[Federal Register Volume 88, Number 148 (Thursday, August 3, 2023)]
[Rules and Regulations]
[Pages 51404-51549]
[FR Doc No: 2023-15124]

Vol. 88

Thursday,

No. 148

August 3, 2023

Part II

Securities and Exchange Commission

-----------------------------------------------------------------------

17 CFR Parts 270, 274, and 279

Money Market Fund Reforms; Form PF Reporting Requirements for Large
Liquidity Fund Advisers; Technical Amendments to Form N-CSR and Form N-
1A; Final Rule

Federal Register / Vol. 88 , No. 148 / Thursday, August 3, 2023 /
Rules and Regulations

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 270, 274 and 279

[Release Nos. 33-11211; 34-97876; IA-6344; IC-34959; File No. S7-22-21]
RIN 3235-AM80

Money Market Fund Reforms; Form PF Reporting Requirements for
Large Liquidity Fund Advisers; Technical Amendments to Form N-CSR and
Form N-1A

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to certain rules that govern money market funds
under the Investment Company Act of 1940. These amendments are designed
to improve the resilience and transparency of money market funds. The
amendments will revise the primary rule that governs money market funds
to remove the ability for a fund board to temporarily suspend
redemptions if the fund's liquidity falls below a threshold. In
addition, the amendments will remove the tie between liquidity
thresholds and the potential imposition of liquidity fees. The
amendments will also require certain money market funds to implement a
liquidity fee framework that will better allocate the costs of
providing liquidity to redeeming investors. In addition, the Commission
is increasing the daily liquid asset and weekly liquid asset minimum
requirements to 25% and 50%, respectively. The Commission also is
amending certain reporting requirements on Form N-MFP and Form N-CR and
making certain conforming changes to Form N-1A to reflect amendments to
the regulatory framework for money market funds. In addition, the
Commission is addressing how money market funds with stable net asset
values may handle a negative interest rate environment, including by
adopting amendments that will permit these funds to use share
cancellation, subject to certain conditions. Further, the Commission is
adopting rule amendments to specify how funds must calculate weighted
average maturity and weighted average life. In addition, the Commission
is adopting amendments to Form PF concerning the information large
liquidity fund advisers must report for the liquidity funds they
advise. Finally, the Commission is adopting two technical amendments to
Form N-CSR and Form N-1A to correct errors from recent Commission
rulemakings.

DATES: Effective dates: The rule amendments are effective October 2,
2023. The amendments to Forms N-1A and N-CSR are effective October 2,
2023 and the amendments to Forms N-CR, N-MFP, and PF are effective June
11, 2024.
    Compliance dates: The applicable compliance dates are discussed in
section II.H.

FOR FURTHER INFORMATION CONTACT: Blair Burnett, Christian Corkery,
David Driscoll, or Laura Harper Powell, Senior Counsels; Angela
Mokodean, Branch Chief; or Brian M. Johnson, Assistant Director at
(202) 551-6792, Investment Company Regulation Office, Division of
Investment Management, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to the
following rules and forms:
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 80a-1 et seq. Unless otherwise noted, all
references to statutory sections are to the Investment Company Act,
and all references to rules under the Investment Company Act are to
title 17, part 270 of the Code of Federal Regulations [17 CFR part
270].
    \2\ 15 U.S.C. 77a et seq.
    \3\ 15 U.S.C. 78a et seq.

------------------------------------------------------------------------

------------------------------------------------------------------------
                Commission reference                  CFR Citation (17
                                                       CFR)
------------------------------------------------------------------------
Investment Company Act of 1940    Rule 2a-7.........  Sec.   270.2a-7.
 (``Act'' or ``Investment
 Company Act'') \1\.
                                  Rule 31a-2........  Sec.   270.31a-2.
                                  Form N-MFP........  Sec.   274.201.
                                  Form N-CR.........  Sec.   274.222.
Securities Act of 1933            Form N-1A.........  Sec.  Sec.
 (``Securities Act'') \2\ and                          239.15A and
 Investment Company Act.                               274.11A.
Securities Exchange Act of 1934   Form N-CSR........  Sec.  Sec.
 (``Exchange Act'') \3\ and                            249.331 and
 Investment Company Act.                               274.128.
Investment Advisers Act of 1940   Form PF...........  Sec.   279.9.
 (``Advisers Act'').
------------------------------------------------------------------------

Table of Contents

I. Introduction
    A. Role of Money Market Funds and Existing Regulatory Framework
    B. March 2020 Market Events and Need for Reform
II. Discussion
    A. Amendments To Remove the Tie Between the Weekly Liquid Asset
Threshold and Redemption Gates and Liquidity Fees
    1. Unintended Effects of the Tie Between the Weekly Liquid Asset
Threshold and Liquidity Fees and Redemption Gates
    2. Removal of Redemption Gates From Rule 2a-7
    B. Liquidity Fee Requirement
    1. Determination To Adopt a Liquidity Fee Requirement
    2. Terms of the New Mandatory Liquidity Fee Requirement
    3. The Continued Availability of Discretionary Liquidity Fees
    4. Disclosure
    5. Tax and Accounting Implications of Liquidity Fees
    C. Amendments to Portfolio Liquidity Requirements
    1. Increase of the Minimum Daily and Weekly Liquidity
Requirements
    2. Consequences for Falling Below Minimum Daily and Weekly
Liquidity Requirements
    3. Amendments to Liquidity Metrics in Stress Testing
    D. Amendments Related to Potential Negative Interest Rates
    E. Amendments to Specify the Calculation of Weighted Average
Maturity and Weighted Average Life
    F. Amendments to Reporting Requirements
    1. Amendments to Form N-CR
    2. Amendments to Form N-MFP
    3. Amendments to Form PF
    G. Technical Amendments to Form N-CSR and Form N-1A
    H. Effective and Compliance Dates
III. Other Matters
IV. Economic Analysis
    A. Introduction
    B. Baseline
    1. Money Market Funds
    2. Large Liquidity Funds and Form PF
    3. Other Affected Entities
    C. Costs and Benefits of the Final Amendments
    1. Removal of the Tie Between the Weekly Liquid Asset Threshold
and Liquidity Fees and Redemption Gates
    2. Raised Liquidity Requirements
    3. Stress Testing Requirements
    4. Liquidity Fees
    5. Amendments Related to Potential Negative Interest Rates
    6. Disclosures
    7. Calculation of Weighted Average Maturity and Weighted Average
Life
    8. Form PF Requirements for Large Liquidity Fund Advisers
    D. Alternatives
    1. Alternatives to the Removal of Temporary Redemption Gates

    2. Alternatives to the Removal of the Tie Between Weekly Liquid
Assets and Discretionary Liquidity Fees
    3. Alternatives to the Final Increases in Liquidity Requirements
    4. Alternative Stress Testing Requirements
    5. Alternative Implementations of Liquidity Fees
    6. Swing Pricing
    7. Expanding the Scope of the Floating NAV Requirements
    8. Countercyclical Weekly Liquid Asset Requirements
    9. Amendments Related to Potential Negative Interest Rates
    10. Amendments Related to WAL/WAM Calculation
    11. Form PF Amendments for Large Liquidity Fund Advisers
    12. Disclosures
    13. Sponsor Support
    14. Capital Buffers
    15. Minimum Balance at Risk
    16. Liquidity Exchange Bank Membership
    17. Alternative Compliance and Filing Periods
    E. Effects on Efficiency, Competition, and Capital Formation
V. Paperwork Reduction Act
    A. Introduction
    B. Rule 2a-7
    C. Form N-MFP
    D. Form N-CR
    E. Form N-1A
    F. Form PF
    G. Rule 31a-2
VI. Regulatory Flexibility Act Certification Statutory Authority

I. Introduction

    The Commission is adopting amendments to rule 2a-7 under the
Investment Company Act of 1940. Money market funds are a type of mutual
fund registered under the Act and regulated pursuant to rule 2a-7.\4\
These funds are popular cash management vehicles for both retail and
institutional investors because they seek to provide investors with
principal stability and access to daily liquidity. In addition, money
market funds serve as an important source of short-term financing for
businesses, banks, and Federal, state, municipal, and Tribal
governments. In March 2020, in connection with an economic shock from
the onset of the COVID-19 pandemic, certain types of money market funds
had significant outflows, contributing to stress on short-term funding
markets that resulted in government intervention to enhance the
liquidity of such markets.\5\ Our historical experience with these
funds and the events of March 2020 have led us to re-evaluate certain
aspects of the regulatory framework applicable to money market funds.
Accordingly, the Commission is adopting amendments to rule 2a-7 and
certain reporting forms that are designed to improve the resilience of
money market funds during times of market stress while preserving the
benefits that investors have come to expect from these funds.
---------------------------------------------------------------------------

    \4\ Money market funds are also sometimes called ``money market
mutual funds'' or ``money funds.''
    \5\ See infra section I.B (discussing these events in more
detail).
---------------------------------------------------------------------------

    In December 2021, the Commission proposed to amend rule 2a-7 to
remove the tie between weekly liquid asset thresholds and the potential
imposition of liquidity fees and redemption gates, since it appears
these provisions contributed to investors' incentives to redeem from
certain funds in March 2020 and affected fund managers' willingness to
use available liquidity in their portfolios to meet redemptions.\6\ For
funds that experienced the heaviest outflows in March 2020 and in prior
periods of market stress, the proposal also included a new swing
pricing requirement that was designed to mitigate the dilution and
investor harm that can occur when other investors redeem--and remove
liquidity--from these funds, particularly when certain markets in which
the funds invest are under stress and effectively illiquid. The
Commission also proposed to increase the minimum daily and weekly
liquid asset requirements to better equip money market funds to manage
significant and rapid investor redemptions. In addition, we proposed
certain form amendments to improve transparency and facilitate
Commission monitoring of money market funds. As part of the proposal,
the Commission proposed to amend rule 2a-7 to prohibit a stable net
asset value (``NAV'') money market fund from using share cancellation
or a reverse distribution mechanism in a negative interest rate
environment.
---------------------------------------------------------------------------

    \6\ Money Market Fund Reforms, Investment Company Act Release
No. 34441 (Dec. 15, 2021) [87 FR 7248 (Feb. 8, 2022)] (``Proposing
Release'').
---------------------------------------------------------------------------

    The Commission received comment letters on the proposal from a
variety of commenters, including funds and investment advisers, law
firms, other fund service providers, investor advocacy groups,
professional and trade associations, and interested individuals.\7\ As
discussed in greater detail throughout this release, these commenters
expressed a diversity of views. Many commenters expressed support for
aspects of the proposal, including removing the link between liquidity
thresholds and the imposition of redemption gates and liquidity fees;
increasing the minimum daily and weekly liquid asset requirements above
current minimums; and clarifying the calculation of weighted average
portfolio maturity and weighted average life maturity.\8\ Many
commenters, however, expressed concern about the consequences of the
proposed swing pricing requirement, suggesting, among other reasons,
that it would be operationally difficult and may not effectively
prevent destabilizing runs during periods of stress.\9\ Separately,
several commenters expressed that the Commission should adopt more
modest increases to the daily and weekly liquid asset requirements than
proposed.\10\ Many commenters also generally opposed the proposed
clarification of how stable net asset value money market funds should
handle a negative interest rate environment, stating that the proposed
prohibition from using share cancellation in certain negative interest
environments could be operationally burdensome and costly without clear
benefits for investors.\11\ Lastly, while some commenters were
supportive of the proposed modifications to the fund reporting
requirements, others expressed concern about the sensitivity or burdens
of reporting certain information regarding money market fund investors
or portfolios, as well as significant declines in liquidity.\12\
---------------------------------------------------------------------------

