Strengthening Money Market Funds to Reduce Systemic Risk

July 23rd, 2014
in econ_news

from the Securities and Exchange Commission

The Securities and Exchange Commission today adopted amendments to the rules that govern money market mutual funds. The amendments make structural and operational reforms to address risks of investor runs in money market funds, while preserving the benefits of the funds.

Follow up:

Today’s rules build upon the reforms adopted by the Commission in March 2010 that were designed to reduce the interest rate, credit and liquidity risks of money market fund portfolios. When the Commission adopted the 2010 amendments, it recognized that the 2008 financial crisis raised questions of whether more fundamental changes to money market funds might be warranted.

The new rules require a floating net asset value (NAV) for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets and provide non-government money market fund boards new tools – liquidity fees and redemption gates – to address runs. Said SEC Chair Mary Jo White:

Today’s reforms fundamentally change the way that money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system. Together, this strong reform package will make our markets more resilient and enhance transparency and fairness of these products for America’s investors.

With a floating NAV, institutional prime money market funds (including institutional municipal money market funds) are required to value their portfolio securities using market-based factors and sell and redeem shares based on a floating NAV. These funds no longer will be allowed to use the special pricing and valuation conventions that currently permit them to maintain a constant share price of $1.00. With liquidity fees and redemption gates, money market fund boards have the ability to impose fees and gates during periods of stress. The final rules also include enhanced diversification, disclosure and stress testing requirements, as well as updated reporting by money market funds and private funds that operate like money market funds.

The final rules provide a two-year transition period to enable both funds and investors time to fully adjust their systems, operations and investing practices.

Norm Champ, director of the SEC’s Division of Investment Management, said, “Today’s adoption of final money market fund reforms represents a significant additional step to address a key area of systemic risk identified during the financial crisis. These reforms are important both to investors who use money market funds as a cash management vehicle and to the corporations, financial institutions, municipalities and others that use them as a source of short-term funding.”

The SEC today also issued a related notice proposing exemptions from certain confirmation requirements for transactions effected in shares of floating NAV money market funds. Additionally, the SEC re-proposed amendments to the Commission’s money market fund rules and Form N-MFP to address provisions that reference credit ratings. The re-proposed amendments would implement section 939A of the Dodd-Frank Wall Street and Consumer Protection Act of 2010, which requires the Commission to review its rules that use credit ratings as an assessment of credit-worthiness, and replace those credit-rating references with other appropriate standards.

The rules adopted today will be effective 60 days after their publication in the Federal Register, and the re-proposal will have a 60-day public comment period following its publication in the Federal Register.

A Speech by Commissioner Luis A. Aguilar, Securities and Exchange Commission

Today, the Commission considers adopting long-considered reforms to the rules governing money market funds.[1] I commend the hard work of the staff, particularly the Division of Investment Management and the Division of Economic and Risk Analysis (“DERA”), who worked tirelessly to present these thoughtful and deliberate amendments. It is well known that the journey to arrive at the amendments considered today was a difficult one, and I can confidently say that this has been, at times, perhaps one of the most flawed and controversial rulemaking processes the Commission has undertaken.

The amendments we consider today arose in response to the worst financial crisis this country has experienced since the Great Depression. Six years have passed since the failure of Lehman led to the Reserve Primary Fund “breaking the buck.”[2] As we all know, Lehman’s failure, the failure of other well-known financial institutions, and the markets’ related concerns about the quality of other corporate paper, led to unprecedented redemptions from a number of other money market funds.[3] This run of redemptions, in turn, led the short-term financing markets to freeze,[4] and the U.S. Department of the Treasury had to step in to guarantee the investments that were in registered money market funds as of September 19, 2008.[5]

