redemption gates from rule 2a-7, institutional investors will continue
to view weekly liquid assets as the primary metric of liquidity and
health of a money market fund. Consequently, these commenters suggested
that fund managers will still be incentivized to maintain liquid assets
above the regulatory minimums, particularly since fund liquidity levels
will continue to be publicly available on a fund's website. Conversely,
a commenter asserted that, absent a regulatory tie between liquidity
levels and the potential imposition of a redemption gate, fund managers
could be incentivized to carry less liquidity.\291\ Some commenters
also suggested that a fund that consistently maintains liquidity closer
to the minimum requirements likely does so because it has determined
that holding more liquid assets is unnecessary to effectively manage
its redemptions and overall liquidity profile.\292\
---------------------------------------------------------------------------

    \290\ See BlackRock Comment Letter; SIFMA AMG Comment Letter;
Sen. Toomey Comment Letter.
    \291\ See JP Morgan Comment Letter.
    \292\ See SIFMA AMG Comment Letter; Federated Hermes Comment
Letter I (arguing that ``managers will not attempt to skirt
regulatory minimums and risk operating a portfolio with improper
liquidity levels as doing so could jeopardize a particular fund's
continued operations'').
---------------------------------------------------------------------------

    Some commenters suggested that minimum liquidity requirements
should vary based on a money market fund's investor base.\293\ For
example, in light of the fact that the outflows for retail prime money
market funds were not as heavy as those experienced by institutional
prime money market funds in March 2020, some commenters urged the
Commission to consider whether an increase in liquidity minimums for
retail funds is necessary to the same degree as for institutional money
market funds.\294\ Some commenters asserted that, relative to
institutional investors, historically retail investors display more
stable and predictable redemption behavior in all market
conditions.\295\ These commenters therefore believe that it would be
more appropriate for the Commission either to not increase the
liquidity requirements or to implement more modest increases for retail
money market funds. In addition, one commenter suggested that liquidity
requirements should vary depending on a fund's investor concentration,
with greater liquidity requirements for funds with larger levels of
investor concentration.\296\
---------------------------------------------------------------------------

    \293\ See, e.g., Fidelity Comment Letter; Americans for Tax
Reform Comment Letter; SIFMA AMG Comment Letter; T. Rowe Comment
Letter; CFA Comment Letter.
    \294\ Id.
    \295\ See Fidelity Comment Letter; T. Rowe Comment Letter.
    \296\ See Comment Letter of HSBC Global Asset Management (Apr.
11, 2022) (``HSBC Comment Letter'').
---------------------------------------------------------------------------

    Some commenters opposed increasing rule 2a-7's current minimum
liquidity requirements for any type of money market fund.\297\ A few of
these commenters reasoned that the rule's current requirement for a
money market fund to hold sufficient liquidity to meet reasonably
foreseeable shareholder redemptions renders further increases in the
rule's minimum liquidity requirements unnecessary.\298\ Further, one
commenter explained that this obligation should continue to be tailored
using properly considered know-your-customer procedures, which provide
fund managers with investor information that is helpful for managing
fund liquidity.\299\ Conversely, another commenter stated that there
are limits to know-your-customer procedures, such as the use of omnibus
accounts masking individual shareholder activity and identity, and the
reality that some investors may have unpredictable cash flow needs that
even the investor cannot predict.\300\
---------------------------------------------------------------------------

    \297\ See Federated Hermes Comment Letter I; Sen. Toomey Comment
Letter; T. Rowe Comment Letter.
    \298\ See Federated Hermes Comment Letter I; HSBC Comment
Letter.
    \299\ See Federated Hermes Comment Letter I (stating that know-
your-customer processes help a fund manager understand key
information about the fund's investor base, such as investor type
and liquidity preferences).
    \300\ See HSBC Comment Letter.
---------------------------------------------------------------------------

    We are adopting, as proposed, requirements for money market funds
to hold a minimum of 25% daily liquid assets and 50% weekly liquid
assets because we believe it is important for money market funds to
have a strong source of available liquidity to meet daily redemption
requests, particularly in times of stress, when liquidity in the
secondary market can be less reliable for many instruments in which
they invest. Although we considered lower liquidity requirements
relative to the proposed thresholds, our analysis suggests that 25%
daily liquid assets and 50% weekly liquid assets paired with our other
amendments would be sufficient to allow most money market funds to
manage their liquidity risk in a market crisis, while lower minimum
levels of liquidity may not provide an adequate buffer during a market
crisis.\301\ For example, the largest weekly outflow in March 2020 was
around 55%, and the largest daily outflow was about 26% (both well
above the respective weekly liquid asset and daily liquid asset
thresholds of 30% and 10%).
---------------------------------------------------------------------------

    \301\ See infra section IV.D.3.a (discussing the potential
effect of various liquidity thresholds).
---------------------------------------------------------------------------

    In response to a commenter's conclusion that, pursuant to its data
analysis, daily liquid asset and weekly liquid asset minimums of 20%
and 40%, respectively, would serve as sufficient levels of liquidity
during a market stress event after we remove the connection between
weekly liquid assets and the consideration of gates, we conducted
further analysis to probe this assertion.\302\ Our updated analysis
takes into account the potential effect of removing the tie between
liquidity thresholds and fees and gates. It also modifies certain
assumptions in the commenter's analysis that are not in line with the
observed variations in redemption patterns across funds during the
stress of March 2020 and typical portfolio constructions of funds.\303\
With these adjustments, our analysis suggests that a significant number
of funds would not be able to withstand multiple weeks of redemption
stress if they began with 40% weekly liquid assets.\304\ Specifically,
our updated analysis observes that after two weeks of redemptions akin
to the most significant week of outflows in March 2020, 30% of these
portfolios would have weekly liquid assets of 13% or less. In contrast,
30% of portfolios that began with weekly liquid assets of 50% would
have weekly liquid assets of 32% or less by the end of the two week
period. Accordingly, we continue to believe that 25% daily liquid
assets and 50% weekly liquid assets are appropriate minimum liquidity
requirements that will better equip money market funds to manage
significant and rapid investor redemptions in times of stress.
---------------------------------------------------------------------------

    \302\ See ICI Comment Letter (asserting that an institutional
prime fund holding 40% weekly liquid assets can withstand 10 weeks
of 16% redemptions and still have a weekly liquid assets above 25%).
See infra section IV.C.2.a (discussing our updated analysis in more
detail).
    \303\ See infra section IV.D.3.a (detailing the Commission's
review of the commenter's data assumptions and providing additional
economic analysis for various liquidity minimum levels).
    \304\ Id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, the liquidity minimums that
we are adopting are generally close to the average liquidity levels
prime money market funds have maintained over the past several
years.\305\ We agree with commenters that at the higher levels of

liquidity that funds typically have maintained, if money market funds
had used their liquidity buffers in March 2020, many would have been
able to fulfill redemption requests without selling longer-term
portfolio securities or receiving sponsor support. However, we
understand that rule 2a-7's fee and gate provisions have been a
significant motivating factor for funds to maintain liquidity buffers
well above the current regulatory minimums. Accordingly, the removal of
the link between a fund's liquidity and the potential imposition of
fees and gates on its own may result in funds subsequently reducing
their liquidity levels.\306\ As we saw in March 2020, markets can
become illiquid very rapidly in response to events that fund managers
may not anticipate. The failure of a single fund to anticipate such
conditions may lead to a run affecting all or many funds. We continue
to think it would be ill-advised to rely solely on the ability of
managers to anticipate liquidity needs, which may arise from events the
money market fund manager cannot anticipate or control. As expressed by
a commenter, predicting cash flow needs can be challenging for
investors and fund managers.\307\ Accordingly, requiring a higher
minimum amount of daily liquid assets and weekly liquid assets for all
money market funds, as we are adopting in this release, limits the
potential effect on fund liquidity that may otherwise arise from
removing the fee and gate provisions from rule 2a-7, while also
providing an additional level of liquid assets for funds to meet
redemptions during times of market stress.
---------------------------------------------------------------------------

    \305\ See Proposing Release, supra note 6, at section II.C.1.
According to analysis of Form N-MFP data from Oct. 2016 to Mar.
2023, the average amount of daily liquid assets and weekly liquid
assets for prime money market funds was 38% and 54%, respectively.
See also section IV.C.2.b, at Table 5 (reflecting the distribution
of daily weekly liquid assets and weekly liquid assets among
different types of prime money market funds, as of March 2023).
    \306\ See Proposing Release, supra note 6, at n.81 (discussing a
comment letter on the 2020 President's Working Group on Financial
Markets report that stated that for the more than 6 years that the
30% weekly liquid asset threshold was in effect but not connected to
fee and gate provisions, 68% of prime money market funds and 10% of
tax-exempt money market funds dropped below the 30% weekly liquid
asset threshold at least once, and at least one prime money market
fund was below this threshold in nearly each week during this
period).
    \307\ See HSBC Comment Letter.
---------------------------------------------------------------------------

    We generally disagree with commenters' assertions that the minimum
liquidity requirements that we are adopting will have a significantly
negative effect on the yield of prime money market funds or the demand
for such funds. As discussed above, over the past several years prime
money market funds generally have maintained levels of liquidity that
are close to or that exceed the thresholds we are adopting in this
release. This demonstrates that funds have the ability to operate at
these minimum liquidity levels while continuing to serve as an
efficient and diversified cash management tool for investors.\308\
Accordingly, we believe that concerns raised by commenters related to
reduced lending in the short-term funding market and pushing investors
into alternative products are overstated.\309\ Moreover, investors
could allocate flows from prime money market funds into government
money market funds, which may better match the risk tolerance and yield
expectations for certain investors with cash management and capital
preservation as their primary objectives. In addition, while we
acknowledge that requirements to provide daily liquid asset and weekly
liquid asset levels on funds websites and on Form N-MFP may encourage
funds to hold liquidity buffers above the regulatory minimums, as some
commenters suggested, this would not be required by our rules nor would
it be necessarily an expected outcome. This is not necessarily an
expected outcome because, relative to the current lower minimums, it
seems less likely that an investor will be concerned that a fund will
rapidly run out of daily or weekly liquid assets merely because its
liquidity has dropped below the 25% or 50% thresholds we are adopting.
In addition, since the final amendments remove the regulatory link
between minimum liquidity levels and the potential imposition of fees
and gates, it is also likely that investors will be less sensitive to
funds approaching or temporarily dropping below a liquidity minimum.
---------------------------------------------------------------------------

    \308\ In addition, Form N-MFP data from 2022 reflects that prime
money market funds have increased their daily and weekly liquidity
levels while simultaneously increasing assets, further demonstrating
that prime money market funds can maintain higher liquidity levels
without reducing investor demand. See also infra section IV.C.2.b
(discussing mitigating factors to the potential costs of the final
amendments if, in fact, the amended liquidity requirements were to
result in decreased demand for prime money market funds, as
suggested by several commenters).
    \309\ See also infra section IV.C.2.b (discussing that the final
amendments will have a limited impact on commercial paper markets
since money market funds hold less than a quarter of outstanding
commercial paper, while also acknowledging that if the final
amendments were to result in less demand in the commercial paper
markets, other investors, such as mutual funds or insurance
companies, may absorb some of the newly available supply).
---------------------------------------------------------------------------

