above, this amendment will assist us in reviewing reported information.
---------------------------------------------------------------------------

    \460\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    Further, we are adopting, as proposed, amendments to require money
market funds to report only the amount of any fee waiver or expense
reimbursement that occurred during the reporting period.\461\ Under
current Form N-MFP, funds are required to provide the name of any
person who paid for or waived all or part of the fund's operating
expenses or management fees during the reporting period and describe
the amount and nature of the fee and expense waiver or
reimbursement.\462\ As discussed in the Proposing Release, these
disclosures are difficult to use because they are provided in a format
that is not structured.\463\ In addition, identification of the person
who paid for or waived the fund's expenses or fees is not significantly
beneficial to the Commission's monitoring and assessment of fund risks,
and investors separately have access to information about fee and
expense waivers or reimbursements in funds' financial statements.
Commenters generally did not discuss these specific proposals, except
one commenter agreed that the simplified fee waiver and expense
reimbursement reporting is sufficient.\464\ Accordingly, for the
reasons discussed above and in the proposal, we are adopting these
amendments as proposed.
---------------------------------------------------------------------------

    \461\ See Item B.9 of amended Form N-MFP.
    \462\ See Item B.8 of current Form N-MFP.
    \463\ See Proposing Release, supra note 6, at section II.F.2.b.
    \464\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

c. More Frequent Data Points
    As proposed, we are amending Form N-MFP to require a money market
fund to provide in its monthly report certain daily data points to
improve the utility of the reported information. Specifically, the
amendments require a fund to report its percentage of total assets
invested in daily liquid assets and in weekly liquid assets, net asset
value per share (including for each class of shares), and shareholder
flow data for each business day of the month.\465\ Currently, in
monthly reports on Form N-MFP, a money market fund must provide the
same general information on a weekly basis.\466\ Also, under current
rule 2a-7, a money market fund must prominently disclose on its
website, as of the end of each business day during

the preceding six months, the fund's weekly liquid assets and daily
liquid assets, as well as the fund's net asset value and net
shareholder flow.\467\ The more frequent information on Form N-MFP will
allow Commission staff to better and more precisely monitor risks and
trends in these areas in an efficient and more precise manner without
requiring frequent visits to the websites of many different funds. It
also will provide industry-wide daily data in a central repository as a
resource for investors and others.\468\ The weekly data currently
reported on Form N-MFP provides only a snapshot of the liquidity, net
asset value, and flow data for any given month, and is therefore
incomplete and less useful for purposes of analysis and monitoring than
data for each business day in that month. In addition, most of the data
on Form N-MFP is reported as of the end of the month, making it
difficult to analyze the weekly data in a comprehensive manner. This is
because the weekly data points generally relate to different days than
the monthly data points. Consistent with the website information funds
already provide, the reported daily data points will be calculated as
of the end of each business day.
---------------------------------------------------------------------------

    \465\ See Items A.13, A.20, B.6, and B.7 of amended Form N-MFP.
    \466\ See Items A.13, A.20, B.5, and B.6 of current Form N-MFP.
    \467\ 17 CFR 270.2a-7(h)(10)(ii).
    \468\ To enhance consistency in reporting practices, filers must
report gross subscriptions and gross redemptions as of the trade
date (rather than as of the settlement date). This change is
designed to ensure that funds are reporting the information in the
same manner. Filers that are master-feeder funds must report the
required shareholder flow data at the feeder fund level only. See
Item B.7 of amended Form N-MFP.
---------------------------------------------------------------------------

    One commenter opposed the proposal to require liquidity, net asset
value, and flow data to be reported as of the close of business on each
business day of each month on the basis that it would be unduly
burdensome and without any added benefit.\469\ This commenter suggested
instead that the Commission should look to private data resources where
such information is readily available. As discussed in the proposal,
although private data vendors provide some daily data based on
information gathered from funds' websites, the staff has observed this
data can be incomplete at times, and therefore may not be appropriate
for purposes of staff monitoring and analyses. Also, money market funds
generally are already required to provide on their websites the same
data that we are requiring be reported on Form N-MFP, and thus we
believe this change will impose minimal burden on money market funds.
---------------------------------------------------------------------------

    \469\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    As proposed, we are also increasing the frequency with which funds
report certain yield information. Currently, funds must report 7-day
gross yields (at the series level) and 7-day net yields (at the share
class level) as of the end of the reporting period. We are amending
Form N-MFP to require funds to report this information for each
business day.\470\ One commenter opposed the proposal to require money
market funds to report 7-day yield information on a daily basis,
suggesting instead that money market funds should, at most, be required
to report 7-day yield information on a weekly basis, though the
commenter preferred monthly reporting.\471\ This commenter suggested
that the requirement would place an undue burden on funds and would
fail to add value and enhance funds. The higher-frequency reporting,
however, will assist in the timely monitoring and assessment of fund
risks, particularly during periods of market stress. The additional
burdens associated with these amendments are appropriate and justified
by the increased investor protection and other benefits.
---------------------------------------------------------------------------

    \470\ See Items A.19 and B.8 of amended Form N-MFP.
    \471\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

d. Other Amendments
    As proposed, we are amending how advisers report the identity of
fund registrants and series.\472\ Under current Form N-MFP, a filer
must disclose the registrant's LEI, if available, and the form does not
require the LEI of the series.\473\ Filers also currently provide the
name of the registrant and series in metadata associated with the form,
but they do not report these names on the form itself. As adopted, the
amended form will require funds to identify the name and LEI for both
the fund registrant and the series.\474\ Requiring reporting of
registrant and series names on the form is intended to make the form
easier for investors to use. In addition, the change to require LEIs
for the registrant and series will align Form N-MFP with other
reporting forms, such as Forms N-CEN and N-PORT, which require LEI
reporting for the registrant and series.
---------------------------------------------------------------------------

    \472\ See Proposing Release, supra note 6, at section II.F.2.d.
    \473\ See Item 3 of current Form N-MFP.
    \474\ See Items 2, 4, 5, and 6 of amended Form N-MFP.
---------------------------------------------------------------------------

    We are also adopting as proposed amendments to specify that funds
should respond to an item request with ``N/A'' if the information is
not applicable (e.g., a company does not have an LEI).\475\ The amended
definition of LEI in the form removes language providing that, in the
case of a financial institution that does not have an assigned LEI, a
fund should instead disclose the RSSD ID assigned by the National
Information Center of the Board of Governors of the Federal Reserve
System, if any.\476\ Instead, the amendments add RSSD ID as an
additional category of ``other identifiers'' that a fund can use for
relevant portfolio securities.\477\ These changes are designed to
improve consistency and comparability of information funds report about
the securities they hold.
---------------------------------------------------------------------------

    \475\ See General Instruction A to amended Form N-MFP.
    \476\ See General Instruction E to amended Form N-MFP for a
revised definition of LEI.
    \477\ See Item C.5 of amended Form N-MFP.
---------------------------------------------------------------------------

    Commenters generally did not discuss these specific aspects of the
proposal, except one commenter opposed them without offering a
supporting reason or explanation.\478\ For the reasons discussed above,
we are adopting the amendments as proposed.
---------------------------------------------------------------------------

    \478\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    Separately, some commenters suggested that the Commission should
provide funds with more time to file reports on the form because the
proposed amendments to Form N-MFP would increase the volume and
frequency of reported data points.\479\ Currently, money market funds
must file reports on Form N-MFP by the fifth business day of each
month.\480\ Some commenters recommended extending the filing deadline
to seven business days after month-end to allow sufficient time for
review and verification of the new information.\481\ Another commenter
recommended an extension of 10 business days following month-end to
reduce the risk of error in the submitted data and information to the
Commission.\482\ For similar reasons, another commenter recommended an
additional three business days, resulting in a filing deadline on the
eighth business day of the following month.\483\ After considering
these comments, we are not amending the reporting deadline, and funds
will continue to be required to file reports on Form N-MFP by the fifth
business day of each month.
---------------------------------------------------------------------------

    \479\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
BlackRock Comment Letter; Federated Hermes Comment Letter I; CCMR
Comment Letter; Bancorp Comment Letter; Invesco Comment Letter;
Capital Group Comment Letter.
    \480\ See 17 CFR 270.30b1-7; General Instruction A of current
Form N-MFP.
    \481\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
BlackRock Comment Letter; Federated Hermes Comment Letter I
(responding to Question 132); CCMR Comment Letter; Bancorp Comment
Letter.
    \482\ See Invesco Comment Letter.
    \483\ See Capital Group Comment Letter.
---------------------------------------------------------------------------

    As discussed above, we are not adopting the full scope of the

amendments we proposed. For example, we are not requiring lot-level
reporting of portfolio holdings or disaggregated information if
multiple securities of an issuer are subject to a repurchase agreement.
In addition, several of the amendments will require funds to report
daily data points they already publish on their websites, including
liquidity levels and net asset values. Considering the more tailored
scope of the final amendments and funds' experience collecting the same
or similar data in several cases, we believe the current five business
day timeline continues to be appropriate and will ensure timely public
access to the data. To the extent that a fund identifies an error in
its report after the filing deadline, it can file an amendment to
correct the error, as currently permitted.\484\ In our experience, only
a small number of funds needed to make amendments to Form N-MFP filings
to correct reporting issues after the deadline.
---------------------------------------------------------------------------

    \484\ See General Instruction A of current Form N-MFP; General
Instruction A of amended Form N-MFP.
---------------------------------------------------------------------------

3. Amendments to Form PF
    The Commission is also amending Form PF, the confidential reporting
form for certain SEC-registered investment advisers to private funds to
require additional information regarding the liquidity funds they
advise. Liquidity funds are private funds that seek to maintain a
stable NAV (or minimize fluctuations in their NAVs) and thus can
resemble money market funds.\485\ The amendments to section 3 of Form
PF will provide a more complete picture of the short-term financing
markets in which liquidity funds invest and enhance the Commission's
and the Financial Stability Oversight Council's (``FSOC'') ability to
assess short-term financing markets and facilitate our oversight of
those markets and their participants.\486\ This, in turn, is designed
to enhance investor protection efforts and systemic risk
assessment.\487\ We have consulted with FSOC to gain input on these
amendments to help ensure that Form PF continues to provide FSOC with
information it can use to assess systemic risk.
---------------------------------------------------------------------------

    \485\ For purposes of Form PF, a ``liquidity fund'' is any
private fund that seeks to generate income by investing in a
portfolio of short term obligations in order to maintain a stable
net asset value per unit or minimize principal volatility for
investors. See Form PF: Glossary of Terms.
    \486\ In addition, the changes will enhance the Commission's and
FSOC's ability to assess short-term financing markets, facilitate
the Commission's oversight of those markets, and improve the data
quality and comparability by making certain categories in section 3
more consistent with the categories the Federal Reserve Board uses
in its reports and analysis.
    \487\ The Commission is adopting these amendments, in part,
pursuant to its authority under section 204(b) of the Advisers Act,
which gives the Commission the authority to establish certain
reporting and recordkeeping requirements for advisers to private
funds and provides that the records and reports of any private fund
to which an investment adviser registered with the Commission
provides investment advice are deemed to be the records and reports
of the investment adviser.
---------------------------------------------------------------------------

    In a January 2022 release proposing amendments to Form PF, the
Commission proposed changes to section 3 of Form PF that were intended
to require large liquidity fund advisers to report substantially the
same information that the Commission had proposed money market funds to
report on Form N-MFP.\488\ The proposed amendments to section 3 of Form
PF included requirements for additional and more granular information
regarding large liquidity fund operational information and assets,
portfolio holdings, financing, and investor information as well as a
new item concerning the disposition of portfolio securities.\489\
Consistent with the final amendments to Form N-MFP, we are adopting
largely as proposed the amendments to section 3 of Form PF, with some
modifications to better tailor the reporting to private liquidity funds
and remain consistent with the final requirements for money market
funds under amended Form N-MFP.
---------------------------------------------------------------------------

    \488\ See Form PF Proposing Release, supra note 14; Proposing
Release, supra note 6, at section II.F.2.
    \489\ See Form PF Proposing Release, supra note 14, at section
II.C.
---------------------------------------------------------------------------

