
[Federal Register Volume 88, Number 148 (Thursday, August 3, 2023)]
[Rules and Regulations]
[Pages 51404-51549]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15124]



[[Page 51403]]

Vol. 88

Thursday,

No. 148

August 3, 2023

Part II





Securities and Exchange Commission





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17 CFR Parts 270, 274, and 279





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

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

[[Page 51404]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 270, 274 and 279

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


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

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

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

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

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

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

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

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

I. Introduction

    The Commission is adopting amendments to rule 2a-7 under the 
Investment Company Act of 1940. Money market funds are a type of mutual 
fund registered under the Act and regulated pursuant to rule 2a-7.\4\ 
These funds are popular cash management vehicles for both retail and 
institutional investors because they seek to provide investors with 
principal stability and access to daily liquidity. In addition, money 
market funds serve as an important source of short-term financing for 
businesses, banks, and Federal, state, municipal, and Tribal 
governments. In March 2020, in connection with an economic shock from 
the onset of the COVID-19 pandemic, certain types of money market funds 
had significant outflows, contributing to stress on short-term funding 
markets that resulted in government intervention to enhance the 
liquidity of such markets.\5\ Our historical experience with these 
funds and the events of March 2020 have led us to re-evaluate certain 
aspects of the regulatory framework applicable to money market funds. 
Accordingly, the Commission is adopting amendments to rule 2a-7 and 
certain reporting forms that are designed to improve the resilience of 
money market funds during times of market stress while preserving the 
benefits that investors have come to expect from these funds.
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    \4\ Money market funds are also sometimes called ``money market 
mutual funds'' or ``money funds.''
    \5\ See infra section I.B (discussing these events in more 
detail).
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    In December 2021, the Commission proposed to amend rule 2a-7 to 
remove the tie between weekly liquid asset thresholds and the potential 
imposition of liquidity fees and redemption gates, since it appears 
these provisions contributed to investors' incentives to redeem from 
certain funds in March 2020 and affected fund managers' willingness to 
use available liquidity in their portfolios to meet redemptions.\6\ For 
funds that experienced the heaviest outflows in March 2020 and in prior 
periods of market stress, the proposal also included a new swing 
pricing requirement that was designed to mitigate the dilution and 
investor harm that can occur when other investors redeem--and remove 
liquidity--from these funds, particularly when certain markets in which 
the funds invest are under stress and effectively illiquid. The 
Commission also proposed to increase the minimum daily and weekly 
liquid asset requirements to better equip money market funds to manage 
significant and rapid investor redemptions. In addition, we proposed 
certain form amendments to improve transparency and facilitate 
Commission monitoring of money market funds. As part of the proposal, 
the Commission proposed to amend rule 2a-7 to prohibit a stable net 
asset value (``NAV'') money market fund from using share cancellation 
or a reverse distribution mechanism in a negative interest rate 
environment.
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    \6\ Money Market Fund Reforms, Investment Company Act Release 
No. 34441 (Dec. 15, 2021) [87 FR 7248 (Feb. 8, 2022)] (``Proposing 
Release'').
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    The Commission received comment letters on the proposal from a 
variety of commenters, including funds and investment advisers, law 
firms, other fund service providers, investor advocacy groups, 
professional and trade associations, and interested individuals.\7\ As 
discussed in greater detail throughout this release, these commenters 
expressed a diversity of views. Many commenters expressed support for 
aspects of the proposal, including removing the link between liquidity 
thresholds and the imposition of redemption gates and liquidity fees; 
increasing the minimum daily and weekly liquid asset requirements above 
current minimums; and clarifying the calculation of weighted average 
portfolio maturity and weighted average life maturity.\8\ Many 
commenters, however, expressed concern about the consequences of the 
proposed swing pricing requirement, suggesting, among other reasons, 
that it would be operationally difficult and may not effectively 
prevent destabilizing runs during periods of stress.\9\ Separately, 
several commenters expressed that the Commission should adopt more 
modest increases to the daily and weekly liquid asset requirements than 
proposed.\10\ Many commenters also generally opposed the proposed 
clarification of how stable net asset value money market funds should 
handle a negative interest rate environment, stating that the proposed 
prohibition from using share cancellation in certain negative interest 
environments could be operationally burdensome and costly without clear 
benefits for investors.\11\ Lastly, while some commenters were 
supportive of the proposed modifications to the fund reporting 
requirements, others expressed concern about the sensitivity or burdens 
of reporting certain information regarding money market fund investors 
or portfolios, as well as significant declines in liquidity.\12\
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    \7\ The comment letters on the Proposing Release (File No. S7-
22-21) are available at https://www.sec.gov/comments/s7-22-21/s72221.htm.
    \8\ See, e.g., Comment Letter of Investment Company Institute 
(Apr. 11, 2022) (``ICI Comment Letter''); Comment Letter of 
Americans for Financial Reform Education Fund (Apr. 11, 2022) 
(``Americans for Financial Reform Comment Letter'').
    \9\ See, e.g., Comment Letter of The Asset Management Group of 
the Securities Industry and Financial Markets Association (Apr. 11, 
2022) (``SIFMA AMG Comment Letter''); Comment Letter of State Street 
Global Advisors (Apr. 11, 2022) (``State Street Comment Letter'').
    \10\ See, e.g., Comment Letter of Western Asset Management 
Company, LLC (Apr. 11, 2022) (``Western Asset Comment Letter''); 
Comment Letter of Healthy Markets Association (Apr. 12, 2022) 
(``Healthy Markets Association Comment Letter'').
    \11\ See, e.g., Comment Letter of Federated Hermes Inc. (Apr. 
11, 2022) (``Federated Hermes Comment Letter I''); Comment Letter of 
Allspring Funds Management, LLC (Apr. 11, 2022) (``Allspring Funds 
Comment Letter''); Comment Letter of Fidelity Management Research 
Company LLC (Apr. 11, 2022) (``Fidelity Comment Letter'').
    \12\ See infra section II.F.
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    After considering the comments on the proposal, we are adopting 
rule and form amendments to improve the resilience and transparency of 
money market funds, with certain modifications.\13\ As proposed, the 
final amendments will remove the redemption gate provision from rule 
2a-7; increase the minimum daily and

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weekly liquid asset requirements to 25% and 50%, respectively; specify 
the weighted average portfolio maturity and weighted average life 
maturity calculations; and require public reporting of significant 
declines in liquidity on Form N-CR. However, we are not adopting the 
proposed swing pricing requirement. Rather, the final amendments will 
modify the current liquidity fee framework to require institutional 
prime and institutional tax-exempt money market funds to impose a 
liquidity fee when the fund experiences net redemptions that exceed 5% 
of net assets, while also allowing any non-government money market fund 
to impose a discretionary liquidity fee if the board determines a fee 
is in the best interest of the fund. Similar to the proposed swing 
pricing requirement, the liquidity fee framework is designed to better 
allocate liquidity costs associated with redemptions to the redeeming 
investors. In addition, in a change from the proposal, the final 
amendments will permit retail and government money market funds to use 
a reverse distribution mechanism if negative interest rates occur in 
the future with certain conditions, including appropriate disclosure to 
concisely and clearly describe to shareholders the fund's use of a 
reverse distribution mechanism and its effect on investors.
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    \13\ We have consulted and coordinated with the Consumer 
Financial Protection Bureau regarding this final rulemaking in 
accordance with section 1027(i)(2) of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act.
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    Moreover, while we are adopting the amended reporting requirements 
for Form N-MFP largely as proposed, we are making modifications to 
certain aspects of the requirements in response to commenter concerns 
about the sensitivity of publicly reporting certain investor and 
portfolio information. We are also adopting, largely as proposed in a 
January 2022 Proposing Release, amendments to Form PF reporting 
requirements for large liquidity fund advisers.\14\ The final 
amendments to Form PF generally are designed to align with relevant 
revisions we are making to Form N-MFP. Finally, we are adopting two 
technical amendments to Form N-CSR and Form N-1A to correct errors from 
recent Commission rulemakings.
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    \14\ Amendments to Form PF to Require Current Reporting and 
Amend Reporting Requirements for Large Private Equity Advisers and 
Large Liquidity Fund Advisers, Investment Advisers Act Release No. 
5950 (Jan. 26, 2022) [87 FR 9106 (Feb. 17, 2022)] (``Form PF 
Proposing Release'').
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A. Role of Money Market Funds and Existing Regulatory Framework

    Money market funds are managed with the goal of providing principal 
stability by investing in high-quality, short-term debt securities--
such as Treasury bills, repurchase agreements, or commercial paper--
whose value does not fluctuate significantly in normal market 
conditions. Money market fund investors receive dividends that reflect 
prevailing short-term interest rates and have access to daily 
liquidity, as money market fund shares are redeemable on demand. The 
combination of limited principal volatility, diversification of 
portfolio securities, payment of short-term yields, and liquidity has 
made money market funds popular cash management vehicles for retail and 
institutional investors. Money market funds also serve as an important 
source of short-term financing for businesses, banks, and governments.
    Different types of money market funds exist to meet differing 
investor needs. ``Prime money market funds'' hold a variety of taxable 
short-term obligations issued by corporations and banks, as well as 
repurchase agreements and asset-backed commercial paper.\15\ 
``Government money market funds,'' which are currently the largest 
category of money market fund, almost exclusively hold obligations of 
the U.S. Government, including obligations of the U.S. Treasury and 
Federal agencies and instrumentalities, as well as repurchase 
agreements collateralized by government securities.\16\ Compared to 
prime funds, government money market funds generally offer greater 
safety of principal but historically have paid lower yields. ``Tax-
exempt money market funds'' (or ``municipal money market funds'') 
primarily hold obligations of state and local governments and their 
instrumentalities, and pay interest that is generally exempt from 
Federal income tax for individual taxpayers.\17\ Within the prime and 
tax-exempt money market fund categories, some funds are ``retail'' 
funds and others are ``institutional'' funds. Retail money market funds 
are held only by natural persons, and institutional funds can be held 
by a wider range of investors, such as corporations, small businesses, 
and retirement plans.\18\
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    \15\ Commission staff regularly publish comprehensive data 
regarding money market funds on the Commission's website, available 
at https://www.sec.gov/divisions/investment/mmf-statistics.shtml. 
This data includes information about the monthly holdings of prime 
money market funds by type of security. Staff reports and other 
staff documents (including those cited herein) represent the views 
of Commission staff and are not a rule, regulation, or statement of 
the Commission. The Commission has neither approved nor disapproved 
the content of these documents and, like all staff statements, they 
have no legal force or effect, do not alter or amend applicable law, 
and create no new or additional obligations for any person.
    \16\ Some government money market funds generally invest at 
least 80% of their assets in U.S. Treasury obligations or repurchase 
agreements collateralized by U.S. Treasury securities and are called 
``Treasury money market funds.''
    \17\ In this release, we also use the term ``non-government 
money market fund'' to refer to prime and tax-exempt money market 
funds.
    \18\ A retail money market fund is defined as a money market 
fund that has policies and procedures reasonably designed to limit 
all beneficial owners of the fund to natural persons. See 17 CFR 
270.2a-7(a)(21) (rule 2a-7(a)(21)).
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    To some extent, different types of money market funds are subject 
to different requirements under rule 2a-7. One primary example is a 
fund's approach to valuation and pricing. Government and retail money 
market funds can rely on valuation and pricing techniques that 
generally allow them to sell and redeem shares at a stable share price, 
typically $1.00, without regard to small variations in the value of the 
securities in their portfolios.\19\ If the fund's stable share price 
and market-based value per share deviate by more than one-half of 1%, 
the fund's board may determine to adjust the fund's share price below 
$1.00, which is also colloquially referred to as ``breaking the buck.'' 
\20\ Institutional prime and institutional tax-exempt money market 
funds, however, are required to use a ``floating'' NAV per share to 
sell and redeem their shares, based on the current market-based value 
of the securities in their underlying portfolios rounded to the fourth 
decimal place (e.g., $1.0000). These institutional funds are required 
to use a floating NAV because their investors have historically made 
the heaviest redemptions in times of market stress and are more likely 
to act on the incentive to redeem if a fund's stable price per share is 
higher than its market-based value.\21\
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    \19\ See Proposing Release, supra note 6, at n.10 (discussing 
amortized cost method and penny rounding cost method); see also 17 
CFR 270.2a-7(c)(1)(i) and (g)(1) and (2). Throughout this release, 
we generally use the term ``stable share price'' or ``stable NAV'' 
to refer to the stable share price that these money market funds 
seek to maintain and compute for purposes of distribution, 
redemption, and repurchases of fund shares.
    \20\ These funds must compare their stable share price to the 
market-based value per share of their portfolios at least daily.
    \21\ See Proposing Release, supra note 6, at n.12.
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    As of March 2023, there were approximately 294 money market funds 
registered with the Commission, and these funds collectively held over 
$5.7 trillion of assets.\22\ The vast majority of these assets are held 
by government money market funds ($4.4 trillion), followed by prime 
money market funds ($1 trillion) and tax-exempt money

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market funds ($119 billion).\23\ Of prime money market funds' assets, 
approximately 44% are held by retail prime money market funds, with the 
remaining assets almost evenly split between institutional prime money 
market funds that are offered to the public and institutional prime 
money market funds that are not offered to the public.\24\ The vast 
majority of tax-exempt money market fund assets are held by retail 
funds.
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    \22\ Money Market Fund Statistics, Form N-MFP Data, period 
ending Mar. 2023, available at: https://www.sec.gov/files/mmf-statistics-2023-03.pdf. This data excludes ``feeder'' funds to avoid 
double counting assets.
    \23\ Id.
    \24\ Some asset managers establish privately offered money 
market funds to manage cash balances of other affiliated funds and 
accounts.
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    The Commission adopted rule 2a-7 in 1983 and has amended the rule 
several times over the years, including in 2010 and 2014, in response 
to market events that have highlighted money market fund 
vulnerabilities.\25\ Among other things, these past reforms introduced 
minimum daily and weekly liquid asset requirements, provided for 
redemption gates and liquidity fees as available tools when a fund's 
liquidity drops below a threshold, required institutional money market 
funds to use floating NAVs, and improved transparency through reporting 
and website posting requirements.\26\
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    \25\ See Proposing Release, supra note 6, at n.16 and 
accompanying text (providing more detail related to previous 
Commission actions and government intervention following the 2008 
financial crisis).
    \26\ Money Market Fund Reform, Investment Company Act Release 
No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (``2010 
Adopting Release''); Money Market Fund Reform; Amendments to Form 
PF, Investment Company Act Release No. 31166 (July 23, 2014) [79 FR 
47735 (Aug. 14, 2014)] (``2014 Adopting Release'').
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    In addition to reforms for money market funds, in 2014 the 
Commission introduced new reporting requirements for large advisers of 
liquidity funds on Form PF to better align reporting obligations of 
advisers regarding private liquidity funds to those of money market 
funds, in order to help the Commission have a more complete picture of 
the broader short-term financing market.\27\ Liquidity funds follow 
similar investment strategies as money market funds, but investment 
advisers are not required to register liquidity funds as investment 
companies under the Act. Liquidity funds are a relatively small but 
important category of private funds due to the role they play along 
with money market funds as sources, and users, of liquidity in markets 
for short-term financing.\28\ Similar to money market funds, liquidity 
funds are managed with the goal of maintaining a stable net asset value 
or minimizing principal volatility for investors. However, liquidity 
funds are not required to comply with the risk-limiting conditions of 
rule 2a-7, such as the restrictions on the maturity, diversification, 
credit quality, and liquidity of investments. Consequently, liquidity 
funds may take on greater risks and, as a result, may be more sensitive 
to market stress relative to money market funds.
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    \27\ Generally, investment advisers registered (or required to 
be registered) with the Commission with at least $150 million in 
private fund assets under management must file Form PF.
    \28\ As of Sept. 2022, there were 79 liquidity funds reported on 
Form PF with $336 billion in gross assets under management.
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B. March 2020 Market Events and Need for Reform

    As discussed in the Proposing Release, in March 2020, growing 
economic concerns about the impact of the COVID-19 pandemic led 
investors to reallocate their assets into cash and short-term 
government securities.\29\ Institutional investors, in particular, 
sought highly liquid investments, including government money market 
funds.\30\ In contrast, institutional prime and institutional tax-
exempt money market funds experienced outflows beginning the week of 
March 9, 2020, which accelerated the following week.\31\ Outflows from 
retail prime and retail tax-exempt funds began the week of March 16, a 
week after outflows in institutional funds began.
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    \29\ See SEC Staff Report on U.S. Credit Markets 
Interconnectedness and the Effects of the COVID-19 Economic Shock 
(Oct. 2020) (``SEC Staff Interconnectedness Report''), at 2, 
available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf.
    \30\ More specifically, government money market funds had record 
inflows of $838 billion in Mar. 2020 and an additional $347 billion 
of inflows in Apr. 2020. See id. at 25.
    \31\ Id.
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    During the two-week period of March 11 to 24, publicly offered 
institutional prime funds had a 30% redemption rate (about $100 
billion), which included outflows of approximately 20% of assets during 
the week of March 20 alone.\32\ In contrast, privately offered 
institutional prime funds had redemptions of 3% of assets during the 
week of March 20, and lost approximately 6% of their total assets ($17 
billion) from March 9 through 20. Retail prime funds had outflows of 
approximately 11% of their total assets ($48 billion) in the last three 
weeks of March 2020. Outflows from tax-exempt money market funds, which 
are mostly retail funds, were approximately 8% of their total assets 
($12 billion) from March 12 through 25.
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    \32\ See Proposing Release, supra note 6, at n.30.
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    The Proposing Release discussed the potential factors that 
incentivized investors to redeem from certain money market funds in 
March 2020.\33\ These factors included concerns about the potential 
imposition of redemption gates or liquidity fees based on observed 
declines in some funds' weekly liquid assets, general concerns about 
declining fund liquidity, general uncertainty related to a global 
health crisis and fears of associated economic downturns, and the need 
to meet near-term cash needs unrelated to the market stress. The 
Proposing Release also discussed data regarding the relationship 
between a fund's weekly liquid asset levels and the amount of outflows 
it experienced in March 2020. The data showed that funds with lower 
weekly liquid asset levels were more likely to have significant 
outflows in March 2020, but some funds with higher levels of liquidity 
also experienced large outflows.\34\
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    \33\ Id., at n.42 and accompanying discussion.
    \34\ Id., at n.44.
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    These outflows caused some money market funds to engage in greater 
than normal selling activity in short-term funding markets which, when 
combined with similar selling activity from other market participants 
such as hedge funds and bond mutual funds, both contributed to, and was 
impacted by, stress in short-term funding markets.\35\ In markets for 
private short-term debt instruments, such as commercial paper and 
certificates of deposit, conditions significantly deteriorated in the 
second week of March 2020. These markets, in which prime money market 
funds and other participants invest, essentially became ``frozen'' in 
March 2020, making it more difficult to sell these instruments, which 
have limited secondary trading even in normal market conditions.\36\ 
Similarly, stresses in short-term municipal markets contributed to 
pricing pressures and outflows for tax-exempt money market funds which, 
in turn, contributed to increased stress in municipal markets.\37\ One 
factor that appears to have contributed to money market funds' sales of 
long-term portfolio securities is the incentive fund managers had to 
maintain weekly liquid assets above 30% in an effort to avoid 
investors' concerns about the possibility of redemption gates or 
liquidity fees under our current rule.\38\
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    \35\ See Proposing Release, supra note 6, at n.54 and 
accompanying discussion.
    \36\ Id.
    \37\ Id.
    \38\ Id., at n.77 and accompanying discussion.