    \7\ The comment letters on the Proposing Release (File No. S7-
22-21) are available at https://www.sec.gov/comments/s7-22-21/s72221.htm.
    \8\ See, e.g., Comment Letter of Investment Company Institute
(Apr. 11, 2022) (``ICI Comment Letter''); Comment Letter of
Americans for Financial Reform Education Fund (Apr. 11, 2022)
(``Americans for Financial Reform Comment Letter'').
    \9\ See, e.g., Comment Letter of The Asset Management Group of
the Securities Industry and Financial Markets Association (Apr. 11,
2022) (``SIFMA AMG Comment Letter''); Comment Letter of State Street
Global Advisors (Apr. 11, 2022) (``State Street Comment Letter'').
    \10\ See, e.g., Comment Letter of Western Asset Management
Company, LLC (Apr. 11, 2022) (``Western Asset Comment Letter'');
Comment Letter of Healthy Markets Association (Apr. 12, 2022)
(``Healthy Markets Association Comment Letter'').
    \11\ See, e.g., Comment Letter of Federated Hermes Inc. (Apr.
11, 2022) (``Federated Hermes Comment Letter I''); Comment Letter of
Allspring Funds Management, LLC (Apr. 11, 2022) (``Allspring Funds
Comment Letter''); Comment Letter of Fidelity Management Research
Company LLC (Apr. 11, 2022) (``Fidelity Comment Letter'').
    \12\ See infra section II.F.
---------------------------------------------------------------------------

    After considering the comments on the proposal, we are adopting
rule and form amendments to improve the resilience and transparency of
money market funds, with certain modifications.\13\ As proposed, the
final amendments will remove the redemption gate provision from rule
2a-7; increase the minimum daily and

weekly liquid asset requirements to 25% and 50%, respectively; specify
the weighted average portfolio maturity and weighted average life
maturity calculations; and require public reporting of significant
declines in liquidity on Form N-CR. However, we are not adopting the
proposed swing pricing requirement. Rather, the final amendments will
modify the current liquidity fee framework to require institutional
prime and institutional tax-exempt money market funds to impose a
liquidity fee when the fund experiences net redemptions that exceed 5%
of net assets, while also allowing any non-government money market fund
to impose a discretionary liquidity fee if the board determines a fee
is in the best interest of the fund. Similar to the proposed swing
pricing requirement, the liquidity fee framework is designed to better
allocate liquidity costs associated with redemptions to the redeeming
investors. In addition, in a change from the proposal, the final
amendments will permit retail and government money market funds to use
a reverse distribution mechanism if negative interest rates occur in
the future with certain conditions, including appropriate disclosure to
concisely and clearly describe to shareholders the fund's use of a
reverse distribution mechanism and its effect on investors.
---------------------------------------------------------------------------

    \13\ We have consulted and coordinated with the Consumer
Financial Protection Bureau regarding this final rulemaking in
accordance with section 1027(i)(2) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
---------------------------------------------------------------------------

    Moreover, while we are adopting the amended reporting requirements
for Form N-MFP largely as proposed, we are making modifications to
certain aspects of the requirements in response to commenter concerns
about the sensitivity of publicly reporting certain investor and
portfolio information. We are also adopting, largely as proposed in a
January 2022 Proposing Release, amendments to Form PF reporting
requirements for large liquidity fund advisers.\14\ The final
amendments to Form PF generally are designed to align with relevant
revisions we are making to Form N-MFP. Finally, we are adopting two
technical amendments to Form N-CSR and Form N-1A to correct errors from
recent Commission rulemakings.
---------------------------------------------------------------------------

    \14\ Amendments to Form PF to Require Current Reporting and
Amend Reporting Requirements for Large Private Equity Advisers and
Large Liquidity Fund Advisers, Investment Advisers Act Release No.
5950 (Jan. 26, 2022) [87 FR 9106 (Feb. 17, 2022)] (``Form PF
Proposing Release'').
---------------------------------------------------------------------------

A. Role of Money Market Funds and Existing Regulatory Framework

    Money market funds are managed with the goal of providing principal
stability by investing in high-quality, short-term debt securities--
such as Treasury bills, repurchase agreements, or commercial paper--
whose value does not fluctuate significantly in normal market
conditions. Money market fund investors receive dividends that reflect
prevailing short-term interest rates and have access to daily
liquidity, as money market fund shares are redeemable on demand. The
combination of limited principal volatility, diversification of
portfolio securities, payment of short-term yields, and liquidity has
made money market funds popular cash management vehicles for retail and
institutional investors. Money market funds also serve as an important
source of short-term financing for businesses, banks, and governments.
    Different types of money market funds exist to meet differing
investor needs. ``Prime money market funds'' hold a variety of taxable
short-term obligations issued by corporations and banks, as well as
repurchase agreements and asset-backed commercial paper.\15\
``Government money market funds,'' which are currently the largest
category of money market fund, almost exclusively hold obligations of
the U.S. Government, including obligations of the U.S. Treasury and
Federal agencies and instrumentalities, as well as repurchase
agreements collateralized by government securities.\16\ Compared to
prime funds, government money market funds generally offer greater
safety of principal but historically have paid lower yields. ``Tax-
exempt money market funds'' (or ``municipal money market funds'')
primarily hold obligations of state and local governments and their
instrumentalities, and pay interest that is generally exempt from
Federal income tax for individual taxpayers.\17\ Within the prime and
tax-exempt money market fund categories, some funds are ``retail''
funds and others are ``institutional'' funds. Retail money market funds
are held only by natural persons, and institutional funds can be held
by a wider range of investors, such as corporations, small businesses,
and retirement plans.\18\
---------------------------------------------------------------------------

    \15\ Commission staff regularly publish comprehensive data
regarding money market funds on the Commission's website, available
at https://www.sec.gov/divisions/investment/mmf-statistics.shtml.
This data includes information about the monthly holdings of prime
money market funds by type of security. Staff reports and other
staff documents (including those cited herein) represent the views
of Commission staff and are not a rule, regulation, or statement of
the Commission. The Commission has neither approved nor disapproved
the content of these documents and, like all staff statements, they
have no legal force or effect, do not alter or amend applicable law,
and create no new or additional obligations for any person.
    \16\ Some government money market funds generally invest at
least 80% of their assets in U.S. Treasury obligations or repurchase
agreements collateralized by U.S. Treasury securities and are called
``Treasury money market funds.''
    \17\ In this release, we also use the term ``non-government
money market fund'' to refer to prime and tax-exempt money market
funds.
    \18\ A retail money market fund is defined as a money market
fund that has policies and procedures reasonably designed to limit
all beneficial owners of the fund to natural persons. See 17 CFR
270.2a-7(a)(21) (rule 2a-7(a)(21)).
---------------------------------------------------------------------------

    To some extent, different types of money market funds are subject
to different requirements under rule 2a-7. One primary example is a
fund's approach to valuation and pricing. Government and retail money
market funds can rely on valuation and pricing techniques that
generally allow them to sell and redeem shares at a stable share price,
typically $1.00, without regard to small variations in the value of the
securities in their portfolios.\19\ If the fund's stable share price
and market-based value per share deviate by more than one-half of 1%,
the fund's board may determine to adjust the fund's share price below
$1.00, which is also colloquially referred to as ``breaking the buck.''
\20\ Institutional prime and institutional tax-exempt money market
funds, however, are required to use a ``floating'' NAV per share to
sell and redeem their shares, based on the current market-based value
of the securities in their underlying portfolios rounded to the fourth
decimal place (e.g., $1.0000). These institutional funds are required
to use a floating NAV because their investors have historically made
the heaviest redemptions in times of market stress and are more likely
to act on the incentive to redeem if a fund's stable price per share is
higher than its market-based value.\21\
---------------------------------------------------------------------------

    \19\ See Proposing Release, supra note 6, at n.10 (discussing
amortized cost method and penny rounding cost method); see also 17
CFR 270.2a-7(c)(1)(i) and (g)(1) and (2). Throughout this release,
we generally use the term ``stable share price'' or ``stable NAV''
to refer to the stable share price that these money market funds
seek to maintain and compute for purposes of distribution,
redemption, and repurchases of fund shares.
    \20\ These funds must compare their stable share price to the
market-based value per share of their portfolios at least daily.
    \21\ See Proposing Release, supra note 6, at n.12.
---------------------------------------------------------------------------

    As of March 2023, there were approximately 294 money market funds
registered with the Commission, and these funds collectively held over
$5.7 trillion of assets.\22\ The vast majority of these assets are held
by government money market funds ($4.4 trillion), followed by prime
money market funds ($1 trillion) and tax-exempt money

market funds ($119 billion).\23\ Of prime money market funds' assets,
approximately 44% are held by retail prime money market funds, with the
remaining assets almost evenly split between institutional prime money
market funds that are offered to the public and institutional prime
money market funds that are not offered to the public.\24\ The vast
majority of tax-exempt money market fund assets are held by retail
funds.
---------------------------------------------------------------------------

    \22\ Money Market Fund Statistics, Form N-MFP Data, period
ending Mar. 2023, available at: https://www.sec.gov/files/mmf-statistics-2023-03.pdf. This data excludes ``feeder'' funds to avoid
double counting assets.
    \23\ Id.
    \24\ Some asset managers establish privately offered money
market funds to manage cash balances of other affiliated funds and
accounts.
---------------------------------------------------------------------------

    The Commission adopted rule 2a-7 in 1983 and has amended the rule
several times over the years, including in 2010 and 2014, in response
to market events that have highlighted money market fund
vulnerabilities.\25\ Among other things, these past reforms introduced
minimum daily and weekly liquid asset requirements, provided for
redemption gates and liquidity fees as available tools when a fund's
liquidity drops below a threshold, required institutional money market
funds to use floating NAVs, and improved transparency through reporting
and website posting requirements.\26\
---------------------------------------------------------------------------

    \25\ See Proposing Release, supra note 6, at n.16 and
accompanying text (providing more detail related to previous
Commission actions and government intervention following the 2008
financial crisis).
    \26\ Money Market Fund Reform, Investment Company Act Release
No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (``2010
Adopting Release''); Money Market Fund Reform; Amendments to Form
PF, Investment Company Act Release No. 31166 (July 23, 2014) [79 FR
47735 (Aug. 14, 2014)] (``2014 Adopting Release'').
---------------------------------------------------------------------------

    In addition to reforms for money market funds, in 2014 the
Commission introduced new reporting requirements for large advisers of
liquidity funds on Form PF to better align reporting obligations of
advisers regarding private liquidity funds to those of money market
funds, in order to help the Commission have a more complete picture of
the broader short-term financing market.\27\ Liquidity funds follow
similar investment strategies as money market funds, but investment
advisers are not required to register liquidity funds as investment
companies under the Act. Liquidity funds are a relatively small but
important category of private funds due to the role they play along
with money market funds as sources, and users, of liquidity in markets
for short-term financing.\28\ Similar to money market funds, liquidity
funds are managed with the goal of maintaining a stable net asset value
or minimizing principal volatility for investors. However, liquidity
funds are not required to comply with the risk-limiting conditions of
rule 2a-7, such as the restrictions on the maturity, diversification,
credit quality, and liquidity of investments. Consequently, liquidity
funds may take on greater risks and, as a result, may be more sensitive
to market stress relative to money market funds.
---------------------------------------------------------------------------

    \27\ Generally, investment advisers registered (or required to
be registered) with the Commission with at least $150 million in
private fund assets under management must file Form PF.
    \28\ As of Sept. 2022, there were 79 liquidity funds reported on
Form PF with $336 billion in gross assets under management.
---------------------------------------------------------------------------

B. March 2020 Market Events and Need for Reform

    As discussed in the Proposing Release, in March 2020, growing
economic concerns about the impact of the COVID-19 pandemic led
investors to reallocate their assets into cash and short-term
government securities.\29\ Institutional investors, in particular,
sought highly liquid investments, including government money market
funds.\30\ In contrast, institutional prime and institutional tax-
exempt money market funds experienced outflows beginning the week of
March 9, 2020, which accelerated the following week.\31\ Outflows from
retail prime and retail tax-exempt funds began the week of March 16, a
week after outflows in institutional funds began.
---------------------------------------------------------------------------

