cash for short or long periods of time or to take a temporary

“defensive position” in anticipation of declining equity markets. Institutional investors commonly use

money market funds for cash management in part because, as discussed later in this Release, money market

funds provide efficient diversified cash management due both to the scale of their operations and money

market fund managers’ expertise. See infra notes 63-64 and accompanying text.

See, e.g., Comment Letter of UBS Global Asset Management (Sept. 16, 2013) (“UBS Comment Letter”)

(“Historically, money funds have offered both retail and institutional investors a means of achieving a

market rate of return on short-term investment without having to sacrifice stability of principal. The stable

NAV per share also allows investors the convenience of not having to track immaterial gains and losses,

and helps facilitate investment processes, such as sweep account arrangements…”).

option that provides an efficient and diversified means for investors to participate in the shortterm financing markets through a portfolio of short-term, high-quality debt securities. 32

In order for money market funds to use techniques to value and price their shares

generally not permitted to other mutual funds, rule 2a-7 imposes additional protective conditions

on money market funds. 33 As discussed in the Proposing Release, these additional conditions are

designed to make money market funds’ use of the valuation and pricing techniques permitted by

rule 2a-7 consistent with the protection of investors, and more generally, to make available an

investment option for investors that seek an efficient way to obtain short-term yields.

We understand, and considered when developing the final amendments we are adopting

today, that money market funds are a popular investment product and that they provide many

benefits to investors and to the short-term financing markets. Indeed, it is for these reasons that

we designed these amendments to make the funds more resilient, as discussed throughout this

Release, while preserving, to the extent possible, the benefits of money market funds. But as

discussed in section III.K.1 below, we recognize that these reforms may make certain money

market funds less attractive to some investors.

Certain Economic Features of Money Market Funds

As discussed in detail in the Proposing Release, the combination of several features of

money market funds can create an incentive for their shareholders to redeem shares heavily in

See, e.g., Comment Letter of the Investment Company Institute (Sept. 17, 2013) (“ICI Comment Letter”)

(“Today over 61 million retail investors, as well as corporations, municipalities, and institutional investors

rely on the $2.6 trillion money market fund industry as a low cost, efficient cash management tool that

provides a high degree of liquidity, stability of principal value, and a market based yield.”).

See, e.g., ICI Comment Letter (“Money market funds owe their success, in large part to the stringent

regulatory requirements to which they are subject under federal securities laws, including most notably

Rule 2a-7 under the Investment Company Act.”).

periods of market stress. We discuss these factors below, as well as the harm that can result from

such heavy redemptions in money market funds.

Money Market Fund Investors’ Desire to Avoid Loss

Investors in money market funds have varying investment goals and tolerances for risk.

Many investors use money market funds for principal preservation and as a cash management

tool, and, consequently, these funds can attract investors who are less tolerant of incurring even

small losses, even at the cost of forgoing higher expected returns. 34 Such investors may be loss

averse for many reasons, including general risk tolerance, legal or investment restrictions, or

short-term cash needs. These overarching considerations may create incentives for money

market fund investors to redeem and would be expected to persist, even if the other incentives

discussed below, such as those created by money market fund valuation and pricing, are

addressed.

The desire to avoid loss may cause investors to redeem from money market funds in

times of stress in a “flight to quality.” For example, as discussed in the DERA Study, one

explanation for the heavy redemptions from prime money market funds and purchases in

government money market fund shares during the financial crisis may be 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. 35

See, e.g., PWG Comment Letter of Investment Company Institute (Apr. 19, 2012) (available in File No.

4-619) (“ICI Apr. 2012 PWG Comment Letter”) (enclosing a survey commissioned by the Investment

Company Institute and conducted by Treasury Strategies, Inc. finding, among other things, that 94% of

respondents rated safety of principal as an “extremely important” factor in their money market fund

investment decisions and 64% ranked safety of principal as the “primary driver” of their money market

fund investment).

One study documented that investors redirected assets from prime money market funds into government

Liquidity Risks

When investors begin to redeem a substantial amount of shares, a fund can experience a

loss of liquidity. Money market funds, which offer investors the ability to redeem shares upon

demand, often will first use internal liquidity to satisfy substantial redemptions. A money market

fund has three sources of internal liquidity to meet redemption requests: cash on hand, cash from

investors purchasing shares, and cash from maturing securities. If these internal sources of

liquidity are insufficient to satisfy redemption requests on any particular day, money market

funds may be forced to sell portfolio securities to raise additional cash. 36 And because the

secondary market for many portfolio securities is not deeply liquid, funds may have to sell

securities at a discount from their amortized cost value, or even at fire-sale prices, 37 thereby

incurring additional losses that may have been avoided if the funds had sufficient internal

money market funds during September 2008. See Russ Wermers, et al., Runs on Money Market Funds

(Jan. 2, 2013), available at

http://www.rhsmith.umd.edu/files/Documents/Centers/CFP/WermersMoneyFundRuns.pdf (“Wermers

Study”). Another study found that redemption activity in money market funds during the financial crisis

was higher for riskier money market funds. See Patrick E. McCabe, The Cross Section of Money Market

Fund Risks and Financial Crises, Federal Reserve Board Finance and Economic Discussion Series Paper

No. 2010-51 (2010) (“Cross Section”).

See, e.g., Comment Letter of Goldman Sachs Asset Management L.P. (Sept. 17, 2013) (“Goldman Sachs

Comment Letter”) (“A money fund faced with heavy redemptions could suffer a loss of liquidity that

would force the untimely sale of portfolio securities at losses.”). We note that, although the Investment

Company Act permits a money market fund to borrow money from a bank, see section 18(f) of the

Investment Company Act, such loans, assuming the proceeds of which are paid out to meet redemptions,

create liabilities that must be reflected in the fund’s shadow price, and thus will contribute to the stresses

that may force the fund to “break the buck.”

Money market funds normally meet redemptions by disposing of their more liquid assets, rather than

selling a pro rata slice of all their holdings. See, e.g., Jonathan Witmer, Does the Buck Stop Here? A

Comparison of Withdrawals from Money Market Mutual Funds with Floating and Constant Share Prices,

Bank of Canada Working Paper 2012-25 (Aug. 2012) (“Witmer”), available at

http://www.bankofcanada.ca/wp-content/uploads/2012/08/wp2012-25.pdf. “Fire sales” refer to situations

when securities deviate from their information-efficient values typically as a result of sale price pressure.

For an overview of the theoretical and empirical research on asset “fire sales,” see Andrei Shleifer &

Robert Vishny, Fire Sales in Finance and Macroeconomics, 25 JOURNAL OF ECONOMIC PERSPECTIVES,

Winter 2011, at 29-48 (“Fire Sales”).

liquidity. 38 This alone can cause a fund’s portfolio to lose value. In addition, redemptions that

deplete a fund’s most liquid assets can have incremental adverse effects because the fund is left

with fewer liquid assets, necessitating the sale of less liquid assets, potentially at a discount, to

meet further redemption requests. 39 Knowing that such liquidity costs may occur, money market

fund investors may have an incentive to redeem quickly in times of stress to avoid realizing these

potential liquidity costs, leaving remaining shareholders to bear these costs.

Valuation and Pricing Methods

Money market funds are unique among mutual funds in that rule 2a-7 permits them to use

the amortized cost method of valuation and the penny-rounding method of pricing for their entire

portfolios. As discussed above, these valuation and pricing techniques allow a money market

fund to sell and redeem shares at a stable share price without regard to small variations in the

value of the securities in its portfolio, and thus to maintain a stable $1.00 share price under most

market conditions.

Although the stable $1.00 share price calculated using these methods provides a close

approximation to market value under normal market conditions, differences may exist when

market conditions shift due to changes in interest rates, credit risk, and liquidity. 40 The market

The DERA Study examined whether money market funds are more resilient to redemptions following the

2010 reforms and notes that, “As expected, the results show that funds with a 30 percent [weekly liquid

asset requirement] are more resilient to both portfolio losses and investor redemptions” than those funds

without a 30 percent weekly liquid asset requirement. DERA Study, supra note 24, at 37.

See, e.g., Comment Letter of MSCI Inc. (Sept. 17, 2013) (“MSCI Comment Letter”) (“The need to provide

liquidity provides another set of incentives, as early redeemers may exhaust the fund’s internal sources of

liquidity (cash on hand, cash from maturing securities, etc.), leaving possibly distressed security sales as the

only source of liquidity for late redeemers.”).

We note that the vast majority of money market fund portfolio securities are not valued based on market

prices obtained through secondary market trading because most portfolio securities such as commercial

paper, repos, and certificates of deposit are not actively traded in a secondary market. Accordingly, most

value of a money market fund’s portfolio securities also may experience relatively large changes

if a portfolio asset defaults or its credit profile deteriorates. 41 Today, unless the fund “breaks the

buck,” market value differences are reflected only in a fund’s shadow price, and not the share

price at which the fund satisfies purchase and redemption transactions.

Deviations that arise from changes in interest rates and credit risk are temporary as long

as securities are held to maturity, because amortized cost values and market-based values

converge at maturity. But if a portfolio asset defaults or an asset sale results in a realized capital

gain or loss, deviations between the stable $1.00 share price and the shadow price become

permanent. For example, if a portfolio experiences a 25 basis point loss because an issuer

defaults, the fund’s shadow price falls from $1.0000 to $0.9975. Even though the fund has not

broken the buck, this reduction is permanent and can only be reversed internally in the event that

the fund realizes a capital gain elsewhere in the portfolio, which generally is unlikely given the

types of securities in which money market funds typically invest and the tax requirements for

these funds. 42

If a money market fund’s shadow price deviates far enough from its stable $1.00 share

price, investors may have an economic incentive to redeem their shares. For example, investors

money market fund portfolio securities are valued largely through “mark-to-model” or “matrix pricing”

estimates, which often use market inputs, as well as other factors in their pricing models. See Proposing

Release, supra note 25, at n.27. See also infra section III.D.2.

The credit quality standards in rule 2a-7 are designed to minimize the likelihood of such a default or credit

deterioration.

In practice, a money market fund cannot use future portfolio earnings to restore its shadow price because

Subchapter M of the Internal Revenue Code requires money market funds to distribute virtually all of their

earnings to investors. These tax requirements can cause permanent reductions in shadow prices to persist

over time, even if a fund’s other portfolio securities are otherwise unimpaired.

may have an incentive to redeem shares when a fund’s shadow price is less than $1.00. 43 If

investors redeem shares when the shadow price is less than $1.00, the fund’s shadow price will

decline even further because portfolio losses are spread across the remaining, smaller asset base.

If enough shares are redeemed, a fund can “break the buck” due, in part, to heavy investor

redemptions and the concentration of losses across a shrinking asset base. 44 In times of stress,

this alone provides an incentive for investors to redeem shares ahead of other investors: early

redeemers get $1.00 per share, whereas later redeemers may get less than $1.00 per share even if

the fund experiences no further losses. 45

We note that although defaults in assets held by money market funds are low probability

events, the resulting losses can lead to a fund breaking the buck if the default occurs in a position

that is greater than 0.5% of the fund’s assets, as was the case in the Reserve Primary Fund’s

investment in Lehman Brothers commercial paper in September 2008. 46 And as discussed

further in section III.C.2.a of this Release, money market funds hold significant numbers of such

larger positions. 47

See, e.g., Comment Letter of the Systemic Risk Council (Sept. 16, 2013) (“Systemic Risk Council

Comment Letter”) (“If the fund’s assets are worth less than a $1.00- and you can redeem at $1.00- the

remaining shareholders are effectively paying first movers to run. This embeds permanent losses in the

fund for the remaining holders.”).

See, e.g., MSCI Comment Letter (“[W]hen a fund’s market-based NAV falls significantly below its stable

NAV, an early redeemer not only benefits from this price discrepancy, but also puts downward pressure on

the market-based NAV for the remaining investors (as the realized losses on the fund’s assets must be

shared across a smaller investor base).”).

For an example illustrating this incentive, see Proposing Release, supra note 25, at text following n.31.

For a detailed discussion of the financial crises, see generally DERA Study, supra note 24, at section 4.A.

The Financial Stability Oversight Council (“FSOC”), in formulating possible money market reform

recommendations, solicited and received comments from the public (FSOC Comment File, File No. FSOC2012-0003, available at http://www.regulations.gov/#!docketDetail;D=FSOC-2012-0003), some of which

have made similar observations about the concentration and size of money market fund holdings. See, e.g.,

Investors’ Misunderstanding about the Actual Risk of Investing in Money

Market Funds

Lack of investor understanding and lack of complete transparency concerning the risks

posed by particular money market funds can contribute to heavy redemptions during periods of

stress. This lack of investor understanding and complete transparency can come from several

different sources.