    We received limited comments regarding the proposed amendments to
section 3 of Form PF.\490\ Two commenters were supportive of the
changes, with one commenter stating that it was reasonable to require
the large liquidity fund advisers to provide comprehensive reports to
the SEC on their operations and financial condition.\491\ This
commenter argued that if a significant difference between the
requirements applicable to money market funds and liquidity funds
exists, this difference could allow for a significant but hidden risk
to develop.\492\ In contrast, another commenter argued that the
proposed changes to Form PF would represent a fundamental shift from
the original intent of Form PF to assist the FSOC in its monitoring
obligations and questioned whether additional data was necessary.\493\
---------------------------------------------------------------------------

    \490\ See Comment Letter of Better Markets on File No. S7-01-22
(Mar. 21, 2022) (``Better Markets Comment Letter on File No. S7-01-
22''); Comment Letter from Andres Loubriel on File No. S7-01-22
(Oct. 13, 2022) (``Loubriel Comment Letter on File No. S7-01-22'');
Comment Letter of New York City Bar Association on File No. S7-01-22
(Mar. 21, 2022) (``NYC Bar Comment Letter on File No. S7-01-22'').
Comment letters on the Form PF Proposing Release (File No. S7-01-22)
are available at https://www.sec.gov/comments/s7-01-22/s70122.htm.
    \491\ See Better Markets Comment Letter on File No. S7-01-22;
Loubriel Comment Letter on File No. S7-01-22.
    \492\ See Better Markets Comment Letter on File No. S7-01-22.
    \493\ See NYC Bar Comment Letter on File No. S7-01-22.
---------------------------------------------------------------------------

    We do not agree that the proposed amendments represent a
fundamental shift from the original intent of Form PF. The Commission
adopted Form PF, as required by the Dodd-Frank Act, to enhance FSOC's
monitoring and assessment of systemic risk; to provide information for
FSOC's use in determining whether and how to deploy its regulatory
tools; and to collect additional data for the Commission's use in its
own regulatory program, including examinations, investigations, and
investor protection efforts relating to private fund advisers.\494\ The
final amendments to section 3 of Form PF are designed to provide the
Commission and FSOC with a more complete picture of the short-term
financing markets in which liquidity funds invest, and in turn, enhance
the Commission's and FSOC's ability to assess the potential market and
systemic risks presented by liquidity funds' activities and facilitate
our oversight of those markets and their participants. Specifically, we
believe that the additional and more granular information the final
amendments require will enable the Commission and FSOC to better assess
liquidity funds' asset turnover, liquidity management and secondary
market activities, subscriptions and redemptions, and ownership type
and concentration. This information may be used to analyze funds'
liquidity and susceptibility to the risk of runs, which may give rise
to systemic risk concerns. In addition, the information can be used for
identifying trends in the liquidity fund industry during normal market
conditions and for assessing deviations that may serve as signals for
changes in short-term funding markets. These amendments also are
designed to improve data quality and comparability. Together, the

amendments are intended to enhance investor protection efforts and
systemic risk assessment and, further, are consistent with the original
intent of Form PF.
---------------------------------------------------------------------------

    \494\ See Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF, Investment Advisers Act Release No. 3308 (Oct. 31, 2011)
[76 FR 71128 (Nov. 16, 2011)] (``2011 Form PF Adopting Release''),
at sections II and V; see also Amendments to Form PF to Require
Event Reporting for Large Hedge Fund Advisers and Private Equity
Fund Advisers and to Amend Reporting Requirements for Large Private
Equity Fund Advisers, Advisers Act Release No. 6297 (May 3, 2023)
[88 FR 38146 (June 12, 2023)] (``2023 Form PF Adopting Release'').
---------------------------------------------------------------------------

    Our Form PF amendments apply only to large liquidity fund advisers,
which generally are SEC-registered investment advisers that advise at
least one liquidity fund and manage, collectively with their related
persons, at least $1 billion in combined liquidity fund and money
market fund assets.\495\ Large liquidity fund advisers today are
required to file information on Form PF quarterly, including certain
information about each liquidity fund they manage. Under our final
amendments, we are amending the reporting requirements for section 3 of
Form PF as follows:
---------------------------------------------------------------------------

    \495\ See Instruction 3 to Form PF.
---------------------------------------------------------------------------

     Operational Information. We are adopting as proposed
amendments to revise how advisers report operational information about
their liquidity funds. Under current Form PF, advisers must report
whether the liquidity fund uses certain methodologies to compute its
net asset value.\496\ These questions sought to determine how the fund
might try to maintain a stable net asset value.\497\ The final
amendments replace these questions with a requirement for advisers to
report the information more directly, by requiring advisers to report
whether the liquidity fund seeks to maintain a stable price per share
and, if so, to provide the price it seeks to maintain.\498\ As
proposed, the final amendments also remove current Question 54 of Form
PF, which requires advisers to report whether the liquidity fund has a
policy of complying with certain provisions of rule 2a-7, as we can use
portfolio information we collect in section 3, Item E, to determine
whether the liquidity fund is complying with rule 2a-7, regardless of
whether it has a policy or not.
---------------------------------------------------------------------------

    \496\ See current Form PF, section 3, Item A, Questions 52 and
53.
    \497\ See Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF, Release No. 3145 (Jan. 26, 2011) [76 FR 8068 (Feb. 11,
2011)], at n.133 and accompanying text.
    \498\ See amended Form PF, section 3, Item A, Question 52.
---------------------------------------------------------------------------

     Assets and portfolio information. We are adopting largely
as proposed amendments to how advisers report assets and portfolio
information in section 3. With respect to fund assets, as proposed, the
final amendments will require advisers to report cash separately from
other categories when reporting assets and portfolio information
concerning repo collateral.\499\ Currently, there is not a distinct
category for cash for reporting fund assets.\500\ We are also adopting
as proposed an amended definition of the term ``weekly liquid assets''
to specify that the term includes ``daily liquid assets.'' \501\
---------------------------------------------------------------------------

    \499\ See, e.g., amended Form PF, section 3, Item B, Question
53(j).
    \500\ See current Form PF, section 3, Item B, Question 55.
    \501\ See amended Form PF Glossary of Terms.
---------------------------------------------------------------------------

    As proposed, the final amendments also will require advisers to
report additional identifying information about each portfolio
security, including the name of the counterparty of a repo.\502\
Currently, section 3 requires advisers to name the issuer. However, for
repos, it is not clear whether advisers should report the name of the
counterparty of the repo, the name of the clearing agency (in the case
of centrally cleared repos), or both. The final amendments will address
this ambiguity.\503\ In addition, under the final amendments, if an
adviser reports an ``other unique identifier'' in identifying a
portfolio security, the adviser will be required to describe that
identifier.\504\ This will improve reported data quality and
comparability. We are also revising, as proposed, the list of
categories of investments that advisers will use to identify a
portfolio security in Item E of section 3.\505\ Accordingly, the
amended form will require advisers to distinguish between U.S.
Government agency debt categorized as (1) a coupon-paying note and (2)
a no-coupon discount note. These changes will provide more granular
information and will enhance the Commission and FSOC's assessment of
systemic risk and the Commission's investor protection oversight
efforts.
---------------------------------------------------------------------------

    \502\ See amended Form PF, section 3, Item E, Question 62.
    \503\ See id.
    \504\ See amended Form PF, section 3, Item E, Question 62(e).
    \505\ See amended Form PF, section 3, Item E, Question 62(f).
---------------------------------------------------------------------------

    Consistent with the proposed amendments to Form N-MFP, the
Commission had proposed to require large liquidity fund advisers to
provide information separately for initial and subsequent transactions
relating to securities purchased or sold by their liquidity funds
during the reporting period.\506\ As discussed in section II.F.2.b
above, we are not adopting such lot level requirements in Form N-MFP
and, accordingly, we are not adopting the proposed lot level reporting
requirements for Form PF at this time. The form as amended will
continue to require an adviser to report the coupon, if applicable,
when reporting the title of the issue.\507\ We proposed to remove this
requirement in connection with the addition of lot level reporting.
---------------------------------------------------------------------------

    \506\ See Form PF Proposing Release, supra note 14, at section
II.C.
    \507\ See amended Form PF, section 3, Item E, Question 62(b).
---------------------------------------------------------------------------

     Additional Repo Reporting. In addition to the changes
discussed above, we are adopting further amendments to how advisers
report information about repos, largely as proposed. The final
amendments will require advisers to provide clearing information for
repos to inform the Commission and FSOC about liquidity fund activity
in various segments of the market.\508\ However, in a change from the
proposal and consistent with the final amendments discussed above,
amended Form PF will continue to permit the advisers to aggregate
certain information if multiple securities of an issuer are subject to
a repo.\509\ This change from the proposal aligns with comparable
reporting requirements under amended Form N-MFP.
---------------------------------------------------------------------------

    \508\ See amended Form PF, section 3, Item E, Question 62(g)(ii)
through (iv).
    \509\ See amended Form PF, section 3, Item E, Question 62(g).
---------------------------------------------------------------------------

     Subscriptions/Redemptions. We are adopting, as proposed,
an amendment to Item B of section 3 that will require information about
subscriptions and redemptions. Specifically, under the final
amendments, advisers must report the total gross subscriptions
(including dividend reinvestments) and total gross redemptions for each
month of the reporting period.\510\
---------------------------------------------------------------------------

    \510\ See amended Form PF, section 3, Item B, Question 53(k) and
(l).
---------------------------------------------------------------------------

     Financing information. We are adopting, as proposed,
amendments to revise how advisers report financing information to
indicate whether a creditor is based in the United States and whether
it is a ``U.S. depository institution,'' rather than a ``U.S. financial
institution,'' as section 3 currently providers.\511\ As amended,
advisers will also be required to indicate whether a creditor is based
outside the U.S., but will not have to indicate whether that non-U.S.
creditor is a depository institution. This amendment is designed to
make the categories in section 3 more consistent with the categories
the Federal Reserve Board uses in its reports and analysis.\512\
---------------------------------------------------------------------------

    \511\ See amended Form PF, section 3, Item C, Question 54(b).
    \512\ The Chairman of the Federal Reserve Board is a member of
FSOC.
---------------------------------------------------------------------------

     Investor information. We are adopting, largely as
proposed, amendments to how advisers report investor information. As
proposed, instead of requiring advisers to report

how many investors beneficially own five percent or more of the
liquidity fund's equity, section 3 will require advisers to provide the
following information for each investor that beneficially owns five
percent or more of the reporting fund's equity: (1) the type of
investor; and (2) the percent of the reporting fund's equity owned by
the investor.\513\ This information will help inform the Commission and
FSOC of the liquidity and redemption risks of liquidity funds, because
different types of investors may pose different types of redemption
risks. For example, if a market event results in a certain type of
investor exercising redemption rights, liquidity funds with a
homogenous investor base composed of that type of investor could face
greater redemption risks, which could raise systemic risk implications,
as compared to liquidity funds with a more diversified investor base.
---------------------------------------------------------------------------

    \513\ See amended Form PF, section 3, Item D, Question 58.
---------------------------------------------------------------------------

    However, we are adopting these amendments with one modification
from the proposal. Where an adviser selects ``other'' as an investor
category in response to this question, unlike the proposal, the final
amendments will require the adviser to describe the investor further in
its response to section 1, Question 4.\514\ This modification is
designed to provide the Commission and FSOC with greater transparency
into the investor base of such funds. In addition, we are adopting as
proposed a new question requiring advisers to report whether the
liquidity fund is established as a cash management vehicle for other
funds or accounts that the adviser or the adviser's affiliates manage
that are not cash management vehicles.\515\
---------------------------------------------------------------------------

    \514\ See amended Form PF, section 3, Item D, Question 58(b).
    \515\ See amended Form PF, section 3, Item D, Question 57.
---------------------------------------------------------------------------

