Stradley Ronon Partner Jamie Gershkow and Associate Geena Marzouca recently published an article in The Investment Lawyer titled, "Are We Trying to Kill Institutional Prime Funds? -- Money Market Funds in a Post Reform Era." The two explain, "At a meeting of the US Securities and Exchange Commission (SEC) adopting significant reforms to money market fund regulation, Commissioner Peirce posed a pointed question: Are we trying to kill institutional prime funds? With the `final compliance date for money market fund reform behind us, this article looks at whether Commissioner Peirce's concern became reality and assesses the overall impact of the reforms on the money market fund industry. This article reviews considerations related to the implementation of certain aspects of the reforms, including liquidity fees, share cancellation, increased liquidity requirements and stress testing, and board oversight of money market funds under amended Rule 2a-7 of the Investment Company Act of 1940 (1940 Act)."
In a brief "Refresher on the 2023 Money Market Fund Reforms," they comment, "On July 12, 2023, the SEC adopted amendments to Rule 2a-7 under the 1940 Act that significantly impacted the operation and management of money market funds, particularly institutional prime and institutional tax-exempt money market funds. The key provisions of the SEC's rulemaking package included: Removing redemption gates from Rule 2a-7. Modifying and expanding the liquidity fee framework: - Adopting a mandatory liquidity fee frame work for institutional prime and institutional tax-exempt money market funds. - Amending the discretionary liquidity fee framework for money market funds by delinking weekly liquid assets from liquidity fee requirements. — Adding the ability for a board of directors/trustees (the board) to delegate the responsibility to make liquidity fee determinations."
The key provisions also include: Modifying portfolio liquidity requirements: — Increasing daily liquid asset and weekly liquid asset requirements to 25 percent and 50 percent of total assets, respectively. — Requiring board notification and public SEC filing if a money market fund has less than 12.5 percent or 25 percent of total assets invested in daily liquid assets or weekly liquid assets, respectively. Modifying stress testing requirements to require testing of the ability to maintain a sufficient liquidity level under specified hypothetical events. Permitting stable net asset value (NAV) money market funds to use share cancellation in a negative interest rate event, subject to board determinations and disclosure requirements. Amending SEC reporting requirements on Forms N-MFP, N-1A, N-CR and PF to require additional items to be reported to the SEC [and].... The SEC adopted a tiered compliance framework in connection with the reforms, with the final compliance date related to mandatory liquidity fees occurring on October 2, 2024."
Stradley's piece says, "As Commissioner Peirce has highlighted, the sweeping nature of the reform package posed the significant potential to kill the institutional prime money market fund sector. This is largely due to the complexity of the reforms and their impact on the overall institutional money market fund product as a cash management vehicle. While the institutional prime money market fund sector still exists, it has shrunk to a shell of its prior form. In fact, following the adoption of the SEC's reforms, over 30 institutional prime and institutional tax-exempt money market funds either converted to government money market funds or retail money market funds or liquidated in advance of the compliance date for mandatory liquidity fees."
It explains, "[P]rior to the adoption of the SEC's money market fund reforms, the institutional prime and institutional tax-exempt money market fund sector consisted of 52 separate series with $666.5 billion in assets under management, representing approximately 11.2 percent of the overall money market fund sector. By October 31, 2024 (the month end immediately following the compliance date for mandatory liquidity fees), the institutional prime and institutional tax-exempt money market fund sector shrunk to only 20 separate series with $349.1 billion in assets under management, representing approximately 5 percent of the overall money market fund sector. This means that between June 30, 2023 and October 31, 2024, the institutional prime and tax-exempt money market fund sector shrunk by nearly 50 percent in assets under management and over 60 percent in number of funds offered. Many sponsors exited the institutional prime and institutional tax-exempt sector entirely."
The piece adds, "In addition, the remaining institutional prime and institutional tax-exempt money market funds have changed various elements of their structure that previously had provided benefits to investors looking for cash management vehicles. The remaining public institutional prime and institutional tax-exempt money market funds, for example, no longer offer intraday liquidity through multiple NAV strikes per day due to operational hurdles in being able to implement the mandatory liquidity fee framework in a multiple NAV strike money market fund. Further, various institutional money market funds have moved their cut-off time for purchase and redemption orders to earlier in the day in order to preserve the ability to offer same day settlement while providing sufficient time to determine whether the fund is required to impose a mandatory liquidity fee and calculate and apply the mandatory liquidity fee, if any."
Gershkow and Marzouca write, "The mandatory liquidity fee framework is a maze of operational complexities and challenges. Under amended Rule 2a-7, if an institutional prime or institutional tax-exempt money market fund has total daily net redemptions that exceed 5 percent of the fund's net assets (or such smaller amount as the board or its delegate determines), then the fund must apply a liquidity fee to all shares that are redeemed at a price computed on that day. The calculation of the amount of a liquidity fee must be based on a good faith estimate of the transaction costs and market impacts of selling a pro rata amount of each security in its portfolio (a 'vertical slice' of the fund's portfolio) to meet net redemptions."
They state, "As of December 31, 2024, no money market funds have implemented a liquidity fee. While the SEC estimated that only 3.2 percent of institutional funds would cross a 5 percent net redemption threshold on a given day, and that liquidity costs would typically be below the de minimis exception of 0.01 percent of shares redeemed in normal market conditions, the unlikelihood of imposing a mandatory liquidity fee did not reduce the resources and expenditures necessary to build the framework to implement mandatory liquidity fees should they be required on any given business day. The complexities associated with implementing the mandatory liquidity fee requirements resulted in increased costs and resources for those funds that determined to continue to operate as institutional prime or institutional tax-exempt money market funds."
Stradley's article also says, "In addition to these operational difficulties (and the costs associated with overcoming such difficulties), questions also remain regarding the ongoing commercial implications of the SEC's new requirements and the level of investor interest in a cash management vehicle that could impose a liquidity fee on redemptions on any given business day (which fee would not be known to investors at the time a redemption order was submitted and which fee is not subject to a maximum cap under Rule 2a-7). Taken altogether, these factors, many of which were raised in various comment letters submitted to the SEC, contributed to the significant decrease in the number and assets under management of institutional prime and institutional tax-exempt money market funds. The overall impact of these reforms thus far begs the question of whether an empirical basis may develop for asking the SEC to reconsider the mandatory liquidity fee requirements."
Finally, the piece concludes, "While institutional prime funds have lived to see another day, the SEC's 2023 money market fund reform package significantly transformed the money market fund sector and reduced investor choice in investment product offerings. This transformation includes, among other changes, a substantial reduction in the number of, and assets in, institutional prime and institutional tax-exempt money market funds and the removal or modification of key features of such funds. The full impact and potential consequences of the amendments to Rule 2a-7 remain to be seen."