First, if investors do not know a fund’s shadow price and/or its underlying portfolio

holdings (or if previous disclosures of this information are no longer accurate), investors may not

be able to fully understand the degree of risk in the underlying portfolio. 48 In such an

environment, a default of a large-scale commercial paper issuer, such as a bank holding

company, could accelerate redemption activity across many funds because investors may not

know which funds (if any) hold defaulted securities. Investors may respond by initiating

redemptions to avoid potential rather than actual losses in a “flight to transparency.” 49 Because

Comment Letter of Harvard Business School Professors Samuel Hanson, David Scharfstein, & Adi

Sunderam (Jan. 8, 2013) (“Harvard Business School FSOC Comment Letter”) (noting that “prime MMFs

mainly invest in money-market instruments issued by large, global banks” and providing information about

the size of the holdings of “the 50 largest non-government issuers of money market instruments held by

prime MMFs as of May 2012”).

See, e.g., DERA Study, supra note 24, at 31 (stating that although disclosures on Form N-MFP have

improved fund transparency, “it must be remembered that funds file the form on a monthly basis with no

interim updates,” and that “[t]he Commission also makes the information public with a 60-day lag, which

may cause it to be stale”). As discussed in section III.E.9.c, a number of money market funds have begun

voluntarily disclosing information about their portfolio assets, liquidity, and shadow NAV on a more

frequent basis than required, in part to address investor concerns regarding the staleness of information

about fund holdings. The final amendments we are adopting today include a number of regulatory

requirements designed to enhance transparency of money market risks, including daily disclosure of liquid

assets, shareholder flows, current NAV and shadow NAV on fund websites, and elimination of the 60 day

lag on public disclosure of Form N-MFP data. See infra section III.G.1.

See Nicola Gennaioli, Andrei Shleifer & Robert Vishny, Neglected Risks, Financial Innovation, and

Financial Fragility, 104 J. FIN. ECON. 453 (2012) (“A small piece of news that brings to investors’ minds

the previously unattended risks catches them by surprise and causes them to drastically revise their

valuations of new securities and to sell them….When investors realize that the new securities are false

many money market funds hold securities from the same issuer, investors may respond to a lack

of transparency about specific fund holdings by redeeming assets from funds that are believed to

be holding the same or highly correlated positions. 50

Second, money market funds’ sponsors on a number of occasions have voluntarily

chosen to provide financial support for their money market funds. 51 The reasons that sponsors

have done so include keeping a fund from re-pricing below its stable value, protecting the

sponsors’ reputations or brands, and increasing a fund’s shadow price if its sponsor believes

investors avoid funds that have low shadow prices. Prior to the changes that we are adopting

today, funds were not required to disclose instances of sponsor support outside of financial

statements; as a result, sponsor support has not been fully transparent to investors and this, in

turn, may have lessened some investors’ understanding of the risk in money market funds. 52

substitutes for the traditional ones, they fly to safety, dumping these securities on the market and buying the

truly safe ones.”).

See Comment Letter of Federal Reserve of Boston (Sept. 12, 2013) (“Boston Federal Reserve Comment

Letter”) (“Investors in other MMMFs may in turn run if they perceive that their funds are similar (e.g.

similar portfolio composition, similar maturity profile, similar investor concentration) to the fund that

experienced the initial run.”); see infra notes 58-59 and accompanying text. Based on Form N-MFP data as

of February 28, 2014, there were 27 different issuers whose securities were held by more than 100 prime

money market funds.

In the Proposing Release we requested comment on amending rule 17a-9 (which allows for discretionary

support of money market funds by their sponsors and other affiliates) to potentially restrict the practice of

sponsor support, but did not propose any specific changes. Most commenters who addressed our request

for comment on amending rule 17a-9 opposed making any changes to rule 17a-9, arguing that the

transactions facilitated by the rule are in the best interests of the shareholders. See Comment Letter of the

Investment Company Institute (Sept. 17, 2013) (“ICI Comment Letter”); Comment Letter of the Dreyfus

Corporation (Sept. 17, 2013) (“Dreyfus Comment Letter”); Comment Letter of American Bar Association

Business Law Section (Sept. 30, 2013) (“ABA Business Law Comment Letter”). One commenter

supported amending rule 17a-9, arguing that these transactions can result in shareholders having unjustified

expectations of future support being provided by sponsors. Comment Letter of HSBC Global Asset

Management (Sept. 17, 2013) (“HSBC Comment Letter”). In light of these comments, we are not

amending rule 17a-9 at this time. See also infra section III.E.7.a.

See, e.g., HSBC Comment Letter (“[A] level of ambiguity about who owns the risk when investing in a

MMF has developed amongst some investors. Some investors have been encouraged to expect sponsors to

Instances of discretionary sponsor support were relatively common during the financial

crisis. For example, during the period from September 16, 2008 to October 1, 2008, a number of

money market fund sponsors purchased large amounts of portfolio securities from their money

market funds or provided capital support to the funds (or received staff no-action assurances in

order to provide support). 53 But the financial crisis is not the only instance in which some money

market funds have come under strain, although it is unique in the number of money market funds

that requested or received sponsor support. 54 As noted in the Proposing Release, since 1989, 11

other financial events have been sufficiently adverse that certain fund sponsors chose to provide

support or to seek staff no-action assurances in order to provide support, potentially affecting

158 different money market funds. 55

Finally, the government assistance provided to money market funds during the financial

support their MMFs. Such expectations cannot be enforced, since managers are under no obligation to

support their funds, and consequently leads some investors to misunderstand and misprice the risks they are

subject to.”) (emphasis in original).

Our staff estimated that during the period from August 2007 to December 31, 2008, almost 20% of all

money market funds received some support (or staff no-action assurances concerning support) from their

money managers or their affiliates. We note that not all such support required no-action assurances from

Commission staff (for example, fund affiliates were able to purchase defaulted Lehman Brothers securities

from fund portfolios under rule 17a-9 under the Investment Company Act without the need for any noaction assurances). See, e.g., http://www.sec.gov/divisions/investment/im-noaction.shtml#money.

Commission staff provided no-action assurances to 100 money market funds in 18 different fund groups so

that the fund groups could enter into such arrangements. Although a number of advisers to money market

funds obtained staff no-action assurances in order to provide sponsor support, several did not subsequently

provide the support because it was not necessary. See, e.g., Comment Letter of the Dreyfus Corporation

(Aug. 7, 2012) (available in File No. 4 619) (“Dreyfus III Comment Letter”) (stating that no-action relief to

provide sponsor support “was sought by many money funds as a precautionary measure”).

See Moody’s Investors Service Special Comment, Sponsor Support Key to Money Market Funds (Aug. 9,

2010) (“Moody’s Sponsor Support Report”). Interest rate changes, issuer defaults, and credit rating

downgrades can lead to significant valuation losses for individual funds.

See Proposing Release, supra note 25, at section II.B.3. We note, as discussed more fully in the Proposing

Release, that although these events affected money market funds and their sponsors, there is no evidence

that these events caused systemic problems, most likely because the events were isolated either to a single

entity or class of security and because sponsor support prevented any funds from breaking the buck.

crisis may have contributed to investors’ perceptions that the risk of loss in money market funds

is low. 56 If investors perceive that money market funds have an implicit government guarantee,

they may believe that money market funds are safer investments than they in fact are and may

underestimate the potential risk of loss. 57

Effects on Other Money Market Funds, Investors, and the Short-Term

Financing Markets

In this section, we discuss how stress at one money market fund can be positively

correlated across money market funds in at least two ways. Some market observers have noted

that if a money market fund suffers a loss on one of its portfolio securities—whether because of

a deterioration in credit quality, for example, or because the fund sold the security at a discount

to its amortized-cost value—other money market funds holding the same security may have to

reflect the resultant discounts in their shadow prices. 58 Any resulting decline in the shadow

prices of other funds could, in turn, lead to a contagion effect that could spread even further as

investors run from money market funds in general. For example, some commenters have

observed that many money market fund holdings tend to be highly correlated, making it more

likely that multiple money market funds will experience contemporaneous decreases in shadow

prices. 59

For a further discussion of issues related to money market fund sponsor support and its effect on investors’

perception, see Proposing Release, supra note 25, at nn.60-61 and accompanying text.

See, e.g., HSBC Comment Letter.

See generally Douglas W. Diamond & Raghuram G. Rajan, Fear of Fire Sales, Illiquidity Seeking, and

Credit Freezes, 126 Q. J. ECON. 557 (May 2011); Fire Sales, supra note 37; Markus Brunnermeier, et al.,

The Fundamental Principles of Financial Regulation, in GENEVA REPORTS ON THE WORLD ECONOMY 11

(2009).

See, e.g., Boston Federal Reserve Comment Letter (discussing the relative homogeneity of money market

funds holdings, and noting that as of the end of June 2013, the 20 largest corporate issuers accounted for

As discussed above, in times of stress, if investors do not wish to be exposed to a

distressed issuer (or correlated issuers) but do not know which money market funds own these

distressed securities at any given time, investors may redeem from any money market fund that

could own the security (e.g., redeeming from all prime funds). 60 A fund that did not own the

security and was not otherwise under stress could nonetheless experience heavy redemptions

which, as discussed above, could themselves ultimately cause the fund to experience losses if it

does not have adequate liquidity.

As was experienced by money market funds during the financial crisis, liquidity-induced

contagion may have negative effects on investors and the markets for short-term financing of

corporations, banks, and governments. This is in large part because of the significance of money

market funds’ role in the short-term financing markets. 61 Indeed, money market funds had

experienced steady growth before the financial crisis, driven in part by growth in the size of

institutional cash pools, which grew from under $100 billion in 1990 to almost $4 trillion just

before the financial crisis. 62 Money market funds’ suitability for cash management operations

approximately 44 percent of prime money market funds’ assets); Comment Letter of Americans for

Financial Reform (Sept. 17, 2013) (“Americans for Fin. Reform Comment Letter”) (discussing a study

estimating that 97 percent of non-governmental assets of prime money market funds consists of financial

sector commercial paper); Comment Letter of Better Markets, Inc. (Feb. 15, 2013) (available in File No.

FSOC-2012-0003) (“Better Markets FSOC Comment Letter”) (agreeing with FSOC’s analysis and stating

that “MMFs tend to have similar exposures due to limits on the nature of permitted investments. As a

result, losses creating instability and a crisis of confidence in one MMF are likely to affect other MMFs at

the same time.”).

See, e.g., Wermers Study, supra note 35 (based on an empirical analysis of data from the 2008 run on

money market funds, finding that, during 2008, “[f]unds that cater to institutional investors, which are the

most sophisticated and informed investors, were hardest hit,” and that “investor flows from money market

funds seem to have been driven both by strategic externalities…and information.”).

See infra section III.K.3 for statistics on the types and percentages of outstanding short-term debt

obligations held by money market funds.

See Proposing Release supra note 25, at nn.70-71.

also has made them popular among corporate treasurers, municipalities, and other institutional

investors, some of which rely on money market funds for their cash management operations

because the funds provide diversified cash management more efficiently due both to the scale of

their operations and the expertise of money market fund managers. 63 For example, according to

one survey, approximately 16% of organizations’ short-term investments were allocated to

money market funds (and, according to this survey, this figure is down from almost 40% in 2008

due in part to the reallocation of cash investments to bank deposits following temporary

unlimited Federal Deposit Insurance Corporation deposit insurance for non-interest bearing bank

transaction accounts, which expired at the end of 2012). 64

Money market funds’ size and significance in the short-term markets, together with their

features that can create an incentive to redeem as discussed above, have led to concerns that

See, e.g., U.S. Securities and Exchange Commission, Roundtable on Money Market Funds and Systemic

Risk, unofficial transcript (May 10, 2011), available at http://www.sec.gov/spotlight/mmf-risk/mmf-risktranscript-051011.htm (“Roundtable Transcript”) (Kathryn L. Hewitt, Government Finance Officers

Association) (“Most of us don’t have the time, the energy, or the resources at our fingertips to analyze the

credit quality of every security ourselves. So we’re in essence, by going into a pooled fund, hiring that

expertise for us…it gives us diversification, it gives us immediate cash management needs where we can

move money into and out of it, and it satisfies much of our operating cash investment opportunities.”); see

also Proposing Release supra note 25, at n.72.

