Now that the previous regime of emergency gates and liquidity fees has been removed from money market mutual funds (effective Oct. 2), advisors have begun changing disclosures and filing updates to prepare for the new round of pending regulations. As we mentioned in our Oct. 23 Link of the Day, "Dreyfus Recaps 2a-7 Changes for AFP," discretionary liquidity fees will become live on April 2, 2024 and mandatory liquidity fees for Prime Institutional MMFs will become active on Oct. 2, 2024. Below, we excerpt from a batch of the latest SEC filings, which shed more light on the rules and how fund managers are handling disclosures. (See the latest filings containing the term "discretionary liquidity fee" here.) (Note: Thanks to those who visited our booth and who we visited with at AFP '23 in San Diego earlier this week -- it was great to see everyone!)
A Prospectus Supplement (497) for DWS Money Market Prime Series and DWS Tax-Exempt Portfolio explains, "In July 2023, changes to the federal regulations that govern money market funds were adopted. The changes will be effective at various times in 2023 and 2024. Among the changes are: (i) an increase in the minimum investment percentages in securities offering daily and weekly liquidity, (ii) making any liquidity fees fully discretionary and not tied to minimum liquidity requirements, and (iii) the removal of the ability to temporarily suspend (gate) redemptions."
It continues, "The changes related to the removal of any ties between liquidity fees and minimum liquidity requirements and the removal of the ability to temporarily suspend (gate) redemptions are effective October 2, 2023. Therefore, any references to liquidity fees tied to minimum liquidity requirements and/or to the temporary gating of redemptions are hereby removed (except where such references are contained in disclosure similar to that above announcing the regulatory changes). The fund may continue to impose a discretionary liquidity fee (not to exceed 2% of the value of the shares redeemed) if the Board of Trustees of the fund determines that a liquidity fee is in the best interests of the fund."
Allspring Money Market Funds states in their new Prospectus Supplement, "On July 12, 2023, the Securities and Exchange Commission ('SEC') adopted amendments to certain rules that govern money market funds under the Investment Company Act of 1940. Among other changes, the amendments revise Rule 2a-7, the primary rule governing the operation of money market funds, to: 1. remove the ability for a fund board to temporarily suspend redemptions if the fund's liquidity falls below a threshold; 2. remove the tie between liquidity thresholds and the potential imposition of liquidity fees; 3. adopt a new mandatory liquidity fee framework for institutional prime and institutional tax-exempt money market funds when net redemptions exceed 5% of net assets; and 4. adopt a discretionary liquidity fee for all non-government money market funds, to be applied when the board (or its delegate) determines that the fee is in the best interests of the fund."
They write, "The effective date of (1) and (2) above is October 2, 2023. Accordingly, as of such date, the sub-section entitled 'Liquidity Fees and Redemption Gates' contained within the section of the Funds' Prospectuses entitled 'Buying and Selling Fund Shares' is hereby removed. In addition, as of this date, the sentence 'The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund's liquidity falls below required minimums because of market conditions or other factors' contained within the first paragraph under the heading 'Principal Investment Risks' in each Fund's 'Fund Summary <b:>' section is hereby deleted. The Allspring Institutional Money Market Funds must comply with (3) above by October 2, 2024 and the Funds must comply with (4) above by April 2, 2024. The Funds may voluntarily choose to begin to rely on the mandatory and discretionary liquidity fee provisions at any time between October 2, 2023 and the applicable compliance date (October 2, 2024 and April 2, 2024, respectively), and Fund shareholders will be notified in advance if the Funds choose to do so."
An SEC filing for Goldman Sachs Financial Square Funds comments, "Effective on April 2, 2024, institutional and retail money market funds will be permitted to impose a discretionary liquidity fee on redemptions (up to 2%), if the applicable fund's board of trustees (or its delegate) determines that it is in the best interests of the fund to do so. Government money market funds will continue to be exempt from requirements relating to these discretionary liquidity fees. Institutional and retail money market funds may choose to rely on this modified discretionary liquidity fee framework prior to April 2, 2024. Effective on October 2, 2024, institutional money market funds will be required to impose a mandatory liquidity fee on redemptions, if the applicable fund experiences total daily net redemptions that exceed 5% of net assets, unless the fee is de minimis (i.e., less than 1 basis point of the value of the shares redeemed)."