Accordingly, it became extremely important that the SEC take deliberate action to strengthen the framework governing money market funds. To that end, I strongly supported the Commission’s January 2010 adoption of a number of amendments to the rules governing money market funds. In fact, I suggested we implement Form N-MFP to obtain more real-time disclosures of money market fund portfolio holdings because I remember too well the strain we felt not knowing which money markets funds had invested in particular securities.[6] It is well recognized that the 2010 amendments made money market funds more resilient in a number of ways, including by limiting the types of investments money market funds can make and adopting more robust liquidity requirements.[7]

In the 2010 adopting release, the Commission forecast that further reforms to money market funds were on the horizon. At the time, I stated that future proposals – like all of our proposals – should be based on a rigorous analysis of the possible consequences.[8] In that vein, I highlighted the possibility that adoption of further amendments could cause a flight of significant dollars from regulated vehicles to unregulated vehicles. Because these vehicles lack the transparency and protections provided by registered money market funds, I deeply believed that the Commission had to address the danger of money migrating to these riskier vehicles.[9]

In 2012, the SEC’s former leadership discussed with the Commissioners a possible set of additional structural reforms to money market funds. As a threshold matter in response, a majority of the Commission requested that the staff conduct a thorough and comprehensive study of the effects of the 2010 amendments before proceeding with additional and fundamental changes to money market funds.

To be clear, millions of investors – retail and institutional alike – rely upon and benefit from money market funds. Thus, it was particularly important that the Commission’s actions be firmly grounded upon reliable information and rigorous analysis, which included the causes of investor redemptions in 2008, the efficacy of our 2010 reforms, and the potential impacts of further reform.

At the time, the SEC staff stated that they possessed the in-house resources and data necessary to conduct and complete such a study in five weeks. However, for reasons that still remain unclear, the SEC’s former leadership declined to authorize the staff to undertake such a study, and instead pushed ahead with proposed amendments that failed to be informed by any analysis of the impact of the 2010 amendments or to appropriately consider the risks of funds migrating from the transparent money market funds market to opaque and less-regulated – or completely unregulated – vehicles. As has been well-documented in the press, that proposal was withdrawn in August 2012 before it was put to the Commission for a vote.[10]

Fortunately, at the further insistence of a majority of the Commission who thought the matter too important to simply let drop,[11] the staff completed and presented to the Commission a thoughtful, well-supported, and in-depth study of the causes of investor redemptions in 2008 and the efficacy of the Commission’s 2010 amendments.[12] The staff’s November 2012 study concluded that the probability of a money market fund breaking the buck had indeed been substantially mitigated by the 2010 reforms, but that those reforms would have been unlikely to prevent a fund from breaking the buck when faced with a market turmoil like the one experienced in 2008.[13] The study facilitated a productive and informed discussion between the Commissioners, and its findings and conclusions formed the basis for the proposed amendments that were unanimously approved in June 2013.

The quality of the June 2013 release resulted in the Commission receiving thoughtful input and a considerable amount of data and detailed analysis, which, in turn, has significantly improved today’s proposal. In total, the Commission received over 1,400 comment letters from a variety of commenters, including individuals, academics, investment companies, investment advisers, banks, operating companies, professional and trade associations, and government entities. The comment letters commented on all aspects of the June 2013 proposal from a variety of perspectives, including, expressing support,[14] or opposition,[15] to the floating NAV proposal, indicating varying degrees of support,[16] or opposition,[17] for liquidity fees and/or redemption gates (or the combination thereof), and mostly support of the enhanced disclosure requirements in the proposed reforms.[18]