See 2013 Association for Financial Professionals Liquidity Survey, at 15, available at

http://www.afponline.org/liquidity (subscription required) (“2013 AFP Liquidity Survey”). The size of this

allocation to money market funds is down substantially from prior years. For example, prior AFP Liquidity

Surveys show higher allocations of organizations’ short-term investments to money market funds: almost

40% in the 2008 survey, approximately 25% in the 2009 and 2010 surveys, almost 30% in the 2011 survey,

and 16% in the 2012 survey. This shift has largely reflected a re-allocation of cash investments to bank

deposits, which rose from representing 25% of organizations’ short-term investment allocations in the 2008

Association for Financial Professionals Liquidity Survey, available at

http://www.afponline.org/pub/pdf/2008_Liquidity_Survey.pdf (“2008 AFP Liquidity Survey”), to 50% of

organizations’ short-term investment allocations in the 2013 survey. The 2012 survey noted that some of

this shift has been driven by the temporary unlimited FDIC deposit insurance coverage for non-interest

bearing bank transaction accounts (which expired at the end of 2012) and in which assets have remained

despite the expiration of the insurance. See 2013 AFP Liquidity Survey. As of February 28, 2014,

approximately 67% of money market fund assets were held in money market funds or share classes

intended to be sold to institutional investors according to iMoneyNet data. All of the AFP Liquidity

Surveys are available at http://www.afponline.org.

money market funds may contribute to systemic risk. Heavy redemptions from money market

funds during periods of financial stress can remove liquidity from the financial system,

potentially disrupting other markets. Issuers may have difficulty obtaining capital in the shortterm markets during these periods because money market funds are focused on meeting

redemption requests through internal liquidity generated either from maturing securities or cash

from subscriptions, and thus may be purchasing fewer short-term debt obligations. 65 To the

extent that multiple money market funds experience heavy redemptions, the negative effects on

the short-term markets can be magnified. Money market funds’ experience during the financial

crisis illustrates the impact of heavy redemptions, as we discuss in more detail below.

Heavy redemptions in money market funds may disproportionately affect slow-moving

shareholders because, as discussed further below, redemption data from the financial crisis show

that some institutional investors are likely to redeem from distressed money market funds far

more quickly than other investors and to redeem a greater percentage of their prime fund

holdings. 66 This likely is because some institutional investors generally have more capital at

stake, along with sophisticated tools and professional staffs to monitor risk. Because of their

proportionally larger investments, just a few institutional investors submitting redemption

requests may have a significant effect on a money market fund’s liquidity, while it may take

many more retail investors, with their typically smaller investments sizes, to cause similar

See supra text preceding and accompanying note 36. Although money market funds also can build

liquidity internally by retaining (rather than investing) cash from investors purchasing shares, this is not

likely to be a material source of liquidity for a distressed money market fund experiencing heavy

redemptions as a stressed fund may be unlikely to be receiving significant investor purchases during such a

time.

See Money Market Fund Reform, Investment Company Act Release No. 28807 (June 30, 2009) [74 FR

32688 (July 8, 2009)] (“2009 Proposing Release”), at nn.46-48 and 178 and accompanying text.

negative consequences. Slower-to-redeem shareholders may be harmed because, as discussed

above, redemptions at a money market fund can concentrate existing losses in the fund or create

new losses if the fund must sell assets at a discount to obtain liquidity to satisfy redemption

requests. In both cases, redemptions leave the fund’s portfolio more likely to lose value, to the

detriment of slower-to-redeem investors. 67 Retail investors—who tend to be slower moving—

also could be harmed if market stress begins at an institutional money market fund and spreads to

other funds, including funds composed solely or primarily of retail investors. 68

The Financial Crisis

The financial crisis in many respects demonstrates the various considerations discussed

above in sections B and C, including the potential implications and harm associated with heavy

redemption from money market funds. 69 On September 16, 2008, the day after Lehman Brothers

Holdings Inc. announced its bankruptcy, The Reserve Fund announced that its Primary Fund—

which held a $785 million (or 1.2% of the fund’s assets) position in Lehman Brothers

commercial paper—would “break the buck” and price its securities at $0.97 per share. 70 At the

See, e.g., DERA Study, supra note 24, at 10 (“Investor redemptions during the financial crisis, particularly

after Lehman’s failure, were heaviest in institutional share classes of prime money market funds, which

typically hold securities that are illiquid relative to government funds. It is possible that sophisticated

investors took advantage of the opportunity to redeem shares to avoid losses, leaving less sophisticated

investors (if co-mingled) to bear the losses.”).

As discussed further below, retail money market funds experienced a lower level of redemptions in 2008

than institutional money market funds, although the full predictive power of this empirical evidence is

tempered by the introduction of the Department of Treasury’s (“Treasury Department”) temporary

guarantee program for money market funds, which may have prevented heavier shareholder redemptions

among generally slower-to-redeem retail investors. See infra note 80.

See generally DERA Study, supra note 24, at section 3. See also 2009 Proposing Release supra note 66, at

section I.D.

See also 2009 Proposing Release, supra note 66, at n.44 and accompanying text. We note that the Reserve

Primary Fund’s assets have been returned to shareholders in several distributions made over a number of

years. We understand that assets returned constitute approximately 99% of the fund’s assets as of the close

same time, there was turbulence in the market for financial sector securities as a result of other

financial company stresses, including, for example, the near failure of American International

Group (“AIG”), whose commercial paper was held by many prime money market funds. 71

Heavy redemptions in the Reserve Primary Fund were followed by heavy redemptions

from other Reserve money market funds, 72 and soon other institutional prime money market

funds also began to experience heavy redemptions. 73 During the week of September 15, 2008

(the week that Lehman Brothers announced it was filing for bankruptcy), investors withdrew

approximately $300 billion from prime money market funds or 14% of the assets in those

funds. 74 During that time, fearing further redemptions, money market fund managers began to

retain cash rather than invest in commercial paper, certificates of deposit, or other short-term

instruments. 75 Short-term financing markets froze, impairing access to credit, and those who

of business on September 15, 2008, including the income earned during the liquidation period. See, e.g.,

Consolidated Class Action Complaint, In Re The Reserve Primary Fund Sec. & Derivative Class Action

Litig., No. 08-CV-8060-PGG (S.D.N.Y. Jan. 5, 2010). A class action suit brought on behalf of the Reserve

Fund shareholders was settled in 2013. See Nate Raymond, Settlement Reached in Reserve Primary Fund

Lawsuit, REUTERS (Sept. 7, 2013) available at http://www.reuters.com/article/2013/09/07/usreserveprimary-lawsuit-idUSBRE98604Q20130907.

In addition to Lehman Brothers and AIG, there were other stresses in the market as well, as discussed in

greater detail in the DERA Study. See generally DERA Study, supra note 24, at section 3.

See 2009 Proposing Release, supra note 66, at section I.D.

See DERA Study, supra note 24, at section 3.

See INVESTMENT COMPANY INSTITUTE, REPORT OF THE MONEY MARKET WORKING

GROUP, at 62 (Mar. 17, 2009), available at http://www.ici.org/pdf/ppr_09_mmwg.pdf (“ICI REPORT”)

(analyzing data from iMoneyNet). The latter figure describes aggregate redemptions from all prime money

market funds. Some money market funds had redemptions well in excess of 14% of their assets. Based on

iMoneyNet data (and excluding the Reserve Primary Fund), the maximum weekly redemptions from a

money market fund during the financial crisis was over 64% of the fund’s assets.

See Philip Swagel, “The Financial Crisis: An Inside View,” Brookings Papers on Economic Activity, at 31

(Spring 2009) (conference draft), available at

http://www.brookings.edu/~/media/projects/bpea/spring%202009/2009a_bpea_swagel.pdf; Christopher

Condon & Bryan Keogh, Funds’ Flight from Commercial Paper Forced Fed Move, BLOOMBERG, Oct.

7, 2008, available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5hvnKFCC_pQ.

were still able to access short-term credit often did so only at overnight maturities. 76

Figure 1, below, provides context for the redemptions that occurred during the financial

crisis. Specifically, it shows daily total net assets over time, where the vertical line indicates the

date that Lehman Brothers filed for bankruptcy, September 15, 2008. Investor redemptions

during the financial crisis, particularly after Lehman’s failure, were heaviest in institutional share

classes of prime money market funds, which typically hold securities that are less liquid and of

lower credit quality than those typically held by government money market funds. The figure

shows that institutional share classes of government money market funds, which include

Treasury and government funds, experienced heavy inflows. 77 The aggregate level of retail

investor redemption activity, in contrast, was not particularly high during September and October

2008, as shown in Figure 1. 78

See 2009 Proposing Release, supra note 66, at nn.51-53 & 65-68 and accompanying text (citing to minutes

of the Federal Open Market Committee, news articles, Federal Reserve Board data on commercial paper

spreads over Treasury bills, and books and academic articles on the financial crisis). Commenters have

stated that money market funds were not the only investors in the short-term financing markets that reduced

or halted investment in commercial paper and other riskier short-term debt securities during the financial

crisis. See, e.g., Comment Letter of Investment Company Institute (Jan. 24, 2013) (available in File No.

FSOC-2012-0003) (“ICI Jan. 24 FSOC Comment Letter”).

As discussed in section III.C.1 government money market funds historically have faced different

redemption pressures in times of stress and have different risk characteristics than other money market

funds because of their unique portfolio composition, which typically have lower credit default risk and

greater liquidity than non-government portfolio securities typically held by money market funds.

We understand that iMoneyNet differentiates retail and institutional money market funds based on factors

such as minimum initial investment amount and how the fund provider self-categorizes the fund, which

does not necessarily correlate with how we define retail funds in this Release.

Figure 1

On September 19, 2008, the U.S. Department of the Treasury (“Treasury Department”)

announced a temporary guarantee program (“Temporary Guarantee Program”), which would use

the $50 billion Exchange Stabilization Fund to support more than $3 trillion in shares of money

market funds, and the Board of Governors of the Federal Reserve System authorized the

temporary extension of credit to banks to finance their purchase of high-quality asset-backed

commercial paper from money market funds. 79 These programs successfully slowed

redemptions in prime money market funds and provided additional liquidity to money market

funds. As discussed in the Proposing Release, the disruptions to the short-term markets detailed

above could have continued for a longer period of time but for these programs. 80

See 2009 Proposing Release, supra note 66, at nn.55-59 and accompanying text for a fuller description of

the various forms of governmental assistance provided to money market funds during this time.

See Proposing Release supra note 25 at n.91.

Examination of Money Market Fund Regulation since the Financial Crisis

The 2010 Amendments

After the events of the financial crisis, in March 2010, we adopted a number of

amendments to rule 2a-7. 81 These amendments were designed to make money market funds

more resilient by reducing the interest rate, credit, and liquidity risks of fund asset portfolios. 82

More specifically, the amendments decreased money market funds’ credit risk exposure by

further restricting the amount of lower quality securities that funds can hold. 83 The amendments,

for the first time, also required that money market funds maintain liquidity buffers in the form of

specified levels of daily and weekly liquid assets. 84 These liquidity buffers provide a source of

internal liquidity and are intended to help funds withstand high levels of redemptions during

times of market illiquidity. The amendments also reduce money market funds’ exposure to

2010 Adopting Release, supra note 17.

Commenters have noted the importance of the 2010 reforms in enhancing the resiliency of money market

funds. See, e.g., Comment Letter of Invesco Ltd. (Sept. 17, 2013) (“Invesco Comment Letter”) (“In

evaluating the reforms contained in the Proposed Rule it is also important to take into account the

significant impact of the reforms implemented by the Commission in 2010, which amounted to a

comprehensive overhaul of the regulatory framework governing MMFs.”).

Specifically, the amendments placed tighter limits on a money market fund’s ability to acquire “second

tier” securities by (1) restricting a money market fund from investing more than 3% of its assets in second

tier securities (rather than the previous limit of 5%), (2) restricting a money market fund from investing

more than ½ of 1% of its assets in second tier securities issued by any single issuer (rather than the previous

limit of the greater of 1% or $1 million), and (3) restricting a money market fund from buying second tier

securities that mature in more than 45 days (rather than the previous limit of 397 days). See rule

2a-7(c)(3)(ii) and (c)(4)(i)(C). Second tier securities are eligible securities that, if rated, have received

other than the highest short-term term debt rating from the requisite NRSROs or, if unrated, have been

determined by the fund’s board of directors to be of comparable quality. See current rule 2a-7(a)(24)

(defining “second tier security”); current rule 2a-7(a)(12) (defining “eligible security”); current rule 2a7(a)(23) (defining “requisite NRSROs”). Today, in a companion release, we are also re-proposing to

remove NRSRO rating references from rule 2a-7 and Form N-MFP.