     Disposition of portfolio securities. We are adopting,
largely as proposed, new Item F (Disposition of Portfolio Securities)
to section 3 of Form PF. Under the amendments, advisers will report
information about the portfolio securities the liquidity fund sold or
disposed of during the reporting period (not including portfolio
securities that the fund held until maturity). Advisers will report the
gross market value sold or disposed of for each category of
investment.\516\ We are also making a formatting change to improve the
table presentation of the requirements for reporting the disposition of
portfolio securities under section 3, Question 64, Item F, without
altering the information reported thereunder.
---------------------------------------------------------------------------

    \516\ Under the final amendments, advisers will be required to
report the gross market value of portfolio securities sold or
disposed of, rather than the ``amount'' of such securities as
proposed, for consistency with Form N-MFP as adopted. See amended
Form PF, section 3, Item F, Question 63; Item D.1 of amended Form N-
MFP.
---------------------------------------------------------------------------

     Weighted average maturity and weighted average life. In
addition, we are adopting, as proposed, revisions to the definitions of
``WAM'' and ``WAL'' to include an instruction to calculate these
figures with the dollar-weighted average based on the percentage of
each security's market value in the portfolio.\517\ This change will
help ensure advisers calculate WAM and WAL using a consistent approach
across both Form PF and Form N-MFP, which will improve data quality and
comparability and in turn will enhance investor protection efforts and
systemic risk assessment.
---------------------------------------------------------------------------

    \517\ See amended Form PF Glossary of Terms. This calculation
methodology is consistent with amended rule 2a-7's definitions of
WAM and WAL.
---------------------------------------------------------------------------

    As discussed in the 2022 Form PF Proposing Release, together these
amendments will improve the transparency of liquidity fund activities
and risks and help the Commission and FSOC in developing a more
complete picture of the short-term financing markets where liquidity
funds operate.\518\ In turn, this will enhance the Commission's and
FSOC's ability to assess the potential systemic risks presented by
liquidity funds' activities and inform the Commission's investor
protection efforts. In addition, the amendments will, among other
things, improve data comparability across liquidity funds and money
market funds, which will assist regulators with oversight and
assessment of short-term financing markets and their participants.
---------------------------------------------------------------------------

    \518\ See Form PF Proposing Release, supra note 14, at section
II.C.
---------------------------------------------------------------------------

G. Technical Amendments to Form N-CSR and Form N-1A

    We are adopting amendments to two Commission forms to correct
technical errors resulting from recent Commission rulemakings. First,
we are adopting an amendment to Form N-CSR to retain an exception
addressing money market funds' financial statements that was
inadvertently omitted as a result of amendments adopted in the Tailored
Shareholder Reports Adopting Release.\519\ Second, we are adopting
amendments to Item 27A(i) of Form N-1A and the corresponding
instructions to correct an error resulting from the Commission's 2022
rulemaking on enhanced reporting of proxy votes by registered
management investment companies.\520\
---------------------------------------------------------------------------

    \519\ See Tailored Shareholder Reports Adopting Release, supra
note 347. In this release, the Commission adopted amendments under
which open-end funds' financial statements will no longer appear in
their annual and semi-annual shareholder reports, but instead will
be filed on Form N-CSR (under amended Item 7 of Form N-CSR).
Pursuant to Instruction 2 to Item 27(b)(1) of Form N-1A, as this
item appeared prior to the amendments in the Tailored Shareholder
Reports Adopting Release, a money market fund was permitted to omit
Schedule I--Investments in securities of unaffiliated issuers--from
its annual report under specified circumstances. This exception was
omitted inadvertently in the corresponding Item 7 of the amended
Form N-CSR in the Tailored Shareholder Reports Adopting Release. We
did not intend to remove this exception, and therefore are amending
the instruction to Item 7 of Form N-CSR to add language mirroring
the parallel exception that formerly appeared in Form N-1A as
Instruction 2 to Item 27(b)(1).
    \520\ See Enhanced Reporting of Proxy Votes by Registered
Management Investment Companies; Reporting of Executive Compensation
Votes by Institutional Investment Managers, Investment Company Act
Release No. 34745 (Nov. 2, 2022) [87 FR 78770 (Dec. 22, 2022)]
(``2022 Form N-PX Release''). The Tailored Shareholder Reports
Adopting Release included amendments to Form N-1A that moved certain
content requirements for funds' shareholder reports from Item 27 of
Form N-1A to new Item 27A of Form N-1A. New Item 27A(i) addresses
the website availability of additional fund information, including
proxy voting information. The 2022 Form N-PX Release, which the
Commission issued after it issued the Tailored Shareholder Reports
Adopting Release, erroneously included amendments to Form N-1A Item
27--rather than new Item 27A--that address disclosure of the website
availability of a fund's proxy voting record in the fund's annual
and semi-annual shareholder reports, and the provision of this
information to investors upon request. Accordingly, we are adopting
amendments to incorporate into Item 27A(i) the requirement, pursuant
to the 2022 Form N-PX Release, that the proxy voting information
whose website availability funds disclose in their shareholder
reports includes the fund's proxy voting record. These amendments
also incorporate into Item 27A(i) the same instructions about the
provision of this information upon request that the Commission
adopted in the 2022 Form N-PX Release in Item 27.
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    Under the Administrative Procedure Act (``APA''), notice of
proposed rulemaking is not required when the agency, for good cause,
finds ``that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.'' \521\ These
amendments are ministerial in nature. Accordingly, we find good cause
that publishing the amendments for comment is unnecessary.\522\ These
ministerial amendments do not make any substantive modifications to any
existing collection of information requirements or impose any new
substantive recordkeeping or information collection requirements within
the meaning of the Paperwork

Reduction Act of 1995 (``PRA'').\523\ Accordingly, we are not revising
any burden and cost estimates in connection with these amendments.
---------------------------------------------------------------------------

    \521\ 5 U.S.C. 553(b).
    \522\ The amendments also do not require analysis under the
Regulatory Flexibility Act (``RFA''). See 5 U.S.C. 601(2) (for
purposes of RFA analysis, the term ``rule'' generally means any rule
for which the agency publishes a general notice of proposed
rulemaking).
    \523\ 44 U.S.C. 3501 through 3521.
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H. Effective and Compliance Dates

    We are adopting a tiered approach to the transition periods for the
final amendments.\524\ The tiered approach to effective and compliance
dates is designed to provide affected funds with appropriate transition
periods in which to prepare to comply with certain aspects of the final
amendments, such as the amendments to rule 2a-7's mandatory and
discretionary liquidity fee frameworks, without unnecessarily delaying
the full scope of the amendments. The effective date for the final
amendments to rule 2a-7, rule 31a-2, and Form N-1A is 60 days after
publication in the Federal Register, with applicable compliance dates
for mandatory and discretionary liquidity fees, liquidity-related
amendments, website posting requirements, and WAM and WAL calculations
described below. The effective date for the technical amendments to
Form N-CSR and Form N-1A also is 60 days after publication in the
Federal Register. For the final amendments to Forms N-MFP, N-CR, and
PF, we are adopting a delayed effective and compliance date of June 11,
2024.
---------------------------------------------------------------------------

    \524\ See Proposing Release, supra note 6, at section II.G.
---------------------------------------------------------------------------

Effective Date for Forms N-MFP, N-CR, and PF and Compliance Date for
Website Posting Requirement Under Rule 2a-7
    The Commission proposed a six-month compliance period following the
effective date for the Forms N-MFP and N-CR amendments, except for the
existing fee and gate reporting requirements in Form N-CR. In a change
from the proposal, rather than permit filers additional time to comply
with the amendments to Forms N-MFP and N-CR following the effective
date of such amendments, we are adopting a simultaneous delayed
effective and compliance date for these form amendments to provide time
for affected funds and advisers to prepare to comply with the form
amendments and provide for a uniform transition to the updated
reporting requirements. For example, having separate effective and
compliance dates for Form N-MFP could cause reporting that is
inconsistent across filers because some filers might voluntarily
provide newly required information after the effective date of the
amendments but before the compliance date, while other filers might
wait until the compliance date to provide the new information. We
therefore are adopting a delayed effective and compliance date of June
11, 2024, for the amendments to Forms N-MFP, N-CR, and PF. We are also
adopting the same compliance date of June 11, 2024, for the amendment
to rule 2a-7 regarding how funds categorize their portfolio investments
for purposes of website disclosures, as this change in categorization
aligns with amendments to Form N-MFP.\525\
---------------------------------------------------------------------------

    \525\ See amended rule 2a-7(h)(10)(i)(B)(2).
---------------------------------------------------------------------------

    A few commenters recommended an implementation period of at least
twelve months for any new and revised reporting requirements.\526\ In
addition, one commenter recommended an 18 to 24 month compliance period
for all aspects of the proposed amendments.\527\ We are not persuaded
that this amount of additional time is needed for affected funds and
advisers to comply with the amended reporting requirements because, as
discussed above, we are not adopting certain proposed reporting
requirements, such as lot-level reporting and disaggregated reporting
for repurchase agreements, which will significantly reduce the
compliance burden on filers relative to the proposal. In addition,
several of the amendments to Form N-MFP will require funds to report
daily data points they already publish on their websites, including
liquidity levels and net asset values.
---------------------------------------------------------------------------

    \526\ See, e.g., ICI Comment Letter; Invesco Comment Letter;
State Street Comment Letter.
    \527\ See T. Rowe Comment Letter.
---------------------------------------------------------------------------

    Considering the more tailored scope of the final amendments and
funds' experience collecting the same or similar data in several cases,
we believe the delayed effective date of June 11, 2024, will provide
adequate time for affected funds and advisers to compile and review the
information that must be disclosed. As a result, all reports on Forms
N-MFP, N-CR, and PF filed on or after June 11, 2024, must comply with
the amendments.\528\
---------------------------------------------------------------------------

    \528\ For example, a money market fund's report on Form N-MFP
for the month of June 2024 that is due no later than the fifth
business day of July 2024 must comply with the amended reporting
requirements.
---------------------------------------------------------------------------

    We are adopting the same delayed effective and compliance date for
Form PF as for Form N-MFP because the amendments to Form PF are
designed in part to require large liquidity fund advisers to report
substantially the same information that money market funds would report
on Form N-MFP. Accordingly, adopting the same delayed effective and
compliance date for amendments to Form N-MFP and PF will result in a
uniform transition to the enhanced reporting obligations.
Compliance Dates for Mandatory and Discretionary Liquidity Fee
Frameworks
    We are adopting a compliance date for the mandatory liquidity fee
framework that is twelve months after the effective date of the final
amendments to rule 2a-7. This transition period is designed to provide
institutional prime and institutional tax-exempt money market funds
with an appropriate amount of time to comply with the new requirements.
The Commission proposed a twelve-month transition period for the
proposed swing pricing requirements in rule 2a-7. Under the final
amendments, we are adopting a mandatory liquidity fee framework in
place of the proposed swing pricing requirements and believe
institutional prime and institutional tax-exempt money market funds
should receive a comparable amount of time in which to comply with
these requirements as were proposed for the swing pricing requirements.
    Generally commenters advocated for a longer compliance period for
the proposed swing pricing requirements, with most of these commenters
suggesting 2 years.\529\ These commenters frequently cited operational
challenges and systems changes, including coordination with third party
vendors, which would necessitate more time to adopt and implement swing
pricing. A few commenters recommended longer for the swing pricing
compliance period than proposed, but did not suggest a specific length
of time.\530\
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    \529\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter;
Invesco Comment Letter; State Street Comment Letter; Bancorp Comment
Letter; Federated Hermes Comment Letter I; Capital Group Comment
Letter; CCMR Comment Letter.
    \530\ See IIF Comment Letter; Dechert Comment Letter.
---------------------------------------------------------------------------