    \29\ See SEC Staff Report on U.S. Credit Markets
Interconnectedness and the Effects of the COVID-19 Economic Shock
(Oct. 2020) (``SEC Staff Interconnectedness Report''), at 2,
available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf.
    \30\ More specifically, government money market funds had record
inflows of $838 billion in Mar. 2020 and an additional $347 billion
of inflows in Apr. 2020. See id. at 25.
    \31\ Id.
---------------------------------------------------------------------------

    During the two-week period of March 11 to 24, publicly offered
institutional prime funds had a 30% redemption rate (about $100
billion), which included outflows of approximately 20% of assets during
the week of March 20 alone.\32\ In contrast, privately offered
institutional prime funds had redemptions of 3% of assets during the
week of March 20, and lost approximately 6% of their total assets ($17
billion) from March 9 through 20. Retail prime funds had outflows of
approximately 11% of their total assets ($48 billion) in the last three
weeks of March 2020. Outflows from tax-exempt money market funds, which
are mostly retail funds, were approximately 8% of their total assets
($12 billion) from March 12 through 25.
---------------------------------------------------------------------------

    \32\ See Proposing Release, supra note 6, at n.30.
---------------------------------------------------------------------------

    The Proposing Release discussed the potential factors that
incentivized investors to redeem from certain money market funds in
March 2020.\33\ These factors included concerns about the potential
imposition of redemption gates or liquidity fees based on observed
declines in some funds' weekly liquid assets, general concerns about
declining fund liquidity, general uncertainty related to a global
health crisis and fears of associated economic downturns, and the need
to meet near-term cash needs unrelated to the market stress. The
Proposing Release also discussed data regarding the relationship
between a fund's weekly liquid asset levels and the amount of outflows
it experienced in March 2020. The data showed that funds with lower
weekly liquid asset levels were more likely to have significant
outflows in March 2020, but some funds with higher levels of liquidity
also experienced large outflows.\34\
---------------------------------------------------------------------------

    \33\ Id., at n.42 and accompanying discussion.
    \34\ Id., at n.44.
---------------------------------------------------------------------------

    These outflows caused some money market funds to engage in greater
than normal selling activity in short-term funding markets which, when
combined with similar selling activity from other market participants
such as hedge funds and bond mutual funds, both contributed to, and was
impacted by, stress in short-term funding markets.\35\ In markets for
private short-term debt instruments, such as commercial paper and
certificates of deposit, conditions significantly deteriorated in the
second week of March 2020. These markets, in which prime money market
funds and other participants invest, essentially became ``frozen'' in
March 2020, making it more difficult to sell these instruments, which
have limited secondary trading even in normal market conditions.\36\
Similarly, stresses in short-term municipal markets contributed to
pricing pressures and outflows for tax-exempt money market funds which,
in turn, contributed to increased stress in municipal markets.\37\ One
factor that appears to have contributed to money market funds' sales of
long-term portfolio securities is the incentive fund managers had to
maintain weekly liquid assets above 30% in an effort to avoid
investors' concerns about the possibility of redemption gates or
liquidity fees under our current rule.\38\
---------------------------------------------------------------------------

    \35\ See Proposing Release, supra note 6, at n.54 and
accompanying discussion.
    \36\ Id.
    \37\ Id.
    \38\ Id., at n.77 and accompanying discussion.

---------------------------------------------------------------------------

    On March 18, 2020, the Federal Reserve, with the approval of the
Department of the Treasury, broadened its program of support for the
flow of credit to households and businesses by taking steps to enhance
the liquidity and functioning of money markets with the establishment
of the Money Market Mutual Fund Liquidity Facility (``MMLF''). The MMLF
provided loans to financial institutions on advantageous terms to
purchase securities from money market funds that were raising
liquidity, thereby helping enhance overall market functioning and
credit provisions to the broader economy.\39\ MMLF utilization reached
a peak of just over $50 billion in early April 2020, or about 5% of net
assets in prime and tax-exempt money market funds at the time.\40\
Along with other Federal Reserve actions and programs to support the
short-term funding markets, the MMLF had the effect of significantly
slowing outflows from prime and tax-exempt money market funds.\41\ The
MMLF ceased providing loans in March 2021.
---------------------------------------------------------------------------

    \39\ Information about the MMLF is available on the Federal
Reserve's website at https://www.federalreserve.gov/monetarypolicy/mmlf.htm. The Federal Reserve Bank of Boston operated the MMLF.
    \40\ See Proposing Release, supra note 6, at n.36.
    \41\ Id., at n.37.
---------------------------------------------------------------------------

    Commenters generally agreed that the growing economic concerns
related to the impact of the COVID-19 pandemic led investors to seek
liquidity in the form of cash and short-term government securities in
March 2020, leading to outflows from prime money market funds and
significant inflows to government money market funds.\42\ Commenters
also acknowledged that the markets for private short-term debt
instruments, such as commercial paper and certificates of deposit,
significantly deteriorated during this period.\43\ However, some
commenters questioned the nexus between the liquidity crisis in the
short-term funding markets and the outflows from prime money market
funds, asserting that events in the money market fund market were not a
significant cause of the liquidity issues in the short-term funding
markets in March 2020.\44\ Accordingly, some commenters suggested that
any reform exclusive to money market funds by themselves will likely
not address the broader liquidity challenges in the short-term funding
markets.\45\ Going further, a few commenters expressed that the
proposed reforms would have negative impacts to the short-term funding
markets because they would reduce the demand for prime money market
funds, thereby reducing capacity in the short-term funding markets.\46\
Some of these commenters encouraged the Commission, and policymakers
more generally, to re-examine the short-term funding markets and the
various events surrounding the volatility in March 2020, and to
consider available tools other than reforms to the money market fund
regulatory framework, that would improve resiliency in this segment of
our markets.\47\ Conversely, other commenters asserted that liquidity
issues with money market funds served as a source of significant
contagion that imperiled the short-term markets broadly and forced
government intervention.\48\ Some of these commenters suggested that
the Commission should consider more aggressive reforms to solve the
unique problems presented by money market funds, mainly that they are
hybrid instruments that embody elements of both securities investments
and banking products that are treated as cash-like by investors.\49\
---------------------------------------------------------------------------

    \42\ See, e.g., ICI Comment Letter; Comment Letter of The
Vanguard Group, Inc. (Apr. 11, 2022) (``Vanguard Comment Letter'');
Comment Letter of Professors Samuel G. Hanson, David S. Scharfstein,
and Adi Sunderam, Harvard Business School (Apr. 11, 2022) (``Prof.
Hanson et al. Comment Letter''); Comment Letter of Blackrock (Apr.
11, 2022) (``BlackRock Comment Letter''); Comment Letter of the CFA
Institute (Apr. 11, 2022) (``CFA Comment Letter'').
    \43\ See, e.g., Comment Letter of Invesco Ltd. (Apr. 11, 2022)
(``Invesco Comment Letter''); Vanguard Comment Letter; BlackRock
Comment Letter (asserting that they struggled to find bids from
dealer banks in the secondary market for much of the commercial
paper, bank certificates of deposits, or municipal debt they were
holding).
    \44\ See, e.g., ICI Comment Letter; Federated Hermes Comment
Letter I; Invesco Comment Letter; Vanguard Comment Letter; BlackRock
Comment Letter; Healthy Markets Association Comment Letter.
    \45\ See, e.g., ICI Comment Letter; Federated Hermes Comment
Letter I; Invesco Comment Letter; Vanguard Comment Letter; BlackRock
Comment Letter.
    \46\ See, e.g., SIFMA AMG Comment Letter; Comment Letter of J.P.
Morgan Asset Management (Apr. 11, 2022) (``JP Morgan Comment
Letter'').
    \47\ See, e.g., JP Morgan Comment Letter; Federated Hermes
Comment Letter I; ICI Comment Letter (recommending adjusting bank
regulations to enable banks and their dealers to expand their
balance sheets to provide market liquidity during periods of market
stress without materially reducing the overall resilience of those
firms).
    \48\ See, e.g., Comment Letter of Better Markets (Apr. 11, 2022)
(``Better Markets Comment Letter''); CFA Comment Letter.
    \49\ See, e.g., Better Markets Comment Letter; Prof. Hanson et
al. Comment Letter.
---------------------------------------------------------------------------

    We understand that money market funds are not the totality of the
short-term funding markets and that the reforms discussed in this
adopting release may not solve all future issues connected to the
short-term funding markets. However, we believe the events of March
2020 evidence that money market funds need better functioning tools for
managing through stress while mitigating harm to shareholders.
Specifically, in addition to requiring higher liquidity minimums to
prepare for significant and rapid investor redemptions, funds need to
be able to use that liquidity when such redemptions occur. In addition,
to prevent redeeming shareholders from diluting the interests of
remaining shareholders by removing liquidity from the fund in times of
market stress, when liquidity in underlying short-term funding markets
is scarce and costly, funds need tools to ensure that liquidity costs
are fairly allocated to redeeming investors. Moreover, while the period
of market stress in March 2020 was relatively brief, it is important to
consider that future stressed periods--whether specific to certain
money market funds or the short-term funding markets more generally--
may be more protracted or more severe than in March 2020, particularly
absent Federal Reserve action. We believe that these needs for better
functioning tools to manage through stress while mitigating harm to
shareholders can be met while preserving the benefits that investors
have come to expect from money market funds. Accordingly, we are
adopting amendments to rule 2a-7 and related reporting and registration
forms that are designed to achieve these key objectives and to reflect
our experience with the rule since it was initially adopted in
1983.\50\
---------------------------------------------------------------------------

    \50\ See generally Valuation of Debt Instruments and Computation
of Current Price Per Share by Certain Open-End Investment Companies
(Money Market Funds), Investment Company Act Release No. 13380 (July
11, 1983) [48 FR 32555 (July 18, 1983)].
---------------------------------------------------------------------------

II. Discussion

A. Amendments To Remove the Tie Between the Weekly Liquid Asset
Threshold and Redemption Gates and Liquidity Fees

1. Unintended Effects of the Tie Between the Weekly Liquid Asset
Threshold and Liquidity Fees and Redemption Gates
    Following amendments to rule 2a-7 in 2014, a money market fund has
the ability to impose liquidity fees or redemption gates (generally
referred to as ``fees and gates'') after crossing a specified liquidity
threshold.\51\ A money market fund may impose a liquidity fee of up to
2%, or temporarily suspend redemptions for up to 10 business days in a
90-day period, if the

fund's weekly liquid assets fall below 30% of its total assets and the
fund's board of directors determines that imposing a fee or gate is in
the fund's best interests.\52\ Additionally, a non-government money
market fund is required to impose a liquidity fee of 1% on all
redemptions if its weekly liquid assets fall below 10% of its total
assets, unless the board of directors of the fund determines that
imposing such a fee would not be in the best interests of the fund.\53\
Separately, a money market fund is required to provide daily disclosure
of the percentage of its total assets invested in weekly liquid assets
(as well as daily liquid assets) on its website to provide transparency
to investors and increase market discipline.\54\
---------------------------------------------------------------------------

    \51\ Government funds are permitted, but not required, to impose
fees and gates, as discussed below. See 17 CFR 270.2a-7(c)(2); 2014
Adopting Release, supra note 26.
    \52\ If, at the end of a business day, a fund has invested 30%
or more of its total assets in weekly liquid assets, the fund must
cease charging the liquidity fee (up to 2%) or imposing the
redemption gate, effective as of the beginning of the next business
day. See 17 CFR 270.2a-7(c)(2)(i).
    \53\ The board also may determine that a lower or higher fee
would be in the best interests of the fund. See 17 CFR 270.2a-
7(c)(2)(ii)(A).
    \54\ 17 CFR 270.2a-7(h)(10)(ii); 2014 Adopting Release, supra
note 26, at section III.E.9.a.
---------------------------------------------------------------------------