    With the exception of tax-exempt money market funds, which will
continue to be exempt from the daily liquid asset requirements, the
amendments do not establish different liquidity thresholds by type of
fund.\310\ As discussed in the Proposing Release, outflows in March
2020 were more acute in institutional prime money market funds than in
retail prime money market funds. We do not know that redemption
patterns would be the same in future periods of market turmoil,
however, particularly without official sector intervention to support
short-term funding markets.\311\ In addition, while the amendments will
require retail prime funds to maintain higher levels of liquidity than
they have historically maintained on average, the resulting larger
liquidity buffers will increase the likelihood that these funds can
meet redemptions without significant dilution, which influenced our
decision not to apply mandatory liquidity fee requirements to retail
funds as part of this rulemaking.\312\ Moreover, retail prime money
market funds invest in markets that are prone to illiquidity in stress
periods, and increased liquidity requirements will help provide
flexibility so that these funds can meet redemptions in times of
stress. Also, while we believe that unique factors like investor
concentration are a relevant consideration when determining if a fund
should have additional liquidity above the regulatory minimums, we are
not adopting minimum liquidity requirements that vary depending on a
fund's investor concentration, as suggested by a commenter.\313\ We
believe that a uniform approach encourages sufficient liquidity levels
across all money market funds, thereby reducing the potential incentive
for investors to flee from funds that might otherwise be perceived as
holding insufficient liquidity during market stress events.
---------------------------------------------------------------------------

    \310\ See supra note 271 (discussing the current exception tax-
exempt funds have from the required daily liquid asset investment
minimum).
    \311\ As an example, if retail investors are merely slower to
act initially in periods of market stress, retail prime and retail
tax-exempt funds may need higher liquidity levels to meet ongoing
redemptions if a stress period is not relatively brief.
    \312\ Based on analysis of Form N-MFP data, retail prime money
market funds maintained average daily liquid assets of 30% and
average weekly liquid assets of 46% during the period of Oct. 2016
through Mar. 2023. In contrast, institutional prime fund averages
during this period were 44% and 59%, respectively.
    \313\ See supra note 296.
---------------------------------------------------------------------------

    Lastly, we agree that money market funds have a general obligation
to hold sufficient liquidity to meet reasonably foreseeable shareholder
redemptions and any commitments the fund made to shareholders.\314\
Policies and procedures related to onboarding shareholders, including
know-your-customer processes, are important tools to gather information
about the characteristics and liquidity needs of a fund's shareholders.
However, we agree with the view expressed by a commenter that investors
may have

unpredictable cash flow needs that are challenging for the investor,
much less the fund manager, to predict.\315\ Further, this
unpredictability can be exacerbated during market stress events. We
also agree with the sentiment expressed by a commenter that requiring a
level of liquidity designed to provide a buffer in the event of market
stress at all times (i.e., prior to a market stress event) is more
effective than funds attempting to increase liquidity once a market
stress event has occurred.\316\ Moreover, although the rule includes
the general obligation to hold sufficient liquidity to meet reasonably
foreseeable redemptions and commitments, since 2010 the rule has also
included a more prescriptive requirement to hold certain minimum
liquidity levels. For the reasons discussed in this section,
maintaining this general obligation while also increasing the specific
minimum daily liquid assets requirement to 25% of total assets and
weekly liquid assets requirement to 50% of total assets will provide a
more substantial buffer that will make money market funds more
resilient during times of market stress while maintaining funds'
flexibility to invest in diverse assets during normal market
conditions.
---------------------------------------------------------------------------

    \314\ See 17 CFR 270.2a-7(d)(4).
    \315\ See HSBC Comment Letter.
    \316\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    We are adopting, as proposed, minimum liquidity requirements of 25%
daily liquid assets and 50% weekly liquid assets, rather than any
higher threshold. While these liquidity levels do not reduce a fund's
liquidity risk to zero, we believe that these thresholds would be
sufficiently high to allow most money market funds to manage their
liquidity risk in a market crisis. Moreover, the increase in funds'
required daily and weekly liquid assets is not the only tool money
market funds have to address redemptions under the final rule
amendments. The amended rule includes a liquidity fee framework that is
designed to mitigate the effect of large scale redemptions on remaining
investors in the fund.
2. Consequences for Falling Below Minimum Daily and Weekly Liquidity
Requirements
    Currently, rule 2a-7 requires that a money market fund comply with
the daily liquid asset and weekly liquid asset standards at the time
each security is acquired.\317\ A money market fund's portfolio that
does not meet the minimum liquidity standards has not failed to satisfy
the daily liquid asset and weekly liquid asset conditions of rule 2a-7;
the fund simply may not acquire any assets other than daily liquid
assets or weekly liquid assets, respectively, until it meets these
minimum thresholds. As proposed, we will continue to maintain this
approach with respect to the increased minimum liquidity thresholds
that we are adopting.
---------------------------------------------------------------------------

    \317\ See 17 CFR 270.2a-7(d)(4)(ii) and (iii).
---------------------------------------------------------------------------

    Commenters generally supported maintaining the requirement that a
money market fund comply with the minimum liquidity requirements at the
time each security is acquired.\318\ These commenters expressed that a
potential regulatory penalty for falling below the liquidity minimum,
such as mandating that funds over-correct to a higher liquidity level,
could convert what should otherwise be useable liquidity to a de facto
floor, with fund managers operating to avoid the potential penalty.
They also asserted that a minimum liquidity maintenance requirement
(i.e., requiring that funds maintain the minimum liquidity at all
times) would necessitate that funds hold an additional buffer in excess
of the required liquidity levels at all times and could similarly
disincentivize fund managers from using available liquidity in times of
need.
---------------------------------------------------------------------------

    \318\ See, e.g., Fidelity Comment Letter; Federated Hermes
Comment Letter I; CFA Comment Letter.
---------------------------------------------------------------------------

    We agree with concerns from commenters and continue to believe that
imposing a new regulatory penalty when a fund drops below a minimum
liquidity threshold, or requiring the fund to ``overcorrect'' in that
case, could have the unintended effect of incentivizing some fund
managers to sell less liquid assets into a declining market rather than
use their daily and weekly liquid assets during market stress events
out of fear of approaching or falling below the regulatory
threshold.\319\ Accordingly, compliance with the minimum liquidity
requirements will continue to be determined at security acquisition. As
proposed, the amendments to rule 2a-7 maintain the current approach and
simply require that a fund that falls below 25% daily liquid assets or
50% weekly liquid assets may not acquire any assets other than daily
liquid assets or weekly liquid assets, respectively, until it meets
these minimum thresholds.\320\
---------------------------------------------------------------------------

    \319\ Id.
    \320\ See amended rule 2a-7(d)(4)(ii) and (iii).
---------------------------------------------------------------------------

    As proposed, the amendments, however, will require a fund to notify
its board of directors when the fund's liquidity falls to less than
half of the required levels, that is, when the fund has invested less
than 25% of its total assets in weekly liquid assets or less than 12.5%
of its total assets in daily liquid assets (a ``liquidity threshold
event'').\321\ A fund must notify the board within one business day of
the liquidity threshold event and must provide the board with a brief
description of the facts and circumstances that led to the liquidity
threshold event within four business days after its occurrence.\322\
---------------------------------------------------------------------------

    \321\ See amended rule 2a-7(f)(4)(i).
    \322\ See amended rule 2a-7(f)(4)(i) and (ii). Similar to these
board notification requirements, we are adopting a requirement that
funds file reports on Form N-CR upon a liquidity threshold event.
See infra section II.F.1.a.
---------------------------------------------------------------------------

    The Commission received a few comments on this aspect of the
proposal. Commenters generally supported board reporting for increased
oversight, monitoring, and transparency.\323\ Some of these commenters
shared that many funds currently notify their board when their
liquidity levels approach the regulatory minimum or some other
specified threshold, suggesting that some form of the proposed board
reporting requirement is already occurring in practice.\324\ A
commenter articulated that a 50% shortfall in liquidity is a
significant enough event that signals likely liquidity pressures that
the board should be aware of so that it can exercise its oversight
duties.\325\ Although several commenters expressed support for a
requirement to notify the board following a liquidity threshold event,
some commenters suggested that a liquidity threshold event should
reflect a 50% decline from their preferred minimum liquidity levels
(e.g., 20% daily liquid assets and 40% weekly liquid assets).\326\
Conversely, one commenter expressed concern with the general concept of
the requirement, stating that a fund should only be required to notify
its board during periods of extreme market volatility.\327\ This
commenter believes that there should be no required liquidity threshold
for board notification, but funds should instead notify their boards
only upon an unexpected event resulting in a fund's liquidity level
falling materially below required levels. In contrast, another
commenter

suggested that funds should notify their boards if a fund's liquidity
drops 25% or more below a regulatory minimum.\328\
---------------------------------------------------------------------------

    \323\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Dechert Comment Letter; JP Morgan Comment Letter.
    \324\ See ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I. See also infra note 682 and
accompanying discussion.
    \325\ See Fidelity Comment Letter (stating that it does ``not
expect shortfalls of this magnitude to be a common occurrence and,
thus, the reporting obligations should not impose an undue burden on
funds or advisors'').
    \326\ See ICI Comment Letter; JP Morgan Comment Letter; Fidelity
Comment Letter.
    \327\ See Federated Hermes Comment Letter I.
    \328\ See CFA Comment Letter.
---------------------------------------------------------------------------

    Triggering a liquidity threshold event reflects that a fund's
liquidity has decreased by more than 50% below at least one of the
minimum daily and weekly liquid asset requirements. We agree with
commenters suggesting that this is a significant event that likely
signals liquidity pressure of which a fund's board should be aware.
This provision is designed to facilitate appropriate board
notification, monitoring, and engagement when such an event occurs, and
will build on the practices some money market funds have today to
inform fund boards about declines in liquidity, as explained by
commenters. Further, we disagree with the commenter that suggested the
rule should not include a specified level for a liquidity threshold
event. A uniform approach that requires board notification at a 50%
decline of the minimum daily or weekly liquidity levels is a simple and
unambiguous metric that does not require subjective assessment of
future cash flow needs or market conditions. We believe this
requirement will provide the board with timely information in a context
that would better facilitate the board's understanding and monitoring
of significant declines in the fund's liquidity levels. Moreover, we
are not adopting a smaller threshold for triggering board
notifications, such as a 25% decline of the minimum daily or weekly
liquidity levels. We recognize that some funds currently may notify
their boards about such declines in liquidity, or may do so in the
future as a matter of practice, and the final rule would not prevent or
discourage these notifications. However, for purposes of a regulatory
requirement to notify the fund's board promptly within one business day
of a decline, it is reasonable to limit the requirement to significant
declines of more than 50% below a minimum to limit potential
disincentives for a fund to use available liquidity to meet redemptions
and to align with the public reporting requirement on Form N-CR. After
considering the comments on the proposal, we are adopting the liquidity
threshold event board notification requirement as proposed.
3. Amendments to Liquidity Metrics in Stress Testing
    As proposed, we are adopting amendments to the liquidity metrics in
the rule's stress testing requirements to reflect amendments to the
liquidity fee framework and the increase of regulatory liquidity
minimums.\329\ Each money market fund is currently required to engage
in periodic stress testing under rule 2a-7 and report the results of
such testing to its board.\330\ Currently, one aspect of periodic
stress testing involves the fund's ability to have invested at least
10% of its total net assets in weekly liquid assets under specified
hypothetical events described in rule 2a-7. The Commission chose the
10% threshold because dropping below this threshold triggered a default
liquidity fee, absent board action, and thus, had consequences for a
fund and its shareholders.\331\ The amendments that we are adopting no
longer provide for default liquidity fees if a fund has weekly liquid
assets below 10%. Further, we are increasing the weekly liquid asset
minimum from 30% to 50%. Accordingly, we no longer believe that the
rule should require funds to test their ability to maintain 10% weekly
liquid assets under the specified hypothetical events described in rule
2a-7. Instead, we will require funds to test whether they are able to
maintain sufficient minimum liquidity under such specified hypothetical
events.\332\ As a result, each fund will be required to determine the
minimum level of liquidity it seeks to maintain during stress periods,
identify that liquidity level in its written stress testing procedures,
periodically test its ability to maintain such liquidity, and provide
the fund's board with a report on the results of the testing.
---------------------------------------------------------------------------

    \329\ See supra section II.B.
    \330\ See 17 CFR 270.2a-7(g)(8).
    \331\ See 2014 Adopting Release, supra note 26, at section
III.J.2.
    \332\ See amended rule 2a-7(g)(8)(i) and (g)(8)(ii)(A).
---------------------------------------------------------------------------