The requirements are that, for all taxable money market funds, at least 10% of assets must be in cash, U.S.

Treasury securities, or securities that convert into cash (e.g., mature) within one day and, for all money

market funds, at least 30% of assets must be in cash, U.S. Treasury securities, certain other Government

securities with remaining maturities of 60 days or less, or securities that convert into cash within one week.

See current rule 2a-7(c)(5)(ii) and (iii).

interest rate risk by decreasing the maximum weighted average maturities of fund portfolios

from 90 to 60 days. 85

In addition to reducing the risk profile of the underlying money market fund portfolios,

the reforms increased the amount of information that money market funds are required to report

to the Commission and the public. Money market funds are now required to submit to the

Commission monthly information on their portfolio holdings using Form N-MFP. 86 This

information allows the Commission, investors, and third parties to monitor compliance with rule

2a-7 and to better understand and monitor the underlying risks of money market fund portfolios.

Money market funds also are now required to post portfolio information on their websites each

month, providing investors with important information to help them make better-informed

investment decisions. 87

Finally, the 2010 amendments require money market funds to undergo stress tests under

the direction of the board of directors on a periodic basis. 88 Under this stress testing requirement,

each fund must periodically test its ability to maintain a stable NAV per share based upon certain

hypothetical events, including an increase in short-term interest rates, an increase in shareholder

redemptions, a downgrade of or default on portfolio securities, and widening or narrowing of

spreads between yields on an appropriate benchmark selected by the fund for overnight interest

rates and commercial paper and other types of securities held by the fund. This reform was

The 2010 amendments also introduced a weighted average life requirement of 120 days, which limits the

money market fund’s ability to invest in longer-term floating rate securities. See current rule 2a-7(c)(2)(ii)

and (iii).

See current rule 30b1-7.

See current rule 2a-7(c)(12).

See current rule 2a-7(c)(10)(v).

intended to provide money market fund boards and the Commission a better understanding of the

risks to which the fund is exposed and give fund managers a tool to better manage those risks. 89

The Eurozone Debt Crisis and U.S. Debt Ceiling Impasses of 2011 and

2013

Several significant market events since our 2010 reforms have permitted us to evaluate

the efficacy of those reforms. Specifically, in the summer of 2011, the Eurozone sovereign debt

crisis and an impasse over the U.S. Government’s debt ceiling unfolded, and during the fall of

2013 another U.S. Government debt ceiling impasse occurred.

While it is difficult to isolate the effects of the 2010 amendments, these events highlight

the potential increased resilience of money market funds after the reforms were adopted. Most

significantly, no money market fund needed to re-price below its stable $1.00 share price. As

discussed in greater detail in the Proposing Release, as a result of concerns about exposure to

European financial institutions, in the summer of 2011, prime money market funds began

experiencing substantial redemptions. 90 But unlike September 2008, money market funds did not

experience meaningful capital losses in the summer of 2011 (or as discussed below, in the fall of

2013), and the funds’ shadow prices did not deviate significantly from the funds’ stable share

prices. Also unlike in 2008, money market funds had sufficient liquidity to satisfy investors’

See 2009 Proposing Release, supra note 66, at section II.C.3.

See Proposing Release supra note 25, at section II.D.2; DERA Study, supra note 24, at 32. Assets held by

prime money market funds declined by approximately $100 billion (or 6%) during a three-week period

beginning June 14, 2011. Some prime money market funds had redemptions of almost 20% of their assets

in each of June, July, and August 2011, and one fund had redemptions of 23% of its assets during that

period after articles began to appear in the financial press that warned of indirect exposure of money

market funds to Greece. Investors purchased shares of government money market funds in late June and

early July in response to these concerns, but then began redeeming government money market fund shares

in late July and early August, likely as a result of concerns about the U.S. debt ceiling impasse and possible

ratings downgrades of government securities. See Proposing Release supra note 25, at section II.D.2.

redemption requests, which were submitted at a lower rate and over a longer period than in 2008,

suggesting that the 2010 amendments acted as intended to enhance the resiliency of money

market funds. 91

In 2013, another debt ceiling impasse took place, 92 although over a longer time period

and without the Eurozone crisis as a backdrop. During the worst two-week period of the 2013

crisis, October 3rd through October 16th, government and treasury money market funds

experienced combined outflows of $54.4 billion, which was 6.1% of total assets, with

approximately 1.5% of assets flowing out of these funds on October 11th, the single worst day

for outflows of the 2013 impasse. Importantly, despite these outflows, fund shadow prices were

largely unaffected during this time period. Once the impasse was resolved, assets flowed back

into these funds, returning government and treasury money market funds to a pre-crisis asset

level before the end of the year, indicating their resiliency. 93

Although money market funds’ experiences differed in 2008 and in the Eurozone crisis,

the heavy redemptions money market funds experienced in both periods appear to have

negatively affected the markets for short-term financing in similar ways. Academics researching

these issues have found, as detailed in the DERA Study, that “creditworthy issuers may

encounter financing difficulties because of risk taking by the funds from which they raise

DERA Study, supra note 24, at 33-34. We note that the redemptions in the summer of 2011 also did not

take place against the backdrop of a broader financial crisis, and therefore may have reflected more targeted

concerns by investors (concern about exposure to the Eurozone and U.S. government securities as the debt

ceiling impasse unfolded). Money market funds’ experience in 2008, in contrast, may have reflected a

broader range of concerns as reflected in the DERA Study, which discusses a number of possible

explanations for redemptions during the financial crisis. Id. at 7-13.

See, e.g., MONEY-MARKET FUNDS SHINE DURING DEBT LIMIT CRISIS (10/25/2013), available at

http://www.imoneynet.com/news/280.aspx.

These statistics are based on an analysis of information from Crane Data. See also infra section III.C.1.

financing”; “local branches of foreign banks reduced lending to U.S. entities in 2011”; and that

“European banks that were more reliant on money funds experienced bigger declines in dollar

lending.” 94 Thus, while such redemptions often exemplify rational risk management by money

market fund investors, they can also have certain contagion effects on the short-term financing

markets. Again, despite these similar effects, the 2010 reforms demonstrated that money market

funds are potentially more resilient today than in 2008.

Continuing Consideration of the Need for Additional Reforms

As discussed in greater detail in the Proposing Release, when we adopted the 2010

amendments, we acknowledged that money market funds’ experience during the financial crisis

raised questions of whether more fundamental changes to money market funds might be

warranted. 95 The DERA Study, discussed throughout this Release, has informed our

consideration of the risks that may be posed by money market funds and our formulation of

today’s final rules and rule amendments. The DERA Study contains, among other things, a

detailed analysis of our 2010 amendments to rule 2a-7 and some of the amendments’ effects to

date, including changes in some of the characteristics of money market funds, the likelihood that

DERA Study, supra note 24, at 34-35 (“It is important to note, however, investor redemptions has a direct

effect on short-term funding liquidity in the U.S. commercial paper market. Chernenko and Sunderam

(2012) report that ‘creditworthy issuers may encounter financing difficulties because of risk taking by the

funds from which they raise financing.’ Similarly, Correa, Sapriza, and Zlate (2012) finds U.S. branches of

foreign banks reduced lending to U.S. entities in 2011, while Ivashina, Scharfstein, and Stein (2012)

document European banks that were more reliant on money funds experienced bigger declines in dollar

lending.”) (internal citations omitted); Sergey Chernenko & Adi Sunderam, Frictions in Shadow Banking:

Evidence from the Lending Behavior of Money Market Funds, Fisher College of Business Working Paper

No. 2012-4 (Sept. 2012); Ricardo Correa, et al., Liquidity Shocks, Dollar Funding Costs, and the Bank

Lending Channel During the European Sovereign Crisis, Federal Reserve Board International Finance

Discussion Paper No. 2012-1059 (Nov. 2012); Victoria Ivashina et al., Dollar Funding and the Lending

Behavior of Global Banks, National Bureau of Economic Research Working Paper No. 18528 (Nov. 2012).

See 2009 Proposing Release, supra note 66, at section III; 2010 Adopting Release, supra note 17, at section

a fund with the maximum permitted weighted average maturity (“WAM”) would “break the

buck” before and after the 2010 reforms, money market funds’ experience during the 2011

Eurozone sovereign debt crisis and the 2011 U.S. debt-ceiling impasse, and how money market

funds would have performed during September 2008 had the 2010 reforms been in place at that

time. 96

In particular, the DERA Study found that under certain assumptions the expected

probability of a money market fund breaking the buck was lower with the additional liquidity

required by the 2010 reforms. 97 For example, funds in 2011 had sufficient liquidity to withstand

investors’ redemptions during the summer of 2011. 98 The fact that no fund experienced a credit

event during that time also contributed to the evidence that funds were able to withstand

relatively heavy redemptions while maintaining a stable $1.00 share price. Finally, using actual

portfolio holdings from September 2008, the DERA Study analyzed how funds would have

performed during the financial crisis had the 2010 reforms been in place at that time. While

funds holding 30% weekly liquid assets are more resilient to portfolio losses, funds will “break

the buck” with near certainty if capital losses of the fund's non-weekly liquid assets exceed

1%. 99 The DERA Study concludes that the 2010 reforms would have been unlikely to prevent a

fund from breaking the buck when faced with large credit losses like the ones experienced in

See generally DERA Study, supra note 24, at section 4.

Id. at 30.

Id. at 34.

Id. at 38, Table 5. In fact, even at capital losses of only 0.75% of the fund's non-weekly liquid assets and

no investor redemptions, funds are already more likely than not (64.6%) to “break the buck.” Id.

2008. 100 Based on the DERA Study, we believe that, although the 2010 reforms were an

important step in making money market funds better able to withstand heavy redemptions when

there are no portfolio losses (as was the case in the summer of 2011 and the fall of 2013), these

reforms do not sufficiently address the potential future situations when credit losses may cause a

fund’s portfolio to lose value or when the short-term financing markets more generally come

under stress.

After consideration of this data, as well as the comments we received on the proposal, we

believe that the reforms we are adopting today should further help lessen money market funds’

susceptibility to heavy redemptions, improve their ability to manage and mitigate potential

contagion from high levels of redemptions, and increase the transparency of their risks, while

preserving, as much as possible, the benefits of money market funds.

III.

DISCUSSION

Liquidity Fees and Redemption Gates

Today, we are adopting amendments to rule 2a-7 that will authorize new tools for money

market funds to use in times of stress to stem heavy redemptions and avoid the type of contagion

that occurred during the financial crisis. These amendments provide money market funds with

the ability to impose liquidity fees and redemption gates (generally referred to herein as “fees

and gates”) in certain circumstances. 101 Today’s amendments will allow a money market fund to

impose a liquidity fee of up to 2%, or temporarily suspend redemptions (also known as “gate”)

100

To further illustrate the point, the DERA Study noted that the Reserve Primary Fund “would have broken

the buck even in the presence of the 2010 liquidity requirements.” Id. at 37.

101

Under the amendments we are adopting today, government funds are permitted, but not required, to impose

fees and gates, as discussed below. See infra section III.C.1 of this Release.

for up to 10 business days in a 90-day period, if the fund’s weekly liquid assets fall below 30%

of its total assets and the fund’s board of directors (including a majority of its independent

directors) determines that imposing a fee or gate is in the fund’s best interests. 102 Additionally,

under today’s amendments, a money market fund will be 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 (including a majority of its independent directors) determines that

imposing such a fee would not be in the best interests of the fund. 103

These amendments differ in some respects from the fees and gates that we proposed,

which would have required funds to impose a 2% liquidity fee on all redemptions, and would

have permitted the imposition of redemption gates for up to 30 days in a 90-day period, after a

fund’s weekly liquid assets fell below 15% of its total assets. In addition, under our proposal, a

fund’s board (including a majority of independent directors) could have determined not to

impose the liquidity fee or to impose a lower fee. A large number of commenters supported, to

varying degrees and with varying caveats, our fees and gates proposal. 104 Many other

commenters, on the other hand, expressed their opposition to fees and gates. 105 Comments on the

102

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 or imposing the redemption gate, effective as of the

beginning of the next business day. See rule 2a-7(c)(2)(i)(A) and (B), and (ii)(B).