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[[Page 51408]]

    On March 18, 2020, the Federal Reserve, with the approval of the 
Department of the Treasury, broadened its program of support for the 
flow of credit to households and businesses by taking steps to enhance 
the liquidity and functioning of money markets with the establishment 
of the Money Market Mutual Fund Liquidity Facility (``MMLF''). The MMLF 
provided loans to financial institutions on advantageous terms to 
purchase securities from money market funds that were raising 
liquidity, thereby helping enhance overall market functioning and 
credit provisions to the broader economy.\39\ MMLF utilization reached 
a peak of just over $50 billion in early April 2020, or about 5% of net 
assets in prime and tax-exempt money market funds at the time.\40\ 
Along with other Federal Reserve actions and programs to support the 
short-term funding markets, the MMLF had the effect of significantly 
slowing outflows from prime and tax-exempt money market funds.\41\ The 
MMLF ceased providing loans in March 2021.
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    \39\ Information about the MMLF is available on the Federal 
Reserve's website at https://www.federalreserve.gov/monetarypolicy/mmlf.htm. The Federal Reserve Bank of Boston operated the MMLF.
    \40\ See Proposing Release, supra note 6, at n.36.
    \41\ Id., at n.37.
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    Commenters generally agreed that the growing economic concerns 
related to the impact of the COVID-19 pandemic led investors to seek 
liquidity in the form of cash and short-term government securities in 
March 2020, leading to outflows from prime money market funds and 
significant inflows to government money market funds.\42\ Commenters 
also acknowledged that the markets for private short-term debt 
instruments, such as commercial paper and certificates of deposit, 
significantly deteriorated during this period.\43\ However, some 
commenters questioned the nexus between the liquidity crisis in the 
short-term funding markets and the outflows from prime money market 
funds, asserting that events in the money market fund market were not a 
significant cause of the liquidity issues in the short-term funding 
markets in March 2020.\44\ Accordingly, some commenters suggested that 
any reform exclusive to money market funds by themselves will likely 
not address the broader liquidity challenges in the short-term funding 
markets.\45\ Going further, a few commenters expressed that the 
proposed reforms would have negative impacts to the short-term funding 
markets because they would reduce the demand for prime money market 
funds, thereby reducing capacity in the short-term funding markets.\46\ 
Some of these commenters encouraged the Commission, and policymakers 
more generally, to re-examine the short-term funding markets and the 
various events surrounding the volatility in March 2020, and to 
consider available tools other than reforms to the money market fund 
regulatory framework, that would improve resiliency in this segment of 
our markets.\47\ Conversely, other commenters asserted that liquidity 
issues with money market funds served as a source of significant 
contagion that imperiled the short-term markets broadly and forced 
government intervention.\48\ Some of these commenters suggested that 
the Commission should consider more aggressive reforms to solve the 
unique problems presented by money market funds, mainly that they are 
hybrid instruments that embody elements of both securities investments 
and banking products that are treated as cash-like by investors.\49\
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 51409]]

fund's weekly liquid assets fall below 30% of its total assets and the 
fund's board of directors determines that imposing a fee or gate is in 
the fund's best interests.\52\ Additionally, a non-government money 
market fund is required to impose a liquidity fee of 1% on all 
redemptions if its weekly liquid assets fall below 10% of its total 
assets, unless the board of directors of the fund determines that 
imposing such a fee would not be in the best interests of the fund.\53\ 
Separately, a money market fund is required to provide daily disclosure 
of the percentage of its total assets invested in weekly liquid assets 
(as well as daily liquid assets) on its website to provide transparency 
to investors and increase market discipline.\54\
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    \51\ Government funds are permitted, but not required, to impose 
fees and gates, as discussed below. See 17 CFR 270.2a-7(c)(2); 2014 
Adopting Release, supra note 26.
    \52\ If, at the end of a business day, a fund has invested 30% 
or more of its total assets in weekly liquid assets, the fund must 
cease charging the liquidity fee (up to 2%) or imposing the 
redemption gate, effective as of the beginning of the next business 
day. See 17 CFR 270.2a-7(c)(2)(i).
    \53\ The board also may determine that a lower or higher fee 
would be in the best interests of the fund. See 17 CFR 270.2a-
7(c)(2)(ii)(A).
    \54\ 17 CFR 270.2a-7(h)(10)(ii); 2014 Adopting Release, supra 
note 26, at section III.E.9.a.
---------------------------------------------------------------------------

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

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

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

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

    Many commenters agreed with the Commission's assessment that the 
regulatory link between a known liquidity threshold and the imposition 
of fees and gates contributed to investors' incentives to redeem from 
money market funds in March 2020.\60\ Many commenters also agreed with 
the Commission's assessment that the weekly liquid asset threshold also 
contributed to incentives for managers to avoid falling below this 
threshold.\61\ One commenter suggested that removing the regulatory 
link between weekly liquid assets and redemption gates (and liquidity 
fees) would free up an additional 30% of liquidity that funds could use 
in a crisis similar to March 2020.\62\
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    \60\ See, e.g., Comment Letter of Morgan Stanley Investment 
Management Inc. (Apr. 8, 2022) (``Morgan Stanley Comment Letter''); 
ICI Comment Letter; Comment Letter of Northern Trust Asset 
Management (Mar. 24, 2022) (``Northern Trust Comment Letter''); 
Fidelity Comment Letter; see also Proposing Release, supra note 6, 
at section II.A.1 (``Available evidence, supported by many comment 
letters in response to the Commission's request for comment [ ] 
suggested that funds' incentives to maintain weekly liquid assets 
above the 30% threshold were directly tied to investors' concerns 
about the possibility of redemption gates and liquidity fees under 
our rules if a fund drops below that threshold.'').
    \61\ See, e.g., ICI Comment Letter, Comment Letter of T. Rowe 
Price (Apr. 11, 2022) (``T. Rowe Comment Letter''); JP Morgan 
Comment Letter.
    \62\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

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

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

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

[[Page 51410]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 51411]]

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

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

B. Liquidity Fee Requirement

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

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

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

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

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

[[Page 51412]]

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

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

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

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

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

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

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

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

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

[[Page 51413]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 51414]]

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

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

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

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

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

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

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

[[Page 51415]]

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

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

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

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

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

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

[[Page 51416]]

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


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

[[Page 51417]]

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

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

    \126\ We refer to money market funds that are not government 
money market funds or retail money market funds collectively as 
``institutional funds'' when discussing the liquidity fee 
requirement.
    \127\ See amended rule 2a-7(c)(2)(ii) (allowing a fund's board 
to determine to use a smaller net redemption threshold than 5%). In 
contrast, the proposed swing pricing requirement would have required 
an institutional fund to adjust its current NAV per share by a swing 
factor reflecting spread and transaction costs, as applicable, if 
the fund has net redemptions for the pricing period. If the 
institutional fund experienced net redemptions exceeding 4% of the 
fund's net asset value (divided by the number of pricing periods the 
fund has in a business day, or such smaller amount of net 
redemptions as the swing pricing administrator determines), then the 
swing factor would also include market impact costs.
    \128\ See amended rule 2a-7(c)(2)(iii)(A).
    \129\ See amended rule 2a-7(c)(2)(iii)(D).
    \130\ See amended rule 2a-7(c)(2)(iii)(C).
---------------------------------------------------------------------------

    The new mandatory liquidity fee has some key differences as 
compared to the current rule. For example, the mandatory liquidity fee 
is triggered by net redemptions as opposed to weekly liquid 
assets.\131\ In addition, unlike the current rule, but consistent with 
the proposed swing pricing requirement, the amended framework does not 
provide discretion to the board with respect to its application. 
Rather, the fund will be required to apply a fee if it crosses the net 
redemption threshold unless the fee amount is de minimis. Moreover, the 
final amendments are more specific in terms of how a fund determines 
the amount of the fee than the current rule and, as a result, does not 
include a limit on the amount of the fee a fund can charge.\132\
---------------------------------------------------------------------------

    \131\ See 17 CFR 270.2a-7(c)(2)(ii) (requiring a non-government 
money market fund to impose a default liquidity fee of 1% on all 
redemptions if its weekly liquid assets fall below 10% of its total 
assets, unless the board of directors of the fund (including a 
majority of its independent directors) determines that imposing such 
a fee would not be in the best interests of the fund).
    \132\ In contrast, under the current rule, a liquidity fee may 
not exceed 2% of the value of the shares redeemed. See 17 CFR 
270.2a-7(c)(2)(ii)(A).
---------------------------------------------------------------------------

    The new mandatory liquidity fee only applies to institutional prime 
and institutional tax-exempt funds. This is in contrast to the current 
rule's default liquidity fees, which apply to retail funds, but is 
consistent with the approach we proposed for swing pricing. We are not 
requiring retail or government money market funds to implement 
mandatory liquidity fees due to differences in investor behavior and, 
in the case of government funds, liquidity costs. As discussed in the 
proposal, retail money market funds historically have had smaller 
outflows than institutional funds during times of market stress and 
appear to be less sensitive to declines in a fund's liquidity.\133\ As 
a consequence, we continue to believe retail fund managers may be more 
comfortable drawing down available liquidity from the fund's daily 
liquid assets and weekly liquid assets to meet redemptions in times of 
stress, without engaging in secondary market sales that could result in 
significant liquidity costs. In addition, we do not believe that retail 
prime and tax-exempt money market funds need special provisions 
requiring them to impose liquidity fees given both the anticipated 
effect of the daily and weekly liquid asset requirement changes and, as 
described below, the availability of the discretionary liquidity fee we 
are adopting. As for government money market funds, investors typically 
view these funds, in contrast to prime money market funds, as a 
relatively safe investment during times of market turmoil, and 
government money market funds have seen inflows during periods of 
market instability. Government money market funds are also less likely 
to incur significant liquidity costs when they purchase or sell 
portfolio securities

[[Page 51418]]

due to the generally higher levels of liquidity in the markets in which 
they invest.
---------------------------------------------------------------------------

    \133\ See Proposing Release, supra note 6, at section II.B.1.
---------------------------------------------------------------------------

    Consistent with the swing pricing proposal, the mandatory anti-
dilution mechanism (in this case a liquidity fee) applies to all 
institutional funds, irrespective of whether they are offered publicly. 
Some commenters suggested that privately offered institutional funds 
should not be subject to a mandatory anti-dilution tool.\134\ Asset 
managers typically organize privately offered institutional money 
market funds to manage cash balances of other affiliated funds and 
accounts. These funds operate in almost all respects as a registered 
money market fund, except that their securities are privately offered 
and thus not registered under the Securities Act.\135\ Some commenters 
suggested privately offered institutional funds are not subject to the 
same first-mover and run concerns as publicly offered institutional 
funds because they serve as tools for funds within the same fund 
complex and are used for internal purposes such as cash management and 
investing collateral from securities lending transactions.\136\ For 
example, one commenter suggested that, because of these 
characteristics, such funds are focused more on liquidity than 
yield.\137\ Other commenters suggested that such funds have greater 
transparency into redemptions than publicly offered institutional 
funds.\138\ We decline to provide an exception for these funds from the 
mandatory liquidity fee requirement because we do not believe that such 
funds are immune to the risks of dilution and potential first-mover 
advantages that mandatory liquidity fees are designed to address. For 
example, registered funds investing in a privately offered 
institutional fund may have an incentive to redeem shares in times of 
market stress (e.g., to raise funds to pay their own redemptions, which 
may be heightened at that time), increasing the risk of dilution for 
remaining registered funds. Potential first-mover incentives may also 
exist, particularly if registered funds are investing in a privately 
offered institutional fund in another fund complex in which the 
registered funds have no greater transparency, creating a potential 
incentive to redeem ahead of other investors in times of market 
stress.\139\
---------------------------------------------------------------------------

    \134\ See, e.g., Fidelity Comment Letter; BlackRock Comment 
Letter; Capital Group Comment Letter; ICI Comment Letter; Comment 
Letter of Dimensional Fund Advisors LP (Apr. 11, 2022) 
(``Dimensional Fund Advisors Comment Letter''); Dechert Comment 
Letter.
    \135\ See 17 CFR 270.12d1-1 (generally requiring that the 
acquiring fund reasonably believes that the money market fund 
operates in compliance with rule 2a-7).
    \136\ See, e.g., Fidelity Comment Letter; ICI Comment Letter; 
BlackRock Comment Letter; Capital Group Comment Letter; ICI Comment 
Letter; Dimensional Fund Advisors Comment Letter; Dechert Comment 
Letter; but see 2014 Adopting Release, supra note 26, at section 
III.C.5 (discussing the Commission's belief that unregistered money 
market funds are not immune to the risks posed by money market funds 
generally).
    \137\ See Capital Group Comment Letter.
    \138\ See Capital Group Comment Letter; ICI Comment Letter.
    \139\ See 2014 Adopting Release, supra note 26, at section 
III.C.5.
---------------------------------------------------------------------------

    The final rule provides for mandatory liquidity fees for 
institutional funds because institutional investors have a history of 
redeeming from these funds quickly in times of stress, increasing the 
risk of dilution for remaining shareholders in institutional funds. In 
addition, if the liquidity fee regime for these funds were purely 
voluntary, institutional funds (or their boards) may require additional 
time or information to decide whether to impose fees, depending on the 
considerations on which the fee is based. This could result in a delay 
that creates timing misalignments between an investor's redemption 
activity and the imposition of liquidity costs, thus allowing some 
investors to redeem without bearing the associated liquidity costs and 
contributing to dilution and a first-mover advantage. Further, some 
funds (or their boards) may be reluctant to impose fees to avoid 
perceived reputational or competitiveness issues associated with 
imposing fees before other institutional funds, which institutional 
investors may be more likely to react to than retail investors.\140\ As 
a result, a purely voluntary regime may result in institutional funds 
not imposing a fee unless a fund is under severe and prolonged stress, 
by which point the fee's effectiveness in addressing dilution and 
potential first-mover advantages would be significantly reduced.\141\
---------------------------------------------------------------------------

    \140\ As discussed above and in the Proposing Release, available 
evidence suggests that institutional investors were more sensitive 
to the possibility of redemption gates or liquidity fees in Mar. 
2020 than retail investors, and institutional prime and 
institutional tax-exempt money market funds managed their portfolios 
to avoid having less than 30% of their total assets invested in 
weekly liquid assets, at which point a board could determine to 
institute gates or fees. In addition, the one money market fund to 
fall below this threshold in Mar. 2020 did not institute gates or 
fees. See supra sections I.B and II.A; Proposing Release, supra note 
6, at sections I.B. and II.A. While we believe that institutional 
investors are more sensitive to redemption gates than to liquidity 
fees, some institutional investors may prefer to avoid the 
possibility of liquidity fees as well, if possible.
    \141\ One commenter, suggesting that discretionary fees would be 
sufficient, indicated that fund boards would have incentives to 
impose fees if redemptions reduced the fund's NAV and imposed 
material dilution, including due to legal and reputational risk 
associated with a failure to act. See Comment Letter of Federated 
Hermes, Inc. (July 5, 2023) (``Federated Hermes Comment Letter V''). 
Absent persuasive information that redemptions would have these 
stated effects, however, there may be contrary incentives to delay 
any fee determinations to avoid reputational risk or second-guessing 
associated with imposing a fee, particularly if comparable funds are 
not imposing fees.
---------------------------------------------------------------------------

a. Threshold for Mandatory Liquidity Fees
    We are requiring that institutional funds apply the mandatory 
liquidity fee when net redemptions for the business day exceed 5% of 
net assets, or such smaller amount of net redemptions as the board (or 
its delegate) determines. This 5% threshold is in contrast to the swing 
pricing proposal, which would have required funds to charge redeeming 
investors spread and certain other transaction costs if the fund had 
any net redemptions for the pricing period and to include market 
impacts in the charge if net redemptions exceeded 4% of net assets, or 
such smaller amount of net redemptions as the swing pricing 
administrator determines. In the proposal, application of this 4% 
threshold would have required funds to divide the 4% value by the 
number of pricing periods (i.e., NAV strikes) the fund has each 
day.\142\ In contrast, the 5% net redemption threshold is based on 
flows for all pricing periods in a given day. In addition, unlike the 
current rule, but consistent with the proposal, application of the 
anti-dilution mechanism is not tied to a weekly liquid asset threshold. 
Also, unlike the current rule, but consistent with the proposal, the 
mechanism applies to redemptions on each business day a fund crosses 
the net redemption threshold. This is in contrast to the current rule's 
default liquidity fee, which applies to redemptions the business day 
after weekly liquid assets fall below the 10% threshold and continues 
to apply on subsequent days until the board determines that the 
liquidity fee is no longer in the best interests of the fund. Per the 
rule we are adopting, an institutional prime or institutional tax-
exempt money market fund must apply a liquidity fee if its total daily 
net redemptions exceed 5% of the fund's net asset value based on flow 
information available within a reasonable period after the last 
computation of the fund's net asset

[[Page 51419]]

value on that day. If this threshold is crossed, the fund must apply a 
liquidity fee to all shares that are redeemed at a price computed on 
that day.\143\
---------------------------------------------------------------------------

    \142\ The proposal defined ``pricing period'' to mean the period 
of time in which an order to purchase or sell securities issued by 
the fund must be received to be priced at the next computed NAV. For 
example, if a fund computes a NAV as of 12 p.m. and 4 p.m., the fund 
would determine if it had net redemptions for each pricing period 
and, if so, apply swing pricing for the corresponding NAV 
calculation.
    \143\ See amended rule 2a-7(c)(2)(ii).
---------------------------------------------------------------------------

    Many commenters suggested that the proposed 4% market impact 
threshold was too low and that a redemption-based threshold for 
applying any charge to redeeming investors should be higher than 4%. 
Some commenters suggested that money market funds frequently experience 
net redemptions greater than 4% in normal market conditions due to 
seasonal redemption activity such as investor redemptions to fulfill 
payroll or tax obligations.\144\ Some commenters suggested that money 
market funds do not incur transaction costs or dilution at such low 
levels of net redemptions due to the structure of these funds, 
including liquidity requirements that insulate funds from transaction 
costs, which allows funds to pay redemptions through maturing assets 
instead of secondary market activity even during periods with high 
redemption levels.\145\ Some commenters suggested that if a fund has 
multiple NAV strikes per day, then the 4% threshold would be 
particularly problematic because the proposal divided the 4% figure by 
the number of pricing periods per day, resulting in a lower 
threshold.\146\ One commenter suggested that swing pricing should be 
triggered by portfolio security sales that are needed to fund 
shareholder redemptions.\147\ The same commenter stated that funds 
should have discretion in setting their own swing thresholds.
---------------------------------------------------------------------------

    \144\ See, e.g., Morgan Stanley Comment Letter; Bancorp Comment 
Letter; Federated Hermes Comment Letter I; IIF Comment Letter; SIFMA 
AMG Comment Letter; BlackRock Comment Letter; Federated Hermes 
Comment Letter II.
    \145\ See, e.g., Allspring Funds Comment Letter; Fidelity 
Comment Letter; T. Rowe Comment Letter; US Chamber of Commerce 
Comment Letter; Vanguard Comment Letter; Western Asset Comment 
Letter; SIFMA AMG Comment Letter; Federated Hermes Comment Letter 
II.
    \146\ See, e.g., Bancorp Comment Letter; ICI Comment Letter.
    \147\ See Capital Group Comment Letter.
---------------------------------------------------------------------------

    Many commenters suggested limiting the application of liquidity 
fees to periods of market stress. Several commenters suggested that 
fund boards should have discretion to determine when fees should apply, 
which would effectively limit fees to times of stress.\148\ Several 
commenters expressed support for requiring a fund to apply a liquidity 
fee if it has net redemptions of more than 10%. These commenters 
generally suggested that the rule should pair a net redemption 
threshold with a weekly liquid asset threshold to ensure that the fee 
would apply only when the fund is under stress.\149\ Some of these 
commenters suggested that a liquidity threshold is needed because a 
fund could meet net redemptions of more than 10% without dilution if it 
has sufficient liquidity and because redemptions exceeding more than 
10% can occur under normal market conditions, although they are rarer 
than net redemptions exceeding 4% of net assets.\150\ Some commenters 
suggested that pairing a weekly liquid asset threshold with a net 
redemption threshold would reduce the predictability of the liquidity 
fee trigger and reduce the likelihood of preemptive redemptions in 
comparison to the current rule, especially considering the effect of 
removing redemption gates from the rule, which commenters suggested 
were more likely to incentivize investor redemptions than liquidity 
fees.\151\ Some commenters suggested a tiered approach with multiple 
thresholds and fee amounts, beginning with the dual threshold of 10% 
net redemptions and 30% weekly liquid assets and then using weekly 
liquid asset-based thresholds to determine when to increase the fee 
amount.\152\ Two commenters discussed using a tiered approach with 
solely weekly liquid asset thresholds.\153\ Commenters supporting a 
tiered approach generally suggested that beginning with relatively 
small fee amounts may reduce investor incentives to preemptively redeem 
in response to declines in liquidity in an effort to avoid a fee.\154\ 
Separately, some commenters suggested thresholds based on the amount of 
net redemptions over multiple days to identify circumstances in which a 
fund is under stress.\155\
---------------------------------------------------------------------------

