First take: SEC’s money market reform

July 2014
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No major surprises, but big open questions

After six years of debate over the risks and operations of money market funds (MMFs) – and events such as the fall of Lehman Brothers, breaking the buck at the Reserve Primary Fund, rancor between financial regulators, and hundreds of industry comment letters – the SEC finally adopted MMF reform on July 23rd. The final rule will fundamentally alter certain aspects of MMF operations and accounting, and the way these funds are viewed by investors.

The final rule combines approaches set forth in the SEC’s proposal last summer[1] to: (1) require institutional prime MMFs to float their Net Asset Values (NAV) and (2) provide tools to all MMF boards to discourage and prevent runs by investors through the use of redemption fees and gates. A key necessity for reaching the SEC’s 3-2 vote in favor of the rule was the Treasury Department’s and IRS’s concurrent issuance of rules mitigating the tax compliance costs for institutional prime MMFs investors (whose investments will be subject to the floating NAV).

The clock is now ticking. MMFs have two years to implement the floating NAV and fees/gates requirements. MMFs also have 18 months to implement additional requirements for diversification, stress testing, disclosure, and reporting (Form PF and Form N-MFP), and nine months to implement requirements for reporting material events on a new Form N-CR.


  1. Potential structural changes within the MMF industry.

  2. Implementation challenges.

  3. Will the reforms work?

Key changes from the proposal

  1. Reduced flexibility for government MMFs.

  2. “Retail MMF” definition improved.

  3. More flexibility for MMF boards when imposing fees/gates.

  4. Amortized cost accounting remains for retail and government funds.

  5. Refined stress testing.

  6. Modest relief for municipal MMFs.

What’s next?

  1. SEC to share the spotlight with industry, investors, and … FSOC (again).

This First take elaborates on these key points.

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