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- **Document type:** Agency decision

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Corrected to conform to Federal Register version
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,

2

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

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
I.
II.

III.

1

INTRODUCTION .................................................................................................................... 6
BACKGROUND .................................................................................................................... 15
A.
Role of Money Market Funds ................................................................................15
B.
Certain Economic Features of Money Market Funds ............................................16
1.
Money Market Fund Investors’ Desire to Avoid Loss .............................. 17
2.
Liquidity Risks........................................................................................... 18
3.
Valuation and Pricing Methods ................................................................ 19
4.
Investors’ Misunderstanding about the Actual Risk of Investing in Money
Market Funds ............................................................................................ 22
C.
Effects on Other Money Market Funds, Investors, and the ShortTerm Financing Markets ........................................................................................25
D.
The Financial Crisis ...............................................................................................29
E.
Examination of Money Market Fund Regulation since the
Financial Crisis ......................................................................................................33
1.
The 2010 Amendments .............................................................................. 33
2.
The Eurozone Debt Crisis and U.S. Debt Ceiling Impasses of 2011 and
2013........................................................................................................... 35
3.
Continuing Consideration of the Need for Additional Reforms................ 37
DISCUSSION ....................................................................................................................... 39
A.
Liquidity Fees and Redemption Gates ...................................................................39
1.
Analysis of Certain Effects of Fees and Gates .......................................... 41
2.
Terms of Fees and Gates........................................................................... 77
3.
Exemptions to Permit Fees and Gates .................................................... 112
4.
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.

4

B.

C.

D.

E.

F.

5.
Operational Considerations Relating to Fees and Gates ....................... 116
6.
Tax Implications of Liquidity Fees ......................................................... 129
7.
Accounting Implications ......................................................................... 133
Floating Net Asset Value .....................................................................................135
1.
Introduction............................................................................................. 135
2.
Summary of the Floating NAV Reform ................................................... 142
3.
Certain Considerations Relating to the Floating NAV Reform .............. 144
4.
Money Market Fund Pricing................................................................... 157
5.
Amortized Cost and Penny Rounding for Stable NAV Funds ................. 168
6.
Tax and Accounting Implications of Floating NAV Money Market Funds
................................................................................................................. 171
7.
Rule 10b-10 Confirmations ..................................................................... 179
8.
Operational Implications of Floating NAV Money Market Funds ......... 182
9.
Transition ................................................................................................ 199
Effect on Certain Types of Money Market Funds and Other
Entities .................................................................................................................202
1.
Government Money Market Funds ......................................................... 202
2.
Retail Money Market Funds.................................................................... 213
3.
Municipal Money Market Funds ............................................................. 243
4.
Implications for Local Government Investment Pools............................ 258
5.
Unregistered Money Market Funds Operating Under Rule 12d1-1 ....... 261
6.
Master/Feeder Funds – Fees and Gates Requirements .......................... 267
7.
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
1.
Use of Amortized Cost Valuation............................................................ 278
2.
Other Valuation Matters ......................................................................... 281
Amendments to Disclosure Requirements ..........................................................288
1.
Required Disclosure Statement ............................................................... 288
2.
Disclosure of Tax Consequences and Effect on Fund Operations—
Floating NAV .......................................................................................... 300
3.
Disclosure of Transition to Floating NAV .............................................. 302
4.
Disclosure of the Effects of Fees and Gates on Redemptions ................. 302
5.
Historical Disclosure of Liquidity Fees and Gates................................. 306
6.
Prospectus Fee Table .............................................................................. 314
7.
Historical Disclosure of Affiliate Financial Support .............................. 315
8.
Economic Analysis .................................................................................. 325
9.
Website Disclosure.................................................................................. 335
Form N-CR ..........................................................................................................374
1.
Introduction............................................................................................. 374
2.
Part B: Defaults and Events of Insolvency ............................................. 376
3.
Part C: Financial Support ...................................................................... 379
4.
Part D: Declines in Shadow Price .......................................................... 393

5

G.