    Money market fund fees and gates below these thresholds were
intended to serve as redemption restrictions that would provide a
``cooling off'' period to temper the effects of a short-term investor
panic and preserve liquidity levels in times of market stress, as well
as better allocate the costs of providing liquidity to redeeming
investors.\55\ However, these provisions did not achieve these
objectives during the period of market stress in March 2020. As
discussed in the Proposing Release, evidence suggests that in March
2020, even though no money market fund imposed a liquidity fee or gate,
the possibility of their imposition after crossing the publicly
disclosed 30% weekly liquid asset threshold appears to have contributed
to investors' incentives to redeem from prime money market funds.\56\
The presence of this threshold appears to have increased investor
redemption activity as prime and tax-exempt money market funds
approached the 30% weekly liquid asset level.\57\ Further, this
liquidity threshold also appeared to affect money market fund managers'
behavior in March 2020 and contributed to incentives for money market
fund managers to maintain weekly liquid asset levels above a 30% weekly
liquid asset threshold, rather than use those assets to meet
redemptions.\58\ Thus, contrary to its intended benefit, this threshold
appeared to heighten prime and tax-exempt money market funds'
susceptibility to heavy redemptions as funds' publicly disclosed weekly
liquid assets approached it and increased the lack of liquidity in
underlying short-term funding markets in March 2020.
---------------------------------------------------------------------------

    \55\ See 2014 Adopting Release, supra note 26, at section III.A.
    \56\ See Proposing Release, supra note 6, at section I.B.
    \57\ See id.
    \58\ See id. See also ICI Comment Letter; SIFMA AMG Comment
Letter.
---------------------------------------------------------------------------

    In addition, as discussed in the Proposing Release, it appears that
money market fund investors are more sensitive to the possibility of
redemption gates than the possibility of liquidity fees.\59\ While
liquidity fees impose a cost for an investor to redeem, gates outright
stop redemptions for the duration of the gate. Money market fund
investors--who typically invest in money market funds for cash
management purposes--are generally sensitive to being unable to access
their investments for a period of time and have a tendency to redeem
from such funds preemptively if they fear a gate may be imposed.
---------------------------------------------------------------------------

    \59\ See Proposing Release, supra note 5, at nn. 75-76 and
accompanying text (discussing comment letters that expressed views
that the possibility of redemption gates was a greater concern for
investors, particularly institutional investors, in Mar. 2020 than
the possibility of liquidity fees and that retail investors appeared
less sensitive to fees and gates than institutional investors).
---------------------------------------------------------------------------

    Many commenters agreed with the Commission's assessment that the
regulatory link between a known liquidity threshold and the imposition
of fees and gates contributed to investors' incentives to redeem from
money market funds in March 2020.\60\ Many commenters also agreed with
the Commission's assessment that the weekly liquid asset threshold also
contributed to incentives for managers to avoid falling below this
threshold.\61\ One commenter suggested that removing the regulatory
link between weekly liquid assets and redemption gates (and liquidity
fees) would free up an additional 30% of liquidity that funds could use
in a crisis similar to March 2020.\62\
---------------------------------------------------------------------------

    \60\ See, e.g., Comment Letter of Morgan Stanley Investment
Management Inc. (Apr. 8, 2022) (``Morgan Stanley Comment Letter'');
ICI Comment Letter; Comment Letter of Northern Trust Asset
Management (Mar. 24, 2022) (``Northern Trust Comment Letter'');
Fidelity Comment Letter; see also Proposing Release, supra note 6,
at section II.A.1 (``Available evidence, supported by many comment
letters in response to the Commission's request for comment [ ]
suggested that funds' incentives to maintain weekly liquid assets
above the 30% threshold were directly tied to investors' concerns
about the possibility of redemption gates and liquidity fees under
our rules if a fund drops below that threshold.'').
    \61\ See, e.g., ICI Comment Letter, Comment Letter of T. Rowe
Price (Apr. 11, 2022) (``T. Rowe Comment Letter''); JP Morgan
Comment Letter.
    \62\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    Several commenters stated that the potential imposition of
redemption gates in particular, as opposed to liquidity fees, drove
instability and redemptions in March 2020.\63\ For example, one
commenter suggested that the mere possibility that fund boards may
impose gates was a key factor that contributed significantly to the
stresses experienced by publicly offered institutional prime funds in
March 2020.\64\ Another commenter stated that, based on a survey of
institutional investor clients, investors were particularly concerned
about gates and perceived the 30% weekly liquid asset threshold as a
``bright line'' not to be crossed.\65\ An additional commenter stated
that, based on data and discussions with its member funds, the
possibility of a gate especially caused investors in March 2020 to
redeem heavily.\66\
---------------------------------------------------------------------------

    \63\ See, e.g., Fidelity Comment Letter; Northern Trust Comment
Letter; Comment Letter of the Institute of International Finance
(Apr. 11, 2022) (``IIF Comment Letter''); ICI Comment Letter.
    \64\ See Fidelity Comment Letter.
    \65\ See JP Morgan Comment Letter.
    \66\ See ICI Comment Letter.
---------------------------------------------------------------------------

    Thus, based on available evidence and as suggested by many
commenters, the weekly liquid asset threshold for consideration of fees
and gates appear to have potentially increased the risks of investor
runs without providing benefits to money market funds as intended by
the Commission. In addition, money market fund investors have
demonstrated particular sensitivity to the possibility of gates and the
corresponding lack of access to their investments, and these concerns
appear to have incentivized redemptions in March 2020 more so than any
concerns about the possibility of fees. Accordingly, after considering
the comments received, we are adopting amendments to the fee and gate
provisions in rule 2a-7 to remove the regulatory link between weekly
liquid assets and fees and gates. As discussed below, we are amending
rule 2a-7 to remove gate provisions altogether and amending the
liquidity fee structure to remove weekly liquid asset-linked thresholds
and implement a modified liquidity fee framework that will provide for
both mandatory and discretionary liquidity fees. We believe these
changes will provide more effective tools for money market funds to use
to mitigate short-term investor panic and preserve liquidity levels in
times of market stress, as well as better

allocate the costs of providing liquidity to redeeming investors.
2. Removal of Redemption Gates From Rule 2a-7
    We are adopting, as proposed, the removal of money market funds'
ability through rule 2a-7 to temporarily suspend redemptions (i.e.,
impose a ``gate'').\67\ In the Proposing Release, we discussed our
concern that gates may not be an effective tool for money market funds
to stem heavy redemptions in times of stress due to money market fund
investors' general sensitivity to being unable to access their
investments for a period of time and tendency to redeem from funds
preemptively if they fear a gate may be imposed. We believe that
removing gate provisions altogether from rule 2a-7 will reduce the risk
of investor runs on money market funds during periods of market stress.
Money market funds will continue to be able to impose permanent gates
to facilitate an orderly liquidation of a fund pursuant to 17 CFR
270.22e-3 (``rule 22e-3''), and we are not adopting any changes to that
rule.\68\
---------------------------------------------------------------------------

    \67\ See Proposing Release, supra note 6, at section II.A.2.
    \68\ See 17 CFR 270.22e-3. Rule 22e-3 under the Act permits
money market funds to suspend redemptions and postpone the payment
of proceeds in connection with a liquidation upon certain declines
in liquidity or deviations between market-based and stable prices,
board approval of liquidation, and notice to the Commission.
---------------------------------------------------------------------------

    Many commenters generally supported the proposal to remove
redemption gates in rule 2a-7.\69\ Several of these commenters stated
that use of rule 22e-3 to suspend redemptions in connection with a fund
liquidation would be sufficient to address scenarios in which a fund
may need to suspend redemptions.\70\ One such commenter suggested that
any money market fund that needed to impose a gate would likely need to
fully liquidate, making rule 22e-3 sufficient for these purposes.\71\
---------------------------------------------------------------------------

    \69\ See, e.g., Western Asset Comment Letter; Morgan Stanley
Comment Letter; Vanguard Comment Letter; CFA Comment Letter; SIFMA
AMG Comment Letter; Comment Letter of the Committee on Capital
Markets Regulation (Apr. 11, 2022) (``CCMR Comment Letter''); T.
Rowe Comment Letter.
    \70\ See Allspring Funds Comment Letter; CFA Comment Letter; IIF
Comment Letter; Northern Trust Comment Letter; SIFMA AMG Comment
Letter.
    \71\ See Invesco Comment Letter.
---------------------------------------------------------------------------

    Some commenters supported removing the tie between the weekly
liquid asset threshold and a fund's ability to impose a gate but
suggested that gates could still be a useful tool outside of a fund
liquidation. These commenters suggested that fund boards should have
broader discretion to impose gates without linkage to a weekly liquid
asset threshold.\72\ Some commenters suggested that the rule should
permit fund boards to impose a gate if the board determines a gate is
in the best interests of the fund and its shareholders, subject to
certain policies and procedures, disclosure, and reporting
requirements.\73\ Another commenter suggested that fund boards should
have complete discretion with respect to imposing gates but that the
SEC should require relevant disclosures.\74\
---------------------------------------------------------------------------

    \72\ See Federated Hermes Comment Letter I; Comment Letter of
Federated Hermes Funds Board of Trustees (Apr. 11, 2022)
(``Federated Hermes Fund Board Comment Letter''); Comment Letter of
the Cato Inst. (Feb. 10, 2022) (``Cato Inst. Comment Letter'').
    \73\ See Federated Hermes Comment Letter I (stating that funds
should be required to report the basis for imposing temporary gates
to the Commission); Federated Hermes Fund Board Comment Letter.
    \74\ See Cato Inst. Comment Letter.
---------------------------------------------------------------------------

    After considering these comments, we continue to believe that the
removal of money market funds' ability to impose gates through rule 2a-
7 is appropriate.\75\ By removing the gate provision, either with or
without an associated liquidity threshold, we seek to limit the
potential for investor uncertainty and de-stabilizing preemptive
investor redemption behavior related to the potential use of gates
during stress events as well as to better encourage funds to more
effectively use their existing liquidity buffers in times of stress. As
discussed above, rather than providing an effective tool for money
market funds to manage redemption pressures during a period of stress,
the potential availability of gates under prescribed parameters
exacerbated the redemption pressures experienced by some funds during
March 2020.
---------------------------------------------------------------------------

    \75\ As proposed, in addition to removing the gate provisions
from rule 2a-7, we are also removing associated disclosure and
reporting requirements about a fund's potential or actual imposition
of gates. See Items 4(b)(1)(ii) and 16(g) of current Form N-1A;
Parts F and G of current Form N-CR.
---------------------------------------------------------------------------

    Retaining a gate provision under rule 2a-7 without an associated
liquidity threshold, as suggested by some commenters, could result in
continuing investor uncertainty and may contribute to preemptive
investor redemption behavior during stress events. In normal and
stressed markets, shareholders may need or want to access their funds
for various reasons, including to meet near-term cash needs. When in
place, a gate fully inhibits the redeemability of the money market fund
shares for the duration of the gate, thereby blocking shareholders'
access to their shares. We believe this complete halt to redemptions,
even if temporary, has the potential to significantly incentivize
preemptive redemptions. As discussed above, several commenters stated
that fear of gates in particular contributed to redemptions in March
2020. Removing the link to a publicly disclosed liquidity threshold
seemingly would expand the current gate provisions under rule 2a-7,
potentially increasing investor uncertainty regarding when a fund may
impose a gate. Even if such action by a money market fund board is
unlikely to occur, as suggested by some commenters,\76\ the mere
possibility of a gate would persist and thus investor uncertainty and
fear may remain, particularly when there are signs that a fund or
short-term funding markets are under stress. Accordingly, we are
removing the gate provision from rule 2a-7 to avoid this unintended
outcome.
---------------------------------------------------------------------------

    \76\ See, e.g., Comment Letter of Mutual Fund Directors Forum
(Apr. 11, 2022) (``Mutual Fund Directors Forum Comment Letter'').
---------------------------------------------------------------------------

