It's been over a month now since the SEC passed its 424-page "Money Market Fund Reforms," and money market participants continue to discuss, interpret and publish updates on the new rules. Over the past week and a half, several law firms -- Dechert, Stradley Ronon and K&L Gates -- have held webinars or posted papers on the subject. We quote from the latter two below, and we'll quote highlights from the Dechert webinar in our next Money Fund Intelligence newsletter. Stradley Ronon's "Client Alert," "A Swing and a Miss! Swing Pricing Strikes Out in SEC's Money Market Fund Reforms," explains, "At a meeting on July 12, 2023, the U.S. Securities and Exchange Commission (SEC), in a 3-2 vote, adopted amendments to Rule 2a-7 under the Investment Company Act of 1940 (1940 Act) that impact the operation and management of money market funds. Here is what you need to know." (Note: Crane's Money Fund University, which is scheduled for Dec. 18-19, in Jersey City, NJ, will feature two sessions on Money Fund Regulations and Reforms.)
They list, "Key Items Included in Rulemaking Package," "Removal of redemption gates from Rule 2a-7; Modified liquidity fee framework: Removal of the tie between weekly liquid assets (WLA) and liquidity fee requirements. Mandatory liquidity fees for institutional prime and institutional tax-exempt money market funds. Discretionary liquidity fees for nongovernment money market funds; Changes to portfolio liquidity requirements: Increase daily liquid asset (DLA) and WLA requirements to 25% and 50%, respectively. Board notification and public SEC filing if a money market fund has less than 25% or 12.5% of total assets invested in WLA or DLA, respectively. Changes to stress testing requirements to require testing of the ability to maintain a sufficient liquidity level under specified hypothetical events; Permit 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; Amendments to SEC reporting requirements on Forms N-MFP, N-1A, N-CR and PF that will require additional items to be reported to the SEC; [and] Clarifications on dollar-weighted average portfolio maturity (WAM) and dollar-weighted average life maturity (WAL) calculations."
Among the "Key Items Not Included in the Rulemaking Package," they cite: "Mandatory swing pricing; Prohibition on share cancellation; Requirement for stable NAV money market funds to determine that financial intermediaries have the capacity to transact at prices other than a stable NAV [and] Certain Form N-MFP amendments: Disclosure of the name of each shareholder who owns 5% or more of the money market fund. Lot-level reporting of portfolio holdings and disaggregated information for certain repurchase agreement reporting on Form N-MFP."
Stradley's Jamie Gershkow, Alison Fuller and Geena Marzouca tell us, "This client alert will review the various requirements of the SEC's rulemaking package and related compliance dates and provide practical tips for managers and boards of directors of money market funds to implement and comply with the new money market fund reforms. For information on amendments to SEC forms and related disclosure considerations, please see our separate client alert. Stradley Ronon is pleased to host a webinar on Sept. 6, 2023, at 12:00 pm (Eastern time) on money market fund reform."
Discussing the "Modified Liquidity Fee Framework," they comment, "Following significant opposition to the SEC's swing pricing proposal for money market funds, the SEC adopted a modified liquidity fee framework in place of the SEC's proposal to require money market funds to implement swing pricing. Unlike the current liquidity fee framework, a money market fund's ability to impose a liquidity fee will no longer be tied to the fund's level of WLA. Instead, the modified liquidity fee contains two liquidity fee components: (i) a mandatory liquidity fee based on net redemptions and (ii) a discretionary liquidity fee based on a best interest finding by the board of directors (or its delegate)."
On the "Calculation of Mandatory Liquidity Fees," Stradley states, "The mandatory liquidity fee framework requires that the fee be based on a good faith estimate, supported by data, of the costs the institutional fund would incur if it sold a pro rata amount of each security in its portfolio (a vertical slice) to satisfy the amount of net redemptions, including (i) spread costs, such that the fund is valuing each security at its bid price, and any other charges, fees and taxes associated with portfolio security sales and (ii) market impacts for each security."
The paper continues, "The final rule does not require an institutional fund to impose the mandatory liquidity fee if its estimated liquidity costs are de minimis, which is defined as less than 0.01% of the value of the shares redeemed. The final rule does not impose a cap on the maximum amount that can be charged under the mandatory liquidity fee framework. With respect to determining market impacts, an institutional fund would first establish a market impact factor for each security, which is a good faith estimate of the percentage change in the value of the security if it were sold ... if the fund sold a pro rata amount of each security in its portfolio to satisfy the amount of net redemptions, under current market conditions.... In response to comments on the proposal, if the costs of selling a vertical slice of the portfolio cannot be estimated in good faith and supported by data, then the fund must apply a default liquidity fee of 1% of the value of shares redeemed."
The K&L Gates update, "A Deep Dive into Money Market Fund Liquidity Fees," was published in the National Law Review and written by Jon-Luc Dupuy, Michael Davalla and Maxwell Black. Their summary says, "On 12 July 2023, the Securities and Exchange Commission (the SEC) adopted amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended (the 1940 Act) (the Final Rule), which governs the structure and operation of money market funds (MMFs). The amendments, which were first proposed by the SEC in a December 2021 release (the Proposed Rule), reflect the SEC's concern over market stresses experienced in response to the COVID-19 pandemic in March 2020 and are intended to improve the resiliency and transparency of MMFs."
It explains, "In a surprising change from the Proposed Rule, the SEC did not adopt the much criticized swing pricing proposals for institutional prime and institutional tax-exempt MMFs (Institutional MMFs) and instead adopted a revamped liquidity fee regime that will require mandatory liquidity fees for Institutional MMFs and allow all MMFs, including Institutional MMFs, to impose discretionary liquidity fees when determined to be in the best interest of the fund."
The paper tells us, "This alert provides a detailed discussion of the requirements for implementing and calculating the new mandatory liquidity fees, the application of discretionary liquidity fees, board obligations and responsibilities, and changes in regulatory reporting requirements related to this new liquidity fee structure. We also briefly touch on the potential implications of the SEC's determination to drop the swing pricing proposal for MMFs on the SEC's separate, and still outstanding, rule proposal that would require swing pricing for non-MMF mutual funds. For a summary of the Final Rule, please see our earlier client alert here. The Final Rule was published in the Federal Register on 3 August 2023 and is slated to go effective on 2 October 2023."
K&L Gates continues, "As proposed, swing pricing would have required the imposition of market impact factors when net redemptions exceeded 4% of the fund's net assets, which commenters asserted could have occurred on a fairly regular basis. As a small concession, the SEC has increased this threshold to 5% of the fund's net assets in the Final Rule as the trigger for when a mandatory liquidity fee must be imposed. Similar to swing pricing under the Proposed Rule, in calculating the market impact for a liquidity fee, a fund must estimate the impact of selling a vertical slice of its portfolio to satisfy the amount of net redemptions. The Final Rule allows funds to estimate transaction costs and market impacts for each type of security with the same or substantially similar characteristics and apply those estimates to all securities of that type in the fund's portfolio, rather than analyze each security separately -- an approach that is consistent with the use of estimates for swing pricing in the Proposed Rule."
They add, "The SEC continues to believe it would be reasonable to assume a market impact of zero for the fund's daily and weekly liquid assets, since a fund could reasonably expect such assets to convert to cash without a market impact to fulfill redemptions, because these assets are close to maturity. As the Final Rule requires MMFs to hold an even greater percentage of both daily and weekly liquid assets, MMFs will be required to hold a larger portion of their portfolios in securities that can be expected to have a market impact of zero."