103

The board also may determine that a lower or higher fee would be in the best interests of the fund. See rule

2a-7(c)(2)(ii)(A); see also infra section III.A.2.c.

104

See, e.g., Form Letter Type A; Comment Letter of Fidelity Investments (Sept. 16, 2013) (“Fidelity

Comment Letter”); Comment Letter of Federated Investors, Inc. (Re: Alternative 2) (Sept. 16, 2013)

(“Federated V Comment Letter”); Comment Letter of Northern Trust Corporation (Sept. 16, 2013)

(“Northern Trust Comment Letter”).

105

See, e.g., Comment Letter of Capital Advisors Group (Sept. 3, 2013) (“Capital Advisors Comment Letter”);

Comment Letter of Americans for Financial Reform (Sept. 17, 2013) (“Americans for Fin. Reform

Comment Letter”); Comment Letter of Edward D. Jones and Co., L.P. (Sept. 20, 2013) (“Edward Jones

Comment Letter”).

proposal are discussed in more detail below.

Analysis of Certain Effects of Fees and Gates 106

Background

As discussed previously, shareholders redeem money market fund shares for a number of

reasons. 107 Shareholders may redeem shares because the current rounding convention in money

market fund valuation and pricing can create incentives for shareholders to redeem shares ahead

of other investors when the market-based NAV per share of a fund is lower than $1.00 per

share. 108 Shareholders also may flee to quality, liquidity, or transparency (or combinations

thereof) during adverse economic events or financial market conditions. 109 Furthermore, in times

of stress, shareholders may simply need or want to withdraw funds for unrelated reasons. In any

case, money market funds may have to absorb quickly high levels of redemptions that exceed

internal sources of liquidity. In these instances, funds will need to sell portfolio securities,

perhaps at a loss either because they incur transitory liquidity costs or they must sell assets at

“fire sale” prices. 110 If fund managers deplete their funds’ most liquid assets first, this may

impose future liquidity costs (that are not reflected in a $1.00 share price based on current

amortized cost valuation) on the non-redeeming shareholders because later redemption requests

must be met by selling less liquid assets. These effects may be heightened if many funds sell

assets at the same time, lowering asset prices. During the financial crisis, for example, securities

106

See infra section III.K (discussing further the economic effects of the fees and gates amendments).

107

See Proposing Release, supra note 25, at 156-172; DERA Study, supra note 24, at 2-4.

108

As discussed in section III.B, the floating NAV amendments help mitigate this incentive for institutional

prime funds by causing redeeming shareholders to receive the market value of redeemed shares.

109

See Proposing Release, supra note 25, at n.340.

110

See Proposing Release, supra note 25, at n.341.

sales to meet heavy redemptions in money market funds and sales of assets by other investors

created downward price pressure in the market. 111

Liquidity fees and redemption gates have been used successfully in the past by certain

non-money market fund cash management pools to stem redemptions during times of stress. 112

Liquidity fees provide investors continued access to their liquidity (albeit at a cost) while also

reducing the incentives for shareholders to redeem shares. Liquidity fees, however, will not

outright stop redemptions. In contrast to fees, redemption gates stop redemptions altogether, but

do not offer the flexibility of fees. 113 Because redemption gates prevent investors from accessing

their investments for a period of time, a fund may choose to first impose a liquidity fee and then,

if needed, impose a redemption gate.

The fees and gates amendments we are adopting today are designed to address certain

111

See supra section II.D herein (discussing the financial crisis); see also Proposing Release, supra note 25 at

32-33; DERA Memorandum Regarding Liquidity Cost During Crisis Periods, dated March 17, 2014

(“DERA Liquidity Fee Memo”), available at http://www.sec.gov/comments/s7-03-13/s70313-321.pdf.

112

A Florida local government investment pool experienced heavy redemptions in 2007 due to its holdings in

SIV securities. The pool suspended redemptions and ultimately reopened but only after the pool (and each

shareholder’s interest) had been split into two separate pools: one holding the more illiquid securities

previously held by the pool (“Fund B”) and one holding the remaining securities of the pool (“Fund A”).

Fund A reopened, but limited redemptions to up to 15% of an investor’s holdings or $2 million without

penalty, and imposed a 2% redemption fee on any additional redemptions. Fund B remained closed. When

Fund A reopened, it experienced withdrawals, but according to state officials, the withdrawals were

manageable. See Dealbook, NY TIMES, Florida Fund Reopens, and $1.1 Billion is Withdrawn; David

Evans and Darrell Preston, Florida Investment Chief Quits; Fund Rescue Approved, BLOOMBERG (Dec. 4,

2007); Helen Huntley, State Wants Fund Audit, TAMPA BAY TIMES (Dec. 11, 2007); see also infra note 114

(discussing the successful use by some European enhanced cash funds of fees or gates during the financial

crisis).

113

See Institutional Money Market Funds Association, IMMFA Recommendations for Redemption Gates and

Liquidity Fees, available at http://www.immfa.org/publications/policy-positions.html (“Redemption gates

and/or a liquidity fee are methods by which a fund manager, if experiencing difficulty due to extreme

market circumstances, can control redemptions in order to ensure that all investors are treated fairly and

that no ‘first-mover’ advantage exists.”); cf. G.W. Schwert & P. J. Seguin, Securities Transaction Taxes:

An Overview of Costs, Benefits and Unresolved Questions, 49 FINANCIAL ANALYSTS JOURNAL 27 (1993);

K.A. Froot & J. Campbell, International Experiences with Securities Transaction Taxes, in THE

INTERNATIONALIZATION OF EQUITY MARKETS (J. Frankel, ed., 1994), at 277–308.

issues highlighted by the financial crisis. In particular, the amendments should allow funds to

moderate redemption requests by allocating liquidity costs to those shareholders who impose

such costs on funds through their redemptions and, in certain cases, stop heavy redemptions in

times of market stress by providing fund boards with additional tools to manage heavy

redemptions and improve risk transparency. We understand that based on the level of

redemption activity that occurred during the financial crisis, many money market funds would

have faced liquidity pressures sufficient to cross the liquidity thresholds we are adopting today

that would allow the use of fees and gates. Although no one can predict with certainty what

would have happened if money market funds had operated with fees and gates during the

financial crisis, we believe that money market funds would have been better able to manage the

heavy redemptions that occurred and limit contagion, regardless of the reason for the

redemptions. 114

Fees and gates are just one aspect of the overall package of reforms we are adopting

today. We recognize that fees and gates do not address all of the factors that may lead to heavy

redemptions in money market funds. For example, fees and gates do not fully eliminate the

114

See, e.g., Comment Letter of Mutual Fund Directors Forum (Sept. 16, 2013) (“MFDF Comment Letter”)

(stating, with respect to the proposed fee and gates amendments, “we concur that this approach has the

potential to reduce runs during times of stress or crisis”); UBS Comment Letter (“We agree that liquidity

fees and gates would help money funds address heavy redemptions in an effective manner and limit the

spread of contagion ….”); Form Letter Type D. We also note that some European enhanced cash funds

successfully used fees or gates during the financial crisis to stem redemptions. See Elias Bengtsson,

Shadow Banking and Financial Stability: European Money Market Funds in the Global Financial Crisis

(2011) (“Bengtsson”), available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1772746&download=yes; Julie Ansidei, et al., Money

Market Funds in Europe and Financial Stability, European Systemic Risk Board Occasional Paper No. 1,

at 36 (June 2012), available at

http://www.esrb.europa.eu/pub/pdf/occasional/20120622_occasional_paper_1.pdf?465916d4816580065dfa

fb92059615b6.

incentive to redeem ahead of other investors in times of stress 115 or fully prevent investors from

redeeming shares (except during the duration of a temporary gate) to invest in securities with

higher quality, better liquidity, or increased transparency. 116 Fees and gates also do not address

the shareholder dilution that results when a shareholder is able to redeem at a stable NAV that is

higher than the market value of the fund’s underlying portfolio securities. 117 Nonetheless, for the

reasons discussed in this Release, fees and gates provide funds and their boards with additional

tools to stem heavy redemptions and avoid the type of contagion that occurred during the

financial crisis by allocating liquidity costs to those shareholders who impose such costs on

funds and by stopping runs.

Liquidity Fees

During the financial crisis, some funds experienced heavy redemptions. Shareholders

who redeemed shares early bore none of the economic consequences of their redemptions.

Shareholders who remained in the funds, however, faced a declining NAV and an increased

probability that their funds would “break the buck.” As discussed in the Proposing Release and

suggested by commenters, investors may have re-assessed their redemption decisions during the

crisis if money market funds had imposed liquidity fees because they would have been required

115

However, as discussed in section III.B herein, under today’s amendments, institutional prime funds will be

required to float their NAV. This reform is designed, in part, to address the incentive to redeem ahead of

other investors in certain money market funds because of current money market fund valuation and pricing

methods.

116

Fees and gates lessen but do not fully eliminate the incentive for investors to redeem quickly in times of

stress because redeeming shareholders will retain an economic advantage over shareholders who remain in

a fund when liquidity costs are high, but before the fund has imposed fees or gates.

117

In contrast, the floating NAV requirement for institutional prime funds will address this issue. See infra

section III.B.1.

to pay at least some of the costs of their redemptions. 118 It is possible that some investors would

have made the economic decision not to redeem because the liquidity fees imposed by the fund

and incurred by an investor would have been certain, whereas potential future losses would have

been uncertain. 119

In addition, liquidity fees would have helped offset the costs of the liquidity provided to

redeeming shareholders and potentially protected the funds’ NAVs because the cash raised from

liquidity fees would create new liquidity for the funds. 120 Additionally, to the extent that

liquidity fees imposed during the crisis could have reduced redemption requests at the margin,

they would have allowed funds to generate liquidity internally as assets matured. By imposing

liquidity costs on redeeming shareholders, liquidity fees, as noted by commenters, also treat

holding and redeeming shareholders more equitably. 121

118

See, e.g., Comment Letter of U.S. Chamber of Commerce, Center for Capital Markets Competitiveness

(Sept. 17, 2013) (“Chamber II Comment Letter”) (“[I]f shareholders were to be charged a fee when a

MMF’s liquidity costs are at a premium, they may be discouraged from redeeming their shares at that time,

which would have the effect of slowing redemptions in the MMF.”); Comment Letter of Charles Schwab

Investment Management, Inc. (Sept. 12, 2013) (“Schwab Comment Letter”) (“[W]e agree that the proposed

liquidity fee of 2% would be a strong disincentive to redeem during a crisis ….”).

119

See HSBC Comment Letter; see also infra note 152-153 and accompanying text. We acknowledge (as we

did in the Proposing Release) that liquidity fees may not always effectively stave off high levels of

redemptions in a crisis; however, liquidity fees, once imposed, should help reduce the incentive to redeem

shares because investors will pay a fee in connection with their redemptions. See Proposing Release, supra

note 25, at 161.

120

Fees paid by investors that redeem shares should help prevent a fund’s NAV from becoming impaired

based on liquidity costs, as long as the liquidity fee imposed reflects the liquidity cost of redeeming shares.

Fees should also generate additional liquidity to help funds meet redemption requests.

121

See, e.g., Invesco Comment Letter (“Liquidity fees would provide an appropriate and effective means to

ensure that the extra costs associated with raising liquidity to meet fund redemptions during times of

market stress are borne by those responsible for them.”); Comment Letter of J.P. Morgan Asset

Management (Sept. 17, 2013) (“J.P. Morgan Comment Letter”); UBS Comment Letter; but see, e.g.,

Comment Letter of U.S. Bancorp Asset Management, Inc. (Sept. 16, 2013) (“U.S. Bancorp Comment

Letter”) (suggesting that liquidity fees harm those that redeem after the fees are imposed and that gates

harm those that remain in the fund after the gate is in place).

Liquidity fees, which we believe would rarely be imposed under normal market

conditions, are designed to preserve the current benefits of principal stability, liquidity, and a

market yield, but reduce the likelihood that, in times of market stress, costs that ought to be

attributed to a redeeming shareholder are externalized on remaining shareholders and on the

wider market. 122 Even if a liquidity fee is imposed, fund investors continue to have the flexibility

to access liquidity (albeit at a cost). The Commission believes, and commenters suggested, that

if funds could have imposed liquidity fees during the crisis, they would likely have been better

able to manage redemptions, thereby ameliorating their impact and reducing contagion effects. 123

ii.

