In July, the Securities and Exchange Commission (SEC) adopted
amendments to rules governing money market mutual funds. These require a
“floating” net asset value (NAV) for some funds, and implement liquidity fees
and temporarily suspend redemptions during periods of liquidity stress. The
rule amendments build on changes made by the SEC in March 2010 in response to
money market liquidity issues during the 2008 financial crisis, such as the
risk of investor “runs” on funds. Investors, including 401(k) and other
retirement plans, will need to evaluate their money market fund investments as
these changes become effective. Here is an overview for plan advisers.
Key definitions. Two new definitions are important
for understanding the amended rules.
- A “governmental” money market fund invests at least 99.5%
of assets in Treasurys and other securities backed by the full faith and credit
of the U.S. government. Although most governmental money market funds already
invest consistently with this standard, current rules would permit a fund to
call itself a governmental fund even if up to 20% of assets are nongovernmental
assets. “Nongovernmental” money market funds include “prime” funds that invest
primarily in corporate debt securities and also municipal and tax-exempt funds
that invest in municipal bonds and other tax-exempt securities.
- A “retail” money market fund must have policies and
procedures designed to limit all beneficial owners to individuals. 401(k) and
other defined contribution (DC) plans and individual retirement accounts (IRAs)
are treated as beneficially owned by individuals and permitted to participate
in retail money market fund rules. Defined benefit (DB) plans generally will
not be treated as retail investors.
Floating NAV. Since 1983, SEC rules have allowed
money market funds to use an amortized cost method of valuing portfolio
securities and a “penny rounding” method of pricing, which has permitted money
market funds to sell and redeem shares at a stable share price—i.e., $1. The
amended rules require nongovernmental institutional money market funds to
redeem and sell shares that use a floating NAV, which means their daily share
price will fluctuate with changes in the market value of portfolio assets.
Governmental and retail money market funds may continue to maintain a stable
Liquidity fees and redemption gates. The amended
rules allow—and in some situations require—nongovernmental money market funds,
including retail funds, to: impose a fee on redemptions, also known as a
liquidity fee, of up to 2% and to temporarily suspend, or “gate,” redemptions
for up to 10 days if weekly liquid assets fall below certain thresholds.
Government funds are not automatically subject to the liquidity-fee and
redemption-gate rules but may use these measures after disclosure to investors.
Other changes. The rule amendments include changes to
update reporting requirements and to enhance disclosure, diversification and
stress-testing requirements for money market funds. Among other things, money
market funds will be required to disclose, on a website, levels of daily and
weekly liquid assets. These rules go into effect over the next six to nine
What to expect. Expect changes to money market
funds—and potential disruptions—as funds reorganize and adopt new policies and
procedures to comply with the August 2016 effective date for the floating NAV,
liquidity fees and redemption gates. Plan advisers may expect to assist plans
in evaluating whether to continue a current money market fund investment or
make a change. Here are some considerations.
- A single money market fund will no longer be able to offer
separate share classes to retail and institutional investors, and funds that
currently do so must reorganize. Funds that seek to qualify as retail may force
redemptions by investors not eligible to invest in a retail money market fund,
such as defined benefit plans.
- Funds that put in place policies and procedures to comply
with the new rules will likely modify contracts with plan recordkeepers and
other intermediaries to obtain certifications of investor status, as well as
implement redemption fees and liquidity gates. Expect communications from
recordkeepers as new policies and procedures are added.
Some predict that investors may move from prime money market
funds to governmental funds, which are exempt from the floating NAV rule and
not required to impose liquidity fees and redemption gates. If so, capacity
restraints on governmental money market funds are possible.
Roberta Ufford, a principal of Groom Law Group, has spent
more than 20 years advising plans, sponsors and plan service providers,
including advisers, on fiduciary responsibility issues under ERISA and related
laws applying to ERISA-covered and governmental retirement and other plans. She
is recognized by The Legal 500 guide for her excellence in the employee
benefits and executive compensation field and often speaks before industry
groups on fiduciary matters. She is a graduate of the George Washington
University School of Law, having served five years as a military intelligence
officer in the U.S. Army before attending law school.