    The adopted mandatory liquidity fee framework in rule 2a-7 will
require institutional prime and institutional tax-exempt money market
funds to update policies and procedures, implement operational and
systems changes, and coordinate with third party vendors, among other
things. As affected

institutional prime and institutional tax-exempt money market funds
currently are permitted to impose liquidity fees and are subject to a
default liquidity fee when a fund's weekly liquid assets fall below
10%, we believe that many funds and their intermediaries likely will be
better positioned to comply with the amended liquidity fee framework
than to the proposed swing pricing requirements within 12 months
following the effective date. Accordingly, we are not persuaded by the
concerns raised by commenters regarding the proposed twelve-month
transition period and are adopting a compliance date for the new
mandatory liquidity fee framework that is twelve months after the
effective date of the rule amendments.
    Separately, we are adopting a six-month compliance date for non-
government money market funds to comply with the amended discretionary
liquidity fee framework. Similar to the mandatory liquidity fee
framework, all money market funds seeking to rely on the discretionary
liquidity fee framework will need to update policies and procedures,
implement operational and systems changes, and coordinate with third
party vendors, among other things. However, the discretionary liquidity
fee framework is similar to the current liquidity fee provisions in
rule 2a-7 without the tie between liquidity fees and weekly liquid
assets and provides money market fund boards with additional discretion
in implementing these fees. Accordingly, we believe that non-government
money market funds will require a shorter transition period than the
transition period provided for the new mandatory liquidity fee
framework and believe a six-month transition period is appropriate for
these amendments.
    Affected money market funds, including government money market
funds that choose to rely on the discretionary liquidity fee framework,
may begin to rely on the mandatory and discretionary liquidity fee
provisions after the amendment's effective date and prior to the
applicable compliance date.
Compliance Date for Liquidity and Maturity-Related Amendments to Rule
2a-7
    We are adopting a compliance date that is six months after the
effective date of the amendments to rule 2a-7 for the following
amendments:
     Amendments to rule 2a-7's portfolio liquidity requirements
discussed in section II.C; and
     Amendments to specify the calculation of WAM and WAL
discussed in section II.E.
    The Commission proposed a compliance date for the increased daily
liquid asset and weekly liquid asset minimum liquidity requirements of
six months after the effective date. Some commenters recommended a
longer compliance period for the proposed liquidity changes, generally
twelve months.\531\ We are not persuaded that additional time is needed
for affected funds to comply with the amended minimum liquidity
requirements. These amendments merely increase an existing framework,
and many funds already maintain liquidity close to the newly adopted
minimums. Accordingly, we continue to believe a six-month transition
period should be sufficient for funds to implement the increased
liquidity requirements. We believe that a six-month transition period
provides sufficient time for funds to update their stress testing
procedures and begin to notify their boards of significant liquidity
events. Money market funds are currently required to engage in periodic
stress testing so these changes will represent updates to an existing
framework. In addition, we understand that many funds already notify
their boards of certain declines in liquidity. Accordingly, six months
is an adequate amount of time for funds to implement these procedural
changes. In addition, six months is sufficient for funds to update
their WAM and WAL calculations, as needed. As recognized above, funds
already have the market values they need for purposes of the amended
WAM and WAL calculations, and many funds already compute these figures
in accordance with the approach the final rule specifies.
---------------------------------------------------------------------------

    \531\ See, e.g., ICI Comment Letter; State Street Comment
Letter.
---------------------------------------------------------------------------

No Separate Compliance Date for Remaining Amendments to Rule 2a-7, Rule
31a-2, and Form N-1A
    The amendments to rule 2a-7 and Form N-1A that are not subject to
additional compliance periods above, which includes removal of
redemption gates, removal of the tie between liquidity fees and
liquidity thresholds, and the new provision allowing share cancellation
under certain circumstances, will go into full effect 60 days after
publication in the Federal Register with no separate compliance date.
As a result, funds will no longer be permitted to impose redemption
gates under rule 2a-7 as of this date. Similarly, the connection
between liquidity fees and weekly liquid asset thresholds will be
removed at that time. The Commission proposed that the amendments to
remove liquidity fee and redemption gate provisions in rule 2a-7, as
well as the associated disclosure requirements, would be effective, if
adopted, when the final rule became effective. Several commenters
expressly supported the immediate effective date to remove these
provisions.\532\ We believe that this approach is appropriate since, as
discussed, these tools did not provide the benefit intended when
adopted and likely contributed to investors' decisions to redeem their
shares in money market funds in March 2020. In addition, the amendments
to permit the use of share cancellation in a negative interest rate
environment, subject to certain conditions, will become effective 60
days after publication in the Federal Register. As a result, funds
could begin to use share cancellation, as appropriate, after this date,
provided they meet the rule's conditions for using share cancellation.
---------------------------------------------------------------------------

    \532\ See, e.g., Federated Hermes Comment Letter I (supporting
the immediate effectiveness of delinking liquidity fees and
redemption gates from liquidity thresholds); State Street Comment
Letter.
---------------------------------------------------------------------------

    Further, the amendments to rule 31a-2 to require money market funds
to preserve records regarding their liquidity fee computations will
become effective 60 days after publication in the Federal Register.
Money market funds are not required to comply with the amended
liquidity fee requirements in rule 2a-7 until after that date, but the
earlier effectiveness of the recordkeeping requirement will require
that funds preserve records for any liquidity fees they may apply prior
to the end of the compliance period for the liquidity fee requirements.

III. Other Matters

    Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated the final amendments as a ``major
rule'' as defined by 5 U.S.C. 804(2). If any of the provisions of these
rules, or the application thereof to any person or circumstance, is
held to be invalid, such invalidity shall not affect other provisions
or application of such provisions to other persons or circumstances
that can be given effect without the invalid provision or application.

IV. Economic Analysis

A. Introduction

    The Commission is mindful of the economic effects, including the
costs and benefits, of the final amendments. Section 2(c) of the
Investment Company Act provides that when the Commission is engaging in
rulemaking under the Act and is required to consider or determine

whether an action is consistent with the public interest, the
Commission shall also consider whether the action will promote
efficiency, competition, and capital formation, in addition to the
protection of investors. Section 202(c) of the Advisers Act provides
that when the Commission is engaging in rulemaking under the Act and is
required to consider or determine whether an action is necessary or
appropriate in the public interest, the Commission shall also consider
whether the action will promote efficiency, competition, and capital
formation, in addition to the protection of investors. The analysis
below addresses the likely economic effects of the final amendments,
including the anticipated and estimated benefits and costs of the
amendments and their likely effects on efficiency, competition, and
capital formation. The Commission also discusses the potential economic
effects of certain alternatives.
    Money market funds serve as intermediaries between investors
seeking to manage cash and receive a return on their savings, and
issuers seeking to raise capital. Specifically, money market funds pool
a diversified portfolio of short-term debt instruments (such as
government and municipal debt, repurchase agreements, commercial paper,
certificates of deposit, and other short-term debt instruments), and
sell shares to end investors, who use money market funds to manage
liquidity needs. Money market funds play an important role in
investors' savings and liquidity management and serve as a source of
short-term funding to financial and non-financial companies and
governments. However, funding of money market funds is subject to daily
and intraday redemptions.\533\
---------------------------------------------------------------------------

    \533\ See Proposing Release at 7292-7294 for an analysis of
portfolio holdings of different types of money market funds.
---------------------------------------------------------------------------

    As discussed in detail in the sections that follow, the final
amendments seek to address liquidity externalities in money market
funds. Under some circumstances, redeeming investors impose negative
liquidity externalities on investors remaining in the fund. Should
redemptions lead to dilution, they may amplify a first-mover advantage,
further incentivizing redemptions. For example, when early redemptions
force a money market fund to draw down on liquid assets, they reduce
overall fund liquidity available for future redemptions. By reducing
liquidity externalities in money market funds, the final amendments may
dampen the risk of runs on money market funds.
    The final amendments may mitigate liquidity externalities and run
risk in money market funds in three ways. First, the removal of the tie
between weekly liquid assets and the potential imposition of liquidity
fees and the elimination of redemption gates under rule 2a-7 may reduce
incentives of investors to redeem early to avoid losing liquidity
during a potential gating period.\534\ Second, the increases in minimum
liquidity requirements may support funds' ability to meet redemptions
from cash or securities convertible to cash, which may reduce
transaction costs associated with redemptions and corresponding
dilution borne by remaining investors. This may be especially important
in market conditions in which money market funds cannot rely on a
secondary or dealer market to provide liquidity. Third, the liquidity
fee framework is intended to require redeeming investors to absorb the
liquidity costs they impose on the fund, protecting non-transacting
investors from being diluted by redeeming investors.\535\ Moreover, to
the degree that dilution may contribute to a first mover advantage in
investor redemptions the liquidity fee framework may reduce such
incentives. These effects may be especially significant in times of
stress, when liquidity externalities of money market fund redemptions
may be more significant.
---------------------------------------------------------------------------

    \534\ See, e.g., Northern Trust Comment Letter; CFA Comment
Letter; Western Asset Comment Letter; Allspring Funds Comment
Letter; IIF Comment Letter; SIFMA AMG Comment Letter.
    \535\ Factors other than dilution costs--such as falling asset
prices and potential differences between a fund's net asset value
and execution prices--may also contribute to runs. These and other
considerations are discussed in greater detail in section IV.B
below.
---------------------------------------------------------------------------

    In addition, the Commission is adopting amendments to Form N-CR and
Form N-MFP, which may enhance Commission oversight over redemption
activity and liquidity risks in money market funds. Similarly, the
Commission is finalizing amendments to Form PF to require generally
parallel reporting requirements for liquidity funds. These amendments
may improve the transparency of liquidity fund activities and risks and
help the Commission and FSOC in developing a more complete picture of
short-term financing markets, in which money market funds and liquidity
funds operate.
    Finally, the final amendments related to negative yields will
provide an additional mechanism that government and retail money market
funds could use to handle a negative interest rate scenario, while
offering valuable flexibility to funds and enhancing transparency about
this decision to investors. Similarly, as discussed in greater detail
below, the amendments to specify the method of calculation of weighted
average maturity and weighted average life will enhance comparability
of these metrics across affected funds and increase transparency to the
Commission and investors.
    In response to comment regarding the assumptions underlying the
proposal's cost-benefit analysis,\536\ we note that the economic
analysis discusses, among other considerations, how the final rule's
costs and benefits reflect current liquidity management practices of
money market funds, incentives of fund managers, and run risk. In
addition, as discussed in section II above, the final rule has been
modified in many significant ways relative to the proposal to reflect
commenter feedback. For example, the final rule imposes a liquidity fee
framework in lieu of the proposed swing pricing requirement, modifies
amendments related to potential negative interest rates relative to the
proposal, and tailors disclosure requirements to reduce burdens on
money market funds.
---------------------------------------------------------------------------

    \536\ See, e.g., Federated Hermes Comment Letter IV.
---------------------------------------------------------------------------

    Many of the benefits and costs discussed below are difficult to
quantify. For example, we lack data to quantify how funds currently
below the new liquidity thresholds may adjust the liquidity of their
portfolios and how this may impact fund yields in different interest
rate environments; the extent to which investors may move capital from
institutional prime to government money market funds; or the reductions
in dilution costs to investors as a result of the final amendments
(which will depend on investor redemption activity, the liquidity risk
of underlying fund assets, and market conditions). Many of these
effects will depend on how affected funds and investors may react to
the final amendments. In addition, we cannot quantify how large private
liquidity fund advisers may adapt existing systems and levels of
technological expertise in response to the final rule. Data needed to
quantify these economic effects are not currently available and the
Commission does not have information or data that would allow such
quantification. While we have attempted to quantify economic effects
where possible, much of the discussion of economic effects is
qualitative in nature.

B. Baseline

1. Money Market Funds
a. Money Market Funds: Affected Entities
    The final amendments would directly affect money market funds
registered with the Commission. From Form N-MFP data, there are a total
of 294 funds with approximately $5.7 trillion in total net assets that
may be affected by various aspects of the final amendments.\537\ Table
3 and Table 4 below estimate the number and total net assets of funds
by fund type as of the end of March 2023. Prime money market funds
account for approximately 20% of the total net assets in the industry,
whereas tax-exempt money market funds account for approximately 2%.
---------------------------------------------------------------------------

    \537\ See, e.g., Money Market Fund Statistics, released 4/25/
2023, available at https://www.sec.gov/files/mmf-statistics-2023-03.pdf.