These comments make it clear that many will believe that today’s reforms may go too far; while conversely, others will believe that we have not gone far enough. Today’s rulemaking, however, is a result of extensive data and in-depth analysis, much of which is the product of work conducted in-house by staff economists in the Division of Economic and Risk Analysis (“DERA”). For example, just to name a few: (i) DERA analyzed the liquidity costs during market stress and non-market stress periods, and its study supports the appropriateness of the 1% default liquidity fee being adopted in today’s reforms;[19] (ii) DERA analyzed government funds’ exposure to non-government securities, and the findings provides support for the significant reduction in the non-government securities basket in today’s reforms;[20] (iii) DERA measured the extent to which municipal money market funds may be exposed to guarantees or demand features from a single guarantor, and its study supports the staff’s recommendation for reducing the 25% basket for guarantees and demand features from a single institution;[21] and (iv) lastly, DERA analyzed the overall availability of domestic and global safe assets, and concluded that, given the size of the global market for safe assets, DERA does not anticipate that the proposed reforms will result in a large impact to the domestic and global markets for safe assets.[22]

Accordingly, the amendments being considered for adoption today reflect an enormous amount of analysis and study and are designed to address money market funds that may be susceptible to heavy redemptions in times of market stress and to help reduce the contagion effects stemming from such redemptions.[23] They are also designed to increase transparency and investor awareness of the risks of investing in money market funds.

There are several aspects of today’s amendments that warrant special mention. First, today the Commission adopts a floating NAV for those money market funds that have tended to exhibit greater volatility. As the release states, for such funds, it is expected that the floating NAV will reduce the chance of unfair investor dilution by weakening the incentive for certain investors to take a “first mover advantage” by redeeming in times of market stress or when there is a price discrepancy between the market-based NAV and the stable share price.[24] Additionally, it will make it even more transparent that money market fund investors bear the risk of loss on their investment, as is always the case.[25]

Nevertheless, many have expressed concerns about requiring money market funds to have a floating NAV.[26] In particular, concerns have been raised as to accounting and federal income tax considerations that would make such funds virtually unworkable. However, as today’s release discusses, the Treasury Department (Treasury) and the Internal Revenue Service (IRS) will announce today proposed regulations and a revenue procedure to address these issues.[27] As a result, it is expected that money market funds, even with a floating NAV, will continue to be viable and efficient products. In that regard, I would like to thank the respective staff at the Treasury and the IRS for helping to address the difficult issues raised by the implementation of today’s floating NAV amendments.

However, as is noted in the Commission’s release, the floating NAV requirement will not by itself stop runs on money market funds in times of market stress.[28] For that reason, the Commission is also authorizing the use of “fees and gates,” as a necessary aid in the reduction of the systemic risks that today’s reforms are designed to address.

Some observers, including staff at the Federal Reserve Bank of New York, have suggested the possibility that fees and gates may themselves cause pre-emptive runs, by encouraging investors to redeem their shares before fees and gates are imposed.[29] However, as discussed at length in today’s release, the Federal Reserve staff’s conclusion that fees and gates may cause pre-emptive runs is based on a model whose assumptions and features are different than the reforms we are adopting today.[30] Accordingly, as noted in the release, the Federal Reserve paper’s findings regarding the risks of pre-emptive redemptions are not likely to apply.[31]

In addition, there are several aspects of today’s amendments that are designed to mitigate the risk of pre-emptive runs as the result of “fees and gates,” and to reduce the effects of such runs should they occur.[32] These include a maximum time period for the imposition of gates that is shorter than what was proposed and a significantly smaller default liquidity fee than initially proposed.[33] As noted in the release, these changes from the proposal are expected to lessen further the risk of pre-emptive runs.[34]

The use of fees and gates, like other provisions recommended today, has required particularly close and thoughtful deliberation. I struggled with a change that allows fund boards to temporarily prevent investors from redeeming their own cash, even when it is limited to a severe market stress scenario. This amendment is in direct conflict with the foundations of the Investment Company Act of 1940, which require that investors be able to redeem their money. It seems equally concerning to me to support the imposition of a fee on redeeming investors in a time of such high market volatility and investor stress, even when the fee provides additional liquidity to other non-redeeming investors in the same fund. Investors may be required to pay fees when they are least able to do so. I ultimately conclude, however, that the combination of providing investors with full disclosure concerning the possibility that gates and fees will be imposed in certain limited circumstances, and the benefits to investors and the country as a whole of reducing systemic risk and lessening the risk of a future economic collapse, justifies the Commission taking these extraordinary steps.