Redemption Gates

We believe that funds also could have benefitted from the ability to impose redemption

gates during the crisis. 124 Like liquidity fees, gates are designed to preserve the current benefits

122

See Proposing Release, supra note 25, at n.343.

123

See Proposing Release, supra note 25, at 155; see also, e.g., Comment Letter of Wells Fargo Funds

Management, LLC (Sept. 16, 2013) (“Wells Fargo Comment Letter”) (“Prime money market fund

investors, the short-term markets and businesses that rely on funds for financing would each benefit from

the ability of [f]ees and [g]ates, during distressed market conditions, to reduce the susceptibility of subject

funds to runs and blunt the spread of deleterious contagion effects.”); but see, e.g., U.S. Bancorp Comment

Letter (suggesting that liquidity fees would not deter redemptions in times of market stress or prevent

contagion because “investors will choose to pay the [fee] now rather than wait for the wind-down of a fund

to be completed.”).

124

See Comment Letter of Arnold & Porter LLP on behalf of Federated Investors [Overview] (Sept. 11, 2013)

(“Federated II Comment Letter”) (noting that gates have “been demonstrated to address runs in a crisis

….”); Comment Letter of BlackRock, Inc. (Sept. 12, 2013) (“BlackRock II Comment Letter”) (“Standby

liquidity fees and gates would “stop the run” in crisis scenarios.”); see also supra note 114 (noting that

European enhanced cash funds successfully used fees or gates during the financial crisis to stem

redemptions); The Need to Focus a Light on Shadow Banking is Nigh, Mark Carney, Financial Times (June

15, 2014), available at http://www.ft.com/intl/cms/s/0/3a1c5cbc-f088-11e3-8f3d00144feabdc0.html?siteedition=intl#axzz35rCMZLTy (“Money market funds are being made less

susceptible to runs…by establishing an ability for funds to use, for example, temporary suspensions of

withdrawals….”); The Age of Asset Management?, Andrew Haldane (Apr. 4, 2014), available at

http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech723.pdf (suggesting gates

may be a “suitable” tool to “tackle market failures”); but see, e.g., Comment Letter of Deutsche Investment

Management Americas (Sept. 17, 2013) (“Deutsche Comment Letter”) (suggesting that gates can

exacerbate a run).

of money market funds under most market conditions; however, if approved and monitored by

their boards, funds can use gates to respond to a run by directly halting redemptions. If funds

had been able to impose redemption gates during the crisis, they would have had available to

them a tool to stop temporarily mounting redemptions, 125 which if used could have generated

additional internal liquidity while gates were in place. 126 In addition, gates may have allowed

funds to invest the proceeds of maturing assets in short-term securities for the duration of the

gate, protecting the short-term financing market, and supporting capital formation for issuers.

Gates also would have allowed funds to directly and fully control redemptions during the crisis,

providing time for funds to better communicate the nature of any stresses to shareholders and

thereby possibly mitigating incentives to redeem shares. 127

Benefits of Fees and Gates

Fees and Gates Address Concerns Related to Heavy

Redemptions

As noted above, a large number of commenters supported our fees and gates proposal. 128

The primary benefit cited by commenters in favor of fees and/or gates is that they would address

125

See, e.g., U.S. Bancorp Comment Letter (suggesting that redemption gates would be the “most effective

option in addressing run risk”); Chamber II Comment Letter (stating that “a redemption gate would stop a

‘run’ in [its] tracks”).

126

See, e.g., Chamber II Comment Letter (“[A] redemption gate also gives [a money market fund] time for

issues in the market to subside and for securities in the portfolio to mature, which would increase the

[money market fund’s] liquidity levels.”); Form Letter Type D (suggesting that redemption gates “would

give funds time to stabilize”). Internal liquidity generated while a gate is in place could prevent funds from

having to immediately sell assets at fire sale prices.

127

See, e.g., Invesco Comment Letter (“Redemption gates have been proven to be an effective means of

preventing runs and providing a ‘cooling off’ period to mitigate the effects of short-term investor panic.”)

128

We note that many participants in the money market fund industry have previously expressed support for

imposing some form of a liquidity fee or redemption gate when a fund comes under stress as a way of

reducing, in a targeted fashion, the fund’s susceptibility to heavy redemptions. See Proposing Release,

supra note 25, at n.358.

run risk and/or systemic contagion risk. 129 Commenters also argued that fees and gates would

protect the interests of all fund shareholders, particularly non- or late-redeeming shareholders,

treating them more equitably. 130 Commenters supported our view that redemption restrictions

could provide a “cooling off” period to temper the effects of short-term investor panic, 131 and that

fees or gates could preserve and help restore the liquidity levels of a money market fund that has

come under stress. 132 Commenters also echoed our view that fees and/or gates could reduce or

eliminate the likelihood that funds would be forced to sell otherwise desirable assets and engage

in “fire sales.” 133 Additionally, commenters noted that gates would provide boards and advisers

129

See, e.g., Form Letter Type A; U.S. Bancorp Comment Letter; Comment Letter of Davenport & Company

LLC (Sept. 13, 2013) (“Davenport Comment Letter”); MFDF Comment Letter; Comment Letter of

Treasury Strategies, Inc. (Mar. 31, 2014) (“Treasury Strategies III Comment Letter”) (“We found that

[f]ees and [g]ates can stop and prevent runs…. We find that highly effective run prevention is attainable

within the approaches contemplated by the [Proposing] Release, while requiring that fund boards be given

discretion to take protective action. This is the mechanism by which [f]ees/[g]ates cause [money market

funds] to internalize the cost of investor protection, while preserving the utility of current CNAV

vehicles.”); see also The Need to Focus a Light on Shadow Banking is Nigh, Mark Carney, Financial Times

(June 15, 2014), available at http://www.ft.com/intl/cms/s/0/3a1c5cbc-f088-11e3-8f3d00144feabdc0.html?siteedition=intl#axzz35rCMZLTy (“By establishing common policy standards and

arrangements for co-operation, the reforms [including temporary gates] will help to avoid a fragmentation

of the global financial system.”); but see, e.g., Boston Federal Reserve Comment Letter (suggesting fees or

gates do not address run risk); Systemic Risk Council Comment Letter; Comment Letter of American

Bankers Association (Sept. 17, 2013) (“American Bankers Ass’n Comment Letter”).

130

See, e.g., Form Letter Type D (noting that gates would “give funds time to stabilize or, in the event a fund

cannot resume redemptions without breaking the buck, ensure that the funds [sic] shareholders are treated

equally in a distribution of the funds [sic] assets upon dissolution”); Invesco Comment Letter (“Liquidity

fees would provide an appropriate and effective means to ensure that the extra costs associated with raising

liquidity to meet fund redemptions during times of market stress are borne by those responsible for them.”);

Comment Letter of Independent Directors Council (Sept. 17, 2013) (“IDC Comment Letter”); J.P. Morgan

Comment Letter. We recognize, however, that our fees and gates reform does not address other

shareholder equity concerns, including shareholder dilution, that arise as a result of the structural features in

current rule 2a-7 that promote a first-mover advantage. Our floating NAV reform is designed to address

this concern for institutional prime money market funds. See infra section III.B.

131

See, e.g., Form Letter Type D; Invesco Comment Letter; Comment Letter of Reich & Tang Asset

Management, LLC (Sept. 17, 2013) (“Reich & Tang Comment Letter”).

132

See, e.g., HSBC Comment Letter; Deutsche Comment Letter; ICI Comment Letter.

133

See, e.g., MSCI Comment Letter; Federated V Comment Letter; Comment Letter of Treasury Strategies,

Inc. (Sept. 12, 2013) (“Treasury Strategies Comment Letter”). We also believe that reducing or eliminating

with crucial additional time to find the best solution in a crisis, instead of being forced to make

decisions in haste. 134

We are adopting reforms that will give a fund the ability to impose either a liquidity fee

or a redemption gate because we believe, and some commenters suggested, that fees and gates,

while both aimed at helping funds to better and more systematically manage high levels of

redemptions, do so in different ways and thus with somewhat different tradeoffs. 135

Accordingly, we believe that both fees and gates should be available to funds and their boards to

provide maximum flexibility for funds to manage heavy redemptions. 136 Liquidity fees are

designed to reduce shareholders’ incentives to redeem shares when it is abnormally costly for

funds to provide liquidity by requiring redeeming shareholders to bear at least some of the

liquidity costs associated with their redemption (rather than transferring all of those costs to

remaining shareholders). 137 Liquidity fees increase the cost of redeeming shares, which may

the likelihood of fire sales would in turn help protect other market participants that need to sell assets in the

market or perhaps mark asset values to market.

134

See, e.g., ICI Comment Letter; UBS Comment Letter; IDC Comment Letter; Federated V Comment Letter.

135

See, e.g., Invesco Comment Letter (suggesting that gates provide “the most direct, simple and effective

method” to prevent runs and contagion as well as “a ‘cooling off’ period to mitigate the effects of shortterm investor panic,” while fees “mitigate the ‘first-mover advantage’” and “provide an appropriate and

effective means to ensure that the extra costs associated with raising liquidity to meet fund redemptions

during times of market stress are borne by those responsible for them.”)

136

See Treasury Strategies III Comment Letter (“Fees enable investors to access their liquidity, but at a

price…, but that is the cost of being able to assure that a stable NAV product will not cause contagion or

fire sales during such periods. Gates do not impose an extra [f]ee on shareholders, which is appealing to

many shareholders, but have the undesirable effect of restricting access to liquidity during critical periods.

Together, [f]ees and [g]ates provide fund boards with powerful tools to prevent a run from materializing, to

stop a run in progress, and to assure that a stress event does not cause contagion or fire sales.”).

137

See, e.g., Dreyfus Comment Letter (“We also agree that liquidity fees can deter net redemption activity

while also providing an appropriate “cost of liquidity” for investors choosing to exercise the option to

redeem over the option to hold….); see also Comment Letter of Wells Fargo Funds Management, LLC

(Jan. 17, 2013) (available in File No. FSOC–2012–0003) (“Wells Fargo FSOC Comment Letter”) (stating

that a liquidity fee would “provide an affirmative reason for investors to avoid redeeming from a distressed

reduce investors’ incentives to sell them. Likewise, fees help reduce investors’ incentives to

redeem shares ahead of other investors, especially if fund managers deplete their funds’ most

liquid assets first to meet redemptions, leaving later redemption requests to be met by selling less

liquid assets.

Several commenters noted that liquidity fees could “re-mutualize” risk-taking among

investors and provide a way to recover costs of liquidity in times of stress. 138 This is because

liquidity fees allocate at least some of the costs of providing liquidity to redeeming rather than

non-redeeming shareholders and protect fund liquidity by requiring redeeming shareholders to

repay funds for liquidity costs incurred. 139 To the extent liquidity fees exceed such costs, they

also can help increase the fund’s net asset value for remaining shareholders which would have a

restorative effect if the fund has suffered a loss. As one commenter has said, a liquidity fee can

“provide a strong disincentive for investors to make further redemptions by causing them to

choose between paying a premium for current liquidity or delaying liquidity and benefitting from

the fees paid by redeeming investors.” 140 This explicit pricing of liquidity costs in money market

funds should offer significant benefits to funds and the broader short-term financing market in

times of potential stress because it should lessen both the frequency and effect of shareholder

fund” and “those who choose to redeem in spite of the liquidity fee will help to support the fund’s marketbased NAV and thus reduce or eliminate the potential harm associated with the timing of their redemptions

to other remaining investors”).

138

See, e.g., HSBC Comment Letter; Invesco Comment Letter; IDC Comment Letter.

139

We note that investors owning securities directly – as opposed to through a money market fund – naturally

bear liquidity costs. They bear these costs both because they bear any losses if they have to sell a security

at a discount to obtain their needed liquidity and because they directly bear the risk of a less liquid

investment portfolio if they sell their most liquid holdings first to obtain needed liquidity.

140

See Proposing Release, supra note 25, at 160 n.352 (citing ICI Jan. 24 FSOC Comment Letter).

redemptions, which might otherwise result in the sale of fund securities at “fire sale” prices. 141

In contrast, redemption gates will provide fund boards with a direct and immediate tool

for stopping heavy redemptions in times of stress. 142 Unlike liquidity fees, gates are designed to

directly stop a run by delaying redemptions long enough to allow (1) fund managers time to

assess the condition of the fund and determine the appropriate strategy to meet redemptions, (2)

liquidity buffers to grow organically as securities in the portfolio (many of which are very shortterm) mature and produce cash, and (3) shareholders to assess the liquidity and value of portfolio

holdings in the fund and for any shareholder or market panic to subside. 143 As contemplated by

today’s amendments, gates definitively stop runs for funds that impose them by blocking all

redemptions for their duration.