    \148\ See, e.g., ICI Comment Letter (suggesting that the rule 
require fund boards to consider certain enumerated factors when 
deciding whether to implement a liquidity fee, subject to a 
determination that implementing fees is in the best interests of the 
fund and its shareholders and is necessary to prevent material 
dilution or other unfair results); JP Morgan Comment Letter; 
Federated Hermes Comment Letter II; Invesco Comment Letter; SIFMA 
AMG Comment Letter.
    \149\ See, e.g., Invesco Comment Letter; IIF Comment Letter; 
SIFMA AMG Comment Letter (explaining that the 10% net redemption 
threshold was selected because it represents half of the commenter's 
preferred 20% daily liquid asset threshold and is less likely to be 
triggered by routine, expected flow activity, particularly if paired 
with a liquidity threshold); ICI Comment Letter.
    \150\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter.
    \151\ See, e.g., IIF Comment Letter; JP Morgan Comment Letter; 
BlackRock Comment Letter.
    \152\ See, e.g., BlackRock Comment Letter; JP Morgan Comment 
Letter; IIF Comment Letter.
    \153\ See Western Asset Comment Letter (suggesting a mandatory 
approach to tiered fees that would first trigger when weekly liquid 
assets are below 30%); ICI Comment Letter.
    \154\ See, e.g., ICI Comment Letter; Western Asset Comment 
Letter; JP Morgan Comment Letter.
    \155\ See, e.g., Morgan Stanley Comment Letter (suggesting a 
framework in which fees would apply when net redemptions are more 
than 15% over two consecutive trading days); State Street Comment 
Letter (suggesting that fees should trigger if net redemptions 
exceed 5% for three consecutive days and the fund has experienced an 
event that requires reporting on Form N-CR).
---------------------------------------------------------------------------

    After considering comments, we are adopting a 5% net redemption 
threshold for mandatory liquidity fees. We recognize that some funds 
would trigger the proposed 4% net redemption threshold with some 
frequency under normal market conditions, particularly if the fund had 
multiple NAV strikes per day and therefore used a smaller threshold for 
each pricing period under the proposal. Based on historical flow data, 
we estimate that an average of 4.4% of institutional prime and 
institutional tax-exempt money market funds would cross a 4% net 
redemption threshold on a given day.\156\ To reduce the burdens of the 
liquidity fee requirement and to reduce the frequency at which the 
requirement may trigger under normal market conditions, when liquidity 
costs and the benefits to remaining shareholders of imposing liquidity 
fees are likely small, we are increasing the threshold to 5%. We 
estimate that an average of 3.2% of institutional funds would cross a 
5% net redemption threshold on a given day. While funds may still cross 
the 5% threshold under normal market conditions, we anticipate that a 
fund's liquidity costs generally will be de minimis under those 
circumstances, and the final rule will not require a fund to apply a 
fee when estimated costs are de minimis.\157\ We are also making other 
changes to the final rule that we believe will reduce the burdens of 
determining the amount of the fee, as discussed below.
---------------------------------------------------------------------------

    \156\ See infra section IV.C.4.b.i (analyzing historical daily 
redemptions out of institutional prime and institutional tax-exempt 
money market funds between Dec. 2016 and Oct. 2021).
    \157\ See amended rule 2a-7(c)(2)(iii)(D).
---------------------------------------------------------------------------

    Consistent with the swing pricing proposal, the final rule permits 
a fund to use a lower net redemption threshold than is required.\158\ 
Allowing a fund's board (or delegate) to use a net redemption threshold 
below 5% for purposes of applying mandatory fees is designed to 
recognize that there may be circumstances in which a smaller threshold 
would be appropriate to mitigate dilution of fund shareholders. For 
example, this may be the case when

[[Page 51420]]

a fund holds a larger amount of less liquid investments or in times of 
stress.
---------------------------------------------------------------------------

    \158\ See amended rule 2a-7(c)(2)(ii); proposed rule 2a-
7(c)(2)(vi)(B).
---------------------------------------------------------------------------

    We are not adopting an even higher net redemption threshold, or a 
net redemption threshold paired with a liquidity threshold, as some 
commenters suggested. While a higher net redemption threshold, such as 
10%, would reduce the likelihood of a fund crossing the threshold under 
normal market conditions when liquidity costs are low, it likewise 
would reduce the likelihood of a liquidity fee applying in the 
beginning wave of redemptions in a crisis period. For example, of the 
outflows from institutional prime and tax-exempt money market funds 
during the week of March 20, 2020, approximately 31% of fund days were 
above the 5% threshold, but only 11% of fund days were above the 10% 
threshold.\159\ If investors can redeem during the beginning stages of 
a crisis with a very low likelihood of incurring a fee, that may 
incentivize investors to redeem early, contributing to a first-mover 
advantage. In addition, we considered the effect of different net 
redemption thresholds during periods of prolonged stress, which might 
have occurred in March 2020 absent government intervention, by modeling 
fund portfolios and liquidity levels.\160\
---------------------------------------------------------------------------

    \159\ See infra section IV.C.4.b.i (discussing this analysis and 
other analyses regarding net redemption thresholds for mandatory 
liquidity fees). ``Fund days'' refers to observations of daily 
redemptions using a sample set of funds during a particular period 
of time. Here, the fund days relate to a measure of daily outflows 
during the week of Mar. 20, 2020. To illustrate the analysis, we 
observed 43 institutional prime and institutional tax-exempt money 
market funds over the 5 days that week. This results in 215 (= 43 x 
5) fund day observations. Using a net redemption threshold of 5%, we 
observed that during the week of Mar. 20 funds would have exceeded 
that threshold on 31% of fund days. This means that net outflows 
exceeded the 5% threshold on 67 (= 0.31 x 215) fund days during the 
week of Mar. 20.
    \160\ See id.
---------------------------------------------------------------------------

    If we were to pair a 10% net redemption threshold with a weekly 
liquid asset threshold, that would further reduce the likelihood of a 
liquidity fee applying to the first wave of redemptions in a stress 
period. Moreover, adding a weekly liquid asset threshold to a net 
redemption threshold, or using a weekly liquid asset threshold on its 
own, would allow investors to better predict when a liquidity fee may 
apply, which may contribute to preemptive redemptions. Incorporating a 
fund's weekly liquid assets into the liquidity fee trigger also may 
incentivize fund managers to maintain weekly liquid assets above the 
relevant threshold, creating a disincentive for using available 
liquidity to meet redemptions and potentially contributing to dilution 
of remaining shareholders through the sale of longer-term portfolio 
securities in a stress period. In March 2020, we observed both of these 
unintended results from the tie between liquidity fees and weekly 
liquid assets in the current rule. As for a tiered approach, we 
understand some commenters' views that using a weekly liquid asset 
threshold to trigger a very small fee amount may be less likely to 
trigger preemptive runs at the outset. However, a tiered approach that 
increases the fee amount according to a specific schedule as liquidity 
declines below predictable thresholds has the risk of ``cliff 
effects.'' Specifically, a tiered approach may incentivize investors to 
redeem before a fund crosses a lower, predictable weekly liquid asset 
threshold to avoid a nonlinear jump in the fee size.
    We also are not adopting other liquidity fee approaches that some 
commenters suggested. A net redemption threshold based on net 
redemptions over multiple trading days may lead to a threshold that is 
more predictable than same day net redemptions, as funds provide 
information about the prior day's net flows on their websites.\161\ In 
addition, a multi-day threshold would contribute to operational 
complexity if the fee applied to redemptions that trigger the fee, as a 
fund would need to apply a fee to redemptions that occurred on a prior 
day. Alternatively, if the fee applied to redemptions occurring after 
the threshold is triggered, this approach would contribute to a first-
mover advantage, as investors redeeming at the onset of market stress 
would be significantly less likely to incur a fee.
---------------------------------------------------------------------------

    \161\ See 17 CFR 270.2a-7(h)(10)(ii)(C).
---------------------------------------------------------------------------

    We also are not adopting an approach that allows funds to establish 
their own criteria for triggering liquidity fees or that relies on 
board considerations of certain criteria. If institutional funds were 
permitted to establish their own criteria for triggering liquidity 
fees, we believe they may use criteria that are unlikely to trigger 
liquidity fees, particularly if they perceive the potential for 
reputational harm from imposing fees. With respect to board 
determinations, as discussed in the Proposing Release, we do not 
believe an approach that relies on board determinations would result in 
timely decisions to impose liquidity fees on days when the fund has net 
redemptions that, due to associated costs to meet those redemptions, 
will dilute the value of the fund for remaining shareholders.\162\ For 
instance, it may take time for a fund board to convene and determine 
whether to apply a liquidity fee with respect to any particular stress 
event. We do not believe that these discretionary approaches would 
provide an effective tool for addressing institutional shareholder 
dilution and potential institutional investor incentives to redeem 
quickly in times of liquidity stress to avoid further losses. Finally, 
we are not adopting a threshold based on when a fund must sell 
portfolio securities to satisfy redemptions because, as discussed 
above, we believe such an approach overlooks the costs redeeming 
investors impose by removing liquidity from the fund, including 
subsequent rebalancing costs, and by increasing the likelihood that the 
fund will need to sell less liquid assets to satisfy future 
redemptions.
---------------------------------------------------------------------------

    \162\ See Proposing Release, supra note 6, at n.95 and 
accompanying text.
---------------------------------------------------------------------------

    When a fund crosses the 5% net redemption threshold, it must apply 
a liquidity fee to all shares that are redeemed at a price computed on 
that day. As a result, when the 5% net redemption threshold is crossed, 
the fee must be applied to all shares redeemed that day, including 
redemptions that are eligible to receive a NAV computed on that day 
even if received by the fund after the last pricing period of the day. 
This approach will require redeeming investors who cause the fund to 
exceed the threshold to bear the costs of their redemption activity, 
irrespective of when they redeem during the day. This approach is 
different from the current rule, which provides that default liquidity 
fees begin to apply on the day after the fund has crossed the 10% 
weekly liquid asset threshold. Compared to the current rule, the 
approach we are adopting is designed to better align the application of 
liquidity fees to those investors whose redemptions result in liquidity 
costs for the fund and to reduce potential first-mover advantages. We 
recognize, however, that funds and intermediaries may need to update 
their systems to apply fees to redemptions on the day the net 
redemption threshold is crossed.\163\
---------------------------------------------------------------------------

    \163\ Under the current rule, the determination to apply 
discretionary liquidity fees could occur at any time during the day, 
meaning that funds and intermediaries would need to begin to apply 
fees to redemptions on that day. See 2014 Adopting Release, supra 
note 26, at n.383 and accompanying text. It is our general 
understanding, in light of the current rule, that there has been an 
industry expectation that a fund board would determine to impose 
discretionary fees after the end of a trading day, such that 
discretionary fees would begin to apply on the next morning.

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

[[Page 51421]]

    Consistent with the final rule, the proposed swing pricing 
requirement would have applied a charge to redeeming investors who 
caused the fund to have net redemptions. However, the design of the net 
redemption threshold in the final rule is somewhat different from the 
proposal, which would have applied a charge to redeeming investors 
based on net redemption activity for each pricing period if a fund had 
multiple NAV strikes per day. Some commenters expressed concern about 
separately analyzing flows for each pricing period under the proposal. 
For example, some commenters stated that institutional money market 
fund investors tend to redeem in the morning and move remaining cash 
back into the fund toward the end of the day, making it more likely 
that funds would need to apply swing pricing in the morning even if 
investor activity for the day, on net, would not cross a 
threshold.\164\ Some commenters expressed concern about potentially 
needing to calculate liquidity costs and apply a charge multiple times 
a day.\165\ In addition, some commenters suggested that it would be 
particularly difficult to calculate liquidity costs under a tightly 
compressed timeline, which is especially a concern for funds that offer 
same-day settlement since the swing pricing adjustment had to occur 
before a fund published its NAV.\166\
---------------------------------------------------------------------------

    \164\ See, e.g., Invesco Comment Letter; Western Asset Comment 
Letter; SIFMA AMG Comment Letter; BlackRock Comment Letter.
    \165\ See, e.g., Northern Trust Comment Letter; U.S. Chamber of 
Commerce Comment Letter; Invesco Comment Letter; ABA Comment Letter 
I; IIF Comment Letter; Mutual Fund Directors Forum Comment Letter.
    \166\ See, e.g., SIFMA AMG Comment Letter; BlackRock Comment 
Letter; Capital Group Comment Letter.
---------------------------------------------------------------------------

    The final rule will not distinguish between flows for different 
pricing periods during the day and, instead, will apply a fee to all 
investors who redeemed on that day if the threshold is crossed. This 
addresses commenters' concerns about applying a threshold to individual 
pricing periods during the day and reduces burdens by requiring no more 
than one liquidity fee determination per day. We recognize, however, 
that the requirement to apply a liquidity fee to all shares redeemed on 
the day the 5% threshold is crossed will likely require some 
adjustments for funds that offer multiple NAV strikes per day.\167\ 
Specifically, we recognize that an investor may redeem at a pricing 
period in the morning or early afternoon, before the fund knows that it 
has crossed the 5% threshold for the day. Under these circumstances, 
the final rule will necessitate a fund that offers multiple NAV strikes 
to develop a method for applying the fee to shares redeemed in an 
earlier pricing period on that day. Funds might take different 
approaches to address this issue. For instance, among other potential 
approaches, the fund might apply the liquidity fee charge to the 
remaining balance in an investor's account if the investor did not 
redeem the full amount of its shares in the fund. Another approach 
would be to hold back a portion of the redemption proceeds until the 
end of the day when the liquidity fee determination is made.\168\ 
Alternatively, a fund might develop a mechanism for taking back a 
portion of redemption proceeds that the investor has already received. 
Further, while not required, some funds might choose to reduce the 
number of NAV strikes they offer or no longer offer multiple NAV 
strikes for operational ease.\169\ Funds and intermediaries may also 
develop other approaches to address this issue. Depending on a given 
fund's approach, a redeeming investor may experience a reduction in its 
access to liquidity relative to current practices. In addition, 
different approaches may have differing effects on investors or raise 
tax or other considerations. Overall, we believe it is unlikely that 
the mandatory liquidity fee would result in a redeeming investor being 
unable to access same-day liquidity.\170\
---------------------------------------------------------------------------

    \167\ See infra section IV.C.4.b.ii.
    \168\ See BlackRock Comment Letter (stating that, under its 
preferred liquidity fee framework, it would plan for its multi-
strike NAV funds to pay out a portion of redemption proceeds after 
each intraday NAV is struck, with the remaining redemption proceeds 
paid out after the close if no fee is required or reduced by the fee 
if a fee is required).
    \169\ See infra section IV.C.4.b.ii.
    \170\ See id.
---------------------------------------------------------------------------

    Some commenters questioned the fairness of applying a charge to 
certain types of investors who redeem on a given day. For instance, 
some commenters suggested that it would be unfair to apply a charge to 
investors who redeem and later purchase an identically sized investment 
on the same day, because these investors would incur costs despite 
having no net effect on liquidity.\171\ One commenter suggested that it 
would be unfair for a shareholder redeeming a relatively small number 
of shares to be charged a liquidity fee because another shareholder 
redeemed a large number of shares and triggered the threshold.\172\
---------------------------------------------------------------------------

    \171\ See, e.g., Federated Hermes Comment Letter I; Allspring 
Funds Comment Letter; Americans for Tax Reform Comment Letter.
    \172\ See Dechert Comment Letter.
---------------------------------------------------------------------------

    With respect to the application of a fee to an investor who has 
both redeemed and purchased the fund's shares on the relevant day, the 
final rule would permit funds to apply liquidity fees based on an 
investor's net transaction activity for that day. The current rule 
likewise provides this flexibility.\173\ When the Commission adopted 
the liquidity fee framework in the current rule, however, several 
commenters suggested that it may be too operationally difficult and 
costly for funds to apply liquidity fees to shareholders based on their 
net activity for the day. As a result, while we are permitting a fund 
to apply fees based on a shareholder's net activity, this approach is 
not required, and a fund could instead apply liquidity fees to each 
redemption separately. As for the application of a liquidity fee to 
small redemptions, the final rule will require application of liquidity 
fees regardless of the size of the redemption. Consistent with the 
Commission's views in 2014 with respect to the current rule's liquidity 
fee framework, an exception from the mandatory liquidity fee for small 
redemptions would increase the cost and complexity of the amendments 
and could facilitate gaming on the part of investors because investors 
could attempt to fit their redemptions within the scope of an 
exception.\174\
---------------------------------------------------------------------------

    \173\ See 2014 Adopting Release, supra note 26, at paragraph 
accompanying n. 380.
    \174\ See id. at section III.C.7.a (stating that such an 
exception for small redemptions would add cost and complexity both 
as an operational matter--for example, fund groups would need to be 
able to separately track which shares are subject to a fee and which 
are not, and create the system and policies to do so--and in terms 
of ease of shareholder understanding).
---------------------------------------------------------------------------

    Under the final rule, to determine whether a fund has crossed the 
5% threshold, the fund will use information about its net flows for the 
day that are available within a reasonable period of time after the 
last pricing time of that day.\175\ For example, if the fund's last NAV 
strike is as of 3 p.m., it would calculate its net flows within a 
reasonable time period thereafter such that the fund can calculate and 
apply any fee as of that day. The fund's approach to determining when 
to calculate net flows should be in its board-approved guidelines on 
the application of liquidity fees.\176\ In determining when to 
calculate its net flows, a fund should consider historical data on when 
it typically receives flow

[[Page 51422]]

information and may also consider the period of time needed to 
calculate and apply fees. For example, if a fund generally receives 
substantially all of its flows by 5 p.m. and the process for 
determining the fee amount will take up to one hour, the rule would not 
require the fund to wait until 6 p.m. to calculate its net flows if, by 
6 p.m., the fund typically has an even larger percentage of its flows. 
Using the same example, it would not be reasonable for this fund to 
calculate its net flows at 3:30 p.m., when it generally has less than a 
majority of its net flows by this time, given that the fund can 
reasonably expect, based on historical data, to have more net flow 
information by 5 p.m. and still be able to calculate and apply any fee 
as of that later time. This approach is designed to provide a fund with 
flexibility to calculate daily flows using the best information 
available to the fund while still being able to offer same-day 
settlement. Consistent with the proposal and with 17 CFR 270.18f-3 
(``rule 18f-3''), an institutional fund with multiple share classes 
must include net flow activity across all share classes in the 
aggregate when determining if the fund has crossed the 5% threshold, 
rather than applying the threshold on a class by class basis.\177\
---------------------------------------------------------------------------

    \175\ See amended rule 2a-7(c)(2)(ii).
    \176\ See infra section II.B.2.b (discussing liquidity fee 
guidelines that the fund's board must approve if it delegates its 
responsibility for liquidity fee determinations to the fund's 
investment adviser or officers).
    \177\ See Proposing Release, supra note 6, at n. 112 and 
accompanying text.
---------------------------------------------------------------------------

    Some commenters stated that it may be difficult for funds to 
receive sufficient flow information to implement swing pricing.\178\ A 
few commenters suggested that using estimates of flows for swing 
pricing would raise potential NAV error and liability concerns.\179\ A 
few commenters suggested that funds may need to establish earlier cut-
off times for receiving investor orders.\180\ As discussed below, the 
amended rule requires that funds calculate net redemptions based on 
actual flow data for the day, as opposed to estimates of flows. In 
addition, in a change from the proposal, we are not requiring funds to 
separately examine flows for each pricing period of the day or reflect 
the charge in the form of a NAV adjustment. We believe these changes 
help mitigate commenters' concerns about sufficiency of flow 
information, as well as liability and other risks.
---------------------------------------------------------------------------