Today’s amendments also address, in part, the possible migration of assets from registered money market funds to private investment funds. In particular, the amendments to Form PF will require large liquidity fund advisers to provide the SEC, on a monthly basis, with basically the same information in respect to their funds’ portfolio holdings as is provided by registered money market funds. While Form PF does not cover all unregulated funds or vehicles,[35]the additional information will provide important information and transparency to the Commission. I expect the Commission staff to closely monitor these developments and to recommend to the Commission and, if necessary, to Congress, any possible amendments or legislative reforms needed to address the operations of these dark, less regulated markets.

More generally, while I support the adoption of today’s amendments, I expect the staff to monitor the impact and effects of these amendments and to provide regular and frequent reports to the Commission.

Re-Proposing Amendments to Remove References to Credit Ratings from Rule 2a-7

Today, I will also vote to approve the re-proposal of amendments that would remove references to credit ratings from Rule 2a-7, as mandated by the Dodd-Frank Act.[36] Under this re-proposal, a money market fund would be limited to investing only in securities that the fund’s board of directors determines to have “minimal credit risk,” a determination that includes a finding that a security’s issuer has an “exceptionally strong capacity to meet its short-term obligations.”[37] These re-proposed amendments would replace the current requirement that an assessment of credit quality be based on both an objective standard (i.e., credit ratings) and a subjective standard (i.e., a fund’s board of directors’ independent credit evaluation), with an entirely subjective evaluation of credit quality by the fund’s board. As I said when these amendments were first proposed back in March 2011,[38]removing the objective baseline of credit rating references from Rule 2a-7 could encourage funds to invest in riskier portfolio securities and may therefore increase, rather than decrease, risks to investors.[39]

There are aspects of today’s re-proposal that seek to address these concerns, which were echoed by several commenters.[40] Most notably, the re-proposal provides guidance on specific objective factors that should be considered by funds’ boards in assessing credit quality, such as issuers’ financial condition and liquidity.[41] Importantly, however, consideration of such objective factors is not required under today’s re-proposal.[42] I therefore strongly encourage commenters to express their views about the adequacy of external, objective factors in assessing the credit quality of portfolio securities, and whether a more prescriptive approach is needed.

Notice of Proposed Exemptive Order from the Confirmation Requirements of Rule 10b-10

Finally, the Commission is also providing notice of a proposed exemptive relief that would grant an exemption from the confirmation requirements of Exchange Act Rule 10b-10 for money market funds, including those with a floating NAV, provided certain conditions are met.[43] I will vote to approve the issuance of this notice.


I will end where I started, by thanking the staff for their hard work.




[1] Money Market Funds, SEC Release No. IC-[XXXX] (July 23, 2014) (hereinafter “Adopting Release”).

[2] 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 position in Lehman Brothers commercial paper – would “break the buck” and price its securities at $0.97 per share. Id. at 29.

[3] Many factors contributed to the unprecedented redemptions from money market funds during the financial crisis. For example, as noted in the adopting release, at the same time the Reserve Primary Fund broke the buck, 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, whose commercial paper was held by many prime money market funds. Adopting Release, supra note 1, at 29-30. Additional potential explanations for the significant redemption activity during the crisis are discussed in the 2012 DERA study, and include: (i) a “flight to quality,” in which investors sought the relative safety of government funds, either because prime funds suddenly looked riskier than before or investors became more risk averse; (ii) a “flight to liquidity,” in which investors recognized that funds’ underlying assets are not equally liquid, making government funds more attractive; (iii) a “flight to transparency,” in which investors shifted assets to government funds, whose portfolio holdings are effectively more transparent than prime funds because government funds are restricted from holding more than 20% of their portfolios in securities of issuers other than the U.S. government; (iv) a “flight to performance,” in which investors shifted assets to funds that had performed well; and (v) structural design issues with funds, in which investors may have had an incentive to sell shares if their funds had embedded losses from non-performing assets, and those investors believed that a fund may have had to sell some of those assets to raise cash to pay redeeming investors. 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) (hereinafter “DERA Study”), available at The Division of Risk, Strategy, and Financial Innovation (“RSFI”) is now known as the Division of Economic and Risk Analysis (“DERA”). The DERA study also notes that issues related to the structural design of money market funds may have accelerated investor redemptions in September 2008. Id.