                      Table 3--Number of Money Market Funds by Fund Type, as of March 2023
----------------------------------------------------------------------------------------------------------------
                   Category                                 Fund type                  Count        Share  (%)
----------------------------------------------------------------------------------------------------------------
Prime.........................................  Institutional Public............              31              11
                                                Institutional Nonpublic.........               9               3
                                                Retail..........................              20               7
Tax-exempt....................................  Institutional...................              12               4
                                                Retail..........................              39              13
Government & Treasury.........................  Government......................             133              45
                                                Treasury........................              50              17
                                                                                -------------------------------
    Total.....................................     Total........................             294             100
----------------------------------------------------------------------------------------------------------------
Source: Form N-MFP.

                Table 4--Money Market Fund Net Assets by Fund Type ($ Billions), as of March 2023
----------------------------------------------------------------------------------------------------------------
                   Category                                 Fund type               Net assets       Share (%)
----------------------------------------------------------------------------------------------------------------
Prime.........................................  Institutional Public............           311.8               5
                                                Institutional Nonpublic.........           332.8               6
                                                Retail..........................           505.8               9
Tax-exempt....................................  Institutional...................            14.7               0
                                                Retail..........................           103.8               2
Government &Treasury..........................  Government......................         2,961.0              52
                                                Treasury........................         1,474.4              26
                                                                                -------------------------------
    Total.....................................     Total........................         5,704.3             100
----------------------------------------------------------------------------------------------------------------
Source: Form N-MFP.

b. Money Market Fund Investors
    Several features of money market funds can create an incentive for
their investors to redeem shares heavily in periods of market stress.
As in the Proposing Release, we consider these factors below, as well
as the adverse impacts that can result from such heavy redemptions out
of money market funds. Moreover, this section provides updated
information about trends in the money market fund sector in light of
the recent banking stress of 2023.
    As discussed in the Proposing Release,\538\ money market fund
investors have varying investment goals and risk tolerances. Many
investors use money market funds for principal preservation and as a
cash management tool. Such investors may be risk averse and averse to
losing access to liquidity for many reasons, including general risk
tolerance, legal or investment policy restrictions, or short-term cash
needs. These overarching considerations may create incentives for money
market fund investors to redeem--incentives that may persist regardless
of market conditions and even if the other dilution-related incentives
discussed below are addressed by the final amendments.
---------------------------------------------------------------------------

    \538\ See, e.g., 87 FR 7289.
---------------------------------------------------------------------------

    The desire to avoid loss and access to liquidity may cause
investors to redeem from certain money market funds in times of stress.
For example, heavy redemptions from prime money market funds and
subscriptions in government money market funds during the 2008
financial crisis pointed to a flight to quality, given that most of the
assets held by government money market funds have a lower default risk
than the assets of prime money market funds.\539\ As another example,
during peak market stress in March 2020, investor redemptions may have
been driven by liquidity considerations, among other things.
---------------------------------------------------------------------------

    \539\ Id.
---------------------------------------------------------------------------

    In addition, under the baseline, as long as investors consider
their money market investments as relatively liquid and low risk, the
possibility that a fund may impose gates or fees when a fund's weekly
liquid assets fall below 30% under rule 2a-7 may contribute to the risk
of triggering runs, particularly from institutional investors that
commonly monitor their funds' weekly liquid asset levels.\540\ As
discussed above, some research suggests that, during peak market
volatility in March 2020, institutional prime money market fund
outflows accelerated as funds' weekly liquid assets went closer to the
30% threshold.\541\ In order to avoid approaching or breaching the 30%
weekly liquid asset threshold for the possible imposition of redemption
gates, money market fund managers may also

choose to sell less liquid portfolio securities during times of
stress.\542\
---------------------------------------------------------------------------

    \540\ Id.
    \541\ See, e.g., Lei Li, et al., Liquidity Restrictions, Runs,
and Central Bank Interventions: Evidence From Money Market Funds, 34
Rev. Fin. Stud. 5402, 5402-5437 (2021). See also, e.g., Morgan
Stanley Comment Letter; ICI Comment Letter; Northern Trust Comment
Letter; Fidelity Comment Letter.
    \542\ Some commenters indicated that, on aggregate, prime money
market funds pulled back little from commercial paper markets as
they were largely unable to resell commercial paper and CDs to
issuing banks and such securities lack a liquid secondary market.
See, e.g., ICI Report, Experiences of U.S. Money Market Funds During
the Covid-19 Crisis (Nov. 2020) (``ICI MMF Report''), available at
https://www.sec.gov/comments/credit-market-interconnectedness/cll10-8026117-225527.pdf.
---------------------------------------------------------------------------

    Finally, investors in different types of money market funds may
behave differently under stress, and fund portfolios may interact with
investor behavior to impact systemic run risk. As discussed in section
I.B, institutional fund investors may monitor economic developments
more closely than retail investors and may be more prone to running in
times of market stress. In addition, prime funds tend to invest in
riskier securities that may suffer losses in crises. For instance,
prime funds held Lehman Brothers debt when it defaulted in 2008 and had
exposure to Eurozone banks in 2011.\543\ Moreover, during both the
global financial crisis of 2008 and the market dislocation of 2020,
prime funds held commercial paper, the market for which froze.\544\
Tax-exempt money market funds may also experience redemption pressures
in times of market stress. Government money market funds, in contrast,
tend to have counter-cyclical flows. Specifically, during times of
market turmoil and volatility, investors--particularly institutional
investors--tend to shift their investments to government money market
funds.\545\ These money market funds offer investments with high credit
quality and liquidity, as well as an explicit guarantee for certain
government securities (e.g., Treasuries) and a perceived implicit
guarantee for others (e.g., Federal Home Loan Bank securities). As
shown below, these funds experienced inflows during the global
financial crisis of 2008, Euro debt crisis of 2011, Covid-19 pandemic
of 2020 and the bank crisis in 2023.
---------------------------------------------------------------------------

    \543\ See, e.g., Response to Questions Posed by Commissioners,
Aguilar, Paredes, and Gallagher, Division of Risk, Strategy, and
Financial Innovation, U.S. Securities and Exchange Commission, Nov.
30, 2012, available at https://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf.
    \544\ See, e.g., President's Working Grp. On Fin. Mkts.,
Overview of Recent Events and Potential Reform Options for Money
Market Funds (2020), available at https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf.
    \545\ Id.
---------------------------------------------------------------------------

Figure 1--Trends in Net Asset Values of Different Types of Money Market
Funds
[GRAPHIC] [TIFF OMITTED] TR03AU23.000

    Most recently, the money market fund sector experienced significant
inflows during stress in the banking sector between February and April
of 2023. For example, between February 1 and March 15, 2023, $201
billion in bank deposits left the banking sector and $191 billion
flowed into money market funds. The rate at which deposits left the
banking sector and flowed into the money market fund sector accelerated
in March: between March 1 and April 5, 2023, $362 billion flowed into
money market funds, primarily into Treasury retail ($54 billion),
Treasury institutional ($122 billion), government agency institutional
($161 billion), and government agency retail ($41 billion) funds. To
the degree that some of the same market participants may allocate
across asset classes, there may be spillovers in run risk between money
market funds and the banking system, which may enhance the importance
of mitigating run risk in money market funds.

Figure 2--Trends in Total Bank Deposits and Money Market Fund Assets
During the Banking Stress of 2023

[GRAPHIC] [TIFF OMITTED] TR03AU23.001

c. Liquidity Externalities and Dilution Costs
    Money market fund investors can incur dilution costs. Specifically,
the value of shares held by investors staying in the fund may be
diluted if other fund investors transact at a NAV that does not fully
reflect the ex post realized costs of the fund's trading induced by
fund flows. Shareholders in floating NAV and stable NAV funds may bear
dilution costs in different forms. In floating NAV funds, dilution is
reflected in the NAV received by remaining shareholders. In stable NAV
funds, dilution costs can accrue until the fund's shadow price declines
below $0.995, which may result in the fund breaking the buck and re-
pricing its shares below $1.00. Fund sponsors can also choose to absorb
some or all of the dilution costs for reputational reasons but are not
obligated to do so. In both types of funds, redemptions can deplete
liquidity, increasing the potential for future dilution.
    Several factors can contribute to the dilution of investors'
interests in money market funds. First, trading costs can lead to
dilution. 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. If
these costs are realized prior to the time the fund strikes the NAV,
they are distributed across both transacting and non-transacting
investors. However, if these costs are realized after NAV strike, they
are borne solely by non-transacting shareholders that remain in the
fund. For low levels of net redemptions or subscriptions, the
difference between the two scenarios for non-transacting shareholders
is low; however, for large net redemptions, the difference in dilution
costs borne by non-transacting shareholders can be stark.
    Using a stylized example, Figure 3 compares the dilution attributed
to trading costs that occurs when a fund trades to meet redemptions
after NAV is struck (as is currently the case in the U.S.) with the
dilution attributed to trading costs that occurs if a fund is able to
trade to accommodate investor redemptions/subscriptions prior to the
NAV strike (dotted straight line). This stylized example assumes that a
fund holds a single asset whose value is constant, but liquidating the
asset incurs a spread/haircut of 10%. The haircut assumption in this
stylized example is used purely for illustrative purposes; haircuts on
assets in money market funds tend to be much smaller. However, this
example demonstrates that larger redemptions can contribute nonlinearly
to higher dilution for remaining shareholders when a fund trades after
the NAV is struck compared to a scenario in which the fund trades
before the NAV is struck.\546\
---------------------------------------------------------------------------

    \546\ To the degree that some funds may determine their NAV
using holdings as of the prior trading day, such practices may also
exacerbate dilution. In Figure 3, if funds strike their NAV using
current trading day holdings, the dotted line would not be
decreasing.
---------------------------------------------------------------------------

Figure 3--Dilution Effects of Different Trading Timelines Over 1 Day

[GRAPHIC] [TIFF OMITTED] TR03AU23.002

    Second, stale prices could contribute to dilution, especially
during times of market stress. Some assets that money market funds hold
may become illiquid and stop trading during times of market
stress.\547\ In such events, the only available prices for these assets
are prices realized during pre-stress market conditions, i.e., stale
prices. If a floating NAV fund's NAV on a given date is based on stale
prices, net redemptions at that NAV can dilute non-transacting fund
shareholders when assets are eventually sold at prices that reflect
their true value. Since funds with a stable NAV have a fixed share
price at $1, stale prices only affect the shadow price per share and
the probability that a fund breaks the buck and potentially leads to
sponsor support. The stale pricing phenomenon has been documented in
fixed income funds \548\ and not specifically in money market funds.
However, money market funds hold significant amounts of commercial
paper, certificates of deposit, and other assets that do not have an
active and robust secondary market, making them similarly opaque and
difficult to accurately price, especially during times of market
stress.
---------------------------------------------------------------------------

    \547\ See, e.g., ICI MMF Report, supra note 542.
    \548\ See, e.g., Jaewon Choi, et al., Sitting Bucks: Stale
Pricing in Fixed Income Funds, 145 J. Fin. Econ. 296, 296-317 (Aug.
2022).
---------------------------------------------------------------------------

    Knowing that these and other factors \549\ may contribute to
dilution, money market fund investors may have an incentive to redeem
quickly in times of stress to avoid realizing potential dilution, an
effect exacerbated if they believe other investors will redeem.\550\
Some research in a parallel open end fund setting suggests that
liquidity externalities may create a ``first-mover advantage'' that may
lead to cascading anticipatory redemptions akin to traditional bank
runs.\551\ There is a dearth of academic research about the degree to
which dilution costs alone may trigger money market fund runs. In
addition, theoretical models of such first-mover advantage typically
rely on some exogenous mechanism to generate initial redemptions from
funds.\552\ While stale NAV and trading costs can create incentives for
early redemptions, redemptions also occur for reasons that are not
strategic, such as a desire to rebalance portfolios and investors'
immediate need for liquidity.
---------------------------------------------------------------------------