    Of the commenters that discussed liquidity stress testing, nearly
all supported the proposal's removal of the 10% weekly liquid asset
metric from the stress testing requirements.\333\ Commenters generally
agreed that the proposed principles-based approach would improve the
utility of the stress test results. In contrast, one commenter
supported the existing liquidity stress testing framework asserting
more generally that when faced with an actual stressed market
environment the results of stress tests themselves are of little value
to the fund and its board.\334\
---------------------------------------------------------------------------

    \333\ See ICI Comment Letter; SIFMA AMG Comment Letter; T. Rowe
Comment Letter; Schwab Comment Letter.
    \334\ See Comment Letter of Federated Hermes Inc. (Nov. 1, 2022)
(``Federated Hermes Comment Letter IV''). Separately, one commenter
expressed concern if the fund's board, as opposed to its adviser,
were required to determine the liquidity level used in the stress
tests. See T. Rowe Comment Letter. The rule does not require the
board specifically to make this determination, however, and also
provides the ability for the board to delegate the responsibility to
make most determinations under the rule to the fund's adviser. See
17 CFR 270.2a-7(j); amended rule 2a-7(j).
---------------------------------------------------------------------------

    After considering comments, and given the amendments to the
liquidity fee framework and the minimum liquidity requirements that we
are adopting, consistent with the proposal, it is appropriate to permit
each fund to determine the level of liquidity that it considers
sufficient for purpose of the rule's stress testing requirements,
instead of continuing to provide a bright-line threshold that all funds
must use uniformly for internal stress testing. This approach is
designed to improve the utility of stress test results because they
will reflect whether the fund is able to maintain the level of
liquidity it considers sufficient in stress periods, which may differ
among funds for a variety of reasons (e.g., type of money market fund
or characteristics of investors, such as investor concentration or
composition that may contribute to large redemptions).
    Separately, one commenter urged the Commission to further
strengthen the stress testing requirements by, among other things,
disclosing results to investors.\335\ We are not requiring funds to
disclose stress testing results publicly as part of this rulemaking.
Stress testing is an important tool to evaluate different drivers of
liquidity risks, and is designed to enhance the manager's and the
board's understanding of the risks to the fund portfolio under extreme
and plausible market conditions. Public dissemination of stress test
results may not provide much utility to the public considering that
stress testing is not standardized from fund to fund and the results
could be prone to misinterpretation from the public, given the
hypothetical nature of the exercise.\336\
---------------------------------------------------------------------------

    \335\ See Systemic Risk Council Comment Letter (stating that
``the market lacks the tools to determine whether the tests are
appropriately calibrated, reducing the usefulness of the exercise
with no apparent benefit'').
    \336\ See Federated Hermes Comment Letter IV.
---------------------------------------------------------------------------

D. Amendments Related to Potential Negative Interest Rates

    If negative interest rates occur in the future, the gross yield of
a money market fund's portfolio may turn negative. Under those
circumstances, it would be challenging or impossible for a government
or retail money market fund (or ``stable NAV fund'') to maintain its
stable share price under the current

rule, as the fund would begin to lose money.\337\
---------------------------------------------------------------------------

    \337\ See Proposing Release, supra note 6, at section II.D
(discussing the relevant provisions of the current rule).
---------------------------------------------------------------------------

    Rule 2a-7, in its current form, does not explicitly address how
money market funds must operate when interest rates are negative.
However, rule 2a-7 states that government and retail money market funds
may seek to maintain a stable share price by using amortized cost and/
or penny rounding accounting methods. A fund may only take this
approach so long as the fund's board of directors believes that the
stable share price fairly reflects the fund's market based net asset
value per share.\338\ Accordingly, the proposal stated that if negative
interest rates turn a stable NAV fund's gross yield negative, a board
may reasonably believe the stable share price does not fairly reflect
the market based price per share and the fund would need to convert to
a floating share price under these circumstances as a result. The
proposed rule also would have prohibited a money market fund from
reducing the number of its shares outstanding to seek to maintain a
stable NAV per share or stable price per share (the ``proposed RDM
prohibition''). As explained in the Proposing Release, the Commission
believed that an approach involving a fund reducing the number of its
shares to maintain a stable NAV (referred to as ``share cancellation,''
``reverse distribution mechanism,'' or ``RDM'') would not be intuitive
for retail investors and may cause these investors to assume that their
investment in a fund with a stable share price is holding its value
while, in fact, the investment is losing value over time.\339\ The
Commission requested comment on the RDM mechanism and the proposed RDM
prohibition.
---------------------------------------------------------------------------

    \338\ See 17 CFR 270.2a-7(c)(1)(i); see also 17 CFR 270.2a-
7(g)(1) (requiring the fund's board to consider what, if any, action
to take if the deviation between the fund's stable share price and
the market-based value of its portfolio exceeds \1/2\ of 1% and
separately imposing a duty on the fund's board to consider
appropriate action whenever the board believes the extent of any
deviation may result in material dilution or other unfair results to
investors or current shareholders).
    \339\ See Proposing Release, supra note 6, at section II.D
(discussing potential investor confusion as the Commission's
rationale for the proposed RDM prohibition).
---------------------------------------------------------------------------

    After considering comments, we continue to believe that a scenario
in which a fund has negative gross yield as a result of negative
interest rates could lead a fund to convert to a floating share price,
as the current rule already permits. However, in a change from the
proposal, the final rule will also permit a stable NAV fund to reduce
the number of its shares outstanding to maintain a stable NAV per share
in the event of negative interest rates, subject to certain board
determinations and disclosures to investors.\340\ Accordingly, under
the final rule, a stable NAV fund will be permitted to either convert
to a floating NAV or to engage in share cancellation in this scenario.
If a stable NAV fund converts to a floating NAV under these
circumstances, the fund's losses will be reflected through a declining
share price. If a fund uses a share cancellation mechanism, the fund
will maintain a stable share price, despite losing value, by reducing
the number of its outstanding shares. Investors in such a fund would
observe a stable share price but a declining number of shares for their
investment.\341\
---------------------------------------------------------------------------

    \340\ Compare amended rule 2a-7(c)(3) (permitting share
cancellation under certain conditions) with proposed rule 2a-7(c)(3)
(prohibiting share cancellation).
    \341\ See Proposing Release, supra note 6, at section II.D
(discussing how use of an RDM helps a fund maintain a stable NAV and
its potential effects on the fund's investors).
---------------------------------------------------------------------------

    With respect to the proposed RDM prohibition, commenters generally
recommended that an RDM should be an available option for stable NAV
funds to use, in addition to the conversion to a floating NAV.\342\
Some commenters stated that many investors prefer a stable NAV
investment.\343\ Commenters stated that, for example, investors may
rely on the ability of stable NAV funds to process cash balances
through cash sweep programs offered by many brokers, banks, and fund
sponsors, and such sweep programs typically cannot accommodate floating
NAVs.\344\ One commenter also observed that brokers and fund sponsors
typically offer investors a range of bank-like features and services,
such as ATM access, check writing, and ACH and Fedwire transfers that
generally are only provided through stable NAV fund systems.\345\ In
response to concerns expressed in the Proposing Release about the
possibility that RDM may confuse investors, particularly retail
investors, some commenters stated that RDM and floating NAV are
economically equivalent options that can be explained to investors in
clear disclosures.\346\ A few commenters provided sample disclosure to
show how funds could explain RDM to investors.\347\ One of these
commenters suggested disclosure to investors in advance of a fund's use
of RDM, as well as ongoing disclosure in account statements when RDM is
in use.\348\ Another commenter suggested a hybrid approach, where a
fund could determine to offer an RDM to institutional investors or a
floating NAV to retail investors.\349\ Another commenter suggested that
transitioning to a floating NAV could be more complex and confusing for
investors than an RDM.\350\ Commenters opposing the proposed RDM
prohibition also generally suggested there is a remote likelihood of
negative interest rates ever occurring in the U.S., and stated that
there would be significant operational burdens and costs on investors
and government and retail money market funds to prepare to convert from
a stable NAV to a floating NAV.\351\ Some commenters encouraged the
Commission to continue a dialogue with the industry and study
appropriate

responses to negative interest rates, rather than adopt amendments to
prohibit the use of RDM to address negative rates in this
rulemaking.\352\
---------------------------------------------------------------------------

    \342\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; Allspring Funds Comment Letter;
Fidelity Comment Letter; 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. One commenter suggested that the Commission could
permit a stable NAV money market fund to use a de-accumulating share
class as an alternative approach, where negative income would result
in a reduction in capital at the share class level and a fluctuating
NAV per share. See BlackRock Comment Letter. We are not adopting
provisions that would allow de-accumulating share classes at this
time. We understand that such an approach would raise similar issues
as a floating NAV for sweep programs and others and would raise tax
considerations as well.
    \343\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; Allspring Funds Comment Letter;
ABA Comment Letter I.
    \344\ See, e.g., Federated Hermes Comment Letter I; Fidelity
Comment Letter; ABA Comment Letter I; ICI Comment Letter; SIFMA AMG
Comment Letter; Morgan Stanley Comment Letter; BNY Mellon Comment
Letter.
    \345\ See ICI Comment Letter.
    \346\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; Allspring Funds Comment Letter;
Fidelity Comment Letter; 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.
    \347\ See Comment Letter of Federated Hermes (Aug. 30, 2022)
(``Federated Hermes Comment Letter III''); SIFMA AMG Comment Letter.
    \348\ Federated Hermes Comment Letter III (providing examples of
disclosure documents including an initial notice upon a board's
adoption of new prospectus disclosure on the potential use of RDM
with a hypothetical side-by-side example to illustrate how a
negative interest rate accrual would be reflected in an investor's
account statement using both an RDM and a floating NAV; ongoing
prospectus disclosure; a draft website notice; and a mock account
statement showing the RDM as a negative dividend adjustment and
directing the investor to the fund's prospectus for additional
information).
    \349\ See ABA Comment Letter I. The commenter's suggested hybrid
approach would raise several financial reporting concerns and issues
under rule 18f-3, which are beyond the scope of this rulemaking.
    \350\ See BNY Mellon Comment Letter.
    \351\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter.
    \352\ See, e.g., SIFMA AMG Comment Letter; Fidelity Comment
Letter; State Street Comment Letter.
---------------------------------------------------------------------------

    Other commenters supported the proposed RDM prohibition.\353\ Two
commenters suggested that share cancellation may be potentially
confusing or misleading to investors, particularly retail investors,
because it presents less transparency about the loss of value in a
shareholder's aggregate investment.\354\ One commenter stated that a
floating NAV provides greater transparency to investors by showing
daily fluctuations in the money market fund's NAV, thus enabling
investors to monitor the value of their investment. This commenter also
stated that the Commission's proposed approach would allow for
international consistency among money market funds, as European money
market fund regulations do not permit use of RDM.\355\ Another
commenter agreed with the goal of the proposed approach but encouraged
the Commission to consider a longer implementation timeframe in the
current rate environment to better balance the costs and benefits of
the proposed approach.\356\ One commenter encouraged the Commission to
allow converted floating NAV funds to re-transition into stable NAV
funds when yields become positive again.\357\
---------------------------------------------------------------------------

    \353\ See Northern Trust Comment Letter; Vanguard Comment
Letter; CFA Comment Letter.
    \354\ See Northern Trust Comment Letter; CFA Comment Letter.
    \355\ See Northern Trust Comment Letter.
    \356\ See Vanguard Comment Letter.
    \357\ See CFA Comment Letter.
---------------------------------------------------------------------------