[4] Adopting Release, supra note 1, at 30-31.

[5] To further stem the contagion effects from these events, the Federal Reserve then authorized the temporary extension of credit to banks to finance their purchase of high-quality asset-backed commercial paper from money market funds. Adopting Release, supranote 1, at 32.

[6] Money Market Fund Reform, SEC Release No. IC-29132 (Feb. 23, 2010), available at

[7] Id. These amendments were designed to make money market funds more resilient by reducing the interest rate, credit, and liquidity risks of fund asset portfolios. More specifically, the amendments decreased money market funds’ credit risk exposure by further restricting the amount of lower quality securities that funds can hold. The amendments, for the first time, also require that money market funds maintain liquidity buffers in the form of specified levels of daily and weekly liquid assets. 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 interest rate risk by decreasing the maximum weighted average maturities of fund portfolios from 90 to 60 days. 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 also required to submit to the Commission monthly information on their portfolio holdings using Form N-MFP.

[8] See Commissioner Luis A. Aguilar, Fortifying the Money Market Framework Upon Which Investors and Issuers Rely (Jan. 27, 2010), available at

[9] Id.

[10] Commissioner Luis A. Aguilar, Statement Regarding Money Market Funds (Aug. 23, 2012),available at

[11] The majority of the Commission referenced herein included Commissioners Aguilar, Paredes, and Gallagher.

[12] See DERA Study, supra note 3. 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 a fund with the maximum permitted weighted average maturity 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.

[13] Id.

[14] See, e.g., Barbara G. Novick, Vice Chairman, and Richard K. Hoerner, CFA, Managing Director, Head of Global Cash Management, BlackRock comment letter (Sept. 12, 2013),available at (stating that Blackrock supports “[f]ocusing on Prime MMFs for the Floating Net Asset Value (“FNAV”) proposal, while exempting Government MMFs.”); F. William McNabb III, Chairman and Chief Executive Officer, Vanguard comment letter (Sept. 17, 2013), available at (indicating that Vanguard supports the proposal “to require floating NAVs for institutional prime MMFs and stable NAVs for retail prime MMFs.”); Larry H. Goldbrum, General Counsel, The SPARK Institute, Inc. comment letter (Sept. 16, 2013), available at (indicating that “the ‘Floating NAV Alternative’ is generally operationally and administratively feasible for retirement plan service providers.”)

[15] See, e.g., John T. Donohue, Chief Investment Officer and Head of Global Liquidity, J.P. Morgan Investment Management Inc. comment letter (Sept. 17, 2013), available at (noting, among other things, that “[i]f the SEC pursues the floating NAV alternative under the Proposal (‘Alternative 1’), we believe that the SEC should not distinguish between retail and institutional

investors.”); Robert Sabatino, Managing Director, Head of US Taxable Money Markets, UBS Global Asset Management (Americas) Inc. and Keith A. Weller, Executive Director & Senior Associate General Counsel, UBS Global Asset Management (Americas) Inc. comment letter (Sept. 16, 2013), available at that UBS “believe[s] that all money funds that meet the requirements of Rule 2a-7 under the Investment Company Act of 1940, as amended [‘1940 Act’], should be allowed to continue to maintain a stable NAV per share.”); Karla M. Rabusch, President, Wells Fargo Funds Management, LLC comment letter (Sept. 16, 2013), available at (noting that Wells Fargo “still oppose[s], however, a variable net asset value (‘NAV’) requirement for any money market funds, whether as a standalone measure or in combination with liquidity fees and gates.”)

