SEC Adopts New Rules to Regulate Money Market Funds
The SEC announced new rules that significantly change the regulatory regime for money market funds. The new rules affect portfolio management by requiring more assets to be held in cash or cash equivalents, limiting holdings of illiquid securities, restricting purchases of lower-credit quality (aka Second Tier) securities, and shortening the permitted weighted average life and weighted average maturity. Money market funds will be required to develop procedures to forecast large redemptions and to stress test portfolios. Funds will not be able to rely solely on security ratings but will be required to do an independent credit analysis of every security purchased. The new rules also increase disclosure by requiring monthly web postings of portfolio holdings and monthly SEC reporting of the shadow mark-to-market report. The rules also allow firms to suspend redemptions and shut down a fund without SEC exemptive relief.
OUR TAKE: We will not argue that the new rules will make money market funds safer and less likely to break the buck. We do wonder whether the SEC has essentially killed the money market fund as a competitive cash management product.