    After considering the comments, we continue to believe it is
valuable to address how government and retail money market funds should
handle a negative interest rate scenario, as this is a question the
industry has encountered multiple times over the years.\358\ However,
we are persuaded by commenters that the concern that investors may find
share cancellation misleading or confusing can be addressed by
establishing conditions for a fund's use of share cancellation,
including required disclosures. We also recognize that some investors
may prefer for a fund to maintain a stable NAV and that a share
cancellation approach may be less disruptive or costly than converting
to a floating NAV in some cases. As a result, should a negative
interest rate scenario ever occur in future periods and cause a stable
NAV fund to have negative gross yield, a stable NAV fund will have the
flexibility under the final rule to use a floating NAV, as already
permitted, or to use an RDM if the board determines that cancelling
shares is in the best interests of the fund and its shareholders and
the fund provides appropriate disclosure to mitigate the possibility of
investor confusion.
---------------------------------------------------------------------------

    \358\ See Proposing Release, supra note 6, at paragraphs
accompanying nn.234 and 240.
---------------------------------------------------------------------------

    Specifically, the final rule will permit a stable NAV fund to use
an RDM only if the fund has negative gross yield as a result of
negative interest rates (a ``negative interest rate event'').\359\
Moreover, even in a negative interest rate event, the fund may use a
share cancellation mechanism only if the fund's board of directors
determines that reducing the number of the fund's shares outstanding is
in the best interests of the fund and its shareholders.\360\ Among
other things, in determining whether cancelling shares to maintain a
stable NAV is in the best interests of the fund and its shareholders,
the board generally should consider the following:
---------------------------------------------------------------------------

    \359\ See amended rule 2a-7(c)(3).
    \360\ The ``best interests of the fund and its shareholders'' in
this context is not intended to apply to each money market fund
shareholder individually, but rather to the fund's shareholders
generally.
---------------------------------------------------------------------------

     The capabilities of the fund's service providers and
intermediaries to support the equitable application of RDM across the
fund's shareholders, including considerations of whether the
operational and recordkeeping systems of the service providers and
intermediaries are able to process and apply a pro rata reduction of
shares in shareholder accounts on a daily basis.
     Any state law limitations on share cancellation.
    In determining the best interests of the fund and its shareholders,
the board will also need to devote particular attention to questions
concerning the applicable tax rules. Absent the use of a share
cancellation mechanism, we understand that for Federal income tax
purposes all fund distributions to shareholders with respect to the
shares of a normally operating stable-NAV money market fund are treated
as dividends, and shareholders' tax basis in each share is always $1.
As a result of that constant basis, no gain or loss is recognized on
redemption of the shares. On the other hand, if fund shares are
cancelled pursuant to RDM, there can be no certainty that this tax
treatment of distributions and shareholder basis would be unchanged.
For example, share cancellation may result in shareholder basis that is
more than $1 per share, and/or the treatment of shareholder
distributions in part not as dividends but as a return of basis that
may reduce basis per share. Either deviation from constant basis may
require tax reporting by shareholders, funds, and fund intermediaries
that are different from those expected for stable-NAV funds. There is
no certainty either that the Treasury Department and the IRS will issue
guidance to remove any tax challenges to the use of RDM share
cancellation or that Congress will enact legislation to do so.
    Accordingly, in determining whether cancelling shares to maintain a
stable NAV is in the best interests of the fund and its shareholders,
the board generally should also consider the following, taking into
account the possibility that no new tax guidance or legislation may be
forthcoming:
     The tax implications of share cancellation for the fund
itself. Those implications for the fund's tax accounting concern not
only any tax liability of the fund but also the tax attributes of the
fund's distributions to its shareholders. It is particularly important
to consider distributions in the latter part of a year whose earlier
portion had contained losses and share cancellations.
     The tax implications of share cancellation for a fund's
shareholders, including:
    [cir] Whether investors will understand the effects that RDM share
cancellation may have on their tax obligations, and whether they will
be able to comply with any novelty and complexity in those obligations.
    [cir] Whether the fund and its intermediaries will be able to
administer shareholder tax reporting and related matters.
    [cir] Whether the fund's use of RDM share cancellation would cause
shareholders to experience any adverse tax consequences that they would
not experience if the fund used a floating NAV instead, and, if so,
whether these consequences are justified by the presence of benefits to
shareholders from RDM share cancellation.
    [cir] The tax characterization of the cancellation, and whether the
cancellations directly produce losses for shareholders or, instead,
there is a change in the bases of the shareholders' remaining shares,
affecting the amount of subsequent loss or gain with respect to those
shares.
    [cir] If the cancellation directly produces a loss, when the
shareholders recognize that loss, and what responsibility the fund and
its intermediaries have for related reporting to the shareholders.

    The board also generally should review its determination that RDM
share cancellation is in the best interests of the fund and its
shareholders if circumstances change, including if a negative interest
rate event appears to be reasonably likely to occur in the near future.
Finally, the board may not delegate to the fund's investment adviser or
officers the responsibility to make such determination.\361\ A fund's
board, and not its adviser, is in the best position to determine if
share cancellation is in the best interests of the fund and its
shareholders and, thus, is the appropriate entity to determine whether
a fund will use share cancellation within the parameters of the rule.
---------------------------------------------------------------------------

    \361\ See amended rule 2a-7(j).
---------------------------------------------------------------------------

    The fund must provide timely, concise, and plain-English disclosure
about the fund's share cancellation practices and their effects on
investors to investors both before and during a negative interest rate
event. Such disclosures must include (i) advance notification to
investors in the fund's prospectus that the fund plans to use share
cancellation in a negative interest rate event and the potential
effects on investors, and (ii) when the fund is cancelling shares,
information in each account statement or in a separate writing
accompanying each account statement identifying that such practice is
in use and explaining its effects on investors.\362\ When disclosing
the effects of share cancellation on investors, the fund should include
a clear and prominent statement that an investor is losing money when
the fund cancels the investor's shares. The fund generally should also
clearly and concisely describe tax effects for shareholders.
---------------------------------------------------------------------------

    \362\ See amended rule 2a-7(c)(3)(iv).
---------------------------------------------------------------------------

    With respect to prospectus disclosure, this disclosure must be
provided before a fund begins to use share cancellation and generally
should be provided with sufficient advance notice to allow an investor
to take into account information about the fund's possible use of share
cancellation and the effects of that approach in the investor's
investment decisions. If the board's determination allowing the fund to
use share cancellation occurs during a time when a negative interest
rate environment does not appear to be reasonably likely to occur in
the near future, the fund may include the required disclosures in any
relevant part of the fund's prospectus. However, if a negative interest
rate environment appears to be reasonably likely to occur in the near
future, the fund must include disclosures about its possible use of
share cancellation and the effects of share cancellation on investors
in the summary prospectus, as share cancellation would be a component
of the fund's principal investment strategies or principal risks when a
fund is reasonably likely to use share cancellation in the near
future.\363\ If a fund modifies its summary prospectus to disclose the
reasonable likelihood of cancelling shares, or to disclose that the
fund has begun to use share cancellation, then the fund also will be
required under Item 27A of Form N-1A to report information about this
change as a material change in its next annual shareholder report.\364\
In addition to providing advance notice in fund prospectuses, funds
generally should consider investor education efforts to help investors
understand share cancellation and the effects of negative interest
rates, as investors may not have ever experienced a negative interest
rate event. For example, if negative interest rates are expected to
occur in the near term, money market funds should consider additional
communications and outreach to educate investors about negative
interest rates and their effects on money market fund investments,
including the tax effects of RDM share cancellation and tax reporting.
---------------------------------------------------------------------------

    \363\ See Item 4 of Form N-1A. Depending on when a fund believes
that negative rates may be reasonably likely to occur relative to
the fund's annual prospectus update, a fund may ``sticker'' its
summary prospectus to provide this information. See 17 CFR 230.497.
    \364\ See Tailored Shareholder Reports for Mutual Funds and
Exchange-Traded Funds; Fee Information in Investment Company
Advertisements, Investment Company Act Release No. 34731 (Oct. 26,
2022) [87 FR 72758 (Nov. 25, 2022)], at section II.A.2.f (``Tailored
Shareholder Reports Adopting Release''); Item 27A(g) of Form N-1A,
as amended by the Tailored Shareholder Reports Adopting Release. The
compliance date for the tailored shareholder report requirements
ends 18 months after the effective date of Jan. 24, 2023. Until the
end of that compliance period, funds will not be required to report
material changes in their annual shareholder reports.
---------------------------------------------------------------------------

    When a fund is using share cancellation, the final rule requires
disclosure in the account statement or a separate writing accompanying
the account statement, because we believe the account statement is
where the shareholder will see the direct effects of share cancellation
on the shareholder's investment. Specifically, if a fund implements
share cancellation, the account statement would show the reduction in
the number of shares the investor holds and the investor's reduced
account balance. Funds generally will need to work with their
distribution networks to make sure that share cancellation is disclosed
clearly and explained in plain English in the account statement or a
separate writing accompanying the account statement. This may include,
for example, showing the share cancellation as a separate transaction
and explaining that the shareholder is losing money on its money market
fund investment because of negative interest rates.
    Using share cancellation also will have an effect on the fund's
financial disclosures. For example, a fund's statements of changes in
net assets must include information about the total distributions to
shareholders coming from different sources.\365\ Under the requirements
for disclosing the total distributions to shareholders in 17 CFR 210.6-
09, negative distributions attributable to RDM would be ``other
sources'' of distributions. Funds generally should disclose negative
distributions attributable to RDM separately from any other sources of
distributions to shareholders in the statement of changes in net
assets. Separate disclosure of negative distributions in the statement
will help investors understand the effect of share cancellation.
Separately, as discussed below, the final amendments will require
stable NAV funds to report on Form N-MFP when they use share
cancellation.\366\
---------------------------------------------------------------------------

    \365\ See 17 CFR 210.6-09 (rule 6-09 of Regulation S-X).
    \366\ See infra section II.F.2.a.
---------------------------------------------------------------------------

    If a fund begins to use share cancellation, it also should consider
effects on other information it provides and evaluate whether that
information continues to present an accurate picture of the fund. For
example, when calculating and providing the fund's market-based NAV per
share, the fund generally should use the number of shares outstanding
it would have but for its use of share cancellation. We generally do
not believe that it would be appropriate to use the actual number of
shares outstanding the fund has under these circumstances because share
cancellation would have the effect of inflating the fund's market-based
NAV per share. That is, assuming two funds have the same portfolios
with the same market-based value, if one fund used share cancellation
and the other fund used a floating NAV, the fund using share
cancellation would appear to have a higher market-based NAV per share
because it would divide the market-based value across a smaller number
of shares than the fund using a floating NAV.
    Taken together, these disclosures are intended to help the
shareholder understand how the value of its investment is declining and
to facilitate

Commission monitoring of how stable NAV money market funds address
negative interest rates. On balance, we believe investors would benefit
from the ability to continue to invest in stable NAV funds during a
negative interest rate environment, and that effective disclosure prior
to and during the use of an RDM will help investors understand why and
how their investment is losing value.
    While this discussion focuses on investor disclosures related to
share cancellation, a stable NAV fund that plans to convert to a
floating NAV if it has negative gross yield due to negative interest
rates generally should consider similar prospectus, shareholder report,
and account statement disclosures, as applicable, given investors' lack
of experience with negative interest rates and potential expectation
that the fund will continue to maintain a stable NAV.
    In addition to the proposed RDM prohibition, the Commission
proposed to require stable NAV funds to determine that each financial
intermediary in the fund's distribution network has the capacity to
redeem and sell the fund's shares at non-stable prices or, if this
determination cannot be made, to prohibit the relevant intermediary
from purchasing the fund's shares in nominee name.\367\ After
considering comments, and given that we are permitting a stable NAV
fund to use RDM under specified conditions in the final rule, we are
not adopting this aspect of the proposal. However, we are providing the
guidance below to address how funds and financial intermediaries
generally should prepare for the possibility of a stable NAV fund's
conversion to a floating NAV fund.
---------------------------------------------------------------------------