    In light of the proposed removal of gates under rule 2a-7, some
commenters suggested additional amendments to rule 22e-3. This rule
generally allows a money market fund to suspend redemptions if, among
other conditions, (1) the fund has invested less than 10% of its total
assets in weekly liquid assets or, in the case of a government or
retail money market fund, the fund's market-based price per share has
deviated or is likely to deviate from its stable price, and (2) the
fund's board has approved the fund's liquidation. Some commenters
suggested that the SEC remove the weekly liquid asset threshold
enumerated in rule 22e-3 and give fund boards more flexibility to
approve liquidations.\77\ One of these commenters suggested that the
weekly liquid asset threshold in rule 22e-3 would not remain meaningful
because of the Commission's proposal to remove the liquidity fee
provisions from rule 2a-7, including the default liquidity fee
provision for non-government money market funds with weekly liquid
assets that fall below 10%.\78\
---------------------------------------------------------------------------

    \77\ See Allspring Funds Comment Letter; Comment Letter of
Dechert LLP (Apr. 11, 2022) (``Dechert Comment Letter'').
    \78\ See Dechert Comment Letter.
---------------------------------------------------------------------------

    We do not agree that expanding the availability of rule 22e-3 is
appropriate. Rule 22e-3 provides a mechanism for a money market fund to
permanently suspend redemptions when the fund is under significant
stress to facilitate an orderly liquidation. While the amendments in
this release include the removal of a default liquidity fee provision
for non-government money market funds linked to a 10% weekly liquid
asset threshold, we do not agree

with the contention that the significance of the 10% weekly liquid
asset threshold is thereby meaningfully reduced with respect to rule
22e-3. Due to the absolute and significant nature of a permanent
suspension of redemptions and liquidation, the conditions in rule 22e-
3, including the 10% weekly liquid asset threshold, limit the fund's
ability to permanently suspend redemptions to circumstances that
present a significant risk of a run on the fund and potential harm to
shareholders.\79\ We continue to believe that where a fund's weekly
liquid assets fall below 10%, the fund is reasonably understood to be
experiencing significant stress and circumstances may present a
significant risk of a run on the fund and potential harm to
shareholders. In these circumstances, the ability of the board of
directors of such fund to suspend redemptions in light of a decision to
liquidate can help address the significant run risk and reduce
potential harm to shareholders. Where a money market fund is unable to
avail itself of a permanent suspension of redemptions under rule 22e-3,
the fund may suspend redemptions after obtaining an exemptive order
from the Commission.\80\ Accordingly, we are not adopting amendments to
rule 22e-3.
---------------------------------------------------------------------------

    \79\ See 2010 Adopting Release, supra note 26, at section II.H.
    \80\ 15 U.S.C. 80a-22(e).
---------------------------------------------------------------------------

B. Liquidity Fee Requirement

1. Determination To Adopt a Liquidity Fee Requirement
    After considering comments, we are adopting a mandatory liquidity
fee framework for institutional prime and institutional tax-exempt
funds instead of the proposed swing pricing requirement. We believe the
mandatory liquidity fee will reduce operational burdens associated with
swing pricing while still achieving many of the benefits we were
seeking with swing pricing by allocating liquidity costs to redeeming
investors in stressed periods. In addition, we are adopting a
discretionary liquidity fee for all non-government money market funds
so that liquidity fees are an available tool for such funds to manage
redemption pressures when the mandatory fee does not apply. Whether the
fee is mandatory or discretionary, we are, as proposed, removing from
rule 2a-7 the tie between liquidity fees and a fund's weekly liquid
asset levels to avoid predictable triggers that may incentivize
investors to preemptively redeem to avoid incurring fees.\81\ This
liquidity fee framework, independent of a predictable threshold for its
application, achieves the intended benefits of the current liquidity
fee regime by allocating liquidity costs to redeeming shareholders in
times of stress while, in contrast to the current rule, avoiding
incentives for preemptive redemptions associated with weekly liquid
asset triggers. An approach solely based on liquidity fees, as opposed
to gates, does not present the same concerns about incentivizing
redemptions that exist under current rule 2a-7. As discussed, money
market fund investors seemingly have been more concerned about the
possibility of redemption gates than the possibility of liquidity
fees.\82\ This change is designed to increase the resilience of money
market funds.
---------------------------------------------------------------------------

    \81\ By ``predictable,'' we mean that an investor can use
available information to predict whether a fee will apply on a given
day or on future days. In the case of weekly liquid assets, an
investor can observe the weekly liquid asset level disclosed for the
prior day and use that information to predict whether the fund will
cross the weekly liquid asset threshold in the near term. In the
case of the net redemption threshold we are adopting for mandatory
liquidity fees, while an investor can observe net flows for the
prior day, that flow information does not necessarily predict the
fund's flows for that day or future days, as net flows depend on
independent investment decisions made by a large number of investors
with differing needs and considerations. See infra section
IV.C.4.a.i.
    \82\ See supra section II.A.1.
---------------------------------------------------------------------------

    The Commission proposed a swing pricing requirement under which an
institutional prime or institutional tax-exempt fund would downwardly
adjust its current NAV per share by a swing factor when a fund has net
redemptions. The swing factor adjustment would reflect spread and
transaction costs and, if net redemptions exceeded 4% of the fund's net
assets, then the swing factor would also include market impact costs.
The Commission also proposed to remove the liquidity fee provision in
rule 2a-7, which conditions the use of liquidity fees upon declines in
fund liquidity below identified, predictable thresholds, and to specify
that money market funds could instead impose liquidity fees under 17
CFR 270.22c-2 (``rule 22c-2'') at their discretion.\83\
---------------------------------------------------------------------------

    \83\ See 17 CFR 270.22c-2 (rule 22c-2 under the Investment
Company Act) (providing that an open-end fund may impose a
redemption fee, not to exceed 2% of the value of the shares
redeemed, upon the determination by the fund's board of directors
that such fee is necessary or appropriate to recoup for the fund the
costs it may incur as a result of those redemptions or to otherwise
eliminate or reduce so far as practicable any dilution of the value
of the outstanding securities issued by the fund).
---------------------------------------------------------------------------

    Many commenters expressed broad concerns about the swing pricing
proposal and its potential effect on institutional money market funds
and investors. Several commenters stated that the proposed swing
pricing requirement was incompatible with how money market funds
operate and manage liquidity, which may limit the utility of these
funds as cash management vehicles.\84\ For instance, commenters
expressed concern that swing pricing may inhibit a fund's ability to
offer features such as same-day settlement and multiple NAV strikes per
day due to concerns that swing pricing would delay a fund's ability to
determine its NAV.\85\ Some commenters suggested that swing pricing may
assume a greater degree of liquidity costs than funds incur to meet
redemptions because money market funds generally satisfy redemptions
through maturing assets, rather than secondary market selling activity,
and are equipped to handle relatively large redemptions with available
liquidity.\86\ Some commenters stated that swing pricing would
introduce greater volatility in fund share prices and performance,
which they asserted would reduce investor demand for institutional
money market funds.\87\ In addition, some commenters indicated that the
operational costs of the proposed swing pricing requirement could cause
some sponsors to eliminate their institutional prime and institutional
tax-exempt money market funds, particularly smaller funds, and reduce
money market fund assets.\88\ In light of these considerations, some
commenters suggested that swing pricing is not an appropriate tool for
money market funds and stated that a

liquidity fee framework would be better suited to the structure and
characteristics of money market funds, if the Commission determines
that an anti-dilution tool is necessary for these funds.\89\
---------------------------------------------------------------------------

    \84\ See, e.g., Comment Letter of Independent Directors Council
(Apr. 11, 2022) (``IDC Comment Letter''); Mutual Fund Directors
Forum Comment Letter; Comment Letter of The Bank of New York Mellon
(Apr. 11, 2022) (``BNY Mellon Comment Letter''); Fidelity Comment
Letter; Comment Letter of State Street Global Advisors (Apr. 11,
2022) (``State Street Comment Letter''); Comment Letter of Federated
Hermes, Inc. (Apr. 11, 2022) (``Federated Hermes Comment Letter
II'') (letter primarily focused on the proposed swing pricing
requirement).
    \85\ See, e.g., Comment Letter of Capital Group Companies, Inc.
(Apr. 11, 2022) (``Capital Group Comment Letter''); State Street
Comment Letter; ICI Comment Letter; Federated Hermes Comment Letter
II; SIFMA AMG Comment Letter; BNY Mellon Comment Letter.
    \86\ See, e.g., SIFMA AMG Comment Letter; Comment Letter of
American Bankers Association (Apr. 11, 2022) (``ABA Comment Letter
I''); Invesco Comment Letter; Fidelity Comment Letter; Allspring
Funds Comment Letter.
    \87\ See SIFMA AMG Comment Letter; Western Asset Comment Letter;
see also Northern Trust Comment Letter; Federated Hermes Comment
Letter II.
    \88\ See, e.g., JP Morgan Comment Letter; BlackRock Comment
Letter; IDC Comment Letter; Comment Letter of U.S. Chamber of
Commerce, Center for Capital Markets Competitiveness (Apr. 11, 2022)
(``US Chamber of Commerce Comment Letter''); CCMR Comment Letter;
Comment Letter of Americans for Tax Reform (Apr. 9, 2022)
(``Americans for Tax Reform Comment Letter''); Northern Trust
Comment Letter.
    \89\ See, e.g., ICI Comment Letter (suggesting that, if data and
analysis show that an anti-dilution mechanism is necessary for
public institutional prime and tax-exempt funds, modifying and
leveraging the existing fee framework would be less problematic than
swing pricing and could serve the Commission's goals in a way that
avoids imposing unnecessary operational costs); Invesco Comment
Letter; SIFMA AMG Comment Letter (suggesting that, to the extent the
Commission continues to believe, based on data driven findings and
analysis, that an additional anti-dilution tool is necessary, the
Commission consider liquidity fees instead of swing pricing);
Federated Hermes Comment Letter I; Federated Hermes Comment Letter
II; Invesco Comment Letter; Comment Letter of The Charles Schwab
Corporation (Apr. 11, 2022) (``Schwab Comment Letter''); Morgan
Stanley Comment Letter; JP Morgan Comment Letter; BlackRock Comment
Letter; State Street Comment Letter; Western Asset Comment Letter;
IIF Comment Letter; Allspring Funds Comment Letter. Some of the
comments received with respect to the swing pricing proposal are
also relevant to issues implicated by the liquidity fee mechanism
that we are adopting. We primarily discuss those comments below in
the relevant sections addressing the amended liquidity fee
framework.
---------------------------------------------------------------------------

    Commenters expressed different views on whether the proposed swing
pricing requirement would achieve the Commission's goal of ensuring
that the costs stemming from net redemptions are fairly allocated and
do not give rise to dilution or a potential first-mover advantage,
particularly in times of stress. A few commenters were supportive of
swing pricing and suggested that it would enhance the resilience of
money market funds.\90\ Many commenters, however, expressed concern
that swing pricing would not achieve the Commission's goals of
allocating liquidity costs and reducing dilution and potential first-
mover advantages. Some commenters suggested that redemptions are not
motivated by a first-mover advantage and that liquidity, rather than
avoiding dilution from other shareholders' redemptions, was the
motivation for redemptions in March 2020.\91\ Some commenters suggested
that swing pricing would not address first-mover issues because
investors would not know at the time they submitted redemptions orders
if a swing factor would apply for that pricing period.\92\ Similarly,
another commenter suggested that small adjustments to a fund's NAV
would be unlikely to affect a shareholder's decision to redeem, even
with a market impact factor.\93\ Some other commenters suggested that
uncertainty regarding the application of swing pricing may in fact
increase incentives for investors to redeem ahead of others.\94\
---------------------------------------------------------------------------