[16] For example, a large group of commenters noted varying degrees of support for either liquidity fees and/or redemption gates, noting generally that fees and gates would address run risk and/or systemic contagion risk, in particular by mitigating the “first-mover advantage.” See Joseph M. Ulrey III, CEO, U.S. Bancorp Asset Management, Inc., President, First American Funds comment letter (Sept. 16, 2013), at 2, available at ; I. Lee Chapman, IV, CEO & President, Davenport & Company LLC comment letter, at 2, available at; Sabatino and Weller comment letter, supra note 15 at 9; James J. Angel, Ph.D., CFA, Associate Professor of Finance, Georgetown University McDonough School of Business and Visiting Associate Professor, The Wharton School, University of Pennsylvania comment letter (Sept. 17, 2013), at 7, available at .

[17] Many other commenters registered their express opposition to the fees and gates alternative, either by expressing doubts about whether fees or gates would be effective in addressing the run and contagion risks that money market funds may pose, or suggesting that fees and gates could actually worsen these run and contagion risks by, for example, leading to “pre-emptive” runs in times of financial stress. See, e.g., Sheila C. Bair, The Systemic Risk Council comment letter (Sept. 16, 2013), at 3, available at (stating that “[b]ecause investors who run first can still get their $1.00 – and investors who stay could bear the losses of the first movers and the potential for delays accessing their funds and new fees – MMF investors will have an incentive to run from these products even earlier than they do now.”); Timothy W. Cameron, Managing Director, SIFMA Asset Management Group, John Maurello, Managing Director, SIFMA Private Client Group, and Matthew J. Nevins, Managing Director and Associate General Counsel, SIFMA Asset Management Group comment letter (Sept. 17, 2013), at 19,available at (noting that some, but not all, members “have expressed concern that a fee or gate will encourage preemptive runs by shareholders who exit the fund before the fee or gate is imposed, as the fund approaches the liquidity trigger for the fee or gate.”); Cecelia Calaby, Senior Vice President, Center for Securities Trusts & Investments, American Bankers Association comment letter (Sept. 17, 2013), at 9, available at that in times of market stress, “we believe it likely that redemptions would simply occur earlier … making such opportunistic redemptions more common”).

[18] See, e.g., id., Calaby comment letter (noting that the enhanced disclosure requirements “would provide investors more information and also influence MMF managers to yet more disciplined and rigorous credit risk analysis.”); Novick and Hoerner comment letter, supra note 14 (supporting “[i]ncreasing transparency to investors through MMF portfolio information disclosures.”); Anchard Scott, Josh Snodgrass, Akshat Tewary, et al [sic], Occupy the SEC comment letter (Sept. 16, 2013), available at (stating support for the Commission’s proposed disclosure measures).

[19] Memorandum from the SEC’s Division of Economic and Risk Analysis regarding Liquidity Cost During Crisis Periods (Mar. 17, 2014), available at

[20] Memorandum from the SEC’s Division of Economic and Risk Analysis regarding Government Money Market Fund Exposure to Non-Government Securities (Mar. 17, 2014),available at

[21] Memorandum from the SEC’s Division of Economic and Risk Analysis regarding Municipal Money Market Funds Exposure to Parents of Guarantors (Mar. 17, 2014), available at

[22] Memorandum from the SEC’s Division of Economic and Risk Analysis regarding Demand and Supply of Safe Assets in the Economy (Mar. 17, 2014), available at

[23] Adopting Release, supra note 1, at 39.

[24] Id. at 144-53.

[25] Id. at 154-57.