    \178\ See, e.g., ICI Comment Letter; Fidelity Comment Letter; 
Capital Group Comment Letter; Invesco Comment Letter.
    \179\ See, e.g., Invesco Comment Letter; ICI Comment Letter; 
SIFMA AMG Comment Letter; ICI Comment Letter; see also Western Asset 
Comment Letter (expressing concern about erroneous application of 
market impacts if an investor or its intermediary partner notifies 
the fund of large outflows and then cancels the instructions late in 
the trading day).
    \180\ See, e.g., Invesco Comment Letter; State Street Comment 
Letter; Dechert Comment Letter; IDC Comment Letter; JP Morgan 
Comment Letter; Federated Hermes Comment Letter I; Fidelity Comment 
Letter.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, institutional money market 
funds often impose order cut-off times to be able to offer same-day 
settlement, which requires that funds complete Fedwire instructions 
before the Federal Reserve's 6:45 p.m. Eastern Time (ET) Fedwire cut-
off time.\181\ Therefore, we believe many institutional funds would 
have a sizeable portion of their daily flows by the last pricing time 
of the day or within a reasonable period of time thereafter. We 
understand there will be circumstances in which the flow information a 
fund uses to determine whether it has crossed the net redemption 
threshold does not reflect the fund's full flows for that day. For 
example, a fund may receive subsequent cancellations or corrections to 
correct intermediary or investor errors, which modify the flows. In 
addition, the fund, or a share class of the fund, may settle some 
transactions on T+1 and receive flow information for those trades from 
intermediaries later, although they are eligible to receive the NAV as 
of the last pricing time.\182\ To the extent that a fund received 
additional flow information after determining that it crossed the 5% 
threshold, but before applying a liquidity fee, the fund could take the 
additional flow information into account when determining the amount of 
the liquidity fee. While using the fund's net flows available within a 
reasonable period after the last pricing time to determine whether the 
fund has crossed the 5% threshold may result in false positives and 
false negatives under certain circumstances, we believe the associated 
risk is relatively low because we anticipate that funds typically will 
not impose liquidity fees under normal market conditions under the de 
minimis exception, and institutional money market funds often have net 
redemptions in periods of stress. Moreover, this risk is justified by 
the benefits of a framework that is easier for funds to operationalize 
and likely less prone to error than a framework based on estimated 
flows. In addition, to the extent that a fund did not have net 
redemptions of more than 5% within a reasonable period after the last 
pricing period but subsequently received additional net redemptions 
that would cause it to cross the threshold, the fund should consider 
imposing a liquidity fee under the discretionary fee provision 
discussed below.
---------------------------------------------------------------------------

    \181\ See Proposing Release, supra note 6, at section II.B.2. 
Based on a 2021 analysis of information from CraneData, a majority 
of the prime institutional money market funds that impose an order 
cut-off time impose a 3 p.m. ET deadline for same-day processing of 
shareholder transaction requests. See id.; see also Fidelity Comment 
Letter (stating that its prior publicly offered institutional prime 
fund that offered same-day settlement used the same order cut-off 
and NAV strike times to allow the fund to calculate its NAV and wire 
redemption proceeds as quickly as possible to meet shareholder 
expectations and cash needs).
    \182\ See Federated Hermes Comment Letter II (stating that over 
a 3-month representative period, its institutional prime fund 
received 35.7% of trade notices after 3 p.m. and that generally 
settled on T+1).
---------------------------------------------------------------------------

    We recognize that institutional money market funds that are used as 
cash management vehicles for other funds may have particular difficulty 
obtaining flow information by the last pricing time of the day.\183\ As 
with other institutional funds that may cross the 5% threshold after 
the last pricing time of the day, these funds should consider imposing 
liquidity fees under the discretionary fee provision if they 
subsequently cross the 5% threshold under market conditions where 
estimated liquidity costs are not de minimis.
---------------------------------------------------------------------------

    \183\ See Capital Group Comment Letter.
---------------------------------------------------------------------------

    In general, the proposed swing pricing requirement would have 
required institutional money market funds to apply charges to reflect 
spread and certain other transaction costs for any level of net 
redemptions. We are not requiring institutional funds to apply a 
liquidity fee when net redemptions are below the 5% net redemption 
threshold. After considering comments, we do not believe that the 
benefits of the proposed approach justify the costs at this time 
because the structure of money market funds, including minimum 
liquidity requirements, helps mitigate dilution risk when the fund has 
low levels of net redemptions. In addition, the vast majority of money 
market funds already price portfolio securities at the bid price when 
striking their NAVs.\184\ This market practice effectively passes 
spread costs on to redeeming investors, which means that the proposed 
application of swing pricing when a fund has low levels of net 
redemptions would have had limited effect.\185\
---------------------------------------------------------------------------

    \184\ See ICI Comment Letter; JP Morgan Comment Letter; see also 
Allspring Funds Comment Letter.
    \185\ See Financial Accounting Standards Board Accounting 
Standards Codification (``FASB ASC'') 820-10-35-36C. Generally 
accepted accounting principles (``GAAP'') provide that if an asset 
measured at fair value has a bid price and an ask price (for 
example, an input from a dealer market), the price within the bid-
ask spread that is most representative of fair value in the 
circumstances shall be used to measure fair value, and that the use 
of bid prices for asset positions is permitted but not required for 
these purposes. Id; see also FASB ASC 820-10-35-36D (stating that 
use of mid-market pricing as a practical expedient for fair value 
measurements within a bid-ask spread is not precluded). Very 
generally, mid-market pricing values a security at the average of 
its bid price and ask price. Since a seller generally asks for a 
higher price for a security than a buyer bids for that security, the 
mid-market price is incrementally higher than the bid price for a 
security, but lower than its ask price.

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

[[Page 51423]]

b. Administration of Mandatory Liquidity Fees
    Under the final rule, an institutional fund's board will be 
responsible for administering the mandatory liquidity fee, but the 
board can delegate this responsibility to the fund's investment adviser 
or officers, subject to written guidelines established and reviewed by 
the board and ongoing board oversight.\186\ The current rule, in 
contrast, does not permit a board to delegate its responsibility for 
liquidity fee determinations.\187\ Boards will be able to delegate 
liquidity fee determinations under the final rule, unlike under the 
current rule, to facilitate timely application of liquidity fees on 
days when the fund has net redemptions that, due to associated costs to 
meet those redemptions, will dilute the value of the fund for remaining 
shareholders. This change will better allow funds to address liquidity 
fee determinations in periods of market stress when it may not be 
practical to assemble a quorum of the necessary directors in advance of 
the required application of a fee, particularly because the final rule 
requires application of fees to redemptions on the same day the 5% net 
redemption threshold is crossed. Because money market funds already 
have experience with liquidity fee requirements, it is appropriate to 
allow for the delegation of liquidity fee determinations. This approach 
is consistent with other delegable routine board functions under rule 
2a-7.
---------------------------------------------------------------------------

    \186\ See amended rule 2a-7(j). Consistent with rule 2a-7, the 
fund must maintain and preserve for six years a written copy of 
these guidelines. The fund also must maintain and preserve for six 
years a written record of the board's considerations and actions 
taken in connection with discharging its responsibilities, to be 
included in the board's minutes. See 17 CFR 270.2a-7(h)(1) and (2).
    \187\ See 17 CFR 270.2a-7(j) (stating that a board may not 
delegate determinations related to liquidity fees and temporary 
gates).
---------------------------------------------------------------------------

    Allowing a board to delegate the responsibilities for making 
liquidity fee determinations is similar to the proposed requirement for 
a board-designated swing pricing administrator. Also consistent with 
the proposal, the board will be responsible for oversight of the anti-
dilution mechanism. Specifically, the board will be required to review 
its written guidelines and the delegate's liquidity fee determinations 
periodically. This approach is similar to the proposed board oversight 
of the swing pricing administrator.
    Under the final rule's delegation provision, a board will need to 
adopt and periodically review written guidelines (including guidelines 
for determining the application and size of liquidity fees) and 
procedures under which a delegate makes liquidity fee determinations. 
Such written guidelines generally should specify the manner in which 
the delegate is to act with respect to any discretionary aspect of the 
liquidity fee mechanism (e.g., whether the fund will apply a fee to a 
shareholder based on the shareholder's gross or net redemption activity 
for the relevant day, the fund's approach to determining the reasonable 
period after the last pricing period of the day when the delegate will 
measure the fund's flows for purposes of the 5% net redemption 
threshold). The board will also need to periodically review the 
delegate's liquidity fee determinations. This approach is consistent 
with rule 2a-7's approach to the delegation of board responsibilities 
generally and provides a framework for a board effectively to oversee 
liquidity fees imposed by the fund.
c. Calculation and Size of Mandatory Liquidity Fees
    The mandatory liquidity fee provision we are adopting generally 
will require an institutional fund to determine the amount to charge 
redeeming investors by making a good faith estimate, supported by data, 
of the costs the fund would incur if it sold a pro rata amount of each 
security in its portfolio (i.e., ``vertical slice'') to satisfy the 
amount of net redemptions, including spread costs, such that the fund 
is valuing each security at its bid price and any other charges, fees, 
and taxes associated with portfolio security sales (``transaction 
costs'') and market impacts.\188\ This is a change from the current 
rule, which establishes a default fee of 1% and provides for board 
discretion to adjust that amount down or up (subject to a 2% limit), 
but does not prescribe how the board determines the liquidity fee 
amount. The final rule's approach, however, is similar to the 
proposal's swing pricing requirement and its inclusion of transaction 
costs and good faith estimates of market impacts in the swing factor 
when net redemptions exceed a specified level. In a change from the 
proposal, we are modifying the requirements for the liquidity fee 
calculation in response to comments, as well as providing additional 
guidance on how a fund may arrive at good faith estimates of the costs. 
For instance, the final rule will provide that if an institutional fund 
makes a good faith estimate that liquidity costs are de minimis, then 
the fund is not required to charge a liquidity fee.\189\ In addition, 
if a fund cannot estimate in good faith the costs of selling a pro rata 
amount of each portfolio security, then the fund will apply a default 
fee of 1% of the value of the shares redeemed.\190\
---------------------------------------------------------------------------

    \188\ Amended rule 2a-7(c)(2)(iii)(A); see Proposing Release, 
supra note 6, at section II.B.1; see also amended rule 31a-2(a)(2) 
(requiring funds to preserve for the prescribed periods all 
schedules evidencing and supporting each computation of a liquidity 
fee by the fund).
    \189\ Amended rule 2a-7(c)(2)(iii)(D).
    \190\ Amended rule 2a-7(c)(2)(iii)(C).
---------------------------------------------------------------------------

    As discussed in the proposal, the vertical slice approach may help 
prevent remaining shareholders from bearing the costs associated with 
fund redemptions and may help discourage investors from redeeming 
quickly during periods of market stress. Several commenters expressed 
concern about the proposed vertical slice assumption for estimating the 
costs imposed by redeeming investors. These commenters generally argued 
that because money market funds generally meet redemptions with 
available liquidity from maturing assets, rather than through the sale 
of a vertical slice of the fund's portfolio, the vertical slice 
assumption may impose costs on redeeming investors that the fund does 
not actually incur.\191\ We understand that a money market fund does 
not typically sell a vertical slice of its portfolio to meet 
redemptions. However, the vertical slice approach is designed to 
account for the costs of leaving remaining investors with a less liquid 
portfolio and potential rebalancing costs. For example, if investor 
redemptions are met through daily or weekly liquid assets, the 
redemptions leave the fund with less liquidity, which increases the 
likelihood that further redemptions could require the fund to sell less 
liquid assets or incur costs in rebalancing the portfolio, particularly 
in periods of market stress when redemptions may be elevated. If we 
instead required funds to determine the amount of a liquidity fee based 
on the direct transaction costs incurred to meet redemptions, a fund 
would not charge a liquidity fee to redeeming investors until after 
other investors' redemptions had already extracted much of the

[[Page 51424]]

fund's liquidity. Such a framework could incentivize preemptive 
redemptions to avoid liquidity fees in periods of stress and would not 
account for the full costs of removing liquidity from the fund in these 
periods.
---------------------------------------------------------------------------

    \191\ See, e.g., SIFMA AMG Comment Letter; BlackRock Comment 
Letter; State Street Comment Letter; ICI Comment Letter; Federated 
Hermes Comment Letter II; Bancorp Comment Letter; ABA Comment Letter 
I; Invesco Comment Letter; Fidelity Comment Letter; Allspring Funds 
Comment Letter; Keen Comment Letter; Western Asset Comment Letter.
---------------------------------------------------------------------------

    Consistent with the proposal, the fee has two components: (1) 
transaction costs; and (2) market impact costs. The transaction costs 
category includes spread costs, such that the fund is valuing each 
security at its bid price, and any other charges, fees, and taxes 
associated with portfolio security sales.\192\ Several commenters 
suggested that money market funds would not need to include spread 
costs in a charge to redeeming investors because most money market 
funds already value their portfolio securities at bid prices when 
striking their NAVs.\193\ In light of this general market practice, we 
recognize that most funds will not have to include spread costs in 
their charged liquidity fee because they already use bid pricing. Per 
the rule, however, the few funds that do not currently use bid pricing 
will need to include spread costs in the fee.
---------------------------------------------------------------------------

    \192\ The proposal included within this category of costs 
specific references to both brokerage and custody fees. A few 
commenters suggested that brokerage fees would not be applicable to 
money market funds and custody fees would not increase when a fund 
has net redemptions. See Allspring Funds Comment Letter; see also 
Capital Group Comment Letter. In a change from the proposal, we have 
removed from the final rule those references, but we expect the 
transaction costs category to include, as applicable, any charges 
the fund would incur if it sold a pro rata amount of each security 
in its portfolio to satisfy the amount of net redemptions, whether 
in the form of brokerage, custody, or other fees.
    \193\ See Americans for Tax Reform Comment Letter; Allspring 
Funds Comment Letter; ICI Comment Letter; JP Morgan Comment Letter; 
see also Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    The second component of the mandatory liquidity fee calculation 
requires that funds make a good faith estimate of the market impact of 
selling a vertical slice of a fund's portfolio to satisfy the amount of 
net redemptions.\194\ The required market impact calculation is 
designed to provide a good faith estimate of the full liquidity costs 
of selling a vertical slice of a money market fund's portfolio because, 
for a money market fund's less liquid investments, market impacts may 
impose significant costs on a fund that should be borne by redeeming 
investors as opposed to remaining investors. This concern may be 
particularly acute when net redemptions are large or in times of stress 
and when a fund must sell less liquid investments. In terms of the 
mechanics, a fund would first establish a market impact factor for each 
security, which is a good faith estimate of the percentage change in 
the value of the security if it were sold, per dollar of the amount of 
the security that would be sold, if the fund sold a pro rata amount of 
each security in its portfolio to satisfy the amount of net 
redemptions, under current market conditions. A fund would then 
multiply the market impact factor by the dollar amount of the security 
that would be sold.\195\
---------------------------------------------------------------------------

    \194\ See amended rule 2a-7(c)(2)(iii)(A).
    \195\ See amended rule 2a-7(c)(2)(iii)(A)(2).
---------------------------------------------------------------------------

    Some commenters stated that it would be challenging to make a good 
faith estimate of the market impact of selling a vertical slice of a 
money market fund's portfolio because of the limited nature of the 
secondary market for funds' portfolio securities.\196\ Some commenters 
expressed particular concern about funds' abilities to make good faith 
estimates of market impacts in stress events such as March 2020, when 
some underlying markets are prone to freezing and few transactions 
occur.\197\ Some commenters suggested that the market impact 
calculations will require estimates in periods of market stress and 
will result in either errors or incorrect estimates.\198\ One commenter 
suggested that estimating market impact costs a priori is challenging 
and requires judgments for which it may be difficult to have a high 
degree of confidence.\199\ Some commenters suggested that it would take 
time to undertake the market impact calculation, which may create 
operational burdens that result in the need for earlier order cut-off 
times or a reduction of features like multiple NAV strikes per day or 
same-day settlement.\200\ Some commenters suggested that funds need 
additional guidance to make the good faith estimates of market impacts 
that the rule will require.\201\ One commenter suggested that if funds 
have too much discretion in making good faith estimates, then it could 
lead to artificial manipulation.\202\
---------------------------------------------------------------------------

    \196\ See, e.g., ICI Comment Letter; BlackRock Comment Letter.
    \197\ See, e.g., Federated Hermes Comment Letter II; ICI Comment 
Letter; BlackRock Comment Letter; SIFMA AMG Comment Letter.
    \198\ See Federated Hermes Comment Letter I; Federated Hermes 
Comment Letter II; CCMR Comment Letter; BlackRock Comment Letter; 
see also Western Asset Comment Letter (suggesting that application 
of calculation is likely to vary across the industry and lead to 
inconsistencies).
    \199\ See ICI Comment Letter.
    \200\ See, e.g., State Street Comment Letter; IIF Comment 
Letter; see also Capital Group Comment Letter; Northern Trust 
Comment Letter.
    \201\ See, e.g., BlackRock Comment Letter; ICI Comment Letter 
(suggesting particular challenges exist for securities that do not 
trade frequently); Federated Hermes Comment Letter II; Capital Group 
Comment Letter.
    \202\ See Morgan Stanley Comment Letter.
---------------------------------------------------------------------------

    We recognize that market impact costs of a transaction cannot be 
determined with certainty before the transaction occurs. As a result, 
the rule requires good faith estimates of these costs, given that a 
fund generally is not selling a vertical slice of its portfolio to meet 
net redemptions.\203\ While the calculated liquidity fee will be based 
on good faith estimates and thus will not precisely reflect the 
liquidity costs of redemptions, this result is preferable to an overly 
low liquidity fee that does not attempt to include market impact costs, 
which can be a significant source of liquidity costs. We also recognize 
the challenges in assessing the amount of a liquidity fee to charge in 
times of market stress when underlying markets are frozen or 
transactions are rare. To reduce these challenges, we are providing 
guidance on one method funds could use to make a good faith estimate of 
the costs of selling a vertical slice of the fund's portfolio to meet 
net redemptions. In addition, like the proposal, the final rule permits 
a fund to make a good faith estimate of costs for each type of security 
with the same or substantially similar characteristics and apply those 
good faith estimates to all securities of that type in the fund's 
portfolio, rather than analyze each security separately.\204\ Some 
commenters suggested that the Commission should provide additional 
guidance on how to determine which securities share substantially 
similar characteristics.\205\ As discussed in the proposal, a fund 
could determine that the liquidity, trading, and pricing 
characteristics of a subset of securities justifies the application of 
the same costs and market impact factor to all securities of that type 
within its portfolio. Further examples of the kinds of criteria that 
fund might consider when determining how to group securities could 
include: issuance size, credit worthiness, number of other investors in 
the same issuance, maturity, industry, and geographic region. Also 
consistent with the proposal, and as reflected in the amended rule, we 
continue to believe it would be reasonable to assume a market impact of 
zero for the fund's daily and weekly liquid assets, since a fund could 
reasonably expect such assets to convert

[[Page 51425]]

to cash without a market impact to fulfill redemptions (e.g., because 
the assets are maturing shortly).\206\ In addition, in a change from 
the proposal, we are requiring funds to apply a default fee of 1% of 
the value of shares redeemed if they are unable to make good faith 
estimates of these costs. This change is intended to reduce the burden 
on funds if good faith estimates are not feasible. The default fee 
provision applies if costs cannot be estimated in good faith and 
supported by data.
---------------------------------------------------------------------------

    \203\ If a fund were to manipulate its estimates of market 
impact costs in an effort to increase or decrease the calculated fee 
amount, without regard to a reasonable assessment of costs under 
current market conditions, the manipulated estimates would not be 
``good faith'' estimates.
    \204\ See amended rule 2a-7(c)(2)(iii)(B).
    \205\ See Capital Group Comment Letter; Fidelity Comment Letter; 
see also Federated Hermes Comment Letter II.
    \206\ See amended rule 2a-7(c)(2)(iii)(A)(2); Proposing Release, 
supra note 6, at section II.B.1.
---------------------------------------------------------------------------

    To develop good faith estimates of market impact costs supported by 
data, funds may consider using historical data to model the reasonably 
expected price concessions a fund may need to make to sell different 
amounts of a security under different market conditions. Specifically, 
among other potential methods for establishing a good faith estimate of 
the market impact of selling a vertical slice of the fund's portfolio 
to meet net redemptions, a fund could estimate and document in pricing 
grids the effect of selling different amounts of the security on a 
security's price for each group of securities in its portfolio with the 
same or substantially similar characteristics under different market 
conditions. Under a grid-based approach, a fund would develop separate 
grids for different market conditions, such as normal market conditions 
or periods with credit stress, liquidity stress, or interest rate 
stress (or a combination of such stresses).\207\ Because market impact 
varies depending on the amount a fund sells, the grids would assess 
market impact of selling different amounts of a security. For example, 
a grid might estimate the market impact of selling various percentage- 
or value-based ranges of a security or group of securities. Thus, on a 
day a fund has net redemptions of more than 5%, it could calculate 
market impact by referring to the appropriate grid that reasonably 
approximates current market conditions and identifying the market 
impact estimate for the assumed amount to be sold under the required 
vertical slice analysis. If a fund uses grids to implement its market 
impact calculations, it generally should review the grids periodically 
and update them to account for recent market data. Under the rule, if a 
fund encountered unforeseen market conditions not contemplated in 
advance and the fund was not able to otherwise make a good faith 
estimate of its liquidity costs, then the fund would rely on the 1% 
default liquidity fee provision of the amended rule.\208\
---------------------------------------------------------------------------