    \549\ For example, market risk may contribute to dilution costs.
If a fund redeems investors at a given NAV, but must raise funds to
meet those redemptions on a subsequent trading day during which the
value of the fund's holdings declines significantly, non-transacting
shareholders will be diluted. Conversely, non-transacting money
market fund investors can benefit if assets are sold at a price
higher than NAV. While the value of the fund's holdings can go both
up and down, such market risk amplifies the risk fund shareholders
would otherwise experience. However, since true market prices may be
very difficult to forecast, the degree to which such dilution
contributes to the first-mover advantage is unclear.
    \550\ Run dynamics in banking contexts have been subject of
extensive research. See, e.g., Douglas Diamond & Philip Dybvig, Bank
Runs, Deposit Insurance and Liquidity, J. Pol. Econ. 401, 401-419
(1983). However, we recognize that this and related bank run models
may have less applicability for the money market fund context due to
differences between banks and money market funds in, among others,
the amount of maturity, liquidity, and credit risk transformation,
leverage, and transparency about portfolios. See, e.g., Federated
Hermes 11/22 Comment Letter.
    \551\ This research generally models an exogenous response to
negative fund returns and not trading costs. However, these results
may extend to trading costs to the degree that cost based dilution
may reduce subsequent fund returns, which would trigger runs in
these models. See, e.g., Qi Chen, et al., Payoff Complementarities
and Financial Fragility: Evidence From Mutual Fund Outflows, 97 J.
Fin. Econ. 239, 239-262 (2010). See also Itay Goldstein, et al.,
Investor Flows and Fragility in Corporate Bond Funds, 126 J. Fin.
Econ. 592, 592-613 (2017). See also Stephen Morris, et al.,
Redemption Risk and Cash Hoarding by Asset Managers, J. Monetary
Econ. 71, 71-87 (2017). See also Yao Zeng, A Dynamic Theory of
Mutual Funds and Liquidity Management (ESRB working paper no. 2017/
42, Apr. 2017), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3723389 (retrieved from SSRN Elsevier
database). See also Yiming Ma, et al., Mutual Fund Liquidity
Transformation and Reverse Flight to Liquidity, 35 Rev. Fin. Stud.
4674, 4674-4711 (2022). See also Yiming Ma, et al., Bank Debt Versus
Mutual Fund Equity in Liquidity Provision (Jacobs Levy Equity Mgmt.
Ctr. Quantitative Fin. Rsch. Paper, Dec. 2019, last revised Dec. 16,
2022), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3489673 (retrieved from SSRN Elsevier
database).
    \552\ For example, one model assumes that investors redeem from
funds following poor performance. See Qi Chen, et al., Payoff
Complementarities and Financial Fragility: Evidence From Mutual Fund
Outflows, 97 J. Fin. Econ. 239, 239-262 (2010).
---------------------------------------------------------------------------

    Regardless of the reason for a fund experiencing net redemptions on
any given day, such redemptions impose a cost on investors remaining in
the fund in the absence of measures to take trading costs into account.
In addition, since money market funds can trade portfolio holdings to
meet redemptions or subscriptions, money market fund liquidity
management can both dampen and magnify disruptions in underlying
securities markets.
    In addition, trends in composition of money market fund portfolios,
NAV and price volatility, as well as liquidity management practices of
money market

funds form a part of the baseline against which we are assessing the
effects of the final rule. A detailed quantitative analysis of these
issues can be found in the Proposing Release.\553\
---------------------------------------------------------------------------

    \553\ See 87 FR 7292 through 7298.
---------------------------------------------------------------------------

    Finally, as a baseline matter, money market funds in the U.S. have
not experienced persistent negative yields. Thus, stable NAV funds have
not implemented reverse distribution mechanisms or conversions to a
floating NAV in response to negative yields. However, as discussed in
section II, the Commission has received comment that reverse
distribution mechanisms may be a more cost efficient measure for funds
to deploy in the event of persistent negative yields given their
baseline fund management practices.\554\ These and related economic
effects are discussed in greater detail in section IV.C.5.
---------------------------------------------------------------------------

    \554\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; Allspring Funds Comment Letter;
Fidelity; BNY Mellon Comment Letter; State Street Comment Letter;
Sen. Toomey Comment Letter; Americans for Tax Reform Comment Letter;
Dechert Comment Letter; CCMR Comment Letter; IDC Comment Letter.
---------------------------------------------------------------------------

d. Regulatory Baseline
    The Commission is assessing the economic effects of the final
amendments relative to a regulatory baseline, which reflects rules and
forms imposed on affected money market funds currently in effect.
Specifically, for the purposes of this economic analysis, the
regulatory baseline includes, among others, rule 2a-7, rule 22c-2, and
rule 22e-3, and existing Forms PF, N-MFP, N-CR, and N-1A, as discussed
in greater detail in section II.
2. Large Liquidity Funds and Form PF
    Some of the final amendments impact the reporting by investment
advisers on Form PF regarding private liquidity funds. The Commission
adopted Form PF in 2011, with additional amendments made to section 3
along with certain money market fund reforms in 2014. Form PF
complements the basic information about private fund advisers and
private funds reported on Form ADV.\555\ Unlike Form ADV, Form PF is
not an investor-facing disclosure form. Information that private fund
advisers report on Form PF is provided to regulators on a confidential
basis and is nonpublic.\556\ The purpose of Form PF is to provide the
Commission and FSOC with data that regulators can deploy in their
regulatory and oversight programs directed at assessing and managing
systemic risk and protecting investors both in the private fund
industry and in the U.S. financial markets more broadly.
---------------------------------------------------------------------------

    \555\ Investment advisers to private funds report on Form ADV
general information about private funds that they advise. This
includes basic organizational, operational information, and
information about the fund's key service providers. Information on
Form ADV is available to the public through the Investment Adviser
Public Disclosure System, which allows the public to access the most
recent Form ADV filing made by an investment adviser. See, e.g.,
Form ADV, available at https://www.investor.gov/introductioninvesting/investing-basics/glossary/form-adv. See also
Investment Adviser Public Disclosure, available at https://adviserinfo.sec.gov/. Some private fund advisers that are required
to report on Form ADV are not required to file Form PF (for example,
exempt reporting advisers). Other advisers are required to file Form
PF and are not required to file Form ADV (for example, commodity
pools that are not private funds). Based on the staff review of Form
ADV filings and the Private Fund Statistics, less than 10% of funds
reported on Form ADV but not on Form PF in 2020.
    \556\ Commission staff publish quarterly reports of aggregated
and anonymized data regarding private funds on the Commission's
website. See Private Fund Statistics, Securities and Exchange
Commission: Division of Investment Management, available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
---------------------------------------------------------------------------

    Currently, liquidity fund advisers with between $150 million and $1
billion in assets file Form PF annually, which contains general
information about funds they manage. Large liquidity fund advisers with
at least $1 billion in combined regulatory assets under management
attributable to liquidity funds and money market funds are required to
file Form PF quarterly and provide more detailed data on the liquidity
funds they manage (section 3 of Form PF).\557\ In the third quarter of
2022, there were 79 liquidity funds reported on Form PF with $336
billion in gross assets under management.\558\ Of those, 51 funds were
large liquidity funds with $331 billion in gross assets, which
represented approximately 99 percent of the reported liquidity fund
assets.\559\
---------------------------------------------------------------------------

    \557\ Item A of section 3 of Form PF collects certain
information for each liquidity fund the adviser manages, such as
information regarding the fund's portfolio valuation methodology.
This item also requires information regarding whether the fund, as a
matter of policy, is managed in compliance with certain provisions
of rule 2a-7 under the Investment Company Act. Item B requires the
adviser to report information regarding the fund's assets, while
Item C requires the adviser to report information regarding the
fund's borrowings. Finally, Item D asks for certain information
regarding the fund's investors, including the concentration of the
fund's investor base and the liquidity of its ownership interests.
See Form PF.
    \558\ See Division of Investment Management, Private Fund
Statistics (Apr. 6, 2023), available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
    \559\ Id.
---------------------------------------------------------------------------

    Liquidity funds are a relatively small \560\ category of private
funds, that plays a similar role to money funds.\561\ Liquidity funds
follow similar investment strategies as money market funds, but are not
registered as investment companies under the Act.\562\ 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.\563\ These funds typically achieve these goals by investing
in high-quality, short-term debt securities, such as Treasury bills,
repurchase agreements, or commercial paper, that fluctuate very little
in value under normal market conditions.\564\ Also, similar to money
market funds, liquidity funds are sensitive to market conditions and
may be exposed to losses from certain of their holdings when the
markets in which the funds invest are under stress. Compared to money
market funds, liquidity funds may take on greater risks and, as a
result, may be more sensitive to market stress, as they are not
required to comply with the risk-limiting conditions of rule 2a-7,
which place restrictions on the maturity, diversification, credit
quality, and liquidity of money market fund investments.\565\
---------------------------------------------------------------------------

    \560\ According to the Private Fund Statistics Report, in the
third quarter of 2023, liquidity fund assets accounted for 1.5% of
the gross asset value ($0.3/$19.9 trillion) and 2.2% of the NAV
($0.3/$13.8 trillion) of all private funds reported on Form PF.
    \561\ See Daniel Hiltgen, Private Liquidity Funds:
Characteristics and Risk Indicators, DERA White Paper (Jan. 2017)
(``Hiltgen Paper''), available at https://www.sec.gov/files/2017-03/Liquidity%20Fund%20Study.pdf.
    \562\ Id.
    \563\ See section II above.
    \564\ See Hiltgen Paper.
    \565\ See section II above.
---------------------------------------------------------------------------

3. Other Affected Entities
    As discussed above, some of the final amendments may indirectly
affect a large group of intermediaries and service providers.
Specifically, as a result of the liquidity fee requirement, certain
money market funds may seek to receive more timely flow information and
streamline the assessment of fees to end investors down the
intermediary chain. As discussed in greater detail below, this may
affect all market participants sending orders to relevant money market
funds, including broker-dealers, registered investment advisers,
retirement plan record-keepers and administrators, banks, other
registered investment companies, and transfer agents that receive flows
directly. In addition, amendments related to stable NAV money market
funds in the event of a negative rate environment may affect
intermediaries sending flows to such funds.
    In addition, the final amendments may indirectly affect issuers of

securities that are held by affected funds, including issuers of
certificates of deposit and commercial paper, and municipalities. While
nothing in the final amendments imposes any requirements on issuers, to
the degree that the final amendments may influence affected funds'
willingness to hold such securities, they may influence the ability of
such issuers to raise debt financing, the terms of such financing, or
the type of investors that provide debt financing to such issuers.
These and other effects are discussed in greater detail in sections
IV.C and IV.E.

