In July of 2014, the Securities and Exchange Commission (SEC) announced fundamental changes in certain money market mutual funds that must be in effect by October 14, 20161. The new rules are designed to make structural and operational reforms to protect investors from potential liquidity runs while preserving the benefits of such funds. The rules address the accounting treatment of these funds by either preserving amortized cost accounting (i.e. a $1.00 Net Asset Value) or requiring a floating rate Net Asset Value (NAV). Funds are segmented by their natural investors, and differentiate between retail vs. institutional investors, and between prime and US Government funds. Prime funds invest in commercial paper and bank CDs, among other non government backed securities.
Institutional prime money market funds must convert to a floating NAV by the effective date of the rule. A floating NAV fund will value underlying securities each day using market-based factors that will fluctuate with changes in capital markets. Shares will be issued and redeemed based on the floating NAV each day. Both retail and institutional US Government money market funds retain the ability to use a fixed $1.00 NAV for redemptions and purchases.
Retail prime money market funds can also maintain the fixed $1.00 NAV that their investors have traditionally experienced. However, the new rules stipulate that this type of fund must allow the flexibility for a fund’s board of directors to impose liquidity fees (up to 2%) and/or gates (up to 10 business days in a 90-day period) in times of liquidity stress.