    \90\ See, e.g., Americans for Financial Reform Comment Letter;
CFA Comment Letter; Comment Letter of Systemic Risk Council (Apr.
15, 2022) (``Systemic Risk Council Comment Letter''); Better Markets
Comment Letter; Comment Letter of Chris Barnard (Oct. 19, 2022)
(``Chris Barnard Comment Letter'').
    \91\ See, e.g., Fidelity Comment Letter; Capital Group Comment
Letter; BlackRock Comment Letter; Americans for Tax Reform Comment
Letter; see also Federated Hermes Comment Letter I (suggesting that
the 2014 amendments that imposed a floating NAV on institutional
funds sufficiently addressed first-mover issues).
    \92\ See, e.g., Capital Group Comment Letter; Dechert Comment
Letter; Schwab Comment Letter; Allspring Funds Comment Letter;
Federated Hermes Comment Letter II; JP Morgan Comment Letter;
BlackRock Comment Letter; ICI Comment Letter; SIFMA AMG Comment
Letter; see also US Chamber of Commerce Comment Letter.
    \93\ See Fidelity Comment Letter.
    \94\ See, e.g., CCMR Comment Letter (suggesting that swing
pricing could incentivize runs as investors seek to redeem before a
market impact factor is applied); Comment Letter of Institutional
Cash Distributors (Apr. 11, 2022) (``ICD Comment Letter''); Prof.
Hanson et al. Comment Letter; State Street Comment Letter.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, swing pricing and liquidity
fees can be economically equivalent in terms of charging redeeming
investors for the liquidity costs they impose on a fund.\95\ Both
approaches allow funds to recapture the liquidity costs of redemptions
to make non-redeeming investors whole. The Commission considered both
approaches in the Proposing Release and, after acknowledging that each
approach has certain advantages and disadvantages over the other, the
Commission expressed the view that swing pricing appeared to have
operational benefits relative to liquidity fees. For example, as
discussed in the proposal, the Commission believed swing pricing would
require less involvement by intermediaries in applying a charge to
redeeming investors than liquidity fees.\96\
---------------------------------------------------------------------------

    \95\ See Proposing Release, supra note 6, at sections II.B.1 and
III.D.5.
    \96\ See id. at paragraph accompanying n.149 and section
III.D.5.
---------------------------------------------------------------------------

    Many commenters stated that liquidity fees were preferable to swing
pricing.\97\ Many of these commenters stated that liquidity fees would
be easier for money market funds to implement.\98\ For instance, some
commenters suggested that funds would be able to build on their
existing experience with liquidity fees under current rules.\99\
Similarly, some commenters raised the concern that swing pricing is
ill-suited for money market funds given the general lack of experience
with swing pricing in the money market fund industry.\100\
---------------------------------------------------------------------------

    \97\ See, e.g., Invesco Comment Letter; SIFMA AMG Comment Letter
(stating that liquidity fees offer many advantages as compared to
swing pricing); Federated Hermes Comment Letter I (suggesting that a
discretionary liquidity fee would be less onerous than swing
pricing); Federated Hermes Commenter Letter II; Invesco Comment
Letter; Schwab Comment Letter; Morgan Stanley Comment Letter; JP
Morgan Comment Letter; BlackRock Comment Letter; State Street
Comment Letter; Western Asset Comment Letter; IIF Comment Letter;
Allspring Funds Comment Letter; see also Dechert Comment Letter; CFA
Comment Letter.
    \98\ See, e.g., Federated Hermes Comment Letter II; Invesco
Comment Letter; SIFMA AMG Comment Letter; Schwab Comment Letter; IIF
Comment Letter; BlackRock Comment Letter.
    \99\ See, e.g., Federated Hermes Comment Letter II; Invesco
Comment Letter; SIFMA AMG Comment Letter; Schwab Comment Letter; IIF
Comment Letter.
    \100\ See Morgan Stanley Comment Letter; SIFMA AMG Comment
Letter; IIF Comment Letter; Federated Hermes Comment Letter I;
Federated Hermes Comment Letter II; Comment Letter of Senator Pat
Toomey (Apr. 12, 2022) (``Senator Toomey Comment Letter''); Mutual
Fund Directors Forum Comment Letter; see also Comment Letter of
Professor Stephen G. Cecchetti, Brandeis International Business
School, and Professor Kermit L. Schoenholtz, Leonard N. Stern School
of Business, New York University (Feb. 1, 2022) (``Profs. Ceccheti
and Schoenholtz Comment Letter'').
---------------------------------------------------------------------------

    Several commenters stated that a liquidity fee framework would
provide benefits to investors relative to swing pricing.\101\ Some of
these commenters suggested that a liquidity fee would be less confusing
and more transparent with respect to the liquidity costs redeeming
investors incur because investors are more familiar with the concept of
liquidity fees (which exist in the current rule) and because the size
of the swing factor is not readily observable in the fund's share
price.\102\ Some commenters suggested that a liquidity fee would be a
more direct way to pass along liquidity costs and, unlike swing
pricing, would do so without providing a discount to subscribing
investors or adding volatility to the fund's NAV.\103\ Some commenters
suggested that the changes in a fund's

NAV caused by application of the swing factor may cause investors to
time their purchases of money market shares to attain a pricing
advantage during predictable seasonal redemption activity such as tax
payment dates or month-end.\104\ Further, one commenter indicated that
a liquidity fee framework could better preserve same-day liquidity for
investors than swing pricing because liquidity fees are already
operationally feasible for many money market funds and present fewer
implementation challenges.\105\
---------------------------------------------------------------------------

    \101\ See, e.g., ICI Comment Letter; Invesco Comment Letter;
SIFMA AMG Comment Letter; Federated Hermes Comment Letter I;
Federated Hermes Commenter Letter II; Invesco Comment Letter; Schwab
Comment Letter; Morgan Stanley Comment Letter; JP Morgan Comment
Letter; BlackRock Comment Letter; State Street Comment Letter;
Western Asset Comment Letter; IIF Comment Letter; Allspring Funds
Comment Letter; see also Dechert Comment Letter; CFA Comment Letter.
    \102\ See, e.g., Morgan Stanley Comment Letter (expressing the
belief that investors understand and are more comfortable with a
fee-based regime, as compared to swing pricing, because of previous
efforts of money market fund sponsors to educate fund investors on
liquidity fees, as well as investors' experiences with redemption
fees under rule 22c-2 and sales charges and deferred sales charges);
SIFMA AMG Comment Letter; Federated Hermes Comment Letter II.
    \103\ See, e.g., ICI Comment Letter; Federated Hermes Comment
Letter II (``Shareholders who subscribe on days when price is swung
down will receive a windfall profit.''); JP Morgan Comment Letter
(``[R]emaining investors will not experience additional NAV
volatility as with swing pricing.'').
    \104\ See Federated Hermes Comment Letter I; Federated Hermes
Comment Letter II (expressing concern about other scenarios in which
swing pricing may incentivize trading to take advantage of
fluctuations in the fund's NAV, such as incentives to purchase in
early pricing periods--when money market funds tend to have more
redemptions--and redeem in a later pricing period, when net
redemptions are less likely); Western Asset Comment Letter; Dechert
Comment Letter (suggesting that swing pricing may have a potentially
unintended dilutive effect of incentivizing investors to buy into a
fund at a lower NAV once the fund swings).
    \105\ See IIF Comment Letter.
---------------------------------------------------------------------------

    Commenters suggested various alternatives regarding the form and
structure of liquidity fees. Some commenters suggested that fund boards
should have discretion to determine whether to impose liquidity
fees.\106\ Some commenters suggested an approach where liquidity fees
would apply automatically upon certain events, such as upon net
redemptions exceeding an identified threshold or liquidity dropping
below a certain level.\107\
---------------------------------------------------------------------------

    \106\ See, e.g., ICI Comment Letter; Schwab Comment Letter;
Federated Hermes Comment Letter I; Federated Hermes Comment Letter
II; Federated Hermes Fund Board Comment Letter; Invesco Comment
Letter; SIFMA AMG Comment Letter.
    \107\ See, e.g., Morgan Stanley Comment Letter; Western Asset
Comment Letter; BlackRock Comment Letter; State Street Comment
Letter; SIFMA AMG Comment Letter; ICI Comment Letter; JP Morgan
Comment Letter; IIF Comment Letter; Invesco Comment Letter.
---------------------------------------------------------------------------

    After considering these comments, we are adopting a liquidity fee
framework to better allocate liquidity costs to redeeming investors.
The proposed swing pricing requirement was designed to address
potential shareholder dilution and the potential for a first-mover
advantage for institutional funds. While we continue to believe these
goals are important, we are persuaded by commenters that these same
goals are better achieved through a liquidity fee mechanism,
particularly given that current rule 2a-7 includes a liquidity fee
framework that funds are accustomed to and can build upon.
    The mandatory liquidity fee framework we are adopting is designed
to address concerns with the prior liquidity fee framework--namely the
incentives for preemptive redemptions associated with predictable
weekly liquid asset triggers. At the same time it continues to seek to
ensure that the costs stemming from redemptions in stressed market
conditions are more fairly allocated to redeeming investors.
Specifically, institutional prime and institutional tax-exempt money
market funds will be subject to a mandatory liquidity fee when net
redemptions exceed 5% of net assets.\108\ Funds will not be required to
impose this fee, however, when liquidity costs are less than one basis
point, which we anticipate will often be the case under normal market
conditions.\109\ As discussed in more detail throughout this section,
the mandatory liquidity fee we are adopting will broadly address the
concerns commenters raised about the swing pricing proposal while still
generally achieving the goals we sought in that proposal. Separately,
similar to the statements in the proposal that money market funds can
impose discretionary liquidity fees under rule 22c-2, amended rule 2a-7
will provide a discretionary liquidity fee tool to all non-government
money market funds, which a fund will use if its board (or the board's
delegate, in accordance with board-approved guidelines) determines that
such fee is in the best interests of the fund.\110\
---------------------------------------------------------------------------

    \108\ See amended rule 2a-7(c)(2)(ii).
    \109\ See amended rule 2a-7(c)(2)(iii)(D).
    \110\ A government money market fund may elect to be subject to
the discretionary liquidity fee requirement.
---------------------------------------------------------------------------

    The mandatory liquidity fee approach that we are adopting will
require redeeming investors to pay the cost of depleting a fund's
liquidity, particularly under stressed market conditions and when net
redemptions are sizeable. As discussed in the proposal, trading
activity and other changes in portfolio holdings associated with
meeting redemptions may impose costs, including trading costs and costs
of depleting a fund's daily or weekly liquid assets. These costs, which
currently are borne by the remaining investors in the fund, can dilute
the interests of non-redeeming shareholders and create incentives for
shareholders to redeem quickly to avoid losses, particularly in times
of market stress.\111\ If shareholder redemptions are motivated by this
first-mover advantage, they can lead to increasing outflows, and as the
level of outflows from a fund increases, the incentive for remaining
shareholders to redeem may also increase. Regardless of the motive for
investor redemptions, there can be significant, unfair adverse
consequences to remaining investors in a fund in these circumstances,
including material dilution of remaining investors' interests in the
fund. The mandatory liquidity fee mechanism is designed to reduce the
potential for such dilution.
---------------------------------------------------------------------------

    \111\ See infra section IV.B.1.c.
---------------------------------------------------------------------------

    Some commenters suggested that an anti-dilution tool is not
necessary for money market funds. Several of these commenters suggested
that money market funds do not experience dilution as a general matter
because they are able to address their liquidity needs without cost and
without selling assets by using daily liquid assets and weekly liquid
assets, which are held to maturity.\112\ Some commenters further
suggested that the Commission did not provide sufficient data analysis
to support its view that money market funds are subject to
dilution.\113\ Some commenters suggested an anti-dilution tool was
unnecessary in light of either the proposed increased daily and weekly
liquid asset requirements, the proposed removal of the tie to weekly
liquid assets, or a combination of those factors because funds would
have additional liquidity to meet redemptions and would be better able
to use that liquidity in future stress periods.\114\
---------------------------------------------------------------------------