    \207\ Funds may be able to leverage existing processes and 
historical data from existing sources, including stress testing, to 
develop and maintain such grids.
    \208\ See Federated Hermes Comment Letter II (suggesting that 
funds could develop schedules of estimated market impact costs 
stratified by the size of trade for different classes of securities, 
which would require periodic updating over time as market conditions 
evolve, but that these schedules may not be able to reflect good 
faith estimates in stressed conditions).
---------------------------------------------------------------------------

    After estimating the transaction costs and market impact costs of 
selling a vertical slice of the fund's portfolio to meet net 
redemptions, the fund will need to determine the liquidity fee amount, 
as a percentage of the value of the shares redeemed, to fairly allocate 
these costs across all redemptions. To do so, a fund will need 
information about gross redemptions from each intermediary for that 
day.\209\ We recognize that some intermediaries may currently provide 
only net flow information to funds. In those circumstances, funds may 
need to update their arrangements with intermediaries to obtain the 
gross amount of redemptions in a timely manner.\210\ We also recognize, 
as discussed above, that a fund may not have complete flow information 
at the time it determines to apply a fee. The fund's board-approved 
guidelines for implementing mandatory liquidity fees may want to 
specify the time by which the fund will review its flow information for 
purposes of calculating the liquidity fee amount. We recognize that 
this time may differ among funds. For example, some funds (e.g., those 
that typically settle the vast majority of shareholder purchase and 
redemption activity on T+0) may use the same flow information they use 
to determine if the fund has crossed the 5% net redemption threshold. 
Other funds may determine to wait until a later point, particularly if 
they have developed a method for applying a fee after a trade is 
executed. As discussed above, some funds may develop such methods in 
connection with applying liquidity fees to redemptions that occurred in 
earlier pricing periods on the relevant day.
---------------------------------------------------------------------------

    \209\ Information about the gross number of shares redeemed will 
allow the fund to fairly allocate the liquidity costs across all 
redemptions. If a fund instead allocated the liquidity costs based 
on net redemptions, the fund would charge a higher fee amount per 
share redeemed and would collect more than its calculated liquidity 
costs when applied to each redemption on a gross basis. As a 
stylized example, assume a fund's estimated liquidity costs are $100 
to sell a vertical slice of the fund's portfolio to meet net 
redemptions of 10,000 shares at a per share price of $1.0000 (or net 
redemptions of $10,000). On that day, 20,000 shares are redeemed in 
total (i.e., not netted against purchase activity). Using gross 
redemptions to determine the fee, the fund charges redeeming 
investors $0.005 per share ($100 liquidity cost divided by gross 
redemptions of 20,000 shares) and collects the $100 of estimated 
liquidity costs ($0.005 per share multiplied by 20,000 shares). If 
the fund were to instead use net redemptions to determine the charge 
to apply to all redeeming investors, the charge would be $0.01 per 
share ($100 liquidity cost divided by net redemptions of 10,000 
shares), and the fund would collect $200 ($0.01 per share multiplied 
by 20,000 shares redeemed).
    \210\ See infra section IV.C.4.a.ii.
---------------------------------------------------------------------------

    As discussed above, institutional funds may cross the 5% net 
redemption threshold under normal market conditions. Under these 
circumstances, the calculated liquidity fee amount is likely to be very 
small. For instance, under normal market conditions a fund generally 
will be able to assume no market impact for at least 50% of its assets 
invested in weekly liquid assets.\211\ In addition, in many cases, the 
fund may estimate in good faith that the market impact costs of selling 
other positions in its portfolio will be minimal if dealer 
accommodation allows it to transact at or close to bid or mid prices 
under normal market conditions.\212\ To recognize that there are 
limited benefits to imposing a very small liquidity fee under these 
circumstances, the final rule does not require a fund to impose the 
mandatory liquidity fee if its estimated liquidity costs are de 
minimis. Some commenters stated that money market funds would have 
minimal costs stemming from redemptions under normal market conditions 
or when the fund holds a significant amount of daily and weekly liquid 
assets.\213\ The final rule provides that estimated costs are de 
minimis for purposes of the liquidity fee requirement if the amount of 
the fee would be less than 0.01% of the value of the shares 
redeemed.\214\ The de minimis exception for liquidity fees is similar 
to the swing pricing proposal,

[[Page 51426]]

which would not have required a fund to apply a swing factor if it 
would not have changed the fund's price per share.\215\
---------------------------------------------------------------------------

    \211\ This is also true for the fund's portfolio securities that 
qualify as daily liquid assets but, by definition, daily liquid 
assets are also weekly liquid assets.
    \212\ This will not be the case for any illiquid securities the 
fund holds, but a money market fund may not acquire any illiquid 
security if, immediately after the acquisition, the fund would have 
invested more than 5% of its total assets in illiquid securities. 
See 17 CFR 270.2a-7(d)(4)(i). Under rule 2a-7, an illiquid security 
is a security that cannot be sold or disposed of in the ordinary 
course of business within seven calendar days at approximately the 
value the fund ascribed to it. See 17 CFR 270.2a-7(a)(18).
    \213\ See, e.g., T. Rowe Comment Letter; Fidelity Comment 
Letter; Vanguard Comment Letter.
    \214\ See amended rule 2a-7(c)(2)(iii)(D). This provision does 
not reflect an interpretation of the term de minimis for any other 
purpose. See also Federated Hermes Comment Letter I (stating that if 
the portfolio cost of processing a net redemption does not move the 
money market fund's share price, the costs should not viewed as 
material to any money market fund investor and the costs should not 
be assessed).
    \215\ See 17 CFR 270.2a-7(c)(1)(ii) (providing that an 
institutional money market fund must compute its price per share for 
purposes of distribution, redemption, and repurchase by rounding the 
fund's current net asset value per share to a minimum of the fourth 
decimal place in the case of a fund with a $1.0000 share price or an 
equivalent or more precise level of accuracy for funds with a 
different share price, for example $10.000 per share or $100.00 per 
share).
---------------------------------------------------------------------------

    Some commenters suggested that, even in periods of market stress, 
the required calculation would result in small charges to redeeming 
investors.\216\ For example, one commenter estimated the impact of 
swing pricing on its privately offered institutional prime money market 
fund on March 16, 2020, and seemed to suggest that the price change 
would have been slightly more than one basis point.\217\ While the 
commenter did not provide significant detail about its analysis, the 
March 2020 Form N-MFP filing for this fund shows that the fund had 
daily liquid assets of around 30% and weekly liquid assets of around 
53% at the end of the relevant week. Based on available information, we 
believe that the commenter was assuming a market impact of zero for 
these holdings, which would be consistent with the proposal and the 
final rule. This contributes to a lower estimated cost, and this cost 
would rise as the liquidity of the fund's portfolio declines. Another 
commenter analyzed the size of a swing factor adjustment if a fund held 
50% of its assets in weekly liquid assets and applied a 100-basis point 
upward move in market yield for all other holdings (a historically 
large move based on a review of changes in three-month LIBOR rates 
since 2007, according to the commenter) as a proxy of market impact. 
The commenter stated that, in this analysis, a fund's price per share 
would only move down by $0.0007.\218\ Because of rule 2a-7's risk 
limiting requirements, money market funds generally hold portfolios 
that are not subject to significant credit or interest rate risks. As a 
result, changes to a reference rate reflecting these risks, such as 
LIBOR, are somewhat muted relative to risk indicators applicable to 
longer-dated or lower credit quality portfolios even during periods of 
market stress.
---------------------------------------------------------------------------

    \216\ See, e.g., Capital Group Comment Letter; Fidelity Comment 
Letter.
    \217\ See Capital Group Comment Letter (stating that spread 
costs and other transaction costs would not have affected the fund's 
NAV by more than 1 basis point and suggesting that if the fund had 
experienced net redemptions of 8% on that day, the market impact 
would have decreased the fund's NAV by barely more than 3/100 of 1 
basis point).
    \218\ See Fidelity Comment Letter (stating that if the fund had 
30% weekly liquid assets and the market impact factor was 150 basis 
points, the NAV would decline by $0.0014).
---------------------------------------------------------------------------

    We recognize that the estimated liquidity costs may be rather small 
when a fund holds high levels of daily and weekly liquid assets 
because, as discussed above, funds can assume a market impact of zero 
for these assets. Several commenters agreed that the market impact 
factor for daily liquid assets and weekly liquid assets should be set 
at zero.\219\ In addition, as discussed above, several commenters 
suggested that the amount of a fund's liquidity should be a 
consideration for when a fee is triggered. While we decline to have a 
built-in liquidity threshold for triggering the application of fees in 
light of the experience with the current rule in March 2020, the 
determination of the amount of the fee will take into account the 
liquidity of the fund's portfolio.
---------------------------------------------------------------------------

    \219\ See Fidelity Comment Letter; Federated Hermes Comment 
Letter I; see also Mutual Fund Directors Forum Comment Letter.
---------------------------------------------------------------------------

    In response to commenters' concerns about the ability of funds to 
make good faith estimates of the market impact of selling a vertical 
slice of the fund's portfolio in periods of market stress, particularly 
when the markets for portfolio securities are frozen, the final rule 
provides that a fund must impose a default liquidity fee of 1% if the 
fund is not able to make a good faith estimate of its liquidity 
costs.\220\ Like the current rule, the default fee amount is 1% of the 
value of shares redeemed.\221\ The new default fee, however, is not 
connected to a weekly liquid asset threshold and not subject to a 
decision by the fund's board as to whether the fee is in the best 
interests of the fund. In addition, unlike the current rule, the fund's 
board will not have discretion to modify the default fee amount, 
because the amended rule provides a separate framework for determining 
the liquidity fee amount based on good faith estimates and available 
data. Rather, funds will use the default fee when they cannot estimate 
transaction and market impact costs in good faith, and supported by 
data. We are persuaded by the comments that it may prove difficult at 
times for funds to make good faith estimates of liquidity costs in 
periods of market stress. The 1% default fee is designed to provide 
money market funds with the ability to apply a fee when the fund 
determines that its pricing grid, or other method for estimating 
transaction and market impact costs, does not reflect a good faith 
estimate of these costs in current market conditions.
---------------------------------------------------------------------------

    \220\ See amended rule 2a-7(c)(2)(iii)(C).
    \221\ See 2014 Adopting Release, supra note 26, at section 
III.A.2.c (discussing analysis in support of a default fee of 1% 
under the current rule); infra note 668 and accompanying text 
(discussing that a 1% default fee is generally consistent with the 
range of money market fund liquidity costs during March 2020 to the 
degree that discounts experienced by ultra-short bond exchange 
traded funds in this period may serve as a proxy for liquidity costs 
of money market funds).
---------------------------------------------------------------------------

    We are also amending our recordkeeping rules to require funds to 
retain records that document how they determine the amount of any 
liquidity fee.\222\ For example, if a fund establishes good faith 
estimates of its liquidity costs by using pricing grids or otherwise, 
it must preserve records supporting each fee computation. If the fund 
applies a 1% default liquidity fee, the fund must preserve records 
supporting its determination that it cannot establish a good faith 
estimate of its liquidity costs. If a fund determines that its 
liquidity costs are less than 0.01% of the value of the shares redeemed 
and therefore the fund is not required to apply a liquidity fee under 
the rule, the fund must preserve records supporting how it determined 
that the costs would be less than 0.01%.
---------------------------------------------------------------------------

    \222\ See amended rule 31a-2. The Commission similarly proposed 
to amend rule 31a-2 to require funds to preserve records supporting 
swing factor computations for the proposed swing pricing 
requirement.
---------------------------------------------------------------------------

    The mandatory liquidity fee will not be capped since it is 
reflective of a fund's estimated liquidity costs. The uncapped fee is 
consistent with the proposed swing pricing requirement. This is a 
change, however, as compared to the current rule, which does not allow 
a fee to exceed 2% of the value of the shares redeemed.\223\ Some 
commenters suggested that the rule should cap the amount of a liquidity 
fee to provide transparency to investors about the size of fee they may 
incur.\224\ Some commenters expressed concern that an uncapped charge 
may cause investors to leave institutional money market funds due to 
concerns about the possibility of incurring high charges when 
redeeming.\225\ In addition, some commenters suggested that it is 
unlikely that a fund's liquidity costs would exceed 2% because of the 
nature of money market fund portfolio holdings, maturity limits, and 
historical price

[[Page 51427]]

movements.\226\ We believe that the specific parameters in the rule for 
determining the liquidity fee amount sufficiently mitigate the concerns 
that a liquidity fee would place an undue restriction on investors' 
ability to redeem. Further, if a fund were to experience high costs 
associated with redemptions, we believe it is appropriate for redeeming 
investors to bear the costs their redemptions create for the benefit of 
remaining investors. As discussed below, we recognize, however, that it 
is unlikely a fund's calculated liquidity costs would exceed 2% of the 
value of shares redeemed.\227\ Given our experience with investor 
behavior in March 2020, we also believe that requiring redeeming 
investors to internalize the liquidity costs of their redemptions will 
likely make investors consider potential redemption requests more 
carefully in periods of market stress, and will prevent remaining 
investors from bearing costs imposed on the fund by redeeming 
investors.
---------------------------------------------------------------------------

    \223\ See 17 CFR 270.2a-7(c)(2)(ii)(A).
    \224\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
see also Northern Trust Comment Letter (suggesting that a swing 
factor with no upper limit would impede the core functions of money 
market funds).
    \225\ See, e.g., JP Morgan Comment Letter; Morgan Stanley 
Comment Letter; BlackRock Comment Letter.
    \226\ See, e.g., Federated Hermes Comment Letter I; Western 
Asset Comment Letter.
    \227\ See infra section IV.C.4.b.v.
---------------------------------------------------------------------------

    Some commenters suggested approaches for determining the amount of 
liquidity fees that differ from what we are adopting. For example, 
several commenters suggested a static fee amount, such as 1% or 
2%.\228\ Some commenters suggested tiered liquidity fees, where the 
rule would provide for identified increases to the liquidity fee amount 
as a fund crossed different thresholds meant to reflect increasing 
levels of stress.\229\ These commenters suggested thresholds for 
applying liquidity fees that would only trigger in times of significant 
stress. Because, as discussed above, a fund may cross the 5% net 
redemption threshold we are adopting under normal market conditions, we 
do not believe that a static fee amount is appropriate. We anticipate 
that liquidity costs generally will be de minimis under normal market 
conditions. We also decline to adopt tiered liquidity fee amounts. The 
commenters suggesting tiered liquidity fee amounts generally set 
specific weekly liquid asset thresholds for when the fee would 
increase. We believe this approach would establish ``cliff effects'' in 
the rule that investors may seek to avoid through preemptive 
redemptions, similar to the behavior we observed in March 2020.
---------------------------------------------------------------------------

    \228\ See, e.g., ICI Comment Letter; Invesco Comment Letter; 
SIFMA AMG Comment Letter; Morgan Stanley Comment Letter (suggesting 
a liquidity fee of 2%); State Street Comment Letter.
    \229\ See, e.g., JP Morgan Comment Letter; ICI Comment Letter; 
BlackRock Comment Letter; SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

3. The Continued Availability of Discretionary Liquidity Fees
    We are largely retaining the discretionary liquidity fee provisions 
in current rule 2a-7, but without the tie between liquidity fees and 
weekly liquid assets.\230\ The Commission proposed to remove the 
liquidity fee provision in rule 2a-7 for three reasons. First, the 
current rule's tie to liquidity thresholds had unintended consequences 
in March 2020. Second, institutional prime and institutional tax-exempt 
money market funds would be subject to the proposed swing pricing 
requirement, which was designed to address shareholder dilution and 
potential institutional investor incentives to redeem quickly in times 
of liquidity stress to avoid further losses. Third, the proposed 
increased liquidity requirements--which would have the largest effect 
on retail prime funds based on their average historical liquidity 
levels--should result in these funds being able to manage heavier 
redemptions than they have experienced during any previous stress 
period.\231\ While the Commission did not propose to retain a 
discretionary liquidity fee provision in rule 2a-7, it did state that 
funds could use rule 22c-2 under the Act to impose redemption fees to 
mitigate dilution arising from shareholder transaction activity 
generally, including indirect costs such as liquidity costs, and asked 
for comment on whether instead of removing the current liquidity fee 
provisions, we should modify the circumstances in which a money market 
fund may impose liquidity fees.\232\ Several commenters supported money 
market funds continuing to have the ability to impose discretionary 
liquidity fees without a liquidity threshold, whether achieved through 
rule 2a-7 or rule 22c-2.\233\ One commenter stated that rule 2a-7 would 
be a more appropriate place to address the implementation of such fees 
for money market funds.\234\
---------------------------------------------------------------------------

    \230\ See amended rule 2a-7(c)(2)(i); 17 CFR 270.2a-7(c)(2)(i).
    \231\ See Proposing Release, supra note 6, at section II.A.3.
    \232\ See 17 CFR 270.22c-2.
    \233\ See, e.g., SIFMA AMG Comment Letter; Invesco Comment 
Letter; Federated Hermes Comment Letter I; Federated Hermes Comment 
Letter II; Federated Hermes Fund Board Comment Letter; Americans for 
Tax Reform Comment Letter; Fidelity Comment Letter; Schwab Comment 
Letter.
    \234\ See Federated Hermes Comment Letter I (suggesting that 
rule 22c-2 is less appropriate for money market funds because it was 
designed to deter market timing and the history of the rule 
indicates that it was not meant for money market funds).
---------------------------------------------------------------------------

    We recognize that a discretionary liquidity fee provides money 
market fund boards with an additional tool to manage liquidity, 
particularly in times of stress. As a result, we are retaining a 
discretionary liquidity fee provision in rule 2a-7.\235\ The 
discretionary liquidity fee we are adopting, like current rule 2a-7, 
applies to all non-government money market funds. Like the current 
rule, a government money market fund may choose to rely on the ability 
to impose liquidity fees.\236\ Unlike the current rule, but consistent 
with the proposal's observation that funds could impose fees under rule 
22c-2, the fee is not tied to a weekly liquid asset threshold.\237\ 
Although several commenters suggested that investor redemptions in 
March 2020 were largely driven by concerns about the potential for 
redemption gates, and less so by concerns about liquidity fees, we 
continue to believe it is appropriate to remove the tie between 
discretionary liquidity fees and a liquidity threshold to reduce the 
possibility of incentivizing preemptive redemptions.\238\ Many 
commenters agreed with removing this tie.\239\
---------------------------------------------------------------------------

    \235\ See amended rule 2a-7(c)(2)(i).
    \236\ See 17 CFR 270.2a-7(c)(2)(iii); amended rule 2a-
7(c)(2)(i)(A).
    \237\ Under current rule 2a-7, a money market fund may impose a 
liquidity fee of up to 2% if the fund's weekly liquid assets fall 
below 30% of its total assets and the fund's board of directors 
determines that imposing a fee is in the fund's best interests. See 
17 CFR 270.2a-7(c)(2)(i).
    \238\ See, e.g., Invesco Comment Letter; BlackRock Comment 
Letter; Northern Trust Comment Letter; Fidelity Comment Letter.
    \239\ See, e.g., Healthy Markets Association Comment Letter; 
Western Asset Comment Letter; Cato Inst. Comment Letter; Schwab 
Comment Letter; Federated Hermes Comment Letter I; Federated Hermes 
Comment Letter II; ICI Comment Letter.
---------------------------------------------------------------------------

    Similar to the discretionary liquidity fee under current rule 2a-7, 
the discretionary liquidity fee we are adopting is designed to allow a 
fund board (or its delegate) the flexibility to determine when a fee is 
necessary based on current market conditions and the specific 
circumstances of the fund.\240\ Under the amended rule, irrespective of 
weekly liquid asset levels (or redemption levels), a non-government 
money market fund will apply a discretionary fee if the board (or its 
delegate) determines that such fee is in the best interests of the 
fund. Such discretion, untethered from any weekly liquid asset 
requirement or prescribed factors for implementation, should lessen the 
likelihood that sophisticated