It adds, "The amount of the mandatory liquidity fee to be charged must be based on a good faith estimate, supported by data, of the costs the fund would incur if it sold a pro rata amount of each security in its portfolio to satisfy the amount of the net redemptions. If these costs cannot be estimated in good faith and supported by data, the amount of the mandatory liquidity fee will be 1% of the value of the shares redeemed. Government and retail money market funds will be exempt from requirements relating to these mandatory liquidity fees. Effective on April 2, 2024, all money market funds will be required to increase their minimum levels of daily and weekly liquid assets from 10% and 30%, respectively, to 25% and 50%, respectively."
T. Rowe Price Funds say in a new Supplement, "The fund may charge a liquidity fee of up to 2% of the value of shares redeemed if the fund's Board of Directors determines that doing so is in the best interests of the fund (or the Board of Director's delegate, in accordance with Board-approved guidelines).... The fund's Board may impose a discretionary liquidity fee of up to 2% of the value of the shares redeemed if the fund's Board determines that doing so is in the fund's best interests (or the Board's delegate, in accordance with Board-approved guidelines)."
They explain, "The Board's determination will be based on current market conditions and the specific circumstances of the fund. Liquidity fees will be paid to the fund and are designed to allow funds to mitigate heavy redemptions by allocating liquidity costs to those shareholders who impose such costs on the fund through their redemptions. Once imposed, a liquidity fee must be applied to all shares redeemed (whether the shares are held directly with T. Rowe Price, through a retirement plan, or indirectly through an intermediary (such as a broker, bank, or investment adviser) or other third party) and must remain in effect until the fund's Board (or its delegate) determines that imposing a liquidity fee is no longer in the best interests of the fund."
BlackRock Funds writes in a filing for BlackRock Wealth Liquid Environmentally Aware Fund, "Discretionary Liquidity Fee Risk -- The Board has discretion to impose a liquidity fee of up to 2% upon sale of your shares if such fee is determined to be in the best interests of the Fund. Accordingly, your redemptions may be subject to a liquidity fee when you sell your shares at certain times."
Finally, a filing for Vanguard describes, "Important Changes to Vanguard Municipal Money Market Fund, Vanguard California Municipal Money Market Fund, and Vanguard New York Municipal Money Market Fund.... The U.S. Securities and Exchange Commission (SEC) adopted changes to the rule governing money market funds in July 2023. Effective October 2, 2023, the Funds may no longer impose a redemption gate (except under extraordinary circumstances as part of a liquidation), and the imposition of liquidity fees are no longer tied to a fund’s weekly liquid assets."
It continues, "The section related to the particular retail municipal money market fund offered by the prospectus is replaced in its entirety with the following: Vanguard has designated [Vanguard Municipal Money Market Fund], [Vanguard California Municipal Money Market Fund], [Vanguard New York Municipal Money Market Fund] as a retail money market fund.... Retail money market funds are permitted to continue to maintain a stable NAV through the use of amortized cost accounting. A retail money market fund may be subject to a liquidity fee if the fund's board believes such fee is in the best interests of the fund. Liquidity fees are designed to transfer the costs of liquidating securities from shareholders who remain in the Fund to those who leave the Fund during periods when liquidity is limited."
They say, "The Board also may determine that it would not be in the interests of the Fund to continue operating if the Fund's weekly liquid assets fall below 10% of its total assets. In the event that the Board approves liquidation of the Fund under these circumstances, the Fund may permanently suspend redemptions and liquidate. Notices regarding liquidity fees will be filed with the SEC on Form N-CR. In addition, announcements will also be made in supplements to the Fund's prospectus and on the Fund's website at vanguard.com. The Fund is subject to money market fund reform regulatory risk, which is the chance that future money market fund reforms will affect the Fund's investment strategy, fees and expenses, portfolio, share liquidity, and return potential."
Website RIABiz published the article, "SEC forces Vanguard -- and host of other fund firms -- to impose hefty back-end fees on muni money market fund investors who sell into financial panics, in an effort to bullet-proof 'critical investment." It states, "Money market funds (MMF) of the non-government variety -- mostly municipal -- were, until recently, like roach motels; investors could check in, but federal rules kept them from checking out in the event of a financial crisis under a so-called 'gateway' rule. But institutional investors still yanked about 30% of total MMF assets in a two-week period during the 2020 pandemic, and a post-crisis analysis found the rule may have contributed to the run.... This time, in its modification of rule 2a-7 of the 1940 Investment Company Act, the SEC has given up on gateways -- a post-financial crisis initiative intended to reduce the risk of runs on money market funds. Instead, it has chosen to give fund companies the power to levy a 2% withdrawal fee on non-government MMFs, including tax-exempt municipal funds and certain prime funds.