We recognize that redemption gates, if they are ever imposed, will inhibit the full,

unfettered redeemability of money market fund shares, a principle embodied in section 22(e) of

the Investment Company Act. 144 However, as discussed in section III.A.3 below, section 22(e) of

the Investment Company Act is aimed at preventing funds and their advisers from interfering

with shareholders’ redemption rights for improper purposes, such as preservation of management

fees. Consistent with that aim, redemption gates under today’s amendments are designed to

benefit the fund and its shareholders and may be imposed only when a fund’s board determines

141

See Chamber II Comment Letter (“[I]f shareholders were to be charged a fee when an MMF’s liquidity

costs are at a premium, they may be discouraged from redeeming their shares at that time, which would

have the effect of slowing redemptions in the MMF.”).

142

See, e.g., Chamber II Comment Letter (“[A] redemption gate would stop a ‘run’ in [its] tracks, because

shareholders would be prohibited from redeeming their shares while the gate is in place.”)

143

See Proposing Release, supra note 25, at n.348.

144

See section 22(e).

that doing so is in the best interests of the fund. 145 We also note that, in response to commenter

concerns regarding investor access to their investments and the proposed duration of redemption

gates, under today’s amendments, gates will be limited to up to 10 business days in any 90-day

period (rather than 30 days in a 90-day period as proposed). 146 As such, the extent to which

today’s amendments inhibit the redeemability of money market fund shares is limited.

In fact, we note that money market funds are currently permitted to delay payments on

redemptions for up to seven days. 147 In addition, money market funds currently may suspend

redemptions after obtaining an exemptive order from the Commission,148 or in accordance with

rule 22e-3, which requires a fund’s board of directors to determine that the fund is about to

“break the buck” (specifically, that the extent of deviation between the fund’s amortized cost

price per share and its current market-based NAV per share may result in material dilution or

other unfair results to investors). 149 Under today’s amendments, money market fund boards will

be able to temporarily suspend redemptions after a fund falls below the same threshold that funds

145

See rule 2a-7(c)(2)(i).

146

See rule 2a-7(c)(2)(i)(B); see also, infra section III.A.2.d (discussing the duration of redemption gates).

147

See section 22(e).

148

There are limited exceptions specified in section 22(e) of the Act in which a money market fund (and any

other mutual fund) may suspend redemptions or delay payment on redemptions for more than seven days,

such as (i) for any period (A) during which the New York Stock Exchange is closed other than customary

week-end and holiday closings or (B) during which trading on the New York Stock Exchange is restricted,

or (ii) during any period in which an emergency exists (as the Commission determines by rule or

regulation) as a result of which (A) disposal by the fund of securities owned by it is not reasonably practical

or (B) it is not reasonably practical for the fund to determine the value of its net assets. The Commission

also has granted orders in the past allowing funds to suspend redemptions. See, e.g., In the Matter of The

Reserve Fund, Investment Company Act Release No. 28386 (Sept. 22, 2008) [73 FR 55572 (Sept. 25,

2008)] (order); Reserve Municipal Money-Market Trust, et al., Investment Company Act Release No.

28466 (Oct. 24, 2008) [73 FR 64993 (Oct. 31, 2008)] (order).

149

Rule 22e-3(a)(1). Unlike under today’s amendments, a fund that imposes redemptions gates pursuant to

rule 22e-3 must do so permanently and in anticipation of liquidation.

must cross for boards to impose liquidity fees. 150 Accordingly, we believe that the gating allowed

by today’s amendments extends and formalizes the existing gating framework, clarifying for

investors when a money market fund potentially may use a gate as a tool to manage heavy

redemptions and thus prevents any investor confusion on when gating may apply.

Fees and gates also may have different levels of effectiveness under different stress

scenarios. 151 For example, we expect that the imposition of liquidity fees when a fund faces

heavy redemptions should be able to reduce the harm to non-redeeming shareholders and thus

the likelihood of additional redemptions that might have been made in response to that harm. To

the extent that a fund does not need to engage in fire sales and depress prices because of the

imposition of fees, the possibility of broader market contagion is reduced. We also note that

research in behavioral economics suggests that liquidity fees may be particularly effective in

dampening a run because, when faced with two negative options, investors tend to prefer the

option that involves only possible losses rather than the option that involves certain losses, even

when the amount of possible loss is significantly higher than the certain loss. 152 Unlike gates,

which temporarily prevent shareholders from redeeming shares altogether, once imposed,

liquidity fees will present investors with an economic decision as to whether to redeem or remain

150

See rule 2a-7(c)(2)(i).

151

We note that under today’s amendments, a fund’s board may determine that it is in the best interests of a

fund to impose a fee and then later determine to lift the fee and impose a gate, or vice versa, subject to the

limitations on the duration of fees and gates. See rule 2a-7(c)(2)(i) and (ii).

152

See, e.g., Proposing Release, supra note 25, at n.355 (citing DANIEL KAHNEMAN, THINKING, FAST AND

SLOW (2011), at 278-288); see also HSBC Comment Letter; Schwab Comment Letter (“A liquidity fee

would force early redeemers to pay for the costs of their redemption, without knowing whether the fund

was actually going to experience losses or not. This is a powerful disincentive.”); but see Comment Letter

of Melanie L. Fein Law Offices (Sept. 10, 2013) (“Fein Comment Letter”) (suggesting liquidity fees are

unlikely to “prevent institutional [money market fund] investors from reallocating their assets in a crisis”).

in a fund. Investors fearing that a money market fund may suffer losses may prefer to stay in the

fund and avoid paying a liquidity fee (despite the possibility that the fund might suffer a future

loss) rather than redeem and lock in payment of the liquidity fee. 153

It is possible, however, that liquidity fees might not be fully effective during a

market-wide crisis because, for example, shareholders might redeem shares irrespective of the

level of their fund’s true liquidity costs and the imposition of a liquidity fee. 154 In those cases,

gates will be able to function as circuit breakers, creating time for funds to rebuild their own

internal liquidity and shareholders to reconsider whether redemptions are still desired or

warranted. 155

ii.

Management-Related Advantages

We are also mindful that permitting fund boards to impose fees and/or gates after a fund

has fallen below a particular threshold, and requiring funds to impose liquidity fees at a lower

designated threshold (absent a board finding that the fee is not in the best interests of the fund),

may offer certain benefits to funds with respect to management of liquidity and redemption

activity. Some commenters suggested that, even during non-stress periods, fees and gates could

provide fund managers with an incentive to carefully monitor shareholder concentration and

shareholder flow to lessen the chance that the fund might have to impose fees or gates (because

153

See, e.g., Proposing Release, supra note 25, at n.355 (citing DANIEL KAHNEMAN, THINKING, FAST AND

SLOW (2011), at 278-288); see also HSBC Comment Letter; Schwab Comment Letter.

154

See DERA Study, supra note 24, at 7-14 (discussing different possible explanations for why shareholders

may redeem from money market funds in times of stress).

155

See, e.g., Comment Letter of Department of the Treasury, Commonwealth of Virginia (Sept. 17, 2013)

(“Va. Treasury Comment Letter”); Chamber II Comment Letter; Dreyfus Comment Letter.

larger redemptions are more likely to cause the fund to breach the threshold). 156 The fees and

gates amendments also may have the additional effect of encouraging portfolio managers to

more closely monitor fund liquidity and hold more liquid securities to increase the level of daily

and weekly liquid assets in the fund, as it would tend to lessen the likelihood of a fee or gate

being imposed. 157 Such an approach could also lead to greater investor participation in money

market funds to the extent investors seek to invest in a product with low liquidity risk, thereby

increasing the supply of capital available to invest in commercial paper. We recognize, however,

that such an approach could perhaps shrink the market for riskier or longer-term commercial

paper, or have a negative effect on yield. 158

We also note that funds may take alternate approaches to managing liquidity and

imposing fees and gates, which may differentially affect the short-term funding markets. For

example, a fund that imposes a fee or gate may decide to immediately build liquidity by

investing all maturing securities in highly liquid assets, particularly if the fund wants to remove

156

See, e.g., Comment Letter of Securities Industry and Financial Markets Association (Sept. 17, 2013)

(“SIFMA Comment Letter”) (stating that some members “believe the existence of the liquidity trigger for

the fee and gate will motivate fund managers to maintain fund liquidity well in excess of the trigger level,

to avoid triggering the fee or gate. That is to say, the mere existence of the potential for the fee or gate will

result in enhanced liquidity in money market funds.”); BlackRock II Comment Letter; Comment Letter of

Hester Peirce and Robert Greene (Sept. 17, 2013) (“Peirce & Greene Comment Letter”); see also HSBC

Global Asset Management, Liquidity Fees; a proposal to reform money market funds (Nov. 3, 2011)

(“HSBC 2011 Liquidity Fees Letter”) (a liquidity fee “will result in more effective pricing of risk (in this

case, liquidity risk)…[and] act as a market-based mechanism for improving the robustness and fairness” of

money market funds); Comment Letter of BlackRock, Inc. (Dec. 13, 2012) (available in File No. FSOC–

2012–0003) (“BlackRock FSOC Comment Letter”) (“A fund manager will focus on managing both assets

and liabilities to avoid triggering a gate. On the liability side, a fund manager will be incented to know the

underlying clients and model their behavior to anticipate cash flow needs under various scenarios. In the

event a fund manager sees increased redemption behavior or sees reduced liquidity in the markets, the fund

manager will be incented to address potential problems as early as possible.”).

157

See, e.g., Proposing Release, supra note 25, at n.365.

158

See infra section III.K.

the fee or gate as soon as possible. Another fund may plan to impose a fee or gate for a set

period of time, in which case, there would be no reason to stop investing in less liquid short-term

commercial paper provided it matured while the fee or gate was in place. The first strategy

would likely have the capital formation effect of lowering participation in short-term funding

markets, whereas the second strategy may defer the impact until a later time, possibly after

market conditions have improved.

iii.

Transparency

We recognize, and certain commenters noted, 159 that the prospect of fees and gates being

implemented when a fund is under stress should help make the risk of investing in money market

funds more salient and transparent to investors, which may help sensitize them to the risks of

investing in money market funds. On the other hand, we note that other commenters argued that

fees and gates would not improve transparency of risk for investors. 160 Having considered these

comments, however, we believe that there will be an appreciable increase in transparency as a

result of our fees and gates amendments. The disclosure amendments we are adopting today will

require funds to provide disclosure to investors regarding the possibility of fees and gates being

imposed if a fund’s liquidity is impaired. We believe such disclosure will benefit investors by

159

See, e.g., ICI Comment Letter; Comment Letter of Myra Page (July 19, 2013) (“Page Comment Letter”).

160

See, e.g., Comment Letter of Thrivent Financial for Lutherans (Sept. 17, 2013) (“Thrivent Comment Letter)

(“The imposition of a liquidity fee or gate will always be a surprise to the investors that do not redeem

quickly enough to avoid it. The need to impose such a fee or gate will not be transparent to the investor

unless redemption activity is disclosed in a timely manner providing sufficient time for investors to

react.”); Capital Advisors Comment Letter. Two commenters also expressed concern that the ability to

impose fees and gates would perpetuate shareholder reliance on sponsor support. See Capital Advisors

Comment Letter; Thrivent Comment Letter. As discussed herein, we believe fees and gates and the

disclosure associated with fees and gates will provide investors certain benefits, including informing

investors further of the risks associated with money market funds. We further believe that the disclosure

requirements adopted today regarding sponsor support should help ameliorate concerns regarding

shareholder reliance on sponsor support. See infra sections III.E.7, III.E.9.g and III.F.3.

informing them further of the risks associated with money market funds, particularly that money

market funds’ liquidity may, at times, be impaired. 161 In addition, as noted above, fees and gates

also could encourage shareholders to monitor funds’ liquidity levels and exert market discipline

over the fund to reduce the likelihood that the imposition of fees or gates will become necessary

in that fund. 162

Concerns Regarding Fees and Gates

Pre-Emptive Runs and Broader Market Concerns

We acknowledge the possibility that, in market stress scenarios, shareholders might

pre-emptively redeem shares if they fear the imminent imposition of fees or gates (either because

of the fund’s situation or because other money market funds have imposed redemption

restrictions). 163 A number of commenters suggested investors would do so. 164 Some commenters

161

We recognize that the level of board discretion in the fees and gates amendments may make it more

difficult for investors to predict when fees and/or gates will imposed; however, we are adopting certain

thresholds and maximums that we believe will provide investors with notice as to the possible imposition

of fees and gates. Additionally, today we are adopting a requirement that funds disclose their percentage of

weekly liquid assets on a daily basis on their websites and, thus, shareholders should be aware when a fund

is approaching these thresholds. See rule 2a-7(h)(10)(ii)(B).