[[Page 51428]]

investors can preferentially predict when a fee is going to be imposed, 
thus reducing the potential for a run or other adverse effects. Also, 
the possibility of a fund imposing discretionary liquidity fees during 
periods of stress is unlikely, on its own, to incentivize investors to 
preemptively redeem. As discussed, investors are more sensitive to 
gates than to liquidity fees. Moreover, as the Commission discussed in 
the Proposing Release, redemptions in March 2020 from retail and 
institutional non-government funds appear to have been unrelated to 
declines in market-based prices.\241\ This suggests that money market 
fund investors are less sensitive to losses than they are to losing 
access to liquidity and may not preemptively redeem in response to the 
possibility of liquidity fees. In addition, while institutional 
investors reacted quickly to declines in liquidity in March 2020 and 
redeemed in large sizes, any similar behavior in the future that is 
intended to avoid a board (or delegate) determination to apply 
discretionary fees will increase the likelihood of a fund applying a 
mandatory liquidity fee under the amended rule. Thus, it will be more 
difficult for institutional investors to preemptively redeem under the 
amended rule to avoid any type of liquidity fee, including 
discretionary fees. As for retail investors, they appeared to be less 
sensitive to the possibility of redemption gates or liquidity fees in 
March 2020, and retail funds historically have experienced lower levels 
of redemptions in stress periods than institutional funds. Some 
commenters suggested that a discretionary liquidity fee would be a 
useful tool for fund boards when addressing dilution issues or unfair 
results.\242\ We agree that funds will benefit by having the ability to 
mitigate the broader effects of preemptive runs and otherwise manage 
potential dilution.
---------------------------------------------------------------------------

    \240\ See 2014 Adopting Release, supra note 26, at section 
III.A.2.
    \241\ See Proposing Release, supra note 6, at paragraph 
accompanying n. 48.
    \242\ See, e.g., Americans for Tax Reform Comment Letter; CFA 
Comment Letter; Invesco Comment Letter; SIFMA AMG Comment Letter; 
Schwab Comment Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    The Commission previously expressed some concern that a purely 
discretionary trigger for liquidity fees could cause some funds to use 
fees when they are not under stress and in contravention of the 
principles underlying the Investment Company Act.\243\ For example, 
this would be the case if a fund was not under any liquidity stress and 
applied a liquidity fee on redemptions to recover losses incurred in 
the fund's portfolio and to repair the fund's NAV. We would not 
consider a liquidity fee to be in the best interests of the fund under 
those circumstances.\244\ The Commission also expressed concern that a 
discretionary threshold may result in a board being reluctant to impose 
fees (e.g., out of fear that a fee would signal trouble for the fund or 
fund complex or could incite redemptions in other money market funds in 
the fund complex). The framework of the new mandatory liquidity fee 
reduces these concerns with respect to the discretionary liquidity fee 
provision we are adopting, because it is likely that some number of 
funds will cross the 5% net redemption threshold for mandatory fees in 
future periods of stress. This experience with the actual imposition of 
liquidity fees in the money market fund space should help mitigate the 
potential stigma of applying discretionary fees. This is in contrast to 
the current rule's 10% weekly liquid asset threshold for imposing 
default fees, as no fund has ever been required to consider fees under 
this provision. Regardless, the new rule requires funds to impose a 
discretionary fee when such fee is in the best interests of the fund.
---------------------------------------------------------------------------

    \243\ See 2014 Adopting Release, supra note 26, at paragraph 
accompanying n.234.
    \244\ See, e.g., id.
---------------------------------------------------------------------------

    The amended rule does not change the best interest standard by 
which a fund board (or its delegate) would determine to impose a fee. 
Like current rule 2a-7, the rule we are adopting requires a majority of 
directors who are not interested persons of the fund to agree that 
applying a liquidity fee is in the best interests of the fund. In a 
change from the proposal, we are amending rule 2a-7 to permit fund 
boards to delegate liquidity fee determinations to the fund's adviser 
or officers, subject to board guidelines and oversight.\245\ Under this 
approach, a fund will need to adopt and periodically review board-
approved written guidelines (including guidelines for determining the 
application and size of liquidity fees) and procedures under which a 
delegate makes such determinations.\246\ Such written guidelines 
generally should specify the manner in which the delegate is to act 
with respect to any discretionary aspect of the liquidity fee mechanism 
(e.g., whether the fund will apply a fee to a shareholder based on the 
shareholder's gross or net redemption activity for the relevant day). 
The board will also need to periodically review the delegate's 
liquidity fee determinations. This approach is consistent with rule 2a-
7's approach to the delegation of board responsibilities generally and 
provides a framework for a board effectively to oversee liquidity fees 
imposed by the fund. Providing boards with the ability to delegate the 
responsibility for administering discretionary liquidity fees to the 
fund's adviser or officers also addresses the concerns we expressed in 
the proposal regarding potential delays in board action to impose a 
liquidity fee, which may create timing misalignments between an 
investor's redemption activity and the imposition of liquidity 
costs.\247\ This is consistent with some commenters' suggestions that 
discretionary liquidity fees should be accompanied by enhanced 
policies, including escalation procedures to ensure timely 
consideration of the potential fees in times of stress.\248\
---------------------------------------------------------------------------

    \245\ See amended rule 2a-7(j) (removing language that expressly 
prohibited a fund's board of directors from delegating 
determinations related to liquidity fees).
    \246\ Because rule 2a-7 requires a majority of directors who are 
not interested persons of the fund to agree that applying a 
liquidity fee is in the best interests of the fund, a majority of 
directors who are not interested persons of the fund must agree to 
delegate the liquidity fee determinations to the fund's adviser or 
officers and must approve the liquidity fee guidelines the fund's 
adviser or officers would follow.
    \247\ See Proposing Release, supra note 6, at n.95 and 
accompanying text.
    \248\ See, e.g., Federated Hermes Comment Letter I (suggesting 
that discretionary fees should reasonably approximate the cost of 
liquidity); CFA Comment Letter; Schwab Comment Letter.
---------------------------------------------------------------------------

    Like the current rule, our amendments will permit money market fund 
boards to impose a liquidity fee, if in the best interests of the fund, 
of up to 2%, and do not require a particular approach to determining 
the level of a fee. This approach is designed to preserve for the board 
(or its delegate) sufficient flexibility when making determinations 
regarding discretionary liquidity fees and to allow funds to rely upon 
current procedures for determining the amount of discretionary fees 
without the need to make operational or systems changes.\249\ Some 
commenters suggested that discretionary liquidity fees (like the 
current rule) should be capped at 2%.\250\ We agree that, given the 
latitude in determining the fee amount to impose, an upper limit on the 
fee amount continues to be appropriate. Some commenters seemed to 
suggest a lower cap for discretionary fees, such as 1%, but did not 
explain why a lower cap would be preferable.\251\ A 2% upper

[[Page 51429]]

limit will provide fund boards (or their delegates) with greater 
flexibility to impose a fee that is based on liquidity costs in times 
of stress than a lower limit. Moreover, 2% is an appropriate upper 
limit because, as discussed below, it is unlikely a fund's liquidity 
costs would exceed 2% of the value of shares redeemed.\252\ In 
addition, given that the current rule contemplates a fee of up to 2%, 
funds and investors have experience with this metric as a maximum fee 
for discretionary liquidity fees.
---------------------------------------------------------------------------

    \249\ As with mandatory liquidity fees, funds will be required 
to preserve records supporting the computation of a discretionary 
liquidity fee. See amended rule 31a-2(a)(2).
    \250\ See, e.g., Federated Herms Comment Letter I; Western Asset 
Comment Letter.
    \251\ See ICI Comment Letter (favoring a discretionary fee with 
a cap and providing an example of a cap of up to 1%); see also State 
Street Comment Letter (suggested a fixed fee, perhaps of 1%, when 
certain conditions are met); Invesco Comment Letters (suggesting a 
static fee of 1% would be suitable when conditions for market stress 
exist).
    \252\ See infra section IV.C.4.b.v.
---------------------------------------------------------------------------

4. Disclosure
    Money market funds use Form N-MFP to report portfolio and other 
information to the Commission each month. In connection with the 
proposed swing pricing requirement, the Commission proposed to require 
reporting of the size and frequency of swing factor adjustments to a 
fund's NAV.\253\ Because we are adopting liquidity fee provisions 
instead of swing pricing, the final amendments to Form N-MFP will 
instead require money market funds to report certain information 
related to any application of a liquidity fee. Specifically, we are 
amending Form N-MFP to require that money market funds report whether 
they applied a liquidity fee during the reporting period and, if so, 
information about each liquidity fee applied, including the date, the 
type of fee, and the amount.\254\ This reporting requirement will apply 
to both mandatory and discretionary liquidity fees. To identify the 
circumstances for applying a liquidity fee (i.e., the fund had daily 
net redemptions of more than 5% or the fund's board (or delegate) made 
a best interests determination), funds will be required to identify 
whether a fee was a mandatory fee or a discretionary fee. In addition, 
in the case of a mandatory liquidity fee, a fund will be required to 
identify whether the amount of the fee was based on good faith 
estimates of the fund's liquidity costs or was a default fee. This 
information will help investors and the Commission understand the 
extent to which funds are able to estimate their liquidity costs in 
good faith. The proposal did not provide for discretionary swing 
pricing or default charges if liquidity costs could not be estimated, 
but did discuss and request comment on these alternatives. Moreover, 
current reporting requirements on Form N-CR about the imposition of 
liquidity fees, which we are removing in favor of new reporting on Form 
N-MFP, provide information about whether a fee imposed under the 
current rule is a discretionary fee or a default fee.\255\ In addition, 
in comparison to the proposal and current reporting requirements on 
Form N-CR, the final amendments provide more specificity about how to 
report the amount of the charge applied. Specifically, the final 
amendments will require funds to report the total dollar value of the 
fee applied to redemptions and the amount of the fee as a percentage of 
the value of shares redeemed. The percentage-based amount will allow 
investors and the Commission to compare fees across money market funds 
and better understand the amount of fees that funds may charge, while 
the dollar-based amount will provide investors and the Commission with 
information about the fund's total liquidity costs. Overall, the 
reporting requirement, like that proposed for swing pricing, will help 
the Commission monitor the size of the charges funds are applying to 
redeeming investors, as well as the frequency at which funds apply 
liquidity fees.
---------------------------------------------------------------------------

    \253\ See Proposing Release, supra note 6, at section II.B.4 
(proposing to require money market funds that are not government 
funds or retail funds to report the number of times the fund applied 
a swing factor over the course of the reporting period, and each 
swing factor applied).
    \254\ See Item A.22 of amended Form N-MFP.
    \255\ See Part E of current Form N-CR (requiring information 
about the fund's imposition of a liquidity fee, including the fund's 
weekly liquid asset level, which identifies whether a fee under the 
current rule is a discretionary fee or a default fee).
---------------------------------------------------------------------------

    In addition, we are amending the narrative risk disclosure 
requirement in Form N-1A. The final rule will continue to require money 
market funds to provide narrative risk disclosure related to liquidity 
fees, as applicable, in their prospectuses, but we have modified the 
disclosure to reflect the amended liquidity fee framework.\256\ The 
required narrative disclosures relate to both the mandatory and 
discretionary liquidity fees and vary depending upon the type of money 
market fund. As proposed, we are removing from the required narrative 
disclosures references to the suspension of redemptions because money 
market funds cannot impose gates under rule 2a-7 as amended.
---------------------------------------------------------------------------

    \256\ See Item 4(b) of amended Form N-1A.
---------------------------------------------------------------------------

    The amendments also modify the required disclosures in a fund's 
Statement of Additional Information (``SAI'') that currently relate to 
both the imposition of liquidity fees and the suspension of fund 
redemptions.\257\ The proposal would have removed the disclosures 
related to liquidity fees in light of the swing pricing mechanism and 
the proposed elimination of fees and gates from rule 2a-7. In a change 
from the proposal, the amended form will include liquidity fee 
disclosures designed to reflect the new liquidity fee mechanism. In a 
change from current Form N-1A, the required liquidity fee disclosures 
are no longer tied to weekly liquid asset thresholds. Also, amended 
Form N-1A, like the proposal, removes references to the suspension of 
fund redemptions. These changes reflect the amendments to rule 2a-7 
that remove the tie between weekly liquid assets and liquidity fees and 
remove redemption gates from the rule.
---------------------------------------------------------------------------

    \257\ See Item 16(g) of amended Form N-1A.
---------------------------------------------------------------------------

    The modified SAI disclosure will, like the current form, require a 
fund to report information about any liquidity fees imposed during the 
past 10 years, including the date a liquidity fee was imposed and the 
amount of the fee. The required SAI disclosure is similar to what funds 
will report in amended Form N-MFP, except the SAI disclosure will 
provide investors with a historical perspective over a 10 year look-
back period. In addition, consistent with the proposal, because we are 
no longer requiring funds to report on Form N-CR when they impose 
liquidity fees, we are removing the current requirement to incorporate 
in the SAI disclosure, as appropriate, any information the fund 
reported on Form N-CR regarding the fee event and to point investors to 
the fund's Form N-CR filing for additional information.
    The amended disclosure related to liquidity fees will improve 
transparency related to money market funds as well as assist investors 
in their assessment of a fund's overall risk profile. Moreover, the 
disclosure will provide investors and the Commission with historic 
context and a useful understanding of past stress events. Current and 
prospective fund investors could use this information as one factor to 
compare the potential costs of investing in different money market 
funds.
5. Tax and Accounting Implications of Liquidity Fees
    In addition to the operational and similar concerns commenters 
raised about the proposed swing pricing requirement, some commenters 
raised questions about the tax and accounting implications of the 
proposed requirement. Because a liquidity fee framework is part of 
current rule 2a-7, adopting a liquidity fee provision

[[Page 51430]]

instead of swing pricing generally will resolve most of commenters' 
questions and concerns. The specific tax treatment of any liquidity fee 
regime, however, may depend on how the regime is structured, 
particularly with respect to timing.
    In response to the proposed swing pricing requirement, several 
commenters raised concerns related to potential increased tax reporting 
burdens, including whether the wash sale rules would apply to 
redemptions in floating NAV money market funds using swing 
pricing.\258\ Because the tax treatment of money market fund liquidity 
fees is already established, as current rule 2a-7 already includes 
liquidity fee provisions, our adoption of a modified liquidity fee 
framework avoids commenters' tax concerns associated with swing 
pricing. As the Commission has previously discussed, we understand that 
shareholders incurring a liquidity fee would generally treat the fee as 
offsetting the shareholder's amount realized on the redemption 
(decreasing the shareholder's gain, or increasing the shareholder's 
loss, on redemption). Funds would generally treat such fees as having 
no associated tax effect for the fund.\259\ In addition, tax 
regulations provide for a simplified method of accounting for an 
investor's gain or loss on money market fund shares, where the gain or 
loss is based on the change in the aggregate value of the investor's 
shares during a selected computation period and on the net amount of 
purchases and redemptions during that period (the ``NAV method'').\260\ 
Because under the NAV method a gain or loss is not associated with any 
particular redemption of shares, use of the NAV method also addresses 
any effect that a liquidity fee would have under the wash sale 
rule.\261\ In addition, even if a shareholder does not use the NAV 
method, redemptions from floating NAV money market funds are not 
treated as part of a wash sale.\262\ As discussed above, however, in 
the case of a fund that offers multiple NAV strikes per day, we 
recognize that there could be tax considerations associated with 
applying a liquidity fee to redemptions that occurred before the last 
pricing period, depending on a fund's chosen approach to applying a fee 
to such redemptions.
---------------------------------------------------------------------------

    \258\ See, e.g., Northern Trust Comment Letter; Capital Group 
Comment Letter; ICI Comment Letter; SIFMA AMG Comment Letter; 
Federated Hermes Comment Letter II; Americans for Tax Reform Comment 
Letter; Bancorp Comment Letter.
    \259\ See 2014 Adopting Release, supra note 26, at section 
III.A.6 (discussing the tax treatment of redemption fees under rule 
22c-2 and stating the belief that liquidity fees would receive the 
same Federal income tax treatment); see also Investment Income and 
Expenses (Including Capital Gains and Losses), Internal Revenue 
Service (IRS) Publication 550, at 41 (``The fees and charges you pay 
to acquire or redeem shares of a mutual fund are not deductible. . . 
A fee paid to redeem the shares is usually a reduction in the 
redemption price (sales price).''), available at https://www.irs.gov/pub/irs-pdf/p550.pdf.
    \260\ See Method of Accounting for Gains and Losses on Shares in 
Money Market Funds; Broker Returns With Respect to Sales of Shares 
in Money Market Funds, 81 FR 44508 (July 8, 2016); 26 CFR 1.446-7.
    \261\ See 26 U.S.C. 1091. The ``wash sale'' rule applies when 
shareholders sell securities at a loss and, within 30 days before or 
after the sale, buy substantially identical securities. Generally, 
if a shareholder incurs a loss from a wash sale, the loss cannot be 
recognized currently and instead must be added to the basis of the 
new, substantially identical securities, which postpones the loss 
recognition until the shareholder recognizes gain or loss on the new 
securities.
    \262\ See Rev. Proc. 2014-45 (2014-34 IRB 388), available at 
https://www.irs.gov/pub/irs-drop/rp-14-45.pdf.
---------------------------------------------------------------------------

    Some commenters discussed potential accounting implications of 
swing pricing. For example, some commenters questioned whether money 
market fund shares held by corporate entities would still qualify as 
cash equivalents under the swing pricing proposal.\263\ Current U.S. 
GAAP defines cash equivalents as short-term, highly liquid investments 
that both are readily convertible to known amounts of cash and are so 
near their maturity that they present insignificant risk of changes in 
value because of changes in interest rates.\264\ The Commission's 
continued position is that under normal circumstances, an investment in 
a money market fund that has the ability to impose a fee under rule 2a-
7(c)(2) qualifies as a ``cash equivalent'' for purposes of U.S. 
GAAP.\265\ Under normal market conditions, we generally would not 
expect the amount of a liquidity fee a fund charges to prevent a 
shareholder from continuing to classify the fund's shares as ``cash 
equivalent'' under U.S. GAAP. However, as is the case today, if events 
that give rise to credit or liquidity issues for funds occur, 
shareholders would need to reassess if their investments in that money 
market fund would continue to meet the definition of a cash 
equivalent.\266\ If events occur that cause shareholders that are 
corporate entities to determine that their money market fund shares are 
not cash equivalents, the shares would need to be classified as 
investments, and shareholders would have to account for them 
accordingly.\267\
---------------------------------------------------------------------------

    \263\ See, e.g., ICI Comment Letter; Bancorp Comment Letter 
(stating that corporate investors rely on the treatment of money 
market funds as cash and cash equivalents rather than investment 
securities).
    \264\ See FASB Accounting Standards Codification (``FASB ASC'') 
Master Glossary.
    \265\ See 2014 Adopting Release, supra note 26, at section 
III.A.7.
    \266\ See id.
    \267\ Id.
---------------------------------------------------------------------------

    As for accounting implications of swing pricing for affected money 
market funds, some commenters raised questions about how to best 
reflect the use of swing pricing in financial statements and other 
disclosures. For instance, some commenters questioned the manner in 
which a fund should disclose its use of swing pricing in its financial 
statements and other materials.\268\ Another commenter suggested that 
if the proposed swing pricing requirement modified the method of 
accounting for gains or losses in money market fund shares, then it 
would increase the burden on investors, money market funds, and brokers 
who would be required to implement new mechanisms to accommodate the 
changes.\269\ Another commenter suggested that swing pricing could 
cause short term volatility in a fund's NAV, which could present 
internal accounting challenges should the recorded value of an 
investor's cash position appear to fluctuate on a day to day 
basis.\270\ This commenter suggested that a liquidity fee mechanism 
would be preferable to swing pricing in light of the accounting 
concerns. Like the tax implications discussed above, our move to a 
liquidity fee requirement avoids these potential issues. Instead, funds 
are able rely upon existing guidance and established practices to 
address these accounting items.
---------------------------------------------------------------------------

    \268\ See Capital Group Comment Letter; see also Comment Letter 
of Deloitte & Touche LLP (Apr. 11, 2022) (``Deloitte Comment 
Letter'') (requesting clarification as to whether a money market 
fund would be required to include the effect of swing pricing on 
total return in the financial highlights).
    \269\ SIFMA AMG Comment Letter; see also Deloitte Comment Letter 
(recommending guidance on the appropriate methodologies to calculate 
the per share impact of swing pricing for each class of shares).
    \270\ See JP Morgan Comment Letter.
---------------------------------------------------------------------------

C. Amendments to Portfolio Liquidity Requirements

1. Increase of the Minimum Daily and Weekly Liquidity Requirements
    We are adopting, as proposed, the requirements that a money market 
fund, immediately after acquisition of an asset, hold at least 25% of 
its total assets in daily liquid assets and at least 50% of its total 
assets in weekly liquid assets.\271\ Currently, the daily and