    \112\ See, e.g., Northern Trust Comment Letter; Fidelity Comment
Letter; SIFMA AMG Comment Letter; IIF Comment Letter; Federated
Hermes Comment Letter II; CCMR Comment Letter; State Street Comment
Letter; ICI Comment Letter; JP Morgan Comment Letter; Comment Letter
of Stephen A. Keen (Apr. 11, 2022) (``Keen Comment Letter'');
Comment Letter of U.S. Bancorp Asset Management (Apr. 14, 2022)
(``Bancorp Comment Letter'').
    \113\ See, e.g., Morgan Stanley Comment Letter; Fidelity Comment
Letter (suggesting that the SEC lacked data to demonstrate the
significance or materiality of shareholder dilution); ICI Comment
Letter; SIFMA AMG Comment Letter; CCMR Comment Letter.
    \114\ See, e.g., Schwab Comment Letter; Healthy Markets
Association Comment Letter; Allspring Funds Comment Letter; Fidelity
Comment Letter; Invesco Comment Letter; BlackRock Comment Letter;
Federated Hermes Comment Letter II; ICI Comment Letter; SIFMA AMG
Comment Letter; but see Better Markets Comment Letter (suggesting
that increasing the costs of redemptions would reduce potential
first-mover advantages).
---------------------------------------------------------------------------

    After considering comments, we continue to believe that in periods
of market stress, when liquidity in underlying short-term funding
markets is scarce and costly, redeeming investors should bear liquidity
costs associated with sizeable redemption activity. While we recognize
that a fund may not incur immediate costs to meet those redemptions if
the fund can satisfy redemptions using daily liquid assets, the fund is
likely to face costs to rebalance the liquidity of its portfolio

over time.\115\ Moreover, if redemptions are large and ongoing, there
is an increased likelihood that the fund will need to sell less liquid
assets to satisfy redemptions, which involves greater costs. Thus,
there is a timing misalignment between an investor's redemption
activity and when the fund, and its remaining shareholders, incur
liquidity costs. The liquidity fee requirement we are adopting is
designed to protect remaining shareholders from dilution under these
circumstances and to more fairly allocate costs so that redeeming
shareholders bear the costs of removing liquidity from the fund when
liquidity in underlying short-term funding markets is costly.
---------------------------------------------------------------------------

    \115\ Theoretically, a money market fund would not incur
rebalancing costs if it were able to perfectly ``ladder'' the
maturity of its portfolio structure, such that investments are
maturing in parallel with investors' redemption activities. However,
as a practical matter, perfect laddering is impossible because funds
do not have advance notice of all investor purchase and redemption
activity.
---------------------------------------------------------------------------

    In response to comments suggesting that we conduct a data analysis
on the extent to which money market fund shareholders have experienced
dilution in the past, we do not have fund-specific data on dilution
because funds do not report information about their daily portfolio
holdings and transactions. However, as discussed in the Proposing
Release, in March 2020 institutional prime and institutional tax-exempt
money market funds experienced significant outflows, spreads for
instruments in which these funds invest widened sharply, and these
funds sold significantly more long-term portfolio securities (i.e.,
securities that mature in more than a month) than average.\116\ For
instance, Form N-MFP data suggests that publicly offered institutional
prime funds increased their sales of long-term securities in March 2020
to 15% of total assets, in comparison to a 4% monthly average between
October 2016 and February 2020. In addition, the March 2020 figure,
which is over three times the monthly average as compared to data from
prior years, likely understates the full extent of the selling
activity, as Form N-MFP currently does not provide insight on sales of
portfolio securities that a fund acquired during the relevant
month.\117\ As an example of widening spreads in the markets in which
prime funds invest, bid-ask spreads of highly rated dealer-placed
commercial paper reached between approximately 25 and 55 basis points
at the height of the stress in March and April 2020 depending on
maturity.\118\ Thus, available evidence indicates that money market
funds were incurring liquidity costs to meet redemptions, but these
costs generally were not borne by redeeming investors who received the
NAV at the time of their redemptions.\119\ Moreover, the dilution the
final rule is designed to address is not limited to the costs a fund
incurs in selling portfolio securities to meet redemptions. The final
rule also addresses dilution from the costs of reducing the liquidity
of a fund's portfolio, including associated rebalancing costs, which
would also require granular daily data that funds do not publicly
report.
---------------------------------------------------------------------------

    \116\ See Proposing Release, supra note 6, at section I.B.
    \117\ As discussed below, we are amending Form N-MFP to require
prime funds to report the value of non-maturing portfolio securities
they sold each month. See infra section II.F.2.a.
    \118\ See infra paragraph accompanying note 630.
    \119\ To the extent that ultra-short bonds may be somewhat
comparable to the debt instruments that money market funds hold and
the magnitude of NAV discounts that ultra-short bond exchange-traded
funds experienced in March 2020 may proxy for liquidity costs of
money market funds that hold similar assets, this could suggest that
institutional prime money market funds have nontrivial dilution
costs during market stress. See id.
---------------------------------------------------------------------------

    We understand that future stress periods may not look exactly the
same as March 2020, and, as some commenters suggested, in future
periods funds may feel more comfortable drawing on available liquidity
to meet redemptions because we are removing the tie between liquidity
thresholds and fees and gates. Funds also may begin future stressed
periods with higher levels of daily and weekly liquid assets than in
March 2020, although at that time some funds had liquidity above the
minimums we are adopting. However, it is also possible that future
stress periods will be longer or otherwise more severe than March 2020,
that future stress events will have no Federal intervention to
alleviate those stresses, or that a particular fund or group of funds
will come under stress due to factors idiosyncratic to the fund(s). It
is important for funds to be able to manage through various types of
stress events and not to rely solely on liquidity buffers to manage
stress. As discussed below and in the Proposing Release, while
liquidity minimums are an important tool for managing redemptions, our
analysis suggests that some funds would run out of liquidity if faced
with the redemptions rates experienced in March 2020.\120\ Thus, we do
not agree with commenters who suggested that amendments to enhance
money market fund liquidity, and the usability of that liquidity, would
be sufficient on their own, without an available anti-dilution tool.
---------------------------------------------------------------------------

    \120\ See infra sections II.C.1 and IV.C.2; Proposing Release,
supra note 6, at sections II.C.1 and III.C.2.
---------------------------------------------------------------------------

    Moreover, to the extent that investors currently are incentivized
to redeem quickly during periods of market stress to avoid potential
costs from a fund's future sale of less liquid securities, the
amendments will reduce those first-mover incentives and the associated
run risk. While some academic papers support the premise that liquidity
externalities may create a first-mover advantage that may lead to
cascading anticipatory redemptions, we recognize that investors may
redeem from a fund for a variety of reasons, and these reasons may vary
among investors.\121\ Notably, we are concerned about dilution and fair
allocation of costs when a fund has sizeable net redemptions in a
stressed period regardless of the reasons for investors' redemptions.
In response to comments suggesting that an anti-dilution tool would not
address first-mover issues if an investor does not know if it will
incur liquidity costs at the time the investor submits the redemption
order, we disagree. We believe that an investor's general awareness
that it may incur liquidity costs, particularly in stressed market
conditions and when other investors may also be redeeming, is
sufficient to mitigate the first-mover advantage and reduce its
potential influence on an investor's redemption decisions. We also
disagree with commenters who suggested that an anti-dilution tool with
a net redemption trigger may increase incentives for investors to
redeem ahead of others. Investors generally will not know with
certainty if the fund's flows for any particular day will trigger a
liquidity fee since a fund's net flows are dependent on many investors'
individual investment decisions, which are not knowable in advance and
can be influenced by a multitude of different factors.\122\ While
investors may anticipate that a fund will have net redemptions during a
market stress event, the investors will also know that if they redeem,
the likelihood of incurring fees increases. This dynamic should reduce
investors' incentives to attempt to preemptively redeem to avoid
liquidity fees. We agree with commenters that suggested that a net
redemption threshold would be appropriate to avoid the threshold
effects seen in March 2020.\123\

Moreover, the 5% net redemption threshold is designed to help mitigate
the risk that a significant amount of redemptions could occur under
stressed market conditions before a fee is triggered, thus
incentivizing investors to redeem ahead of others.
---------------------------------------------------------------------------

    \121\ See infra note 550 and accompanying text (discussing these
academic papers).
    \122\ See infra section IV.C.4.b.i (further discussing how a
liquidity fee based on a net redemptions trigger may mitigate run
incentives).
    \123\ See, e.g., SIFMA AMG Comment Letter; BlackRock Comment
Letter: IIF Comment Letter; Morgan Stanley Comment Letter. As
discussed further below, some of these commenters suggested a
trigger for liquidity fees that paired a net redemption threshold
with a weekly liquid asset threshold.
---------------------------------------------------------------------------

    As the Commission has previously recognized, in the absence of an
exemption, imposing liquidity fees could violate 17 CFR 270.22c-1
(``rule 22c-1''), which (together with section 22(c) and other
provisions of the Investment Company Act) requires that each redeeming
shareholder receive his or her pro rata portion of the fund's net
assets.\124\ As a result, we are exercising our authority under section
6(c) of the Act to provide exemptions from these and related provisions
of the Act so that a money market fund can institute liquidity fees,
which can benefit the fund and its shareholders by providing a more
systematic and equitable allocation of liquidity costs, notwithstanding
these restrictions.\125\ We believe that such exemptions do not
implicate the concerns that Congress intended to address in enacting
these provisions, and thus they are necessary and appropriate in the
public interest and consistent with the protection of investors and the
purposes fairly intended by the Act.
---------------------------------------------------------------------------

    \124\ See 2014 Adopting Release, supra note 26, at section
III.A.3.
    \125\ Section 6(c) of the Investment Company Act. In addition,
like current rule 2a-7, the final rule provides that,
notwithstanding section 27(i) of the Investment Company Act, a
variable insurance contract issued by a registered separate account
funding variable insurance contracts or the sponsoring insurance
company of such separate account may apply a liquidity fee to
contract owners who allocate all or a portion of their contract
value to a subaccount of the separate account that is either a money
market fund or that invests all of its assets in shares of a money
market fund. See 17 CFR 270.2a-7(c)(2)(iv); amended rule 2a-
7(c)(2)(iv). Section 27(i)(2)(A) makes it unlawful for any
registered separate account funding variable insurance contracts or
the sponsoring insurance company of such account to sell a variable
contract that is not a ``redeemable security.''
---------------------------------------------------------------------------

    As discussed, we are adopting a mandatory liquidity fee framework
in lieu of the proposed swing pricing requirement. Table 1 below
compares the key elements of the current rule's default liquidity fee,
the proposed swing pricing requirement, and the mandatory liquidity fee
provision we are adopting. In addition, Table 2 below compares the key
elements of the current rule's discretionary liquidity fee, the
redemption fee approach contemplated by the proposal, and the
discretionary liquidity fee provision we are adopting. We discuss these
aspects of the final rule and how they relate to comments on the
proposal in the following sections.

