One year ago, we wrote that the "SEC Adopts Money Market Fund Reforms," which reviewed the U.S. Securities & Exchange Commission's latest attempt to make money funds more robust and able to withstand events like the March 2020 Covid crisis. Our update said, the "Money Market Fund Reforms ... abandoned [the SEC's] swing pricing proposal for Prime and Tax Exempt Institutional money market funds and replaced it with a mandatory liquidity fee regime. They also increased liquidity and disclosure requirements." We review the reforms with a focus on the latest piece to go live -- the Form N-MFP disclosures -- below. (Note: Crane Data has been adjusting our Form N-MFP data files to incorporate the latest data reporting changes. Our files have now been posted for Money Fund Wisdom subscribers, though we'll no doubt be tweaking and correcting some issues in the coming days.)
The SEC's "Fact Sheet" from the release a year ago says, "The Commission is considering adopting amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The amendments are designed to improve the resilience and transparency of money market funds by: Increasing minimum liquidity requirements to provide a more substantial buffer in the event of rapid redemptions; Removing provisions from the current rule that permit a money market fund to temporarily suspend redemptions and removing the regulatory tie between the imposition of liquidity fees and a fund's liquidity level; Requiring certain money market funds to implement a liquidity fee framework that will better allocate the costs of providing liquidity to redeeming investors; and Enhancing certain reporting requirements to improve the Commission’s ability to monitor and assess money market fund data." The full 424-page final rule and the Chair Gensler's and the Commissioner's statements are also available.
The press release, "SEC Adopts Money Market Fund Reforms and Amendments to Form PF Reporting Requirements for Large Liquidity Fund Advisers," says, "The Securities and Exchange Commission ... adopted amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The amendments will increase minimum liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The amendments will also remove provisions in the current rule that permit a money market fund to suspend redemptions temporarily through a gate and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold. These changes are designed to reduce the risk of investor runs on money market funds during periods of market stress."
It continues, "To address concerns about redemption costs and liquidity, the amendments will require institutional prime and institutional tax-exempt money market funds to impose liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets, unless the fund's liquidity costs are de minimis. In addition, the amendments will require any non-government money market fund to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund. These amendments are designed to protect remaining shareholders from dilution and to more fairly allocate costs so that redeeming shareholders bear the costs of redeeming from the fund when liquidity in underlying short-term funding markets is costly."
SEC Chair Gary Gensler commented, "Money market funds -- nearly $6 trillion in size today -- provide millions of Americans with a deposit alternative to traditional bank accounts. Money market funds, though, have a potential structural liquidity mismatch. As a result, when markets enter times of stress, some investors -- fearing dilution or illiquidity -- may try to escape the bear. This can lead to large amounts of rapid redemptions. Left unchecked, such stress can undermine these critical funds. I support this adoption because it will enhance these funds' resiliency and ability to protect against dilution. Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress. That benefits investors."
The release adds, "Separately, the amendments will also modify certain reporting forms that are applicable to money market funds and large private liquidity funds advisers. The rule amendments will become effective 60 days after publication in the Federal Register [which should be in several weeks] with a tiered transition period for funds to comply with the amendments. The reporting form amendments will become effective June 11, 2024."
We wrote on August 3, 2023, on the "Amendments to Reporting Requirements in SEC Reforms; Investor Type," which states, "It's been 3 weeks since the SEC passed and published its 424-page Money Market Fund Reforms, and we continue to dig through and discuss the details with money fund professionals, investors and servicers. Of particular interest to Crane Data are the latest "Amendments to Reporting Requirements," which should produce yet another bonanza of data and business for us as market participants look for assistance in compiling, navigating and interpreting the updated batch of data disclosures. Below, we quote from the rule's section on disclosures and reporting. The new reporting amendments become effective June 11, 2024."
The "Reporting Requirements" section says about "Amendments to Form N-CR," "We are adopting the amendments to Form N-CR as proposed. In particular, the final amendments add a new requirement for a money market fund to report publicly if it experiences a liquidity threshold event (i.e., the fund has invested less than 25% of its total assets in weekly liquid assets or less than 12.5% of its total assets in daily liquid assets) because such an event represents a significant drop in liquidity of which investors should be aware. We are also adopting all other proposed amendments to Form N-CR, including the structured data requirement, to improve the availability, clarity, and utility of information about money market funds."