    \367\ See proposed rule 2a-7(h)(11)(ii). A stable NAV fund also
would have been required to maintain records identifying the
intermediaries the fund determined had the capacity to transact at
non-stable prices and the intermediaries for which the fund was
unable to make this determination. See proposed rule 2a-
7(h)(11)(iii).
---------------------------------------------------------------------------

    Several commenters expressed concerns with the potential burdens
and costs of implementing the proposed requirement for government and
retail money market funds to determine each financial intermediary's
capacity to redeem and sell securities issued by a fund at a floating
NAV per share or prohibit the financial intermediary from purchasing
the fund's shares in nominee name.\368\ Some of these commenters stated
that this proposed requirement would be especially burdensome for
financial intermediary platforms that operate cash sweep programs and
bank-like services under a ``dollar in, dollar out'' infrastructure
that does not accommodate a floating share price.\369\ These commenters
stated that such platforms may be unwilling to bear such burdens and
costs and thus may no longer offer government and retail money market
funds to their customers, with potentially adverse effects on the
economy. Several commenters also suggested that imposing this
requirement on government and retail money market funds is misplaced,
given that such funds did not experience the same large redemption
pressures in March 2020 as public institutional prime and institutional
tax-exempt funds.\370\ Some commenters stated that the proposed
determination or certification requirement is not an appropriate role
for fund providers.\371\ One commenter who agreed with the need for the
proposed determination requirement suggested an alternative approach in
which the Commission would act as a repository for such determinations
so that individual firms would not have to conduct their own due
diligence.\372\ Another commenter recommended that the Commission
modify this aspect of the proposal to require that financial
intermediaries have a reasonably adequate plan or playbook in place for
how they would respond to a negative interest rate environment should
one arise.\373\
---------------------------------------------------------------------------

    \368\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I.
    \369\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; Morgan Stanley Comment Letter;
BNY Mellon Comment Letter.
    \370\ See, e.g., ICI Comment Letter; Morgan Stanley Comment
Letter.
    \371\ See, e.g., BlackRock Comment Letter; IIF Comment Letter.
    \372\ See CFA Comment Letter.
    \373\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    Although the final rule will not require funds to make
determinations related to intermediaries' capabilities of transacting
at non-stable prices, intermediaries themselves may be subject to
separate obligations to investors with regard to the distribution of
proceeds received in connection with investments made or assets held on
behalf of investors.\374\ We also believe that stable NAV money market
funds generally should engage with their distribution network in
considering how they would handle a negative interest rate environment,
as intermediaries' abilities to move to a four-digit NAV and apply a
floating NAV or to process share cancellations is an important
consideration in determining an approach that is in the best interests
of the fund and its shareholders.
---------------------------------------------------------------------------

    \374\ Cf. 17 CFR 240.15c3-3 (requiring, among other things, that
broker-dealers take certain steps to protect cash they hold for
customers). See also Gilman v. Merrill Lynch, Pierce, Fenner &
Smith, Inc. 404 N.Y.S.2d 258, 262 (N.Y. Sup. Ct. 1978) (holding that
after an investment is sold and proceeds belonging to the customer
come into the broker's possession, the broker becomes a fiduciary
with respect to those proceeds and may not consciously use them to
the detriment of the customer and for the broker's own benefit).
---------------------------------------------------------------------------

    More generally, it is important for a stable NAV money market fund
to understand the capabilities of its distribution network in the event
the fund breaks the buck. To the extent these funds have not already
done so, they generally should have a proactive plan or playbook in
place for such an event that takes into account how different
intermediaries in the fund's distribution network would address a
fund's use of a floating NAV (e.g., whether the intermediary has an
automated process for processing transactions at a floating NAV or
would need to manually process such transactions, as well as the
likelihood that an intermediary using a manual approach would move
investors to an alternative investment to mitigate the burdens of its
manual process). Consistent with the goals of the Commission's proposed
amendments, this information would help a fund better prepare for a
conversion to a floating NAV and better understand the extent to which
some intermediaries may quickly move investors' money out of the fund,
which has implications for the fund's redemption risks and liquidity
management.\375\
---------------------------------------------------------------------------

    \375\ See Proposing Release, supra note 6, at section II.D.
---------------------------------------------------------------------------

E. Amendments To Specify the Calculation of Weighted Average Maturity
and Weighted Average Life

    We are adopting amendments as proposed to rule 2a-7 to specify the
calculations of ``dollar-weighted average portfolio maturity''
(``WAM'') and ``dollar-weighted average life maturity'' (``WAL'').\376\
WAM and WAL are calculations of the average maturities of all
securities in a portfolio, weighted by each security's percentage of
net assets. These calculations are an important determinant of risk in
a portfolio, as a longer WAM and WAL may increase a fund's exposure to
interest rate risks. As discussed in the Proposing Release, funds have
used different approaches when calculating WAM and WAL under the
current definitions in rule 2a-7.\377\ We understand that a majority of
money market funds calculate WAM and WAL based on the percentage of
each security's market value in the portfolio,

while other money market funds base calculations on the amortized cost
of each portfolio security. This discrepancy can create inconsistency
of WAM and WAL calculations across funds, including in data reported to
the Commission and provided on fund websites.\378\ Under the amended
definitions of WAM and WAL, funds will be required to calculate WAM and
WAL based on the percentage of each security's market value in the
portfolio.\379\
---------------------------------------------------------------------------

    \376\ See amended rule 2a-7(d)(1)(ii) and (iii).
    \377\ See Proposing Release, supra note 6, at section II.E.
    \378\ See Items A.11 and A.12 of current Form N-MFP; 17 CFR
270.2a-7(h)(10)(i)(A).
    \379\ See amended rule 2a-7(d)(1)(ii) and (iii).
---------------------------------------------------------------------------

    Commenters were generally supportive of the proposal.\380\ However,
one commenter disagreed with the proposal, suggesting that the small
difference between the WAM and WAL calculated with amortized cost
versus market value would not meaningfully impact a fund's WAM and WAL
and therefore did not justify the operational burdens for a fund not
currently using market values for these calculations.\381\ While the
difference between a fund's WAM or WAL calculated using amortized cost
versus market value is likely to be small in many circumstances, there
are also circumstances where this difference may be more significant,
such as when a security's issuer experiences a credit event, during
periods of market stress, or when interest rates rise rapidly,
particularly for assets with longer maturities. Further, these
amendments are intended to enhance the consistency of calculations for
funds, while allowing the Commission to better monitor and respond to
indicators of potential risk and stress in the market. While we
recognize that some money market funds may need to implement certain
operational changes to comply with the new calculations, a majority of
money market funds already calculate WAM and WAL based on the
percentage of each security's market value in the portfolio, and all
types of money market funds determine the market values of their
portfolio holdings for other purposes, which should help limit the
extent of operational changes needed. After considering the comments
received on the proposal, we are adopting the amendments to the
definitions of WAM and WAL as proposed.
---------------------------------------------------------------------------

    \380\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Capital Group Comment Letter.
    \381\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

F. Amendments to Reporting Requirements

1. Amendments to Form N-CR
    We are adopting the amendments to Form N-CR as proposed. In
particular, the final amendments add a new requirement for a money
market fund to report publicly if it experiences a liquidity threshold
event (i.e., the fund has invested less than 25% of its total assets in
weekly liquid assets or less than 12.5% of its total assets in daily
liquid assets) because such an event represents a significant drop in
liquidity of which investors should be aware.\382\ We are also adopting
all other proposed amendments to Form N-CR, including the structured
data requirement, to improve the availability, clarity, and utility of
information about money market funds.
---------------------------------------------------------------------------

    \382\ See Part E of amended Form N-CR.
---------------------------------------------------------------------------

a. Reporting of Liquidity Threshold Events
    Under the proposal, money market funds would be required to report
publicly on Form N-CR when their daily or weekly liquid assets declined
by more than 50% below the regulatory minimums. We are adopting this
requirement as proposed. Under the final amendments, a fund
experiencing a liquidity threshold event is required to report: (1) the
initial date on which the fund fell below either the 25% weekly liquid
assets or the 12.5% daily liquid assets threshold; (2) the percentage
of the fund's total assets invested in both weekly liquid assets and
daily liquid assets on the initial date of a liquidity threshold event;
and (3) a brief description of the facts and circumstances leading to
the liquidity threshold event. A fund will be required to report the
amount of both its weekly liquid assets and its daily liquid assets,
regardless of whether it has dropped below one or both thresholds, to
provide insight into the fund's short-term and immediate liquidity
profile. The brief description of facts and circumstances is intended
to help better inform investors, the Commission, and our staff of
events that lead to significant declines in liquidity.
    Commenters had mixed views about whether the reporting of these
liquidity threshold events should be made public or filed
confidentially with the Commission. Some commenters supported the
proposed public reporting requirement.\383\ These commenters emphasized
the benefits of increased transparency for investors and the
Commission. One commenter suggested such public reporting would help
inform investors who do not regularly monitor fund liquidity levels on
fund websites to understand what is happening with their fund.\384\
Another commenter stated that, while there is a possibility investors
will redeem in response to a reported liquidity threshold event, the
proposed amendments may reduce the likelihood of such redemptions
because this report will provide information about why the liquidity
decline occurred, thus reducing investor uncertainty.\385\
---------------------------------------------------------------------------

    \383\ See CFA Comment Letter; Western Asset Comment Letter;
Better Markets Comment Letter.
    \384\ See CFA Comment Letter.
    \385\ See Better Markets Comment Letter.
---------------------------------------------------------------------------

    Commenters requesting confidential reporting to the Commission
reasoned that money market funds are currently required to provide
information about the size of their daily and weekly liquid assets on a
daily basis on their public websites; thus, the commenters suggested
the proposed reporting of a liquidity threshold event does not provide
investors with information they do not otherwise have. These commenters
also suggested that public reporting may heighten investor sensitivity
to liquidity levels and affect redemption behavior.\386\ One of these
commenters expressed concerns that the 12.5% daily liquid asset and 25%
weekly liquid asset thresholds for reporting could become new bright
lines that contribute to investor redemption behavior and incentivize
money fund managers to maintain liquid asset levels above these
thresholds, rather than use those assets to meet redemptions. This
commenter also suggested that the requirement for a fund to report
liquidity threshold events to its board reduces any investor protection
or public interest benefits of public reporting.\387\
---------------------------------------------------------------------------

    \386\ See, e.g., ICI Comment Letter, Federated Hermes Comment
Letter I; Invesco Comment Letter; Schwab Comment Letter; SIFMA AMG
Comment Letter; Bancorp Comment Letter.
    \387\ See Dechert Comment Letter (drawing parallels to the
Commission's determination not to require public reporting on Form
N-PORT if a non-money market fund falls below its highly liquid
investment minimum under rule 22e-4, because the Commission
considered the presence of board oversight in that determination).
---------------------------------------------------------------------------

    After considering comments, we continue to believe public reporting
when a fund drops more than 50% below a regulatory liquidity minimum is
important information for monitoring purposes. Such a significant
decrease in liquidity merits prompt disclosure and explanation to
investors, the Commission, and our staff. Required public reporting
also is consistent with the required public disclosure of daily

liquidity levels on fund websites.\388\ While some commenters suggested
a public report is unnecessary because investors already have access to
daily liquidity levels on fund websites, these websites do not explain
the facts and circumstances surrounding a liquidity threshold event.
Investors benefit from having contextual information to understand the
cause of the declining liquidity, which is helpful for assessing the
fund's risks and its ability to meet redemptions. We also disagree that
public reporting is unnecessary because funds must report liquidity
threshold events to their boards under the final rule. Board reporting
does not improve transparency for investors around the occurrence and
causes of liquidity threshold events. Moreover, in response to some
commenters' suggestion that such reporting might incentivize
redemptions, we cannot predict individual shareholder actions with
certainty, but if such redemptions were to occur, the final rule will
provide information about why the liquidity decline occurred, thus
reducing investor uncertainty. In addition, the final rule provides
fund managers with liquidity fees as a tool for managing these
redemptions. Further, while we appreciate the concern that such a
reporting requirement might encourage money market fund managers to use
assets other than daily or weekly liquid assets to meet redemptions to
avoid a drop in liquidity that would trigger the reporting requirement,
we do not believe such a requirement will contribute significantly to
such an incentive because funds are already required to provide daily
liquidity levels on their websites. As a result of these
considerations, as proposed, the final amendments will require a fund
to report the occurrence of a liquidity threshold event publicly on
Form N-CR.
---------------------------------------------------------------------------