 Table 1--Comparison of the Current Rule's Default Liquidity Fee, the Proposed Rule's Swing Pricing Requirement,
                                  and the Final Rule's Mandatory Liquidity Fee
----------------------------------------------------------------------------------------------------------------
                                     Current rule's default     Proposed rule's swing    Final rule's mandatory
                                         liquidity fee           pricing requirement          liquidity fee
----------------------------------------------------------------------------------------------------------------
Description of mechanism.........  A default fee is charged   The fund's NAV is         A mandatory fee is
                                    to redeeming investors     adjusted downward by a    charged to redeeming
                                    when the fund's weekly     swing factor when the     investors when the fund
                                    liquid assets decline      fund has net              has net redemptions
                                    below 10%, subject to      redemptions.              above 5% of net assets.
                                    certain board discretion.
Scope of affected funds..........  Prime and tax-exempt       Institutional prime and   Institutional prime and
                                    money market funds.        institutional tax-        institutional tax-
                                                               exempt money market       exempt money market
                                                               funds.                    funds.
Scope of affected investors......  Redeeming investors are    The NAV is adjusted       Redeeming investors are
                                    charged a liquidity fee.   downward for both         charged a liquidity
                                    The liquidity fee does     redeemers and             fee. The liquidity fee
                                    not affect subscribing     subscribers. Redeeming    does not affect
                                    investors.                 investors' redemption     subscribing investors.
                                                               proceeds are reduced
                                                               and subscribing
                                                               investors purchase at a
                                                               discounted price,
                                                               compared to the
                                                               unadjusted NAV they
                                                               both otherwise would
                                                               have received.
Threshold for applying a charge..  If weekly liquid assets    At any level of net       Fees are triggered when
                                    fall below 10%, then a     redemptions for a         the fund has total
                                    default fee would apply    pricing period, the       daily net redemptions
                                    to redeeming investors,    swing factor includes     that exceed 5% of net
                                    unless the board           spreads and certain       assets based on flow
                                    determines a fee is not    other transaction costs   information available
                                    in the best interests of   (i.e., brokerage          within a reasonable
                                    the fund.\1\               commissions, custody      period after the last
                                                               fees, and any other       computation of the
                                                               charges, fees, and        fund's net asset value
                                                               taxes associated with     on that day, or such
                                                               portfolio security        smaller amount of net
                                                               sales).                   redemptions as the
                                                                                board determines.
                                                              If net redemptions for a
                                                               pricing period exceed
                                                               4% of net assets
                                                               divided by the number
                                                               of pricing periods per
                                                               day, or such smaller
                                                               amount of net
                                                               redemptions as the
                                                               swing pricing
                                                               administrator
                                                               determines, the swing
                                                               factor also includes
                                                               market impact costs.
Duration and application of the    The liquidity fee begins   The price is adjusted     The fund must apply a
 charge.                            to apply on the business   for all shareholders      liquidity fee to all
                                    day after the fund         transacting in the        shares that are
                                    crosses the 10% weekly     fund's shares during      redeemed at a price
                                    liquid asset threshold.    the relevant pricing      computed on the day the
                                    Once imposed, the fee      period.                   fund has total daily
                                    must be applied to all                               net redemptions that
                                    shares redeemed and                                  exceed 5% of net
                                    remains in effect until                              assets.
                                    the fund's board,
                                    including a majority of
                                    directors who are not
                                    interested persons of
                                    the fund, determines
                                    that imposing a fee is
                                    not in the best
                                    interests of the fund.
                                   If the fund has invested
                                    30% or more of its total
                                    assets in weekly liquid
                                    assets as of the end of
                                    a business day, the fund
                                    must cease charging a
                                    fee effective the
                                    beginning of the next
                                    business day.

Size of the charge...............  The default fee is 1%,     The swing factor would    The size of the fee
                                    unless the fund's board    be determined by making   generally is determined
                                    of directors, including    good faith estimates of   by making a good faith
                                    a majority of the          the spread, other         estimate of the spread,
                                    directors who are not      transaction, and market   other transaction, and
                                    interested persons of      impact costs the fund     market impact costs the
                                    the fund, determines       would incur, as           fund would incur if it
                                    that a higher or lower     applicable, if it were    were to sell a pro rata
                                    fee level is in the best   to sell a pro rata        amount of each security
                                    interests of the fund.     amount of each security   in its portfolio to
                                                               in its portfolio to       satisfy the amount of
                                                               satisfy the amount of     net redemptions.
                                                               net redemptions.
                                                              Affected money market     Affected money market
                                                               funds could estimate      funds can estimate
                                                               costs and market impact   costs and market
                                                               factors for each type     impacts for each type
                                                               of security with the      of security with the
                                                               same or substantially     same or substantially
                                                               similar characteristics   similar characteristics
                                                               and apply those           and apply those
                                                               estimates to all          estimates to all
                                                               securities of that type   securities of that type
                                                               in the fund's             in the fund's
                                                               portfolio, rather than    portfolio, rather than
                                                               analyze each security     analyze each security
                                                               separately.               separately.
                                                                                If the estimated
                                                                                liquidity costs are
                                                                                less than one basis
                                                                                point (0.01%) of the
                                                                                value of the shares
                                                                                redeemed, a fund is not
                                                                                required to apply a fee
                                                                                under the de minimis
                                                                                exception.
                                                                                If the fund cannot
                                                                                estimate the costs of
                                                                                selling a pro rata
                                                                                amount of each
                                                                                portfolio security in
                                                                                good faith and
                                                                                supported by data, a
                                                                                default liquidity fee
                                                                                of 1% of the value of
                                                                                shares redeemed
                                                                                applies.
Maximum charge...................  The fee cannot exceed 2%   The swing factor has no   The fee has no upper
                                    of the value of the        upper limit.              limit.
                                    shares redeemed.
Party who administers the          The board is responsible   The board must approve    The board is responsible
 provision.                         for administering the      swing pricing policies    for administering the
                                    liquidity fee              and procedures. The       liquidity fee
                                    requirement. The board     swing pricing             requirement, but the
                                    may not delegate           administrator is          board can delegate this
                                    liquidity fee              charged with              responsibility to the
                                    determinations.            administering the swing   fund's investment
                                                               pricing requirement.      adviser or officers,
                                                               The swing pricing         subject to written
                                                               administrator is the      guidelines established
                                                               fund's investment         and reviewed by the
                                                               adviser, officer, or      board and ongoing board
                                                               officers responsible      oversight.\2\
                                                               for administering the
                                                               fund's swing pricing
                                                               policies and
                                                               procedures, as
                                                               designated by the
                                                               fund's board. The
                                                               administrator can be an
                                                               individual or a group
                                                               of persons.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ The board determinations this Table refers to generally must include a majority of the directors who are not
  interested persons of the fund.
\2\ This approach is consistent with the operation of several other provisions of rule 2a-7.

 Table 2--Comparison of the Current Rule's Discretionary Liquidity Fee, the Proposed Rule, and the Final Rule's
                                           Discretionary Liquidity Fee
----------------------------------------------------------------------------------------------------------------
                                         Current rule's                                       Final rule's
                                    discretionary liquidity    Proposed rule and rule    discretionary liquidity
                                              fee                       22c-2                      fee
----------------------------------------------------------------------------------------------------------------
Description of mechanism.........  A discretionary fee may    The proposal would have   Irrespective of
                                    be charged to redeeming    removed the               liquidity or redemption
                                    investors when the         discretionary liquidity   levels, a discretionary
                                    fund's weekly liquid       fee provision in rule     fee is charged to
                                    assets decline below 30%   2a-7 and stated that      redeeming investors
                                    and the board determines   money market fund         when the board
                                    that a fee is in the       boards could rely on      determines that the fee
                                    best interests of the      existing rule 22c-2 if    is in the best
                                    fund.\1\                   they determine            interests of the fund.
                                                               redemption fees are
                                                               needed to address
                                                               dilution.
Scope of affected funds..........  Prime and tax-exempt       Any money market fund     Prime and tax-exempt
                                    money market funds.        may elect to rely on      money market funds.
                                    Government money market    rule 22c-2 to impose      Government money market
                                    funds may opt in.          fees, in which case the   funds may opt in.
                                                               fund would no longer be
                                                               an excepted fund under
                                                               that rule.
Scope of affected investors......  Redeeming investors are    Redeeming investors are   Redeeming investors are
                                    charged a liquidity fee.   charged a liquidity       charged a liquidity
                                    The liquidity fee does     fee. The liquidity fee    fee. The liquidity fee
                                    not affect subscribing     does not affect           does not affect
                                    investors.                 subscribing investors.    subscribing investors.
Threshold for applying a charge..  If weekly liquid assets    The fund's board may      If the board determines
                                    fall below 30%, then a     impose a redemption fee   that doing so is in the
                                    fund may institute a fee   that in its judgment is   best interests of the
                                    if the board determines    necessary or              fund, the board must
                                    that the fee is in the     appropriate to recoup     impose a liquidity fee.
                                    best interests of the      for the fund the costs
                                    fund.                      it may incur as a
                                                               result of redemptions
                                                               or to otherwise
                                                               eliminate or reduce so
                                                               far as practicable any
                                                               dilution of the value
                                                               of the outstanding
                                                               securities issued by
                                                               the fund.
Duration and application of the    Once imposed, the          Generally subject to      Once imposed, the
 charge.                            discretionary fee must     board discretion under    discretionary fee must
                                    be applied to all shares   the rule.                 be applied to all
                                    redeemed and remain in                               shares redeemed and
                                    effect until the fund's                              remain in effect until
                                    board determines that                                the fund's board
                                    imposing a fee is not in                             determines that
                                    the best interests of                                imposing such fee is no
                                    the fund.                                            longer in the best
                                                                                interests of the fund.
                                   If the fund has invested
                                    30% or more of its total
                                    assets in weekly liquid
                                    assets as of the end of
                                    a business day, the fund
                                    must cease charging a
                                    fee effective the
                                    beginning of the next
                                    business day.

Size of the charge...............  The rule does not          The fee must be           The rule does not
                                    prescribe the manner or    necessary or              prescribe the manner or
                                    amount of the fee          appropriate, as           amount of the fee
                                    calculation. The fee,      determined by the         calculation. The fee,
                                    however, must be in the    board, to recoup for      however, must be in the
                                    best interests of the      the fund the costs it     best interests of the
                                    fund.                      may incur as a result     fund.
                                                               of those redemptions or
                                                               to otherwise eliminate
                                                               or reduce so far as
                                                               practicable any
                                                               dilution of the value
                                                               of the outstanding
                                                               securities issued by
                                                               the fund.
Maximum charge...................  The fee cannot exceed 2%   The fee cannot exceed 2%  The fee cannot exceed 2%
                                    of the value of the        of the value of the       of the value of the
                                    shares redeemed.           shares redeemed.          shares redeemed.
Party who administers the          The board is responsible   The fund's board........  The board is responsible
 provision.                         for administering the                                for administering the
                                    liquidity fee                                        liquidity fee
                                    requirement. The board                               requirement, but the
                                    may not delegate                                     board can delegate this
                                    liquidity fee                                        responsibility to the
                                    determinations.                                      fund's investment
                                                                                adviser or officers,
                                                                                subject to written
                                                                                guidelines established
                                                                                and reviewed by the
                                                                                board and ongoing board
                                                                                oversight.\2\
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ The board determinations this Table refers to generally must include a majority of the directors who are not
  interested persons of the fund.
\2\ This approach is consistent with the operation of several other provisions of rule 2a-7.

2. Terms of the New Mandatory Liquidity Fee Requirement
    The mandatory liquidity fee we are adopting, like the swing pricing
proposal, is based upon a net redemption threshold and only applies to
institutional prime and institutional tax-exempt funds.\126\ Unlike the
swing pricing proposal, however, the anti-dilution measure triggers
only when net redemptions for the business day exceed 5% of net
assets.\127\ Similar to the proposed swing pricing proposal, the fee
amount would reflect the fund's good faith estimate of liquidity costs,
supported by data, of the costs the fund would incur if it sold a pro
rata amount of each security in its portfolio (i.e., vertical slice) to
satisfy the amount of net redemptions, including: (1) spread costs and
any other charges, fees, and taxes associated with portfolio security
sales; and (2) market impacts for each security.\128\ The final rule
will not require a fund to apply a fee if the estimated costs are de
minimis, meaning that if the fee were applied, the amount of the fee
would be less than 0.01% of the value of the shares redeemed.\129\ In
addition, if a fund cannot make a good faith estimate of liquidity
costs, it will apply a default fee of 1%.\130\ This mandatory liquidity
fee regime substantially accomplishes the same goals as the proposed
swing pricing mechanism and, like swing pricing, it is designed to
ensure that the costs stemming from significant net redemptions in
periods of market stress are fairly allocated and will not give rise to
dilution or a first-mover advantage.
---------------------------------------------------------------------------

    \126\ We refer to money market funds that are not government
money market funds or retail money market funds collectively as
``institutional funds'' when discussing the liquidity fee
requirement.
    \127\ See amended rule 2a-7(c)(2)(ii) (allowing a fund's board
to determine to use a smaller net redemption threshold than 5%). In
contrast, the proposed swing pricing requirement would have required
an institutional fund to adjust its current NAV per share by a swing
factor reflecting spread and transaction costs, as applicable, if
the fund has net redemptions for the pricing period. If the
institutional fund experienced net redemptions exceeding 4% of the
fund's net asset value (divided by the number of pricing periods the
fund has in a business day, or such smaller amount of net
redemptions as the swing pricing administrator determines), then the
swing factor would also include market impact costs.