[[Page 51431]]

weekly liquid asset requirements in rule 2a-7 are 10% and 30%, 
respectively.\272\ Assets that make up daily liquid assets and weekly 
liquid assets are cash or securities that can readily be converted to 
cash within one business day or five business days, respectively.\273\ 
Generally, the daily and weekly liquid asset requirements are designed 
to support funds' ability to meet redemptions from cash or securities 
convertible to cash even in market conditions in which money market 
funds cannot rely on a secondary or dealer market to provide 
liquidity.\274\ As the Commission stated in the Proposing Release, we 
believe that the increased daily and weekly liquidity requirements will 
provide a more substantial buffer that would better equip money market 
funds to manage significant and rapid investor redemptions, like those 
experienced in March 2020, while maintaining funds' flexibility to 
invest in diverse assets during normal market conditions.
---------------------------------------------------------------------------

    \271\ See amended rule 2a-7(d)(4)(ii) and (iii). Tax-exempt 
money market funds are not subject to the daily liquid asset 
requirements due to the nature of the markets for tax-exempt 
securities and the limited supply of securities with daily demand 
features. See 2010 Adopting Release, supra note 26, at n.243 and 
accompanying text. This would continue to be the case under the 
amended rule.
    \272\ See 17 CFR 270.2a-7(d)(4)(ii) and (iii).
    \273\ Daily liquid assets are: cash; direct obligations of the 
U.S. Government; certain securities that will mature (or be payable 
through a demand feature) within one business day; or amounts 
unconditionally due within one business day from pending portfolio 
security sales. See 17 CFR 270.2a-7(a)(8). Weekly liquid assets are: 
cash; direct obligations of the U.S. Government; agency discount 
notes with remaining maturities of 60 days or less; certain 
securities that will mature (or be payable through a demand feature) 
within five business days; or amounts unconditionally due within 
five business days from pending security sales. See 17 CFR 270.2a-
7(a)(28).
    \274\ See 2010 Adopting Release, supra note 26, at n.213 and 
accompanying and following text.
---------------------------------------------------------------------------

    Commenters generally supported increasing the current minimum daily 
and weekly liquidity requirements for money market funds.\275\ In 
particular, commenters expressed support for the Commission's overall 
goal of providing a stronger liquidity buffer for money market funds to 
provide liquidity during market stress events and/or prolonged periods 
of redemption pressure.\276\ Some industry commenters and several 
academic and advocacy group commenters supported the 25% daily liquid 
asset and 50% weekly liquid asset requirements in the proposal.\277\ 
Moreover, some commenters urged the Commission to consider higher 
liquidity thresholds relative to the proposal.\278\ A commenter 
supporting the proposed minimum liquidity requirements asserted that 
attempting to increase liquidity once a market stress event has 
occurred is much more challenging than requiring a fund to hold a 
healthier percentage of liquid assets prior to a stress event in order 
to prevent, or at the least lessen, liquidity pressure on the 
fund.\279\
---------------------------------------------------------------------------

    \275\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter; 
BlackRock Comment Letter; Invesco Comment Letter.
    \276\ Id.
    \277\ See, e.g., Fidelity Comment Letter (expressing support for 
the proposed liquidity requirements with respect to institutional 
prime funds only); Schwab Comment Letter; Vanguard Comment Letter; 
Americans for Financial Reform Comment Letter; ICD Comment Letter.
    \278\ See Systemic Risk Council Comment Letter; Profs. Ceccheti 
and Schoenholtz Comment Letter; Prof. Hanson et al. Comment Letter 
(suggesting that if the rule's objective is to reduce the likelihood 
of future government support, minimum liquidity requirements would 
likely have to be set higher than proposed).
    \279\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    Many commenters, however, urged the Commission to adopt more modest 
increases to the daily and weekly liquid asset requirements.\280\ Many 
of these commenters suggested required thresholds of 20% daily liquid 
assets and 40% weekly liquid assets.\281\ Commenters expressed that a 
more modest increase to the liquidity requirements would be more 
appropriate given that the amendments to the current liquidity fee and 
redemption gate framework would allow money market funds to use 
existing liquid assets more freely to meet redemptions.\282\ Several 
commenters asserted that the bright line established by the current 
rule's regulatory link between a fund's weekly liquid asset levels and 
the possibility of a fund imposing a fee or gate was the primary 
incentive for money market fund managers to maintain weekly liquid 
asset levels above 30% in March 2020, rather than using those assets to 
meet redemptions.\283\ These commenters suggested that, absent this 
regulatory link, funds could have met redemptions in March 2020 as 
securities naturally matured into weekly liquid assets, without the 
need to sell less liquid, longer term assets. Accordingly, one 
commenter, in response to our analysis in the Proposing Release of the 
redemption patterns of institutional prime funds in March 2020 using 
hypothetical portfolios, asserted that 40% weekly liquid assets is more 
than sufficient liquidity to accommodate substantial ongoing 
redemptions absent a regulatory link between weekly liquid assets and 
the potential imposition of redemption gates.\284\ Alternatively, a 
commenter suggested that the Commission should first analyze how funds 
react and operate under a regulatory framework that removes redemption 
gates before adjusting the minimum liquidity requirements.\285\
---------------------------------------------------------------------------

    \280\ See, e.g., ICI Comment Letter; CFA Comment Letter; SIFMA 
AMG Comment Letter; State Street Comment Letter; Western Asset 
Comment Letter; Healthy Markets Association Comment Letter.
    \281\ Id.; cf. IIF Comment Letter (suggesting 20% daily liquid 
asset and 30% weekly liquid asset thresholds); Bancorp Comment 
Letter (suggesting 25% daily liquid asset and 40% weekly liquid 
asset thresholds); Morgan Stanley Comment Letter (suggesting 25% 
daily liquid asset and 45% weekly liquid asset thresholds).
    \282\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Federated Hermes Comment Letter I; T. Rowe Comment Letter; Invesco 
Comment Letter.
    \283\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Federated Hermes Comment Letter I; T. Rowe Comment Letter; Invesco 
Comment Letter.
    \284\ See ICI Comment Letter (asserting that a fund with 40% 
weekly liquid assets would have decreasing weekly liquid assets in 
the first several weeks, but would stabilize after five weeks at 
nearly 30% weekly liquid assets, assuming the redemption patterns of 
prime money market funds in Mar. 2020); see also Proposing Release, 
supra note 6, at section II.C.1.
    \285\ See SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    Several commenters also asserted that increasing the minimum 
liquidity requirements as proposed could reduce the spread between 
prime and government money market funds, resulting in lower investor 
demand for prime funds.\286\ Specifically, commenters suggested that 
higher liquid asset requirements would result in lower yields for 
investors in prime funds because funds may have to sell off longer-
term, higher-yielding securities in favor of short-term, lower-yielding 
securities to meet liquidity requirements.\287\ Moreover, some 
commenters expressed that decreased investor demand for prime money 
market funds could have unintended consequences for the short-term 
funding market, such as reducing funding to private companies and 
financial institutions.\288\ Some of these commenters also expressed 
that lower yields for prime funds could push investors to non-money 
market fund alternatives, including more opaque or less regulated 
investment products.\289\
---------------------------------------------------------------------------

    \286\ See, e.g., ICI Comment Letter; JP Morgan Comment Letter; 
Federated Hermes Comment Letter I.
    \287\ See, e.g., Dechert Comment Letter; Americans for Tax 
Reform Comment Letter.
    \288\ See, e.g., ICI Comment Letter; Federated Hermes Comment 
Letter I; Invesco Comment Letter; CCMR Comment Letter.
    \289\ See CCMR Comment Letter; see also Federated Hermes Comment 
Letter I; SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    In addition, some commenters argued that imposing higher minimum 
liquidity requirements, as a practical matter, could result in de facto 
higher minimums than imposed by regulations.\290\ These commenters 
asserted that, despite the removal of

[[Page 51432]]

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

[[Page 51433]]

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

[[Page 51434]]

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

[[Page 51435]]

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

[[Page 51436]]

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

[[Page 51437]]

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.

[[Page 51438]]

    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

[[Page 51439]]

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,

[[Page 51440]]

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

[[Page 51441]]

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

[[Page 51442]]

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

[[Page 51443]]

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

[[Page 51444]]

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.

[[Page 51445]]

    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\
---------------------------------------------------------------------------

    \436\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
BlackRock Comment Letter; CCMR Comment Letter.
    \437\ Id.
    \438\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \444\ See Proposing Release, supra note 6, at section II.C.2.b.
    \445\ See proposed Item C.6 of Form N-MFP.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    After considering these comments, we understand the concern that 
requiring public lot-level reporting and trade date information may 
subject filers to the risk

[[Page 51446]]

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.
---------------------------------------------------------------------------

    \449\ See Part B and Part D of amended Form N-MFP.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \450\ See Item A.10 of current Form N-MFP.
    \451\ See Proposing Release, supra note 6, at section II.F.2.b.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \452\ See Federated Hermes Comment Letter I.
    \453\ See Item A.10 of amended Form N-MFP.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 51447]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 51448]]

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

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

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

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

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

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

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

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

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

[[Page 51449]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 51450]]

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

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

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

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

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

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

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

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

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

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

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

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

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

    Under the Administrative Procedure Act (``APA''), notice of 
proposed rulemaking is not required when the agency, for good cause, 
finds ``that notice and public procedure thereon are impracticable, 
unnecessary, or contrary to the public interest.'' \521\ These 
amendments are ministerial in nature. Accordingly, we find good cause 
that publishing the amendments for comment is unnecessary.\522\ These 
ministerial amendments do not make any substantive modifications to any 
existing collection of information requirements or impose any new 
substantive recordkeeping or information collection requirements within 
the meaning of the Paperwork

[[Page 51451]]

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

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

H. Effective and Compliance Dates

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

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

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

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

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

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

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

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

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

    \529\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter; 
Invesco Comment Letter; State Street Comment Letter; Bancorp Comment 
Letter; Federated Hermes Comment Letter I; Capital Group Comment 
Letter; CCMR Comment Letter.
    \530\ See IIF Comment Letter; Dechert Comment Letter.
---------------------------------------------------------------------------

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

[[Page 51452]]

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

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

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

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

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

III. Other Matters

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

IV. Economic Analysis

A. Introduction

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

[[Page 51453]]

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

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

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

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

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

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

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

[[Page 51454]]

B. Baseline

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

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

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


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

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

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

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

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

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

[[Page 51455]]

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

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

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

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

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

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

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

[[Page 51456]]

[GRAPHIC] [TIFF OMITTED] TR03AU23.001

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

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

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

[[Page 51457]]

[GRAPHIC] [TIFF OMITTED] TR03AU23.002

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

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

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

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

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

[[Page 51458]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 51459]]

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

C. Costs and Benefits of the Final Amendments

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

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

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

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

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

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

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

[[Page 51460]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 51461]]

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

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

    Some commenters indicated that increases in the weekly liquid asset 
threshold would not necessarily result in enhanced money market fund 
liquidity because fund managers would treat a fund's liquid assets as a 
regulatory minimum and not use them to fulfill redemptions.\587\ Funds 
may, indeed, choose between drawing down on daily or weekly liquid 
assets and selling less liquid assets in distressed markets to meet 
redemptions. As discussed above, the final rule removes the tie between 
weekly liquid assets and the potential imposition of redemption fees 
and gates. As discussed in the Proposing Release, before the 
introduction of fees and gates in the 2014 amendments, the only 
consequence to a money market fund of having the percentage of its 
weekly liquid assets fall below the 30% threshold was that the fund 
could not acquire any security other than a weekly liquid asset until 
its investments were above the 30% threshold. As a result, funds were 
more comfortable using their weekly liquid assets and dropping below 
the 30% threshold.\588\ For example, at the peak of the Eurozone 
sovereign crises in the summer of 2011 the lowest reported weekly 
liquid asset value was approximately 5%.\589\ In combination with the 
elimination of the tie between weekly liquid assets and potential 
imposition of liquidity fees as well as the elimination of redemption 
gates, the liquidity requirements may similarly increase the reliance 
of money market funds on daily and weekly liquid assets in meeting 
redemptions.
---------------------------------------------------------------------------

    \587\ See, e.g., SIFMA AMG Comment Letter; BlackRock Comment 
Letter.
    \588\ See, e.g., Federated Hermes Comment Letter I (citing to 
ICI data and stating that ``even before the linkage was introduced, 
funds utilized their weekly liquid assets as necessary and then in 
accordance with the rule procured only weekly liquid assets until 
the regulatory thresholds were once again met'').
    \589\ 87 FR 7300.
---------------------------------------------------------------------------

    The Commission received comment that a prescriptive regulatory 
minimum liquidity mandate may offer few benefits because funds have a 
current obligation to hold sufficient liquidity to meet reasonably 
foreseeable shareholder redemptions and that properly considered know 
your customer requirements (e.g., investor type and concentration) are 
adequate.\590\ As discussed in section II.C.1, this current obligation 
may not be sufficient, since investors have unpredictable cash flow 
needs that are exacerbated in stress events, markets can rapidly and 
unforeseeably become illiquid during stress events, and requiring an 
appropriate level of liquidity at all times may be more effective than 
waiting until the stress event.
---------------------------------------------------------------------------

    \590\ See, e.g., Federated Hermes Comment Letter I; Sen. Toomey 
Comment Letter.
---------------------------------------------------------------------------

    The Commission has also received comments that the removal of the 
tie between weekly liquid assets and gates and fees would have been 
sufficient, and that other amendments are unnecessary.\591\ In general, 
investors may have cash needs that can be hard to predict for 
investors, and even more so for fund managers.\592\ Moreover, we 
understand that large scale redemptions akin to those experienced by 
some funds in March 2020 are rare, and estimating the risk of such rare 
and large scale redemptions is inherently difficult. Finally, because 
dilution costs are borne by remaining investors and not money market 
funds, funds do not bear the cost of liquidity externalities that money 
market fund liquidity management practices may impose on market 
participants transacting in the same asset classes. We continue to 
believe that there are benefits to increased liquidity requirements. As 
discussed in greater detail below, we also believe that the final 
liquidity fee framework would give rise to additional benefits by 
reducing liquidity externalities of redemptions that can contribute to 
run incentives and by seeking to ensure that the costs stemming from 
redemptions in stressed market conditions are more fairly allocated to 
redeeming investors.
---------------------------------------------------------------------------

    \591\ See, e.g., Federated Hermes Comment Letter I.
    \592\ See HSBC Comment Letter.
---------------------------------------------------------------------------

    We acknowledge that, as discussed in the Proposing Release, the 
anticipated benefits of the final rule may be partly reduced to the 
extent that money market funds already voluntarily hold daily and 
weekly liquid assets in excess of the regulatory minimum thresholds due 
to other regulatory obligations or prevailing market conditions. For 
example, the asset weighted average daily and weekly liquid assets for 
publicly offered institutional prime money market funds between October 
2016 and February 2020 was 33% and 48% respectively.\593\ After the 
peak volatility in March 2020, money market funds generally increased 
their daily and weekly liquidity, initially to meet further redemptions 
and subsequently to take advantage of rising interest rates since March 
2022. Consequently, the asset weighted average daily and weekly liquid 
assets for publicly offered institutional prime money market funds rose 
to 43% and 56% respectively by March 2023.\594\ Additionally, the 
distributions of daily and weekly liquid assets have different amount 
of skewness, with approximately 45% of publicly offered institutional 
prime funds holding below average (43%) in daily liquid assets and 40% 
of funds holding below average (less than 56%) in weekly liquid assets. 
As a result, fewer prime funds may be affected by the higher daily 
liquid asset threshold than the higher weekly liquid asset threshold. 
Specifically, as of March 31, 2023, approximately 8% of all prime funds 
were below the 25% daily liquid asset threshold and approximately 20% 
of all prime funds were below the 50% weekly liquid asset threshold. 
Out of all public institutional prime funds, 8% were below the final 
daily liquid asset threshold and 18% were below the weekly liquid asset 
threshold. This may reduce both costs and benefits of the final 
amendments against the current regulatory baseline.
---------------------------------------------------------------------------

    \593\ Averages were calculated by dividing the aggregate amount 
of daily (weekly) liquid assets from all funds by the aggregated 
amount of assets from all funds.
    \594\ According to one commenter, between 2010 and 2021, 
institutional prime money market funds held, on average, 45% in 
weekly liquid assets, and retail prime money market funds held, on 
average, 42% in weekly liquid assets. See ICI Comment Letter.
---------------------------------------------------------------------------

    We have received comment that the proposed increases in liquidity 
requirements rely on false assumptions, including the assumption that 
failure of a single money market fund to ensure proper liquidity will 
lead to a run impacting all money market funds because transparency 
about liquidity levels of different funds can prevent or limit 
contagion.\595\ Daily and weekly liquid assets of money market funds 
are, indeed, publicly disclosed under the current baseline, and this 
baseline reduces spillovers of run risk on more liquid money market 
funds. However, in the event of a run on a money market fund with lower 
liquidity buffers, investors may also optimally seek to redeem out of 
funds that are similar to the fund experiencing a run (in their 
portfolio exposures, liquidity characteristics, or institutional

[[Page 51462]]

clientele).\596\ Higher liquidity requirements may reduce such 
spillovers of run risk across funds.
---------------------------------------------------------------------------

    \595\ See, e.g., Federated Hermes Comment Letter I.
    \596\ See Proposing Release, supra note 5, at Table 2 and 
accompanying text (discussing outflows from money market funds with 
different fund characteristics).
---------------------------------------------------------------------------

    To the degree that raised liquidity requirements reduce run risk in 
money market funds, they may enhance the resilience of affected funds 
and reduce the risk that money market funds rely on government 
backstops. Moreover, this may benefit investors to the degree that 
increasing the liquidity of money market fund portfolios would allow 
funds to meet large redemptions from liquidity buffers more easily. For 
example, after the March 2020 market dislocation, some prime money 
market funds voluntarily shifted their portfolios by moving out of 
longer maturity commercial paper and certificates of deposit in favor 
of more liquid Treasuries, allowing them to meet any future redemptions 
better. Raising liquidity thresholds may have a similar benefit.
    The magnitude of the above economic benefits is likely to depend on 
the way in which money market funds respond to the final amendments. 
Specifically, some affected money market funds (i.e., money market 
funds with less than 25% in daily and 50% in weekly liquid assets) may 
react to the final amendments by increasing the maturity of the 
remainder of their portfolios \597\ (within the constraints on the 
maturity and weighted average life of the assets they hold), 
potentially reducing their liquidity to the extent that it is tied to 
maturity.
---------------------------------------------------------------------------

    \597\ See, e.g., Federated Hermes Comment Letter I. Notably, 
longer maturity of portfolio assets does not always imply lower 
liquidity. For example, the liquidity stress in 2020 was so severe 
that commercial paper across a variety of maturities became 
illiquid.
---------------------------------------------------------------------------

b. Costs
    The final amendments will impose indirect costs on money market 
funds, investors, and issuers. Because less liquid assets are more 
likely to yield higher returns in the form of a liquidity premium,\598\ 
to the degree that the amendments improve the liquidity of money market 
fund portfolios, it may lower expected returns of those funds to 
investors. Thus, an increase in weekly liquid assets may decrease money 
market fund yields and make them less attractive to some investors 
\599\ and may reduce entry.\600\ One commenter estimated that the 
proposed amendments will narrow the spread in yield between prime and 
government money market funds to less than 10 basis points.\601\ We do 
not agree that this would necessarily be the case. Notably, any changes 
to such yield spread would vary depending on the degree to which some 
money market funds may choose to extend the maturities of their assets 
that do not fall into the weekly liquid asset category \602\ (while 
staying under the regulatory caps on portfolio weighted average 
maturity and weighted average life) in response to the amendments, as 
well as on the prevailing interest rate environment and the steepness 
of the yield curve that reflects interest rates across maturities.
---------------------------------------------------------------------------

    \598\ See, e.g., Lee, Kuan-Hui, The World Price of Liquidity 
Risk, 99 J. Fin. Econ. 136, 136-161 (2011). See also Acharya, Viral, 
and Lasse Pedersen, Asset Pricing with Liquidity Risk, 77 J. Fin. 
Econ. 375, 375-410 (2005). See also Lubos Pastor & Robert Stambaugh, 
Liquidity Risk and Expected Stock Returns, 111 J. Polit. Econ. 642, 
642-685 (2003).
    \599\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
BlackRock Comment Letter; Federated Hermes Comment Letter I; Dechert 
Comment Letter; Americans for Tax Reform Comment Letter.
    \600\ For example, one commenter that closed prime and tax-
exempt money market funds in 2020 asserted that the regulatory 
burdens, including increased liquidity requirements, make it 
unlikely that they will reenter the prime money market fund market. 
See Northern Trust. For a discussion of the potential effects of the 
final amendments on competition, efficiency, and capital formation, 
see section IV.E.
    \601\ See Federated Hermes Comment Letter I.
    \602\ Id.
---------------------------------------------------------------------------

    Reduced investor demand may lead to a decrease in the size of 
assets under management of affected money market funds and the 
wholesale funding liquidity they provide to other market participants. 
Investors that prefer to use money market funds as a cash management 
tool, giving them the ability to preserve the value of their 
investments and receive a small yield, may move out of prime money 
market funds and into government money market funds which deliver lower 
yields, but have lower risk to the value of the investment.\603\ At the 
same time, investors reaching for yield may move to non-money market 
fund alternatives, including more opaque or less regulated investment 
products.\604\ Moreover, to the degree that some investors view money 
market funds as cash equivalents, this amendment may result in better 
matching of investors to funds that meet their risk tolerance and yield 
expectations, mitigating the above costs.
---------------------------------------------------------------------------

    \603\ Government money market funds must invest 99.5% or more of 
their assets in cash, government securities, and/or repurchase 
agreements that are collateralized fully.
    \604\ See, e.g., Federated Hermes Comment Letter I; ICI Comment 
Letter; Dechert Comment Letter; CCMR Comment Letter.
---------------------------------------------------------------------------

    The final amendments may require some affected funds to increase 
their daily liquid assets or weekly liquid assets. However, as of March 
2023, an average institutional prime fund had 54.9% of assets in daily 
liquid assets and an average retail prime fund had 50.5% of assets in 
daily liquid assets; similarly, institutional prime funds had an 
average of 67.9% in weekly liquid assets and retail prime funds 
averaged 61.5% in weekly liquid assets.\605\ As can be seen from Table 
5 below, we understand that many funds are already in compliance or 
close to compliance with the final liquidity requirements under the 
current baseline, mitigating some of the above costs (and benefits) of 
the final amendments.
---------------------------------------------------------------------------

    \605\ See Money Market Fund Statistics, Division of Investment 
Management Analytics Office, 4/25/2023, available at https://www.sec.gov/files/mmf-statistics-2023-03.pdf. The weighted average 
values equal the aggregated daily or weekly liquid assets divided by 
the total assets of the funds.