    \388\ 17 CFR 270.2a-7(h)(10)(ii)(A) and (B).
---------------------------------------------------------------------------

    With respect to the type of liquidity threshold event a fund must
report on Form N-CR, one commenter suggested requiring a fund to report
only if it is 50% below each of the daily and weekly liquidity minimums
for five consecutive days, but did not offer a supporting
rationale.\389\ We continue to believe that dropping 50% below a
minimum liquidity requirement is a significant event that merits
reporting on Form N-CR to help investors, the Commission, and its staff
monitor significant declines in liquidity, even if the drop in
liquidity is not a protracted event.\390\ Expanding the number of days
a fund must be 50% below a regulatory liquidity minimum before it is
required to report would reduce the intended transparency and utility
of the reports on Form N-CR.
---------------------------------------------------------------------------

    \389\ See Federated Hermes Comment Letter I.
    \390\ See Proposing Release, supra note 6, at section II.F.1.a.
---------------------------------------------------------------------------

    We are also adopting the same informational requirements as
proposed for these reports. Commenters generally did not discuss the
proposed informational requirements, except one commenter expressed
support for the general approach.\391\ This commenter expressed support
for requiring a fund to report both its daily and weekly liquid asset
levels when a liquidity threshold event occurs (even if only one
threshold is crossed) and with requiring disclosure about the basis for
the liquidity threshold event.
---------------------------------------------------------------------------

    \391\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    Consistent with current timing requirements and with the proposal,
a fund will have to file a report within one business day after
occurrence of a liquidity threshold event; however, a fund may file an
amended report providing the required brief description of the facts
and circumstances leading to the liquidity threshold event up to four
business days after such event. Commenters did not suggest any changes
to the proposed timeframe for filing reports on Form N-CR. If a fund
has daily liquid assets or weekly liquid assets continuously below the
relevant threshold for consecutive business days after reporting an
initial liquidity threshold event, as proposed, the final amendments
will only require the fund to report the initial date of the liquidity
threshold event, and will not require additional Form N-CR reports to
disclose that the same type of liquidity threshold event
continues.\392\ One commenter discussed this approach and agreed with
it.\393\ Further, as proposed, an additional report will be required
if, for example, a fund initially drops below 25% weekly liquid assets
and then on a subsequent day drops below 12.5% daily liquid
assets.\394\
---------------------------------------------------------------------------

    \392\ See Items E.1 and E.2 of amended Form N-CR; see also
Proposing Release, supra note 6, at section II.F.1.a.
    \393\ See Federated Hermes Comment Letter I.
    \394\ As discussed in the Proposing Release, if a fund initially
falls below only one threshold and then subsequently falls below the
other threshold, the final amendments will require a second Form N-
CR report. For example, if a fund dropped below 25% weekly liquid
assets on Tuesday and dropped below 12.5% daily liquid assets on
Thursday, it would be required to file two separate reports to
disclose each liquidity threshold event. Additionally, if a fund
fell below either threshold and subsequently resolved the liquidity
threshold event before an initial or amended report is filed, the
fund would still be required to report the liquidity threshold event
and the facts and circumstances leading to the liquidity threshold
event. See Proposing Release, supra note 6, at n.261.
---------------------------------------------------------------------------

b. Structured Data Requirement
    As proposed, the final rule will require money market funds to file
reports on Form N-CR in a custom eXtensible Markup Language (``XML'')-
based structured data language created specifically for reports on Form
N-CR (``N-CR-specific XML'').\395\ The few comments the Commission
received on this topic were mixed.\396\ In support, one commenter
regarded it as a reporting enhancement that would increase transparency
for institutional and retail investors, and allow regulators and
policymakers to better assess the state of the financial system.\397\
In opposition, one commenter suggested that structured data is more
expensive and not used by investors.\398\
---------------------------------------------------------------------------

    \395\ See General Instruction D of amended Form N-CR.
    \396\ See Western Asset Comment Letter; Federated Hermes Comment
Letter I.
    \397\ See Western Asset Comment Letter.
    \398\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    After considering commenters' views, we are adopting the structured
data requirement as proposed. While we acknowledge that Form N-CR
filers may bear some additional reporting costs as a result of this
amendment, as one commenter suggested, we believe these costs will
generally be related to funds adjusting their systems to a different
data language.\399\ We continue to believe that use of an N-CR-specific
XML language may result in reduced reporting costs by introducing
additional efficiencies for funds already accustomed to using
structured data for other required reports and may reduce overall
reporting costs in the longer term.\400\ The structured data
requirement will provide more useful data for investors and the
Commission, as applicable, because it will allow tools to be developed
for sorting and filtering the available data according to specified
parameters to enhance comparative assessments and customized analyses.
---------------------------------------------------------------------------

    \399\ Id.
    \400\ As discussed in the Proposing Release, money market funds
already have experience with a custom XML language with respect to
their reports on Form N-MFP. In addition, we understand that when
money market funds prepare reports in HTML or ASCII (as currently
required for Form N-CR reports), they generally need to reformat
required information from the way that information is stored for
normal business purposes. See Proposing Release, supra note 6, at
section II.F.1.b.
---------------------------------------------------------------------------

c. Other Amendments
    We also are adopting the following amendments to Form N-CR as
proposed: (1) require the registrant name, series name, and legal
entity identifiers (``LEIs'') for the registrant and the series to
improve identifying

information on the form; \401\ (2) add definitions of LEI, registrant,
and series to Form N-CR for clarity and consistency with the same
defined terms on Form N-MFP; \402\ (3) remove the reporting events that
relate to liquidity fees and redemption gates, as money market funds
will no longer be permitted to impose redemption gates under rule 2a-7,
and other disclosure about the imposition of liquidity fees is more
appropriate than Form N-CR disclosure under the final rule's amended
liquidity fee framework; \403\ and (4) amend Part C of Form N-CR, which
relates to the provision of financial support to the fund.\404\
Specifically, when such support involves the purchase of a security
from the fund, the final rule, as proposed, will require reporting of
the date the fund acquired the security, which will allow better
identification of, and context for, support that occurs within a short
period of time. For example, if the fund purchased the security a few
days before the affiliate acquired it, this could suggest that the risk
profile of the security deteriorated rapidly. One commenter stated that
we should not adopt these proposed reporting amendments but did not
provide a rationale.\405\ Accordingly, we are adopting such amendments
to realize their intended benefits.
---------------------------------------------------------------------------

    \401\ See Items A.2, A.4, A.5, and A.7 of amended Form N-CR.
    \402\ See General Instruction F of amended Form N-CR.
    \403\ See Parts E through G of current Form N-CR.
    \404\ See Item C.6 of amended Form N-CR.
    \405\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

2. Amendments to Form N-MFP
a. New Information Requirements
    We are adopting, with the modifications discussed below, the
reporting requirements regarding additional information about the
composition and concentration of money market fund shareholders and
about prime funds' sales of non-maturing investments. In addition,
similar to the proposed requirement to report information about the use
of swing pricing, we are requiring funds to report information about
their application of liquidity fees under the final rule. Further,
because the final rule will permit stable NAV funds to use share
cancellation in a negative interest rate environment, we are requiring
reporting related to share cancellation.
Shareholder Concentration
    In a change from the proposal, after considering comments raising
privacy and related concerns, we will not require money market funds to
disclose the name of each person who is known by the fund to own
beneficially or of record 5% or more of the shares outstanding in the
relevant class.\406\ Rather, the final rule requires money market funds
to report only the type of beneficial or record owner who owns 5% or
more of the shares outstanding in the relevant class. Accordingly,
amended Form N-MFP includes the following categories of owner types
from which filers will make the appropriate selection: retail investor;
non-financial corporation; pension plan; non-profit; state or municipal
government entity (excluding governmental pension plans); registered
investment company; private fund; depository institution or other
banking institution; sovereign wealth fund; broker-dealer; insurance
company; and other.\407\ The shareholder concentration information the
final amendments require will provide the Commission and investors with
a greater ability to monitor redemption and liquidity risks.
---------------------------------------------------------------------------

    \406\ See Item B.10 of amended Form N-MFP. If the fund knows
that two or more beneficial owners of the class are affiliated with
each other, the fund would treat them as a single beneficial owner
when calculating the percentage ownership and identify separately
each affiliated beneficial owner by type and the percentage interest
of each affiliated beneficial owner. For these purposes, an
affiliated beneficial owner would be one that directly or indirectly
controls or is controlled by another beneficial owner or is under
common control with another beneficial owner.
    \407\ See Item B.10.b of amended Form N-MFP. This list of
investor types is consistent with the types of investors identified
in the proposed and final reporting item on shareholder composition
of institutional prime and institutional tax-exempt funds, except
the beneficial owner list includes retail investors because the
requirement to report investor concentration is not limited to
institutional money market funds.
---------------------------------------------------------------------------

    As proposed, the final amendments require funds to use a 5%
ownership threshold for the shareholder concentration reporting
requirement. Commenters generally did not engage substantively on the
proposed 5% ownership threshold, though one commenter did agree that 5%
would be an appropriate threshold.\408\ Funds currently provide similar
ownership information using a 5% threshold on an annual basis in their
registration statements.\409\ More frequent reporting of information on
Form N-MFP is designed to facilitate monitoring of a fund's potential
risk of redemptions by an individual or a small group of investors that
could significantly affect the fund's liquidity.
---------------------------------------------------------------------------

    \408\ See Federated Hermes Comment Letter I.
    \409\ See Item 18 of Form N-1A.
---------------------------------------------------------------------------

    As proposed, to address circumstances in which multiple investors
would be represented as a single shareholder of record as a result of
omnibus accounts, the final amendments require funds to report
beneficial owner information only to the extent that such beneficial
ownership is known to the fund.\410\ Commenters did not address this
aspect of the proposal. We recognize that funds may not have
information about the type of beneficial owner or amount each
beneficial owner holds in an omnibus account. The reporting item
distinguishes between the percent of shares outstanding owned of record
and owned beneficially to facilitate a more nuanced understanding of
potential concentration levels.
---------------------------------------------------------------------------

    \410\ Omnibus accounts are accounts established by
intermediaries that typically aggregate all customer activity and
holdings in a money market fund, which can result in the fund not
having information about individual beneficial owners who hold their
shares through the omnibus account.
---------------------------------------------------------------------------

    Some commenters objected to the proposal that funds must publicly
disclose the names of specific investors on the basis that the
information is private and confidential.\411\ For instance, one
commenter suggested that disclosure of investor names would be anti-
competitive and give other fund sponsors a window into shareholder
composition of money market funds.\412\ Another commenter suggested
such reporting may cause investors to adjust holdings as of month end
to avoid public disclosure of their money market fund holdings and
drive redemptions.\413\ To address these concerns, some commenters
suggested that the information should only be reported to the
Commission on a confidential basis, particularly given the frequency of
the reporting.\414\
---------------------------------------------------------------------------