H.

I.

J.

K.

L.

M.

N.

5.
Parts E, F, and G: Imposition and Lifting of Liquidity Fees and Gates. 398
6.
Part H: Optional Disclosure................................................................... 407
7.
Timing of Form N-CR ............................................................................. 408
8.
Economic Analysis .................................................................................. 413
Amendments to Form N-MFP Reporting Requirements .....................................435
1.
Amendments Related to Rule 2a-7 Reforms ............................................ 437
2.
New Reporting Requirements ................................................................. 443
3.
Clarifying Amendments ........................................................................... 458
4.
Public Availability of Information .......................................................... 462
5.
Operational Implications of the N-MFP Amendments ........................... 464
Amendments to Form PF Reporting Requirements .............................................466
1.
Overview of Proposed Amendments to Form PF ................................... 469
2.
Utility of New Information, Including Benefits, Costs, and Economic
Implications............................................................................................. 475
Diversification......................................................................................................486
1.
Treatment of Certain Affiliates for Purposes of Rule 2a-7’s Five Percent
Issuer Diversification Requirement ........................................................ 488
2.
ABS – Sponsors Treated as Guarantors ................................................. 506
3.
The Twenty-Five Percent Basket ............................................................ 517
Amendments to Stress Testing Requirements .....................................................552
1.
Overview of Current Stress Testing Requirements and Proposed
Amendments ............................................................................................ 553
2.
Stress Testing Metrics ............................................................................. 556
3.
Hypothetical Events Used in Stress Testing............................................ 566
4.
Board Reporting Requirements............................................................... 583
5.
Dodd-Frank Mandated Stress Testing ................................................... 587
6.
Economic Analysis .................................................................................. 588
Certain Macroeconomic Consequences of the New Amendments ......................593
1.
Effect on Current Investors in Money Market Funds ............................. 596
2.
Efficiency, Competition and Capital Formation Effects on the Money
Market Fund Industry ............................................................................. 616
3.
Effect of Reforms on Investment Alternatives, and the Short-Term
Financing Markets .................................................................................. 622
Certain Alternatives Considered ..........................................................................643
1.
Liquidity Fees, Gates, and Floating NAV Alternatives........................... 644
2.
Alternatives in the FSOC Proposed Recommendations.......................... 665
3.
Alternatives in the PWG Report .............................................................. 687
Clarifying Amendments .......................................................................................701
1.
Definitions of Daily Liquid Assets and Weekly Liquid Assets ................ 703
2.
Definition of Demand Feature ................................................................ 707
3.
Short-Term Floating Rate Securities ...................................................... 709
4.
Second Tier Securities............................................................................. 712
Compliance Dates ................................................................................................713
1.
Compliance Date for Amendments Related to Liquidity Fees and Gates713

6

2.
3.
4.

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
A.
Rule 2a-7 ..............................................................................................................722
1.
Asset-Backed Securities .......................................................................... 723
2.
Retail and Government Funds ................................................................ 727
3.
Board Determinations – Fees and Gates ................................................ 730
4.
Notice to the Commission ....................................................................... 733
5.
Stress Testing .......................................................................................... 734
6.
Website Disclosure.................................................................................. 740
7.
Total Burden for Rule 2a-7 ..................................................................... 754
B.
Rule 22e-3 ............................................................................................................755
C.
Rule 30b1-7 and Form N-MFP ............................................................................757
1.
Discussion of Final Amendments ............................................................ 757
2.
Current Burden ....................................................................................... 759
3.
Change in Burden ................................................................................... 759
D.
Rule 30b1-8 and Form N-CR...............................................................................763
1.
Discussion of New Reporting Requirements ........................................... 763
2.
Estimated Burden .................................................................................... 765
E.
Rule 34b-1(a) .......................................................................................................779
F.
Rule 482 ...............................................................................................................780
G.
Form N-1A ...........................................................................................................782
H.
Advisers Act Rule 204(b)-1 and Form PF ...........................................................791
1.
Discussion of Amendments ..................................................................... 792
2.
Current Burden ....................................................................................... 793
3.
Change in Burden ................................................................................... 794
V.
REGULATORY FLEXIBILITY ACT CERTIFICATION ............................................................ 797
VI.
UPDATE TO CODIFICATION OF FINANCIAL REPORTING POLICIES ..................................... 800
VII. STATUTORY AUTHORITY ................................................................................................. 801
TEXT OF RULES AND FORMS ............................................................................................... 802