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
a. Benefits
    The final amendments remove the tie between money market funds'
weekly liquid assets and the discretionary imposition of liquidity
fees, as well as eliminate gate provisions from rule 2a-7. In addition,
the final rule removes the tie between the 10% weekly liquid asset
threshold and the imposition of default liquidity fees. Commenters
generally supported these proposed revisions.\566\
---------------------------------------------------------------------------

    \566\ See, e.g., Americans for Tax Reform Comment Letter; Profs.
Ceccheti and Schoenholtz Comment Letter; CCMR Comment Letter;
Federated Hermes I Comment Letter; Western Asset Comment Letter;
Morgan Stanley Comment Letter; Vanguard Comment Letter; CFA Comment
Letter; Fidelity Comment Letter; SIFMA Comment Letter; T.Rowe Price
Comment Letter.
---------------------------------------------------------------------------

    These amendments may benefit money market fund investors by
reducing liquidity costs borne by investors remaining in the fund, and
money market funds and their investors by reducing the risk of runs,
especially during times of liquidity stress.
    First, these amendments may benefit money market fund investors.
Money market fund redemptions can impose liquidity externalities on
shareholders remaining in the fund, as discussed in section IV.B.1. The
possibility of a redemption gate or a redemption fee when linked to a
weekly liquid asset threshold can magnify those incentives and
externalities. The Commission continues to believe that the weekly
liquid asset triggers for the possible imposition of redemption fees or
gates create incentives for investors to redeem first, at the expense
of investors remaining in the fund who experience further dilution
during the gating period, and for fund managers to use less liquid
assets to meet redemptions which imposes liquidity costs on non-
transacting investors. Thus, the removal of the tie between the weekly
liquid asset trigger and the possible imposition of liquidity fees as
well as the elimination of redemption gates outside of liquidation may
reduce the liquidity costs borne by investors remaining in the fund.
This aspect of the final amendments may increase the attractiveness of
money market funds as a low risk cash management tool and sweep
investor account to risk averse investors.
    Second, these amendments may benefit money market funds by reducing
the risk of runs. As discussed in the introduction, money market funds
are subject to daily redemptions and invest in short-term debt
instruments that are not perfectly liquid, which renders them
susceptible to a first-mover advantage in investor redemptions.\567\
Under the current baseline, money market funds may impose redemption
fees or gates if their weekly liquid assets are below 30% of their
total assets. Thus, because weekly liquid assets tend to be persistent
over time, as funds approach the 30% threshold, investors seeking to
avoid a redemption gate or fee are incentivized to redeem before other
redemptions further deplete a fund's liquid assets.\568\ For example,
we have received comment that daily and weekly liquid asset balances
became a closely watched metric for institutional investors worried
about preserving access to their invested funds, and that, for a large
majority of institutional investors that had reduced their investments
in prime money market funds in March 2020, gates were an important
factor in deciding to redeem.\569\ The final amendments are expected to
reduce such incentives to redeem, especially in times of stress.\570\
Moreover, as discussed in section II.A.1, the link between the 30%
weekly liquid asset threshold and the possibility of the imposition of
fees or gates did not serve as a useful liquidity management tool in
March 2020 (no fund imposed fees or gates). However, available evidence
suggests that such a link may have incentivized funds to preserve their
weekly liquid assets instead of using them to absorb redemptions, in
order to stay above the 30% threshold.\571\ The removal of redemption
gates and the tie between weekly liquid assets and liquidity fees
reduces disincentives for funds to absorb large redemptions out of
liquid assets.
---------------------------------------------------------------------------

    \567\ See, e.g., Lawrence Schmidt et al., Runs on Money Market
Mutual Funds, 106 Am. Econ. Rev. 2625, 2625-57 (2016). Run dynamics
in funds have been explored in a large body of finance research,
including, for example: Yao Zeng, A Dynamic Theory of Mutual Funds
and Liquidity Management (ESRB working paper no. 2017/42, Apr.
2017), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3723389 (retrieved from SSRN Elsevier
database). See also Qi Chen et al., Payoff Complementarities and
Financial Fragility: Evidence from Mutual Fund Outflows, 97 J. Fin.
Econ. 239, 239-262 (2010).
    \568\ See, e.g., Fidelity Comment Letter; Northern Trust Comment
Letter; IIF Comment Letter; ICI Comment Letter.
    \569\ See, e.g., CFA Comment Letter.
    \570\ See, e.g., Americans for Tax Reform Comment Letter; Profs.
Ceccheti and Schoenholtz Comment Letter; CFA Comment Letter.
    \571\ See, e.g., supra note 56.
---------------------------------------------------------------------------

    As a result, the removal of redemption gates and the tie between
weekly liquid assets and the discretionary and default imposition of
liquidity fees may better enable funds to use their daily and weekly
liquid assets to meet redemptions in times of stress without giving
rise to risk of runs.\572\ This benefit may be strongest for money
market funds that have weekly liquid assets close to the minimum
threshold during times of liquidity stress, as they are currently most
susceptible to runs. Moreover, money market fund investors would no
longer face the possibility of the imposition of gates outside of
liquidations, enhancing the attractiveness of money market funds as a
highly liquid investment product.
---------------------------------------------------------------------------

    \572\ See, e.g., Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    Overall, we believe that the final rule, including the liquidity
fee framework and the raised liquidity requirements, will provide more
efficient tools for managing liquidity risk than the current baseline
approach tying the potential imposition of fees to weekly liquid asset
thresholds while reducing incentives for strategic redemptions, as
discussed in greater detail in the sections that follow.
b. Costs
    As discussed in section II.A, the final amendments will not only
remove the tie between fund weekly liquid assets and the possibility of
gating and fees, but will also eliminate gate provisions from rule 2a-
7. As a result, money market funds will only be able to impose gates in
the event of liquidation under rule 22e-3. To the degree that temporary
redemption gates may serve as a useful redemption management tool
during times of stress, the amendment would reduce the scope of tools
available to money market funds to manage their liquidity risk in times
of stress. For example, some commenters suggested that fund boards
should have the ability to impose gates at their discretion.\573\ One
of these commenters indicated that retaining a board's ability to
implement either a gate in its

discretion could provide directors with additional liquidity management
tools in times of market stress.\574\ Another of these commenters
suggested that boards should be given maximum discretion as to the
fund's design and operation, including the discretion to implement
redemption gates.\575\
---------------------------------------------------------------------------

    \573\ See, e.g., Federated Hermes Comment Letter I; Federated
Hermes Board Comment Letter; Cato Inst. Comment Letter.
    \574\ See, e.g., Federated Hermes Comment Letter I. As discussed
in section II and in section IV.C.4 below, the final rule would
include a discretionary liquidity fee framework that affected money
market funds could employ in times of stress.
    \575\ See Cato Inst. Comment Letter.
---------------------------------------------------------------------------

    Four factors may mitigate these economic costs. First, no money
market fund imposed a gate under the rule during the market stress of
2020, and investors exhibited anticipatory redemptions when funds
approached the 30% weekly liquid threshold for the potential imposition
of gates. In light of these factors, money market funds may be unlikely
to impose redemption gates outside of fund liquidation, even if we
retained a redemption gate provision in rule 2a-7. As discussed in
section II.A, the possibility that a money market fund would impose
redemption gates may influence investment and redemption decisions,
which could trigger runs.\576\
---------------------------------------------------------------------------

    \576\ See, e.g., State Street Comment Letter.
---------------------------------------------------------------------------

    Second, the final rule includes a liquidity fee framework,
encompassing mandatory and discretionary liquidity fees, as discussed
in greater detail in section I and section II.B, but an amended
framework where the imposition of fees is not tied to weekly liquid
assets. The final rule includes both a discretionary fee framework
\577\ and a mandatory liquidity fee framework. Mandatory liquidity fees
will be tied to a fund's same-day net redemptions, and funds will be
able to assess discretionary liquidity fees, as discussed in section
II.B. As discussed above, we believe that the final rule will provide
more efficient tools for managing liquidity risk than the current
baseline approach tying the potential imposition of fees to weekly
liquid asset thresholds while reducing incentives for strategic
redemptions. Moreover, increases to daily and weekly liquidity
thresholds may increase fund liquidity buffers that can be used to
manage liquidity costs of redemptions.
---------------------------------------------------------------------------

    \577\ The Commission received comment that liquidity fees are
one of the tools that, if fully discretionary, could be very
valuable to money market funds in future stressed markets. See,
e.g., Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    Third, money market funds will continue to be able to suspend
redemptions under rule 22e-3 in anticipation of fund liquidation.
Specifically, a money market fund will be able to suspend redemptions
if its weekly liquid assets decline below 10% or, in the case of a
government or retail money market fund, if its market-based price has
deviated or is likely to deviate from its stable price, and in each
case if the board also approves liquidation of the fund.\578\ Thus,
money market funds will still have access to a form of gating during
large liquidity shocks in connection with a fund liquidation.
---------------------------------------------------------------------------

    \578\ See 17 CFR 270.22e-3.
---------------------------------------------------------------------------

    Fourth, as a result of the run dynamics described above, the tie
between weekly liquid assets and the potential imposition of fees and
gates may have contributed to incentives for money market fund managers
to preserve their weekly liquid assets during liquidity stress, rather
than using them to meet redemptions.\579\ Therefore, the tie between
weekly liquid assets and the possibility of fees and gates may magnify
liquidity stress because it incentivizes money market funds to sell
less-liquid assets with higher liquidity costs rather than absorb
redemptions out of liquid assets. Thus, the removal of gates under rule
2a-7 and the tie between weekly liquid asset thresholds and the
imposition of liquidity fees may reduce run risk and liquidity
externalities in money market funds.
---------------------------------------------------------------------------

    \579\ See, e.g., Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

2. Raised Liquidity Requirements
a. Benefits
    The final amendments increasing daily and weekly liquid asset
requirements to 25% and 50% respectively may reduce run risk in money
market funds. Commenters generally supported increasing the minimum
daily and weekly liquidity requirements for money market funds, and
some commenters supported the final thresholds being adopted.\580\
---------------------------------------------------------------------------

    \580\ See, e.g., Fidelity Comment Letter; Schwab Comment Letter;
Vanguard Comment Letter; CCMR Comment Letter; Americans for
Financial Reform Comment Letter; Better Markets Comment Letter. See
also Prof. Hanson et al. Comment Letter; Systemic Risk Council
Comment Letter (suggesting that the proposed liquidity thresholds
may be too low).
---------------------------------------------------------------------------

    As discussed in the Proposing Release, early redemptions can
deplete a fund's daily or weekly liquid assets, which reduces liquidity
of the remainder of the fund's portfolio and increases the risk that a
fund may need to sell less-liquid assets into a stressed market. Higher
levels of daily and weekly liquid assets in a fund may reduce trading
costs and the first-mover advantage during a wave of redemptions,
potentially dis-incentivizing runs. When money market funds experience
runs, funds with higher daily and weekly liquid assets may experience
lower liquidity costs as they may be more likely to be able to use
their liquid assets to meet redemptions rather than be forced to sell
assets during liquidity stress.\581\ In the open-end fund context, some
research shows that fund illiquidity can contribute to run dynamics, as
discussed in section IV.B.1.c. Other work shows that less-liquid open-
end bond funds suffered more severe outflows during the COVID-19 crisis
than liquid funds, and that less-liquid funds experienced redemptions
well before more-liquid funds.\582\ Other research shows that runs were
more likely in less liquid funds for both U.S. and European
institutional prime money market funds.\583\
---------------------------------------------------------------------------

    \581\ See Prime MMFs at the Onset of the Pandemic Report, supra
note 41, at 4. According to Form N-MFP filings, no prime money
market fund reported daily liquid assets declining below the 10%
threshold in Mar. 2020.
    \582\ See Antonio Falato et al., Financial Fragility in the
COVID-19 Crisis: The Case of Investment Funds in Corporate Bond
Markets, 123 J. Monetary Econ. 35, 35-52 (2021).
    \583\ See Cipriani, Marco and Gabriele La Spada, Sophisticated
and Unsophisticated Runs. FRB of New York Staff Report No. 956
(2020). See also Anadu, Kenechukwu et al., The Money Market Mutual
Fund Liquidity Facility, FRB of New York Staff Report No. 980.
(2021).
---------------------------------------------------------------------------

    A number of commenters indicated that raised liquidity requirements
are critical to improving the resilience of money market funds in
periods of market stress, as higher amounts of liquidity allow funds to
manage through periods of higher redemptions and delay the point at
which funds must access the secondary market to generate
liquidity.\584\ We continue to believe that increases in minimum
liquidity requirements may help funds absorb redemptions and reduce the
likelihood that funds need to sell portfolio securities during periods
of market stress. This may enhance the resilience of money market funds
in times of stress and may reduce the potential effect of redemptions
from money market funds on short-term funding markets during times of
stress. As discussed in the Proposing Release, there may be varying
interpretations of the effects of fund outflows in March 2020 on the
prices of assets held by money market funds and, thus, the degree to
which the liquidity requirements may reduce the transaction costs and
losses money market funds would face when selling portfolio securities
into stressed markets. One commenter indicated that the proposal relied
on a false assumption that all redemptions should be met using weekly
liquid assets.\585\

While funds may sell other securities to meet redemptions during times
of stress, selling portfolio securities into stressed markets is not
only costly, but also might not always be feasible during significant
stress events that impair the ability of dealers to supply such
liquidity.\586\ The Commission continues to believe that increased
liquidity requirements may enhance the ability of funds to meet large
redemptions and reduce the dilution of remaining fund shareholders
which will protect investors, particularly in times of stress.
---------------------------------------------------------------------------