    \411\ See, e.g., CFA Comment Letter; Federated Hermes Comment
Letter I; Invesco Comment Letter; Dechert Comment Letter (expressing
concern that investors, particularly natural persons, would be at
risk of having their investments tracked or monitored throughout the
year); Schwab Comment Letter; ICI Comment Letter; Bancorp Comment
Letter; SIFMA AMG Comment Letter; Northern Trust Comment Letter;
CCMR Comment Letter.
    \412\ See Invesco Comment Letter.
    \413\ See Northern Trust Comment Letter.
    \414\ See, e.g., Federated Hermes Comment Letter I; Invesco
Comment Letter; Dechert Comment Letter (stating that more frequent
reporting raises privacy concerns, as contrasted with the 30-day lag
for reporting similar information on Form N-1A); BlackRock Comment
Letter; Schwab Comment Letter; ICI Comment Letter; Bancorp Comment
Letter; Northern Trust Comment Letter.
---------------------------------------------------------------------------

    Some commenters suggested that shareholder concentration
information is of little value and would be burdensome for money market
funds to report on a monthly basis. For example, some commenters
questioned the usefulness, both to the Commission and investors, of
shareholder concentration information.\415\ Other commenters

questioned the value of requiring reporting of investor names relative
to the burden on money market funds.\416\ One commenter suggested that
intermediary omnibus accounts and the use of nominee names may cause
confusion and interpretive issues since interpretation of the data may
be subjective and potentially inaccurate.\417\ This commenter also
suggested that investors lack sufficient information to assess the
risks of single shareholder positions. Another commenter suggested that
disclosure of shareholders that own 5% or more of shares is not
necessary because daily flow information is available on fund websites
and provides investors with sufficient information to monitor
redemption risk.\418\
---------------------------------------------------------------------------

    \415\ See Invesco Comment Letter (stating that it was unlikely
that the requirement for money market funds to disclose shareholder
concentration levels regularly would produce standardized cross
industry data that could be used in a meaningful manner); ICI
Comment Letter; SIFMA AMG Comment Letter; see also Western Asset
Comment Letter.
    \416\ See BlackRock Comment Letter; see also CCMR Comment Letter
(noting general compliance costs and the burden to funds); Western
Asset Comment Letter.
    \417\ See Western Asset Comment Letter.
    \418\ See Northern Trust Comment Letter.
---------------------------------------------------------------------------

    Upon consideration of the comments, the amended rule will not
require funds to report the names of the greater than 5% owners.
Although shareholder concentration information is already reported
publicly by funds on an annual basis on Form N-1A, we recognize the
sensitivities associated with publicly reporting the names of owners
with ownership of more than 5% on a monthly basis. Accordingly, the
amendments instead require funds to provide information about the types
of owners who invest 5% or more in a class of the fund. This amendment
addresses commenters' concerns while maintaining the value of the
reported information in monitoring a fund's potential risk of
redemptions by an individual or a small group of investors that could
significantly affect the fund's liquidity. We decline to make
shareholder concentration information confidential, as some commenters
suggested, because confidential reporting would deprive investors of
the increased ability to monitor redemption and liquidity risk. In
addition, as proposed, the burden of the reporting requirement is
limited because funds need only report beneficial ownership information
to the extent known by the fund.
    In response to comments questioning the value of shareholder
concentration information, we believe that more frequent information
about shareholder concentration will assist both the Commission and
investors in monitoring a fund's potential risk of redemptions. In
particular, investors can identify shareholder concentrations that may
significantly affect the fund's liquidity. While we recognize investors
have access to information about a fund's historical flows and
liquidity levels, this information may not present the full picture of
the risks of a single shareholder redeeming a large position in the
fund's shares. Investors will benefit from additional information that
allows them to more efficiently monitor and assess liquidity risk. The
shareholder concentration reporting requirement will provide an
additional useful metric when undertaking liquidity risk analyses,
making the form (and its data) more usable by filers, regulators, and
investors when evaluating potential redemption behavior and related
investor risks.
    Some commenters proposed alternative reporting methodologies for
shareholder concentration. Some commenters suggested that funds should
only be required to report the number of investors with ownership at or
above a 5% threshold.\419\ Another commenter suggested that funds
should report, without attribution, the percentage holdings and type of
the top 5 largest investors.\420\ Reporting only the number of
investors above the 5% ownership threshold or only the percentage
holdings of the top 5 largest investors would limit the utility of Form
N-MFP in monitoring for redemption and liquidity risk. The approach we
are adopting is designed to provide a more comprehensive overview of a
fund's shareholder concentration and, accordingly, facilitate a more
incisive risk analysis. In addition, this approach aligns with the
analysis funds already must conduct annually when updating their
registration statements.
---------------------------------------------------------------------------

    \419\ See, e.g., Federated Hermes Comment Letter I (suggesting
that funds should only report the number of investors that own of
record or beneficially 5% or more, distinguishing between record
owners and beneficial owners); SIFMA AMG Comment Letter (suggesting
that funds disclose the number of investors owning 5% or more of the
shares outstanding of a class of a fund).
    \420\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

    With respect to the proposed requirement to report the number of
investors who own of record or beneficially 5% or more, several
commenters suggested that it would be difficult for funds to report the
necessary ownership information given omnibus positions. Some
commenters suggested amendments to require financial intermediaries to
provide certain information to money market funds.\421\ As proposed,
funds must report beneficial ownership information only to the extent
known by the fund. We recognize that money market funds may not have
information about all beneficial owners. We agree with commenters that
information about shareholder concentration can help funds manage
liquidity and improve stress testing. As such, a fund could consider
periodically requesting information from intermediaries about
shareholder concentration.
---------------------------------------------------------------------------

    \421\ See Federated Hermes Comment Letter I (suggesting that
rule 22c-2(a)(2) be amended to require money market funds to enter
into agreements with intermediaries to obtain the needed shareholder
information); Morgan Stanley Comment Letter (``SEC should consider
requiring financial intermediaries holding omnibus positions to
provide data periodically and consistently to money market funds
regarding the ten largest underlying clients (excluding identities)
to assist money market funds in managing liquidity.''); BlackRock
Comment Letter (``The Commission could assess whether requiring some
transparency, such as anonymized flows by client type, could benefit
stress testing and liquidity management.'').
---------------------------------------------------------------------------

    One commenter suggested that shareholder concentration should be
reported monthly at the fund level, not the share class level.\422\
Reporting this information at the share class level provides a more
comprehensive view of a fund's overall shareholder concentration and a
better understanding of the group of investors that could impact the
fund's liquidity. This is particularly relevant in times of stress
because the required concentration information is more specific and
corresponds to the share class flow level reporting on Form N-MFP. Fund
level reporting may still be of value, and the Commission and investors
can use the data reported at the class level to then analyze
concentration at the fund level if needed. Reporting at the share class
level is also appropriate because money market fund shares are sold on
a class level and, in addition, such reporting is consistent with the
current reporting of shareholder concentration on Form N-1A. Reporting
at the share class level also provides insight into customized share
classes, which may have unique shareholder compositions for which
monitoring at the class level may be particularly important from a
liquidity risk perspective.
---------------------------------------------------------------------------

    \422\ See BlackRock Comment Letter (``[W]e note that the data
should be collected monthly at the Fund level and not the share
class level. While we understand the SAI currently lists 5% holders
at the share class level, we believe that information is provided
for a different reason than needing to monitor concentration in a
fund.'').
---------------------------------------------------------------------------

Shareholder Composition
    We are adopting, as proposed, amendments requiring a money market

fund that is not a government money market fund or a retail money
market fund to provide information about the composition of its
shareholders by type.\423\ Accordingly, funds must identify the
percentage of investors within the following categories: non-financial
corporation; pension plan; non-profit; state or municipal government
entity (excluding governmental pension plans); registered investment
company; private fund; depository institution and other banking
institution; sovereign wealth fund; broker-dealer; insurance company;
and other. This information is designed to assist with monitoring the
liquidity and redemption risks of institutional money market funds, as
different types of investors may pose different redemption risks. We
are not requiring this information of government money market funds
because these funds have lower redemption and liquidity risks than
other money market funds. In addition, we are not applying this
requirement to retail funds because these funds, by definition, are
limited to retail investors.
---------------------------------------------------------------------------

    \423\ See Item B.11 of amended Form N-MFP.
---------------------------------------------------------------------------

    With respect to the proposal for funds to report shareholder
composition by type, one commenter suggested that the categories of
investors should align with the current National Securities Clearing
Corporation (``NSCC'') social codes, which some industry participants
presently use.\424\ The NSCC list of social codes includes several
dozen distinct designations, which may cause confusion for money market
funds completing the disclosures as well as investors reviewing such
disclosures. In contrast, our list of general categories better
facilitates the disclosure process and provides sufficient detail for
Commission staff and investors monitoring liquidity and redemption
risk.\425\
---------------------------------------------------------------------------

    \424\ See Invesco Comment Letter.
    \425\ The categories we are adopting have some overlap with the
types of beneficial owners that large liquidity fund advisers and
other private fund advisers that report on Form PF use for purposes
of that form. See Question 16, Item B, Section 1b of Form PF. As a
result, there may be certain efficiencies for money market funds
with advisers to liquidity funds or other private funds.
---------------------------------------------------------------------------

Prime Money Market Funds' Selling Activity
    We are adopting, as proposed, an amendment to require information
about the gross market value of portfolio securities a prime money
market fund sold or disposed of during the reporting period.\426\
Commenters did not address this aspect of the proposed requirement.
This information will facilitate monitoring of prime money market
funds' liquidity management, as well as their secondary market
activities in normal and stress periods. It also will improve the
availability of data about how selling activity by money market funds
relates to broader trends in short-term funding markets. A prime fund
will be required to disclose the aggregate amount it sold or disposed
of for each category of investment.\427\ The categories of investments
mirror the categories funds already use on Form N-MFP for identifying
their month-end holdings (e.g., certificate of deposit, non-negotiable
time deposit, financial or non-financial company commercial paper, or
U.S. Treasury debt).\428\ To focus the disclosure on secondary market
activity, as proposed, portfolio securities held by a fund until
maturity are excluded from the disclosure. We are requiring only prime
funds to provide information about securities sold or disposed of
because asset liquidation by this type of money market fund contributed
to the market stress in March 2020 and during the 2008 financial
crisis. In contrast, government funds generally receive inflows during
periods of market stress and tend to provide liquidity to the market by
investing incoming cash flow in the repurchase agreement market and
purchasing securities. Tax-exempt funds are only a small segment of the
money market fund industry and are less likely to generate significant
liquidity concerns for the broader municipal market.
---------------------------------------------------------------------------

    \426\ See Part D of amended Form N-MFP. The proposed amendment
referred to the ``amount'' of portfolio securities. We are changing
the terminology to ``gross market value'' in the final amendments to
clarify that a fund may not net its purchases and sales for purposes
of this reporting item. This clarification is consistent with
language in the Proposing Release referring to the ``aggregate''
amount a fund sold or disposed of. See Proposing Release, supra note
6, at text accompanying n.274.
    \427\ See Item D.1 of amended Form N-MFP. Thus, if a prime money
market fund sold an instrument and then bought it back during the
reporting period, the fund should include the market value of that
sale in the reported gross market value of portfolio securities sold
during the reporting period.
    \428\ See Item C.6 of current Form N-MFP.
---------------------------------------------------------------------------

Liquidity Fees
    Consistent with the changes described above in the liquidity fee
mechanism section, and in a change from the proposal, we are amending
Form N-MFP to require money market funds to report the date on which
the liquidity fee was applied, the type of liquidity fee, and the
amount of the liquidity fee applied by the fund.\429\ In addition, we
are removing existing reporting requirements on Form N-CR related to
the application of liquidity fees because we believe monthly reporting
of the frequency, type, and size of liquidity fees on Form N-MFP is
more consistent with the modified liquidity fee framework we are
adopting than requiring current reporting on Form N-CR.
---------------------------------------------------------------------------

    \429\ See Item A.22 of amended Form N-MFP.
---------------------------------------------------------------------------

Share Cancellation
    Because the final rule permits stable NAV funds to use share
cancellation when interest rates and the fund's gross yield are
negative, subject to certain conditions, the final amendments will
require a stable NAV fund to report information about its use of share
cancellation on Form N-MFP. Specifically, the amendments require a fund
to report if it used share cancellation during the reporting period
and, if so, the dollar value of shares cancelled, the number of shares
cancelled, and the dates on which it used share cancellation.\430\ This
reporting will help the Commission and investors monitor a fund's
implementation of RDM share cancellation under final rule 2a-7. Under
the proposed rule, the Commission did not need to require separate
reporting of a fund's conversion to a floating NAV in response to a
negative interest rate event, because investors and the Commission can
currently observe such conversion through the fund's reported daily
NAVs on Form N-MFP. Given that the final rule will permit the use of
RDM share cancellation if a fund meets the rule's conditions, separate
reporting of its implementation is important to allow the Commission
and investors to assess how all stable NAV funds address negative
interest rates.
---------------------------------------------------------------------------

    \430\ See Item B.12 of amended Form N-MFP.
---------------------------------------------------------------------------

b. Changes To Improve the Accuracy and Consistency of Currently
Reported Information
    We are adopting, with the modifications discussed below, several
amendments to the information currently reported on Form N-MFP about
money market funds and their portfolio securities, including repurchase
agreements. These amendments are designed to, among other things,
improve the accuracy and consistency of such information reported on
Form N-MFP. However, in response to comments, we are not adopting the
full scope of the amendments we proposed such as requirements for lot-
level reporting of portfolio holdings and disaggregated information for
certain repurchase agreement reporting.