The "Amendments to Form N-MFP" and "New Information Requirements" section (starting on page 135) states, "We are adopting, with the modifications discussed below, the reporting requirements regarding additional information about the composition and concentration of money market fund shareholders and about prime funds' sales of non-maturing investments. In addition, similar to the proposed requirement to report information about the use of swing pricing, we are requiring funds to report information about their application of liquidity fees under the final rule. Further, because the final rule will permit stable NAV funds to use share cancellation in a negative interest rate environment, we are requiring reporting related to share cancellation."
Discussing "Shareholder Concentration," the rules tell us, "In a change from the proposal, after considering comments raising privacy and related concerns, we will not require money market funds to disclose the name of each person who is known by the fund to own beneficially or of record 5% or more of the shares outstanding in the relevant class. Rather, the final rule requires money market funds to report only the type of beneficial or record owner who owns 5% or more of the shares outstanding in the relevant class. Accordingly, amended Form N-MFP includes the following categories of owner types from which filers will make the appropriate selection: retail investor; non-financial corporation; pension plan; non-profit; state or municipal government entity (excluding governmental pension plans); registered investment company; private fund; depository institution or other banking institution; sovereign wealth fund; broker-dealer; insurance company; and other. The shareholder concentration information the final amendments require will provide the Commission and investors with a greater ability to monitor redemption and liquidity risks."
It continues, "As proposed, the final amendments require funds to use a 5% ownership threshold for the shareholder concentration reporting requirement. Commenters generally did not engage substantively on the proposed 5% ownership threshold, though one commenter did agree that 5% would be an appropriate threshold. Funds currently provide similar ownership information using a 5% threshold on an annual basis in their registration statements. More frequent reporting of information on Form N-MFP is designed to facilitate monitoring of a fund's potential risk of redemptions by an individual or a small group of investors that could significantly affect the fund's liquidity."
The SEC writes, "Upon consideration of the comments, the amended rule will not require funds to report the names of the greater than 5% owners. Although shareholder concentration information is already reported publicly by funds on an annual basis on Form N-1A, we recognize the sensitivities associated with publicly reporting the names of owners with ownership of more than 5% on a monthly basis. Accordingly, the amendments instead require funds to provide information about the types of owners who invest 5% or more in a class of the fund.... In response to comments questioning the value of shareholder concentration information, we believe that more frequent information about shareholder concentration will assist both the Commission and investors in monitoring a fund's potential risk of redemptions."
On "Shareholder Composition," the new rule tells us, "We are adopting, as proposed, amendments requiring a money market fund that is not a government money market fund or a retail money market fund to provide information about the composition of its shareholders by type. Accordingly, funds must identify the percentage of investors within the following categories: non-financial corporation; pension plan; non-profit; state or municipal government entity (excluding governmental pension plans); registered investment company; private fund; depository institution and other banking institution; sovereign wealth fund; broker-dealer; insurance company; and other. This information is designed to assist with monitoring the liquidity and redemption risks of institutional money market funds, as different types of investors may pose different redemption risks."
For "Liquidity Fees," they require, "Consistent with the changes described above in the liquidity fee mechanism section, and in a change from the proposal, we are amending Form N-MFP to require money market funds to report the date on which the liquidity fee was applied, the type of liquidity fee, and the amount of the liquidity fee applied by the fund. In addition, we are removing existing reporting requirements on Form N-CR related to the application of liquidity fees because we believe monthly reporting of the frequency, type, and size of liquidity fees on Form N-MFP is more consistent with the modified liquidity fee framework we are adopting than requiring current reporting on Form N-CR."
They add, "We are also adopting as proposed a new item in Form N-MFP that would require filers to indicate whether the fund is established as a cash management vehicle for affiliated funds and accounts. This item is designed to make it easier and more efficient to identify privately offered institutional money market funds. Separately, and as proposed, we are adopting an amendment to the form to require a fund to affirmatively state whether it seeks to maintain a stable price per share, consistent with our proposal."
Finally, under "More Frequent Data Points," the final rule states, "As proposed, we are amending Form N-MFP to require a money market fund to provide in its monthly report certain daily data points to improve the utility of the reported information. Specifically, the amendments require a fund to report its percentage of total assets invested in daily liquid assets and in weekly liquid assets, net asset value per share (including for each class of shares), and shareholder flow data for each business day of the month. Currently, in monthly reports on Form N-MFP, a money market fund must provide the same general information on a weekly basis.... As proposed, we are also increasing the frequency with which funds report certain yield information. Currently, funds must report 7-day gross yields (at the series level) and 7-day net yields (at the share class level) as of the end of the reporting period. We are amending Form N-MFP to require funds to report this information for each business day."