[26] See, e.g., John D. Hawke, Jr., Arnold and Porter LLP on behalf of Federated Investors comment letter (Sept. 17, 2013), available at (stating that “[s]ome financial institutions we have interviewed have determined not to attempt to assess the costs of implementation of a floating NAV, because such a product will no longer serve their customer needs.”); Donohue comment letter, supranote 15 (noting that “we have identified a number of significant operational and transitional challenges that a transition to a floating NAV would pose to investors, the industry and the financial markets.”)

[27] Adopting Release, supra note 1, at 131-132. I also note that, as stated in today’s release, if the Treasury Department and IRS withdraw or materially limit the relief in their proposed regulations, the Commission would consider whether any modifications to the reforms we are adopting today may be appropriate. Id. at 175.

[28] Id. at 649-52.

[29] See, e.g., Federal Reserve Bank of New York Staff Report, Gates, Fees, and Preemptive Runs (Apr. 2014), available at

[30] Id. For example, the Federal Reserve Bank of New York Staff Report relies upon a model that assumes that fees or gates are imposed only when a fund’s liquid assets are fully depleted. In contrast, under today’s reforms, fees or gates may be imposed while the fund still has substantial liquid assets, and thus investors may be dissuaded from pre-emptively redeeming from funds with substantial internal liquidity because the fund is more likely to be able to readily satisfy redemptions without adversely impacting the fund’s pricing. Adopting Release, supra note 1, at 63-66. Another important difference is that our reforms include a floating NAV for a significant portion of money market funds, which may have the effect of altering the behavior of investors under a model that took such a combination of effects into account. Id. at 65. Another significant difference is that our reforms include a floating NAV for institutional prime money market funds, which constitute a sizeable portion of all money market funds, but the model assumes a stable NAV. The floating NAV requirement may encourage those investors who are least able to bear risk of loss to redirect their investments to other investment opportunities (e.g., government money market funds), and this may have the secondary effect of removing from the funds those investors most prone to redeem should a liquidity event occur for which fees or gates could be imposed.

[31] Adopting Release, supra note 1, at 65-66.

[32] Id. at 57-66.

[33] Id.

[34] Id. at 58. In addition, the additional discretion granted to fund boards to impose a fee or gate at any time after a fund’s weekly liquid assets have fallen below the 30% required minimum, a much higher level of remaining weekly liquid assets than proposed, should mitigate the risk of pre-emptive redemptions. Id. at 57-66.

[35] For example, certain private funds that have not had at least $150 million in private fund assets under management as of the last day of their most recently completed fiscal year are not required to complete and file Form PF. Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, SEC Release No. IA-3308 (Oct. 31, 2011), available at

[36] Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule, SEC Release No. IC-[XXXX] (July 23, 2014) (hereinafter “Re-proposing Release”). These amendments are re-proposed in accordance with Dodd-Frank Act Section 939A, which directs the Commission and other federal agencies to review and modify certain regulations “to remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as each respective agency shall determine as appropriate for such regulations.” Pub. L. No. 111-203 § 939A(b). Section 939A of the Dodd Frank Act provides that agencies shall seek to establish to the extent feasible, uniform standards of creditworthiness, taking into account the entities the agencies regulate and the purposes for which those entities would rely on such standards. Specifically, these re-proposed amendments would replace references to credit ratings in rule 2a-7 and Form N-MFP under the Investment Company Act. Today’s re-proposal would also amend rule 2a-7’s provisions relating to issuer diversification. Specifically, the proposed amendments would eliminate an exclusion from rule 2a-7’s diversification requirement that is currently available for securities subject to a guarantee issued by a non‑controlled person. Re-proposing Release, at 42-49. In addition, under the current rule, money market funds may invest in long-term securities with a conditional demand feature if, among other conditions, the underlying security (or its guarantee) has received either a short‑term rating or a long-term rating within the highest two categories from the requisite NRSROs or is a comparable unrated security. Today’s re-proposal would eliminate references to credit ratings and, instead, a fund’s board of directors (or its delegate) would have to evaluate the long-term risk of the underlying security and determine that it (or its guarantor) “has a very strong capacity for payment of its financial commitments.” Re-proposing Release, at 26-31.