I.

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
2

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

7

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

3

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.

4

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.

5

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.

6

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

8

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).
7

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.”

8

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

9

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.

10

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

9

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.”).
11

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).

12

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.

13

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.

14

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

10

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
15

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

16

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

17

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.

18

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.

19

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

11

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

20

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).

21

See INVESTMENT COMPANY INSTITUTE, 2014 INVESTMENT COMPANY FACT BOOK, at 196, Table 37 (2014),
available at http://www.ici.org/pdf/2014_factbook.pdf.

12

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
22

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.

23

Throughout this Release, we generally refer to “short-term financing markets” to describe the markets for
short-term financing of corporations, banks, and governments.

24

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.”

25

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”).

13

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.
26

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.

27

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

28

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.

14

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

15

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

BACKGROUND
A.

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
29

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.

30

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.

31

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…”).

16

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.
B.

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
32

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.”).

33

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.”).

17

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.
1.

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
34

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).

35

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

18

2.

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”).
36

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.”

37

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”).

19

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.
3.

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

38

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.

39

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.”).

40

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

20

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.
41

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

42

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.

21

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

43

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.”).

44

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).”).

45

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

46

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

47

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.,

22

4.

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”).
48

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.

49

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

23

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.”).
50

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.

51

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.

52

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

24

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).
53

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”).

54

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.

55

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.

25

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
C.

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

56

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.

57

See, e.g., HSBC Comment Letter.

58

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).

59

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

26

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.”).
60

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.”).

61

See infra section III.K.3 for statistics on the types and percentages of outstanding short-term debt
obligations held by money market funds.

62

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

27

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
63

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.

64

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.

28

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
65

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.

66

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.

29

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
D.

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

67

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.”).

68

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.

69

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

70

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

30

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.
71

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.

72

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

73

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

74

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.

75

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.

31

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

76

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”).

77

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.

78

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.

32

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

79

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.

80

See Proposing Release supra note 25 at n.91.

33

E.

Examination of Money Market Fund Regulation since the Financial Crisis
1.

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
81

2010 Adopting Release, supra note 17.

82

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.”).

83

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.

84

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).

34

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
85

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).

86

See current rule 30b1-7.

87

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

88

See current rule 2a-7(c)(10)(v).

35

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
2.

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’
89

See 2009 Proposing Release, supra note 66, at section II.C.3.

90

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.

36

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
91

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.

92

See, e.g., MONEY-MARKET FUNDS SHINE DURING DEBT LIMIT CRISIS (10/25/2013), available at
http://www.imoneynet.com/news/280.aspx.

93

These statistics are based on an analysis of information from Crane Data. See also infra section III.C.1.

37

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.
3.

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
94

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).

95

See 2009 Proposing Release, supra note 66, at section III; 2010 Adopting Release, supra note 17, at section
I.

38

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

96

See generally DERA Study, supra note 24, at section 4.

97

Id. at 30.

98

Id. at 34.

99

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.

39

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.
A.

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.

40

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”).

41

proposal are discussed in more detail below.
1.

Analysis of Certain Effects of Fees and Gates 106
a.

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.

42

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.

43

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.

44

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.
i.

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.

45

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).

46

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).

47

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
b.

Benefits of Fees and Gates
i.

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Adafb66e978d7ef89. Public record. Not legal advice.