    We are adopting amendments that will require additional information
about repurchase agreement transactions and standardize how filers
report certain information. Specifically, the final amendments will
require, as proposed, that filers identify (1) the name of the
counterparty in a repurchase agreement; \431\ (2) whether a repurchase
agreement is centrally cleared and the name of the central clearing
counterparty, if applicable; \432\ (3) if a repurchase agreement was
settled on a triparty platform; \433\ and (4) the CUSIP of the
securities involved in the repurchase agreement.\434\ As proposed, the
final amendments will also include ``cash'' as a category of investment
that most closely represents the collateral in repurchase
agreements.\435\ However, in a change from the proposal, we are not
adopting the amendments to remove the ability of funds to aggregate
certain required information if multiple securities of an issuer are
subject to the repurchase agreement.
---------------------------------------------------------------------------

    \431\ See Item C.1 of amended Form N-MFP.
    \432\ See Item C.8.b. of amended Form N-MFP.
    \433\ See Item C.8.c. of amended Form N-MFP.
    \434\ See Item C.8.f of amended Form N-MFP.
    \435\ As discussed in the Proposing Release, adding a ``cash''
category is designed to recognize that cash is sometimes used as
collateral for repurchase agreements. We expect that this addition
will reduce inaccurate disclosure suggesting that a repurchase
agreement is under-collateralized. See Proposing Release, supra note
6, at paragraph accompanying n.278; Item C.8.k of amended Form N-
MFP.
---------------------------------------------------------------------------

    Several commenters disagreed with the proposed removal of the
ability of money market funds to aggregate certain required information
on Form N-MFP if multiple securities of an issuer are subject to a
repurchase agreement.\436\ These commenters suggested that the
additional reporting in a disaggregated format would impose significant
additional operational burdens for funds and that these burdens are not
justified by any benefit to the Commission or investors of the
additional information.\437\ For example, one commenter explained that
a money market fund can enter into a single repurchase agreement that
may cover over one hundred unique CUSIPs, and it would require
significant time to prepare and review this data for reporting on Form
N-MFP.\438\
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    \436\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
BlackRock Comment Letter; CCMR Comment Letter.
    \437\ Id.
    \438\ See BlackRock Comment Letter.
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    As discussed in the Proposing Release, the proposal to require
disaggregated information for repurchase agreements was designed to
provide more complete information about securities subject to a
repurchase agreement.\439\ This would assist the Commission's ability
to analyze and compare information regarding repurchase agreements on
Form N-MFP. The other amendments we are adopting will improve the
reported information about repurchase agreements and allow for improved
Commission monitoring.\440\ In light of the potential challenges of
reporting disaggregated information within five business days of month-
end at this time, and considering the benefits of the other information
about repurchase agreements we are requiring, we are not requiring
funds to report disaggregated information about securities subject to a
repurchase agreement at this time. Accordingly, under the final
amendments, money market funds will continue to be permitted to
aggregate certain required information regarding repurchase agreements
under certain conditions.
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    \439\ See Proposing Release, supra note 6, at section II.F.2.
    \440\ See Item C.1 and C.8 of amended Form N-MFP.
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    With respect to other repurchase agreement-related amendments, one
commenter argued that the proposed reporting of additional information
about the counterparty to the repurchase agreement, whether a
repurchase agreement is centrally cleared or a triparty agreement, and
the CUSIP of collateral subject to the repurchase agreement are not
appropriate given the costs involved to provide such information and
the limited utility in doing so.\441\ Another commenter supported the
proposed requirement to report the CUSIP of collateral subject to
repurchase agreements.\442\ This commenter further suggested that money
market fund managers would not incur substantial additional costs or
burdens with respect to reporting CUSIP identifiers of repurchase
agreement collateral because such managers more likely than not already
rely on the CUSIP reference data to assemble their funds' portfolios.
We do not agree with the assertion that the costs are not justified
given the potential benefits from requiring this information. As
discussed in the Proposing Release, requiring the name of the
counterparty and indicating whether a repurchase agreement is centrally
cleared will clarify how funds should report this information on the
form, as funds currently report varying information about repurchase
agreements in response to an item that currently requires the name of
the issuer.\443\ Moreover, the amendments recognize changes that have
occurred in the repurchase agreement market since the form was last
amended, such as the introduction of centrally cleared (or
``sponsored'') repurchase agreements. Requiring this additional
information is intended to improve data clarity regarding repurchase
arrangements and assist us in monitoring money market fund activity in
various segments of the market for repurchase agreements, including
potentially increased or decreased activity during periods of market
stress, which may affect availability of funding for borrowers.
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    \441\ See Federated Hermes Comment Letter I.
    \442\ See Comment Letter of American Bankers Association (Apr.
11, 2022) (``ABA Comment Letter II'') (letter focusing on security
identifiers).
    \443\ See Proposing Release, supra note 6, at section II.F.2.
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    Our proposed amendments to Form N-MFP also included amendments to
specify that, for purposes of reporting a fund's schedule of portfolio
securities in Part C of Form N-MFP, filers would be required to provide
information separately for the initial acquisition of a security and
any subsequent acquisitions of the security (i.e., lot-level
reporting).\444\ Requiring funds to report information separately for
each lot, including the trade date on which the security was acquired
and the yield of the security as of that trade date, could assist the
Commission in understanding how long a fund has held a given position
and the maturity of the position when it was first acquired.\445\
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    \444\ See Proposing Release, supra note 6, at section II.C.2.b.
    \445\ See proposed Item C.6 of Form N-MFP.
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    Several commenters disagreed with this aspect of the proposal.\446\
These commenters expressed concern that public lot-level reporting
could reveal trading strategies to predatory traders, and thus should
be kept confidential if the Commission requires this information. One
commenter did not believe this aspect of the proposal is appropriate
given the costs involved to provide such information and the limited
utility of the information for the Commission.\447\ Another commenter
expressed support for the proposed portfolio securities reporting
requirement, but suggested that the Commission periodically evaluate
whether any reporting continues to meet policy objectives and remains
useful.\448\
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    \446\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
BlackRock Comment Letter; CCMR Comment Letter.
    \447\ See Federated Hermes Comment Letter I.
    \448\ See Western Asset Comment Letter.
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    After considering these comments, we understand the concern that
requiring public lot-level reporting and trade date information may
subject filers to the risk

that predatory traders and other bad actors may seek to misuse this
information. While we continue to believe such information could, among
other things, help facilitate the Commission's understanding of money
market fund portfolio turnover during normal and stressed market
condition, we are also adopting other amendments to Form N-MFP that
will help facilitate the Commission's understanding in this area,
including new Part D to Form N-MFP, which includes information on prime
money market fund portfolio securities sold or disposed of during the
reporting period, and more frequent data reporting of daily liquidity,
net asset value, and flow data.\449\ In light of the potential risks
identified by commenters coupled with the other amendments to Form N-
MFP that we are adopting, we are not requiring public lot-level
reporting at this time. Under the final amendments, filers will
continue to be permitted but are not required to report information
separately for each lot.
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    \449\ See Part B and Part D of amended Form N-MFP.
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    We are also adopting, as proposed, certain amendments to Form N-MFP
that are intended to make it easier and more efficient to understand
information reported on the form. Under current Form N-MFP, filers are
required to indicate the category of the money market fund, choosing
among categories such as ``Treasury,'' ``Government/Agency,'' and
``Exempt Government,'' among others. We understand that these
categories for government money market funds have contributed to
confusion and inconsistent approaches to reporting.\450\ Accordingly,
we proposed to replace these three categories with a single
``Government Category'' and include a new subsection that requires
government money market funds to indicate whether they typically invest
at least 80% of the value of their assets in U.S. Treasury obligations
or repurchase agreements collateralized by U.S. Treasury
obligations.\451\ These proposed amendments were designed to provide
more clarity for filers and supply the Commission with more accurate
identification of different types of government money market funds.
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    \450\ See Item A.10 of current Form N-MFP.
    \451\ See Proposing Release, supra note 6, at section II.F.2.b.
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    Commenters generally did not discuss this specific aspect of the
proposal, but the one commenter who addressed this aspect of the
proposal supported it.\452\ This commenter stated that the proposed
amendments would reduce confusion and inconsistency in categorizing
government money market funds. This commenter also supported the
proposed addition of a new subsection to identify money market funds
that invest in Treasury obligations, either directly or through
repurchase agreements. We agree and are adopting the amendments as
proposed to money market fund categorization.\453\
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    \452\ See Federated Hermes Comment Letter I.
    \453\ See Item A.10 of amended Form N-MFP.
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    We are also adopting as proposed a new item in Form N-MFP that
would require filers to indicate whether the fund is established as a
cash management vehicle for affiliated funds and accounts.\454\ This
item is designed to make it easier and more efficient to identify
privately offered institutional money market funds. Separately, and as
proposed, we are adopting an amendment to the form to require a fund to
affirmatively state whether it seeks to maintain a stable price per
share, consistent with our proposal.\455\ Commenters generally did not
discuss these specific proposals, except one commenter agreed that the
proposed requirement to require filers to indicate whether the fund is
established as a cash management vehicle for affiliates is sufficiently
clear.\456\
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    \454\ See Item A.21 of amended Form N-MFP.
    \455\ See Item A.18 of amended Form N-MFP.
    \456\ See Federated Hermes Comment Letter I.
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    Under current Form N-MFP, filers are required to indicate the
category of each reported portfolio security using a list of categories
designated on the form.\457\ We are adopting as proposed the amendments
to the list of categories to distinguish between U.S. Government agency
debt categorized as (1) a coupon-paying note and (2) a no-coupon
discount note.\458\ This change will assist us in understanding whether
an agency security is a weekly liquid asset, as only agency discount
notes with less than 60 days to maturity qualify as weekly liquid
assets under the rule. In addition, we are adopting as proposed a
conforming change to the list of investment categories that a fund must
use for purposes of disclosing information about its holdings on its
website.\459\
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    \457\ See Item C.6 of current Form N-MFP.
    \458\ See Item C.6 of amended Form N-MFP.
    \459\ See amended rule 2a-7(h)(10)(i)(B)(2). We are also making
modernizing changes to rule 2a-7(h)(10) (e.g., by replacing the term
``website'' with ``website'') and correcting a typographical error
in rule 2a-7(h)(10)(iii) that refers to share prices of $1.000 and
$10.00 instead of $1.0000 and $10.000.
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    Commenters generally did not discuss these specific amendments,
except one commenter expressed support for this aspect of the proposal
if the Commission would find this information useful.\460\ As discussed