    \584\ See, e.g., Systemic Risk Council Comment Letter; Fidelity
Comment Letter; Schwab Comment Letter; Vanguard Comment Letter.
    \585\ See Federated Hermes Comment Letter I.
    \586\ See, e.g., ICI Comment Letter, BlackRock Comment Letter.
---------------------------------------------------------------------------

    Some commenters indicated that increases in the weekly liquid asset
threshold would not necessarily result in enhanced money market fund
liquidity because fund managers would treat a fund's liquid assets as a
regulatory minimum and not use them to fulfill redemptions.\587\ Funds
may, indeed, choose between drawing down on daily or weekly liquid
assets and selling less liquid assets in distressed markets to meet
redemptions. As discussed above, the final rule removes the tie between
weekly liquid assets and the potential imposition of redemption fees
and gates. As discussed in the Proposing Release, before the
introduction of fees and gates in the 2014 amendments, the only
consequence to a money market fund of having the percentage of its
weekly liquid assets fall below the 30% threshold was that the fund
could not acquire any security other than a weekly liquid asset until
its investments were above the 30% threshold. As a result, funds were
more comfortable using their weekly liquid assets and dropping below
the 30% threshold.\588\ For example, at the peak of the Eurozone
sovereign crises in the summer of 2011 the lowest reported weekly
liquid asset value was approximately 5%.\589\ In combination with the
elimination of the tie between weekly liquid assets and potential
imposition of liquidity fees as well as the elimination of redemption
gates, the liquidity requirements may similarly increase the reliance
of money market funds on daily and weekly liquid assets in meeting
redemptions.
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    \587\ See, e.g., SIFMA AMG Comment Letter; BlackRock Comment
Letter.
    \588\ See, e.g., Federated Hermes Comment Letter I (citing to
ICI data and stating that ``even before the linkage was introduced,
funds utilized their weekly liquid assets as necessary and then in
accordance with the rule procured only weekly liquid assets until
the regulatory thresholds were once again met'').
    \589\ 87 FR 7300.
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    The Commission received comment that a prescriptive regulatory
minimum liquidity mandate may offer few benefits because funds have a
current obligation to hold sufficient liquidity to meet reasonably
foreseeable shareholder redemptions and that properly considered know
your customer requirements (e.g., investor type and concentration) are
adequate.\590\ As discussed in section II.C.1, this current obligation
may not be sufficient, since investors have unpredictable cash flow
needs that are exacerbated in stress events, markets can rapidly and
unforeseeably become illiquid during stress events, and requiring an
appropriate level of liquidity at all times may be more effective than
waiting until the stress event.
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    \590\ See, e.g., Federated Hermes Comment Letter I; Sen. Toomey
Comment Letter.
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    The Commission has also received comments that the removal of the
tie between weekly liquid assets and gates and fees would have been
sufficient, and that other amendments are unnecessary.\591\ In general,
investors may have cash needs that can be hard to predict for
investors, and even more so for fund managers.\592\ Moreover, we
understand that large scale redemptions akin to those experienced by
some funds in March 2020 are rare, and estimating the risk of such rare
and large scale redemptions is inherently difficult. Finally, because
dilution costs are borne by remaining investors and not money market
funds, funds do not bear the cost of liquidity externalities that money
market fund liquidity management practices may impose on market
participants transacting in the same asset classes. We continue to
believe that there are benefits to increased liquidity requirements. As
discussed in greater detail below, we also believe that the final
liquidity fee framework would give rise to additional benefits by
reducing liquidity externalities of redemptions that can contribute to
run incentives and by seeking to ensure that the costs stemming from
redemptions in stressed market conditions are more fairly allocated to
redeeming investors.
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    \591\ See, e.g., Federated Hermes Comment Letter I.
    \592\ See HSBC Comment Letter.
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    We acknowledge that, as discussed in the Proposing Release, the
anticipated benefits of the final rule may be partly reduced to the
extent that money market funds already voluntarily hold daily and
weekly liquid assets in excess of the regulatory minimum thresholds due
to other regulatory obligations or prevailing market conditions. For
example, the asset weighted average daily and weekly liquid assets for
publicly offered institutional prime money market funds between October
2016 and February 2020 was 33% and 48% respectively.\593\ After the
peak volatility in March 2020, money market funds generally increased
their daily and weekly liquidity, initially to meet further redemptions
and subsequently to take advantage of rising interest rates since March
2022. Consequently, the asset weighted average daily and weekly liquid
assets for publicly offered institutional prime money market funds rose
to 43% and 56% respectively by March 2023.\594\ Additionally, the
distributions of daily and weekly liquid assets have different amount
of skewness, with approximately 45% of publicly offered institutional
prime funds holding below average (43%) in daily liquid assets and 40%
of funds holding below average (less than 56%) in weekly liquid assets.
As a result, fewer prime funds may be affected by the higher daily
liquid asset threshold than the higher weekly liquid asset threshold.
Specifically, as of March 31, 2023, approximately 8% of all prime funds
were below the 25% daily liquid asset threshold and approximately 20%
of all prime funds were below the 50% weekly liquid asset threshold.
Out of all public institutional prime funds, 8% were below the final
daily liquid asset threshold and 18% were below the weekly liquid asset
threshold. This may reduce both costs and benefits of the final
amendments against the current regulatory baseline.
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    \593\ Averages were calculated by dividing the aggregate amount
of daily (weekly) liquid assets from all funds by the aggregated
amount of assets from all funds.
    \594\ According to one commenter, between 2010 and 2021,
institutional prime money market funds held, on average, 45% in
weekly liquid assets, and retail prime money market funds held, on
average, 42% in weekly liquid assets. See ICI Comment Letter.
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    We have received comment that the proposed increases in liquidity
requirements rely on false assumptions, including the assumption that
failure of a single money market fund to ensure proper liquidity will
lead to a run impacting all money market funds because transparency
about liquidity levels of different funds can prevent or limit
contagion.\595\ Daily and weekly liquid assets of money market funds
are, indeed, publicly disclosed under the current baseline, and this
baseline reduces spillovers of run risk on more liquid money market
funds. However, in the event of a run on a money market fund with lower
liquidity buffers, investors may also optimally seek to redeem out of
funds that are similar to the fund experiencing a run (in their
portfolio exposures, liquidity characteristics, or institutional

clientele).\596\ Higher liquidity requirements may reduce such
spillovers of run risk across funds.
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    \595\ See, e.g., Federated Hermes Comment Letter I.
    \596\ See Proposing Release, supra note 5, at Table 2 and
accompanying text (discussing outflows from money market funds with
different fund characteristics).
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    To the degree that raised liquidity requirements reduce run risk in
money market funds, they may enhance the resilience of affected funds
and reduce the risk that money market funds rely on government
backstops. Moreover, this may benefit investors to the degree that
increasing the liquidity of money market fund portfolios would allow
funds to meet large redemptions from liquidity buffers more easily. For
example, after the March 2020 market dislocation, some prime money
market funds voluntarily shifted their portfolios by moving out of
longer maturity commercial paper and certificates of deposit in favor
of more liquid Treasuries, allowing them to meet any future redemptions
better. Raising liquidity thresholds may have a similar benefit.
    The magnitude of the above economic benefits is likely to depend on
the way in which money market funds respond to the final amendments.
Specifically, some affected money market funds (i.e., money market
funds with less than 25% in daily and 50% in weekly liquid assets) may
react to the final amendments by increasing the maturity of the
remainder of their portfolios \597\ (within the constraints on the
maturity and weighted average life of the assets they hold),
potentially reducing their liquidity to the extent that it is tied to
maturity.
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    \597\ See, e.g., Federated Hermes Comment Letter I. Notably,
longer maturity of portfolio assets does not always imply lower
liquidity. For example, the liquidity stress in 2020 was so severe
that commercial paper across a variety of maturities became
illiquid.
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b. Costs
    The final amendments will impose indirect costs on money market
funds, investors, and issuers. Because less liquid assets are more
likely to yield higher returns in the form of a liquidity premium,\598\
to the degree that the amendments improve the liquidity of money market
fund portfolios, it may lower expected returns of those funds to
investors. Thus, an increase in weekly liquid assets may decrease money
market fund yields and make them less attractive to some investors
\599\ and may reduce entry.\600\ One commenter estimated that the
proposed amendments will narrow the spread in yield between prime and
government money market funds to less than 10 basis points.\601\ We do
not agree that this would necessarily be the case. Notably, any changes
to such yield spread would vary depending on the degree to which some
money market funds may choose to extend the maturities of their assets
that do not fall into the weekly liquid asset category \602\ (while
staying under the regulatory caps on portfolio weighted average
maturity and weighted average life) in response to the amendments, as
well as on the prevailing interest rate environment and the steepness
of the yield curve that reflects interest rates across maturities.
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    \598\ See, e.g., Lee, Kuan-Hui, The World Price of Liquidity
Risk, 99 J. Fin. Econ. 136, 136-161 (2011). See also Acharya, Viral,
and Lasse Pedersen, Asset Pricing with Liquidity Risk, 77 J. Fin.
Econ. 375, 375-410 (2005). See also Lubos Pastor & Robert Stambaugh,
Liquidity Risk and Expected Stock Returns, 111 J. Polit. Econ. 642,
642-685 (2003).
    \599\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
BlackRock Comment Letter; Federated Hermes Comment Letter I; Dechert
Comment Letter; Americans for Tax Reform Comment Letter.
    \600\ For example, one commenter that closed prime and tax-
exempt money market funds in 2020 asserted that the regulatory
burdens, including increased liquidity requirements, make it
unlikely that they will reenter the prime money market fund market.
See Northern Trust. For a discussion of the potential effects of the
final amendments on competition, efficiency, and capital formation,
see section IV.E.
    \601\ See Federated Hermes Comment Letter I.
    \602\ Id.
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    Reduced investor demand may lead to a decrease in the size of
assets under management of affected money market funds and the
wholesale funding liquidity they provide to other market participants.
Investors that prefer to use money market funds as a cash management
tool, giving them the ability to preserve the value of their
investments and receive a small yield, may move out of prime money
market funds and into government money market funds which deliver lower
yields, but have lower risk to the value of the investment.\603\ At the
same time, investors reaching for yield may move to non-money market
fund alternatives, including more opaque or less regulated investment
products.\604\ Moreover, to the degree that some investors view money
market funds as cash equivalents, this amendment may result in better
matching of investors to funds that meet their risk tolerance and yield
expectations, mitigating the above costs.
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    \603\ Government money market funds must invest 99.5% or more of
their assets in cash, government securities, and/or repurchase
agreements that are collateralized fully.
    \604\ See, e.g., Federated Hermes Comment Letter I; ICI Comment
Letter; Dechert Comment Letter; CCMR Comment Letter.
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    The final amendments may require some affected funds to increase
their daily liquid assets or weekly liquid assets. However, as of March
2023, an average institutional prime fund had 54.9% of assets in daily
liquid assets and an average retail prime fund had 50.5% of assets in
daily liquid assets; similarly, institutional prime funds had an
average of 67.9% in weekly liquid assets and retail prime funds
averaged 61.5% in weekly liquid assets.\605\ As can be seen from Table
5 below, we understand that many funds are already in compliance or
close to compliance with the final liquidity requirements under the
current baseline, mitigating some of the above costs (and benefits) of
the final amendments.
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    \605\ See Money Market Fund Statistics, Division of Investment
Management Analytics Office, 4/25/2023, available at https://www.sec.gov/files/mmf-statistics-2023-03.pdf. The weighted average
values equal the aggregated daily or weekly liquid assets divided by
the total assets of the funds.

Table 5--Distribution of Daily Liquid Assets (DLA) and Weekly Liquid Assets (WLA) by Fund Type, as of March 2023
----------------------------------------------------------------------------------------------------------------
                                                       Prime                           Prime
                      %-ile                        institutional   Prime retail    institutional   Prime retail
                                                      DLA (%)         DLA (%)         WLA (%)         WLA (%)
----------------------------------------------------------------------------------------------------------------
Min.............................................            20.7            15.2            37.5            34.9
10th............................................            28.8            22.1            43.9            42.2