[37] Id. at 13. The “exceptionally strong capacity” standard, by design, is similar to the subjective standard used by credit rating agencies themselves to describe certain of their ratings categories. See id., n. 38.

[38] References to Credit Ratings in Certain Investment Company Act Rules and Forms, SEC Release No. 33-9193 (March 2, 2011), available at

[39] See Commissioner Luis A. Aguilar, Allow the Regulators to Regulate (Mar. 2, 2011), available at

[40] See, e.g., Barbara Roper, Director of Investor Protection, Consumer Federation of America comment letter (Apr. 25, 2011), at 1-2, available at (opposing the 2011 proposal, noting that it “eliminates references to ratings without putting anything in their place,” would “throw open the door to even riskier investment practices by money market mutual funds,” and “does not impose any objective limits on securities money market funds could invest in” nor does it “provide any guidance on factors, beyond credit ratings, that boards would have to consider in arriving at their assessments of credit risk.”); Americans for Financial Reform comment letter (Apr. 25, 2011), available at, (noting that “eliminating the reference to NRSRO ratings from Rule 2a-7 without offering more concrete guidance on alternative means to assess risk could seriously weaken protections for investors in money market funds without truly addressing the systemic problem of institutional over-reliance on the rating agencies who failed during the financial crisis,” and that the “guidance offered in this rule does not rise to the level of specificity necessary to be an objective standard of credit-worthiness, and leaves fund investors completely dependent on the subjective and opaque judgments of the fund directors.”); Dennis M. Kelleher, President & CEO, Better Markets, Inc. and Stephen W. Hall, Securities Specialist, Better Markets, Inc. comment letter (Apr. 25, 2011), at 8-9, available at that the proposed alternative standards of creditworthiness “offer no concrete formulas or guidance that a fund’s board could use to identify securities that actually meet the posited standards,” and thus there can be “little assurance” that boards will make “accurate and consistent judgments about the credit-worthiness of debt securities.”).

[41] Re-proposing Release, supra note 36, at 20-26. For example, as noted in the release, in assessing securities’ creditworthiness, fund boards should consider among other things the issuer’s or guarantor’s financial condition, its liquidity, its ability to react to future events and repay debt in a highly adverse situation, and the strength of the issuer’s industry in the overall economy. Id. In addition, the re-proposal identifies numerous additional factors specific to particular types of asset classes that should be considered by fund boards in making credit quality determinations. Id. For example, the release identifies factors to be considered by boards when assessing the credit quality of repurchase agreements that are “collateralized fully” under rule 2a-7, including an assessment of the creditworthiness of the counterparty, of the volatility and liquidity of the market for collateral, if the collateral is a government agency collateralized mortgage obligation or mortgage backed security, or other non-standardized security, and the process for liquidating collateral. The re-proposal further makes clear that credit risk determinations need to be documented and that we expect such documentation to address any factors considered and the analysis of those factors. Id.

[42] Id.

[43] Notice of Proposed Exemptive Order Granting Permanent Exemptions Under the Securities Exchange Act of 1934 from the Confirmation Requirements of Exchange Act Rule 10b-10 for Certain Money Market Funds, SEC Release No. XXXXX (July 23, 2014). This proposed exemptive relief would allow broker-dealers, subject to certain conditions, to provide transaction information to investors in any money market fund operating pursuant to Rule 2a-7(c)(1)(ii) on a monthly basis in lieu of providing immediate confirmations. Id. As proposed, to be eligible for the exemption from the immediate confirmation requirements of Rule 10b-10(a), a broker-dealer must (1) notify the customer of its ability to request delivery of an immediate confirmation, consistent with the written notification requirements of Exchange Act Rule 10b-10(a), and (2) not receive any such request from the customer. Id.

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