162

See Proposing Release, supra note 25, at n.366. The disclosure of fees and gates also could advantage

larger funds and fund groups if the ability to provide financial support reduces or eliminates the need to

impose fees and/or gates (whose imposition may be perceived to be a competitive detriment).

163

See, e.g., Proposing Release, supra note 25, at 163-167, n.361.

164

See, e.g., Comment Letter of Novelis (July, 16, 2013) (“Novelis Comment Letter”); Comment Letter of

State Investment Commission, Commonwealth of Kentucky (Sept. 9, 2013) (“Ky. Inv. Comm’n Comment

Letter”); Boston Federal Reserve Comment Letter; Comment Letter of Hester Peirce and Robert Greene,

Working Paper: Opening the Gate to Money Market Fund Reform (Apr. 8, 2014) (“Peirce & Greene II

Comment Letter”). Some commenters were concerned that news of one money market fund imposing a

redemption restriction could trigger a system-wide run by investors in other money market funds. See, e.g.,

Samuel Hanson, David Scharfstein, and Adi Sunderam (Sept. 16, 2013) (“Hanson et al. Comment Letter”);

Deutsche Comment Letter; Boston Federal Reserve Comment Letter (suggesting further that “because of

the relative homogeneity in many [money market funds’ holdings], the imposition of a liquidity fee or

redemption gate on one fund may incite runs on other funds which are not subject to such measures”)

(citation omitted). In addition, one commenter, drawing an analogy to banks prior to the adoption of

federally insured deposits, noted that although withdrawal suspensions were commonly used by banks in

also suggested that sophisticated investors in particular might be able to predict that fees and

gates may be imposed and may redeem shares before this occurs. 165

While we recognize that there is risk of pre-emptive redemptions, the benefits of having

effective tools in place to address runs and contagion risk leads us to adopt the proposed fees and

gates reforms, with some modifications. We believe several of the changes we are making in our

final reforms will mitigate this risk and dampen the effects on other money market funds and the

broader markets if pre-emptive redemptions do occur.

As discussed below, the shorter maximum time period for the imposition of gates and the

smaller size of the default liquidity fee that we are adopting in these final amendments, as

compared to what we proposed, are expected to lessen further the risk of pre-emptive runs. 166

We understand that the potential for a longer gate or higher liquidity fee before a restriction is in

place may increase the incentive for investors to redeem at the first sign of any potential stress at

a fund or in the markets. 167 We believe that by limiting the maximum time period that gates may

be imposed to 10 business days in any 90-day period (down from the proposed 30 days), investor

concerns regarding an extended loss of access to cash from their investment should be mitigated.

Indeed, some money market funds today retain the right to delay payment on redemption

response to fleeing depositors, the specter of suspensions themselves were often the cause of such investor

flight. See, e.g., Comment Letter of Committee on Capital Markets Regulation (Sept. 17, 2013) (“Comm.

Cap. Mkt. Reg. Comment Letter”).

165

See, e.g., MFDF Comment Letter; Va. Treasury Comment Letter; Goldman Sachs Comment Letter.

166

See Comment Letter of Federated Investors, Inc. (Apr. 25. 2014) (“Federated XI Comment Letter”).

167

See J.P. Morgan Comment Letter (“The potential of total loss of access to liquidity for up to thirty (30)

days will be a concern for investors, and could exacerbate a pre-emptive run.”); Federated V Comment

Letter (“Shareholders will find it increasingly difficult to compensate for their loss of liquidity the longer

the suspension of redemptions continues. It is therefore important for Alternative 2 to limit the suspension

of redemptions to a period in which the potential benefits to shareholders of delaying redemptions outweigh

the potential disruptions caused by the delay.”).

requests for up to seven days, as all registered investment companies are permitted to do under

the Investment Company Act, and we are not aware that this possibility has led to any preemptive runs historically. 168 In addition, we note that under section 22(e), the Commission also

has the authority to, by order, suspend the right of redemption or allow the postponement of

payment of redemption requests for more than seven days. The Commission used this authority,

for example, with respect to the Reserve Primary Fund. To our knowledge, this authority also

has not historically led to pre-emptive redemptions. We believe that the gating allowed by

today’s amendments extends and formalizes this existing gating framework, clarifying for

investors when a money market fund potentially may use a gate as a tool to manage heavy

redemptions and thus prevents any investor confusion on when gating may apply.

We believe that the maximum 10 business day gating period we are adopting today is a

similarly short enough period of time (as compared to the seven days a fund may delay payment

on redemption requests) that many investors may not be unduly burdened by such a temporary

loss of liquidity. 169 Thus, these investors may have less incentive to redeem their investments

pre-emptively before the imposition of a gate. For similar reasons, the reduction in the default

liquidity fee to 1% (down from the proposed 2%), discussed further below, may also lessen

shareholders’ incentives to redeem pre-emptively as fewer investors may consider it likely that a

168

See section 22(e).

169

See, e.g., Federated V Comment Letter (stating that 10 calendar days “would be a significantly shorter

period than proposed by the Commission, while still allowing prime [money market funds] more than a

week to address whatever problem led to the suspension of redemptions. This would also be consistent

with the comments of some of the investors who indicated to Federated that they probably could not go

more than two weeks without access to the cash held in their [money market fund].”); see also infra section

III.A.2.d (discussing the maximum duration of temporary redemption gates under today’s amendments).

liquidity fee will result in an unacceptable loss on their investment. 170

In addition, we expect that the additional discretion we are granting fund boards to

impose a fee or gate at any time after a fund’s weekly liquid assets have fallen below the 30%

required minimum, a much higher level of remaining weekly liquid assets than proposed, should

mitigate the risk of pre-emptive redemptions. This board discretion should reduce the incentive

of shareholders from trying to pre-emptively redeem because they will be able to less accurately

predict specifically when, and under what circumstances, fees and gates will be imposed. 171

Board discretion also should allow boards to act decisively if they become concerned liquidity

may become impaired and to react to expected, as well as actual, declines in liquidity levels,

given their funds’ investor base and other characteristics.

Likewise, increased board discretion should lessen the likelihood that sophisticated

investors can preferentially predict when a fee or gate is going to be imposed because

sophisticated investors, like any other investor, will not know what specific circumstances a fund

board will deem appropriate for the imposition of fees or gates. 172 We recognize that

170

We note that under our final amendments, the 1% default liquidity may be raised by a fund’s board (up to

2%) if it is in the best interests of the fund. See rule 2a-7(c)(2)(ii)(A). However, given the empirical

information regarding liquidity costs in money market fund eligible securities in the financial crisis, as

discussed in the DERA Liquidity Fee Memo, which supported the reduction in the size of the default

liquidity fee to 1%, money market fund shareholders may estimate that a fee as high as 2% will be unlikely

and that depending on the circumstances, a fee of less than 1% could be appropriately determined by the

board of directors. See DERA Liquidity Fee Memo, supra note 111.

171

See Wells Fargo Comment Letter (“The ability for fund investors to frequently and aggressively ‘game’

and avoid the potential imposition of Fees or Gates is undermined by the element of uncertainty inherent in

a fund board’s discretion to impose a Fee or a Gate.”); see also Proposing Release, supra note 25, at n.362.

Additionally, we believe that requiring investors in institutional prime funds to redeem their shares at

floating NAV should lower the incentive to run pre-emptively when investors anticipate that a gate will be

imposed as a result of a credit event. See infra section III.B for a discussion of the floating NAV

requirement.

172

Although funds’ website disclosure will indicate when a fund is approaching the weekly liquid asset

sophisticated investors may monitor the weekly liquid assets of funds and seek to redeem before

a fund drops below the 30% weekly liquid asset threshold. We believe, however, that a

sophisticated investor may be dissuaded from redeeming in these circumstances because the fund

still has a substantial amount of internal liquidity. In addition, redemptions when the fund still

has this much internal liquidity would not lead to fire sales or other such adverse effects.

We also believe that increased board flexibility will reduce the occurrence of pre-emptive

redemptions by shareholders who seek to redeem because another money market fund has

imposed a fee or gate. Increased board flexibility will likely result in different funds imposing

different redemption restrictions at different times, particularly considering that after crossing the

30% threshold each fund’s board will be required to make a best interests determination with

respect to the imposition of a fee or gate. 173 As such, it will be less likely that investors can

predict whether any particular fund will impose a fee or gate, even if another fund has done so,

and thus perhaps less likely they will redeem assuming that one fund imposing such a restriction

means other funds may soon do so.

Moreover, we believe that funds’ ability to impose fees and gates once weekly liquid

assets drop below 30% will substantially mitigate the broader effects of pre-emptive runs, should

they occur. A money market fund that imposes a fee or gate with substantial remaining internal

liquidity is in a better position to bear those redemptions without a broader market impact

because it can satisfy those redemption requests through existing or internally generated cash and

thresholds for imposing a fee or gate, investors will not know the circumstances under which a board will

deem such a restriction to be in the best interests of the fund. See rule 2a-7(h)(10)(ii)(B).

173

Boards will also be required to make a best interests determination if they determine to change the level of

the default liquidity fee or to not impose the default fee. See rule 2a-7(c)(2)(ii).

not through asset sales (other than perhaps sales of government securities that tend to increase in

value and liquidity in times of stress). Thus, pre-emptive runs, if they were to occur, under these

circumstances are less likely to generate adverse contagion effects on other money market funds

or the short-term financing markets.

We note some commenters suggested that concerns about pre-emptive run risks from fees

and gates are likely overstated. 174 One commenter noted that the “element of uncertainty

inherent in a board’s discretion to impose a fee or gate” would diminish any possible gaming by

investors. 175 Another commenter further noted that “appropriate portfolio construction and daily

transparency” would reduce the likelihood of anticipatory redemptions. 176 For example, as

discussed below, our amendments require that each money market fund disclose daily on its

website its level of weekly liquid assets. This means that if one money market fund imposes a

fee or gate, investors in other money market funds will have the benefit of full transparency on

whether the money market fund in which they are invested is similarly experiencing liquidity

stress and thus is likely to impose a fee or gate. Pre-emptive redemptions and contagion effects

due to a lack of transparency (which may have occurred in the crisis) may therefore be reduced.

Some commenters also have previously indicated that a liquidity fee or gate should not

accelerate a run, stating that such redemptions would likely trigger the fee or gate and that, once

174

See, e.g., SIFMA Comment Letter; Wells Fargo Comment Letter; Dreyfus Comment Letter; see also

Chamber II Comment Letter (stating that “unlike with the current conditions of [r]ule 22e-3 under the

[Investment Company Act], a redemption gate would allow the MMF to remain in operation after the gate

is lifted. This, in turn, will provide MMF investors with comfort regarding the ultimate redemption of their

investment and make any large-scale redemptions less likely.”); Comment Letter of Artie Green (Aug. 29,

2013) (“Green Comment Letter”) (“Fund shareholders would be less likely to panic if they know they will

have access to their assets when the fund reopens after a short suspension of redemptions.”).

175

See Wells Fargo Comment Letter.

176

See Dreyfus Comment Letter.

triggered, the fee or gate would then lessen or halt redemptions. 177

Additionally, we note that while many European money market funds are able to suspend

redemptions and/or impose fees on redemptions, we are not aware that their ability to do so has

historically led to pre-emptive runs. Most European money market funds are subject to

legislation governing Undertakings for Collective Investment in Transferable Securities

(“UCITS”), which also covers other collective investments, and which permits them to suspend

temporarily redemptions of units. 178 For example, in Ireland, UCITS are permitted to

temporarily suspend redemptions “in exceptional cases where circumstances so require and

suspension is justified having regard to the interest of the unit-holders.” 179 Similarly, many

money market funds in Europe are also permitted to impose fees on redemptions. 180

We also note that a commenter discussed a paper by the staff of the Federal Reserve

Bank of New York (“FRBNY”) entitled “Gates, Fees, and Preemptive Runs.” 181 The FRBNY

staff paper constructs a theoretical model of fees or gates used by a financial intermediary and

finds “that rather than being part of the solution, redemption fees and gat

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