Table 5--Distribution of Daily Liquid Assets (DLA) and Weekly Liquid Assets (WLA) by Fund Type, as of March 2023
----------------------------------------------------------------------------------------------------------------
                                                       Prime                           Prime
                      %-ile                        institutional   Prime retail    institutional   Prime retail
                                                      DLA (%)         DLA (%)         WLA (%)         WLA (%)
----------------------------------------------------------------------------------------------------------------
Min.............................................            20.7            15.2            37.5            34.9
10th............................................            28.8            22.1            43.9            42.2
25th............................................            40.1            30.4            52.6            47.4
50th............................................            47.3            43.9            58.7            57.1
75th............................................            57.2            50.9            67.7            60.3
90th............................................            90.3            58.0            92.3            72.9

[[Page 51463]]

 
Max.............................................           100.0            67.5           100.0           76.0
----------------------------------------------------------------------------------------------------------------
Source: Form N-MFP filings.

    Nevertheless, to the extent that some funds have to increase their 
liquidity levels to comply with the final amendments, these amendments 
may increase the demand of money market funds for liquid assets, such 
as repos. To the degree that this results in a decline in yield spreads 
between prime and government money market funds, some investments may 
flow into government money market funds or, alternatively, banking 
entities. To the extent that the liquidity in overnight funding markets 
may flow to banking entities, and through them to leveraged market 
participants, such as hedge funds, the amendments may reduce the 
liquidity risk borne by some money market funds, but may result in a 
concentration of risk taking among leveraged and less regulated market 
participants. At the same time, investors reaching for yield may flow 
out of money market funds and into other more speculative vehicles, 
unregulated and less transparent products.
    The final amendments may also impose indirect costs on issuers. 
Specifically, money market funds are holders of commercial paper and 
certificates of deposit, as described in the baseline,\606\ and most of 
the commercial paper they hold is issued by banks, including foreign 
bank organizations.\607\ Therefore, issuers of commercial paper and 
certificates of deposit are likely to experience incrementally reduced 
demand for their securities from money market funds, particularly 
demand for debt that would fall outside of the weekly liquid assets 
category,\608\ however any such effects may be mitigated by the factors 
discussed below. We have received comment that raised liquidity 
requirements may reduce issuers' access to capital and increase the 
cost of capital, negatively affecting capital formation in commercial 
paper and certificates of deposit.\609\ Issuers may respond to such 
changes by reducing their issuance of commercial paper and certificates 
of deposit and increasing issuance of longer-term debt. In a somewhat 
analogous setting, some research explores the effects of the 2014 money 
market fund reforms, which may have resulted in asset outflows from 
prime money market funds into government money market funds and 
affected funding for large foreign banking organizations in the U.S., 
on bank business models.\610\ One paper found that banks were able to 
replace some of the lost funding, but reduced arbitrage positions that 
relied on unsecured funding, rather than reducing lending.\611\ Another 
paper found that money market fund reforms led to an increase in the 
relative share of lending in bank assets and concludes that reduction 
in unstable funding can discourage bank investments in illiquid 
assets.\612\ Other research examined the effects of decreased holdings 
of European bank debt by money market funds during the Eurozone 
sovereign crisis in 2011. One paper found that reduced wholesale dollar 
funding from money market funds during this period led to a sharp 
reduction in dollar lending by Eurozone banks relative to euro lending, 
which reduced the borrowing ability of firms reliant on Eurozone banks 
prior to the sovereign debt crisis.\613\
---------------------------------------------------------------------------

    \606\ To the degree that some money market funds hold 
significant quantities of commercial paper issued by foreign banks 
seeking dollar funding, such issuer costs may have a greater effect 
on foreign issuers.
    \607\ See ICI MMF Report, supra note 542.
    \608\ See, e.g., Allen Kyle, et al., Money Market Reforms: The 
Effect on the Commercial Paper Market, 154 J. Banking and Finance 
106947 (2023).
    \609\ See, e.g., ICI Comment Letter; Dechert Comment Letter; 
CCMR Comment Letter.
    \610\ These outflows around the Oct. 2016 compliance date for 
the 2014 reforms, for example, led to reduced money market funds 
purchases of commercial paper with other entities like mutual funds 
eventually picking up the shortfall and an approximately 30 basis 
point spike in 90-day financial commercial paper rates for about 
three months.
    \611\ See, e.g., Alyssa Anderson et al., Arbitrage Capital of 
Global Banks (Finance and Economics Discussion Series 2021-032. 
Washington: Board of Governors of the Federal Reserve System, May 
2021), available at https://doi.org/10.17016/FEDS.2021.032.
    \612\ See Thomas Flanagan, Funding Stability and Bank Liquidity 
(Working Paper, Mar. 2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3555346 (retrieved from SSRN Elsevier 
database).
    \613\ See Victoria Ivashina et al., Dollar Funding and the 
Lending Behavior of Global Banks, 130 Q.J. Econ. 1241, 1241-1281 
(2015).
---------------------------------------------------------------------------

    These potential costs of the final amendment to issuers may be 
mitigated by three potential factors. First, as discussed above and in 
the proposal, money market funds may respond to a higher weekly liquid 
asset threshold by increasing the maturity and liquidity risk in their 
non-weekly liquid asset portfolio allocations. This effect may dampen 
the adverse demand shock for commercial paper, but also dampen the 
reductions in the portfolio risk of affected money market funds. 
However, for the past several years prime money market funds have 
maintained levels of liquidity that are close to or that exceed the 
final thresholds, without offsetting the low yield of shorter-term 
securities with significant holdings of riskier longer-term securities 
(``barbelling'').\614\ Second, as discussed in the proposal, money 
market funds hold less than a quarter of outstanding commercial paper, 
which could limit the impact of the final amendments on commercial 
paper issuers and markets. If money market funds pull back from 
commercial paper markets and commercial paper prices decrease as a 
result, other investors may be attracted to commercial paper, absorbing 
some of the newly available supply, as observed after the 2016 reforms. 
Third, the amendments to liquidity requirements may increase some money 
market funds' liquidity buffers, which may enable such funds to meet 
large redemptions from liquid assets and reduce the need to sell 
commercial paper to meet large redemptions during stress periods.\615\ 
This may enhance the stability of commercial paper markets during times 
of market stress--an effect that is also limited by the relative size 
of money

[[Page 51464]]

market fund holdings of commercial paper.
---------------------------------------------------------------------------

    \614\ Fund incentives to barbell may be stronger in higher 
interest rate environments or when the yield curve for short-term 
securities is steeper.
    \615\ See, e.g., Fidelity Comment Letter (stating that higher 
weekly liquid assets allowed the commenter to avoid selling 
commercial paper into frozen markets in Mar. 2020).
---------------------------------------------------------------------------

3. Stress Testing Requirements
a. Benefits
    The final amendments will also alter stress testing requirements 
for money market funds. Under the baseline, money market funds are 
required to stress test their ability to maintain 10% weekly liquid 
assets under the specified hypothetical events described in rule 2a-7 
since breach of the 10% weekly liquid asset threshold would impose a 
default liquidity fee. The amendments will eliminate the default 
liquidity fee triggered by the 10% threshold and the corresponding 
stress testing requirement around the 10% weekly liquid asset 
threshold. Instead, the amendments will require funds to determine the 
minimum level of liquidity they seek to maintain during stress periods 
and to test whether they are able to maintain sufficient minimum 
liquidity under such specified hypothetical events, among other 
requirements. We believe that the final stress-testing approach will 
allow for better tailoring of stress-testing results to individual fund 
characteristics, which may enhance the manager and the board's 
understanding of the risks to the fund portfolio under extreme and 
plausible market conditions, as well as enhance liquidity management 
and the ability of funds to meet redemptions.
    Most commenters generally supported the proposed amendments to the 
liquidity stress testing requirements,\616\ but one commenter supported 
the existing stress testing framework.\617\ Different money market 
funds have different optimum levels of liquidity under times of stress. 
Therefore, the final amendments to stress testing requirements reflect 
our continuing belief that many factors influence optimum levels of 
minimum liquidity during stress periods, including the type of money 
market fund, investor concentration, investor composition, and 
historical distribution of redemption activity under stress. As such, 
we continue to believe that a more principles-based approach may 
improve the utility of stress testing as part of fund liquidity 
management. Specifically, the final amendments may allow funds to 
tailor their stress testing to the fund's relevant factors, which may 
enhance the fund managers' and the board's understanding of the risks 
to the fund portfolio under extreme and plausible market conditions, as 
well as enhancing liquidity management and the funds' ability to meet 
redemptions.
---------------------------------------------------------------------------

    \616\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
T. Rowe Comment Letter; Schwab Comment Letter.
    \617\ See Federated Hermes Comment Letter I; Federated Hermes 
Comment Letter IV.
---------------------------------------------------------------------------

b. Costs
    Amendments to fund stress testing requirements may impose direct 
and indirect costs. Under the final amendments, a 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 level, and provide the fund's board with a report on the 
results of the testing.
    As a baseline matter, funds are already subject to stress testing 
requirements, which may reduce some of the burdens of the final 
amendments. Money market funds have also established written stress 
testing procedures to comply with existing stress testing requirements 
and report the results of the testing to the board. Thus, such funds 
may experience costs related to altering existing stress testing 
procedures as the final amendments would move from bright-line 
requirements to a principles based approach, as well as costs related 
to board reporting and recordkeeping.\618\
---------------------------------------------------------------------------

    \618\ The Commission estimates one-time costs of $125,832 for 
all affected funds to amend stress testing procedures, and these 
costs have been amortized over three years in section V.B for 
purposes of the PRA.
---------------------------------------------------------------------------

    In addition, to the degree that funds do not have sufficient 
incentives to manage liquidity to meet redemptions, they may choose 
insufficiently low minimum levels of liquidity for stress testing, 
which may reduce the value of stress testing and corresponding 
reporting for board oversight of fund liquidity risk. However, funds 
may have significant reputational incentives to manage liquidity costs: 
incentives that have, for example, led many funds to voluntarily 
provide sponsor support.
    While most commenters generally supported the principles-based 
approach, one commenter opposed the change, stating that stress testing 
was not effective in March of 2020 as markets were frozen.\619\ The 
final stress-testing approach would allow for better tailoring of 
stress-testing results to individual fund characteristics, which may 
enhance the manager and the board's understanding of the risks to the 
fund portfolio under extreme and plausible market conditions, as well 
as enhance liquidity management and the ability of funds to meet 
redemptions.
---------------------------------------------------------------------------

    \619\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

4. Liquidity Fees
a. Benefits and Costs of the Mandatory Liquidity Fee Amendments
i. Benefits
    As discussed in section II, the final amendments include both 
mandatory and discretionary liquidity fee provisions intended to reduce 
liquidity externalities in money market funds. Specifically, as 
discussed in the baseline, money market fund investors transacting 
their shares typically do not incur the costs associated with their 
transaction activity. Instead, these liquidity costs may be borne by 
shareholders remaining in the fund, which may contribute to a first-
mover advantage and run risk.\620\ Moreover, as discussed in the 
baseline, liquidity management by money market funds may impose 
negative externalities on all participants investing in the same asset 
classes, and this effect may be magnified if there are large-scale net 
redemptions during times of market stress. As discussed in further 
detail below, we anticipate the final liquidity fee framework will 
reduce the negative externalities that redeemers impose on non-
transacting investors, protect non-transacting investors from dilution, 
and reduce run risk in money market funds.
---------------------------------------------------------------------------

    \620\ As discussed in the baseline, dilution costs most directly 
impact shareholders in floating NAV funds through changes to the 
NAV. In stable NAV funds, dilution costs can make the fund more 
likely to breach the $1 share price if dilution costs are large.
---------------------------------------------------------------------------

    The final liquidity fee framework will require institutional prime 
and institutional tax-exempt money market funds that experience daily 
net redemptions in excess of 5% of their net assets to assess liquidity 
fees so as to charge redeeming shareholders for the liquidity costs 
they impose on the fund. Specifically, the fee amount would reflect the 
fund's good faith estimate of the spread, other transaction costs, as 
well as market impact costs the fund would incur if it were to sell a 
pro rata amount (a vertical slice) of each security in its portfolio to 
satisfy the amount of net redemptions. The Commission anticipates that, 
under normal market conditions, it is likely that the fee amount would 
generally be de minimis, since money market funds already hold 
relatively high quality and liquid investments and will hold even 
higher levels of liquidity under the final amendments, which may reduce 
liquidity costs associated with a vertical slice assumption. In the 
event of de minimis costs (costs that are less than 0.01% of the value 
of the shares redeemed), a fund will not be required to impose a 
liquidity fee. If the fund is

[[Page 51465]]

not able to make a good faith estimate of its liquidity costs based on 
the sale of a vertical slice, the fund will use a default liquidity 
fee, as discussed in section II.B.2. In addition, the final amendments 
will allow affected money market funds to assess discretionary 
liquidity fees if the board or its delegate determines that fees would 
be in the best interest of the fund.
    We anticipate the final liquidity fee framework will reduce 
dilution of non-redeeming shareholders in the face of net redemptions. 
As discussed in greater detail in section IV.C.4.b.i below, redeeming 
investors will bear the fee. As a result, it may dampen any first-mover 
advantage, thus reducing the incentive to redeem early, the resulting 
fund outflows, and dilution resulting from these outflows. By reducing 
dilution, liquidity fees are also expected to protect investors that 
remain in a fund, for instance, during periods of high net redemptions. 
By protecting non-transacting investors from dilution costs of 
redemptions, the liquidity fee framework may also incentivize investors 
to stay in funds experiencing large redemptions, reducing run risk. 
Moreover, the liquidity fee framework may attract some investors (such 
as investors that redeem infrequently) to prime and tax-exempt money 
market funds.
    The above economic benefits of liquidity fees may be influenced by 
several factors. First, under the final amendments, liquidity fees are 
triggered by same-day net redemptions--a threshold that we believe 
makes the final liquidity fee framework less susceptible to run risk 
than fees conditioned on weekly liquid assets. In general, if investors 
expect an indicator that triggers the fee (e.g., weekly liquid assets 
or same-day net redemptions) to be below the fee threshold on a given 
day, but above the fee threshold on subsequent days, they are 
incentivized to redeem early, before the liquidity fee applies. 
Therefore, the ability of investors to accurately forecast an indicator 
that triggers the fee over subsequent days may give rise to incentives 
for strategic redemptions. A day of relatively low weekly liquid assets 
combined with significant redemptions may be more likely than otherwise 
to be followed by a day with even lower weekly liquid assets, due to 
the need to absorb the trading costs of redemptions. This makes 
declines in weekly liquid assets more forecastable. By contrast, 
changes in net redemptions from one day to the next are more difficult 
to predict accurately because net flows aggregate orders from a large 
number of investors that may be redeeming and subscribing based on 
their cash needs, interest rate expectations, and risk tolerances, 
among other things. Investors may still seek to redeem during a 
redemption wave based on observation of prior days' net redemptions out 
of the fund or similar funds. However, such anticipatory redemptions 
run the risk that a liquidity fee would be applied on that day. In such 
a scenario, however, to the degree that fees accurately reflect 
liquidity costs, investors know that they would not be diluted if they 
stay in the fund, reducing their incentives to exit in anticipation of 
the application of a liquidity fee and corresponding run risk.
    Second, under normal market conditions, investor dilution may not 
be significant and liquidity fees may not be charged or the fees 
charged may be small. However, the final rule is intended to address 
the dilution that can occur when a money market fund experiences large 
net redemptions and is not intended to result in significant fees 
unless there is significant net redemption activity leading to large 
liquidity costs, such as in times of stress in short-term funding 
market. As discussed in section II, funds are expected to charge larger 
fees in times of stress, when the benefits of protecting investors from 
dilution are higher.
    Third, as discussed in greater detail in section II, the final 
liquidity fee framework will require affected funds to calculate fees 
based on, among other things, an assessment of the market impacts of 
selling a vertical slice of the fund portfolio. To the degree that the 
costs of selling a pro rata amount of each portfolio security cannot be 
estimated in good faith and supported by data, funds will use the 
default liquidity fee prescribed in the rule. This default liquidity 
fee is a proxy for true liquidity costs of redemptions in times of 
stress,\621\ and may over-estimate or under-estimate the liquidity 
costs of different funds. In addition, differences in fund portfolio 
composition may allow some funds to estimate liquidity fees under 
stress, while other affected funds may be unable to do so and may 
simply charge the default fee. This may decrease the ex-ante benefit of 
increased comparability of liquidity costs across affected money market 
funds.
---------------------------------------------------------------------------

    \621\ As discussed elsewhere, to the degree that discounts 
experienced by ultra-short bond exchange traded funds in the peak 
market stress of March 2020 may serve as a proxy for liquidity costs 
of money market funds, the default liquidity fee is generally 
consistent with the range of money market fund liquidity costs 
during the same period.
---------------------------------------------------------------------------

    Fourth, the final liquidity fee framework addresses only the 
portion of dilution costs related to trading costs and market impacts, 
and will not address other sources of dilution discussed in section 
IV.B. Thus, the requirement may only partly reduce the dilution costs 
that redemptions impose on non-transacting investors and the related 
liquidity externalities.
    The final amendments will require affected funds to implement 
liquidity fees when faced with redemptions in excess of the 5% 
threshold. While money market funds may have reputational incentives to 
manage liquidity to meet redemptions,\622\ affected funds also face 
collective action problems and disincentives stemming from investor 
behavior. Specifically, to the degree that institutional investors may 
use institutional prime and institutional tax-exempt funds for cash 
management and their flows are sensitive to liquidity fees, funds may 
be dis-incentivized to implement liquidity fees until the fund is under 
severe and prolonged stress. For example, even if all institutional 
money market funds recognized the benefits of charging redeeming 
investors for the liquidity costs of redemptions, no fund may be 
incentivized to be the first to adopt such an approach as a result of 
the collective action problem. By making liquidity fees in the face of 
large outflows mandatory, rather than optional, the final amendments 
are intended to ensure that funds assess liquidity fees to capture the 
dilution costs of net redemptions. Moreover, it may be suboptimal for 
an individual money market fund to implement liquidity fees frequently 
under normal market conditions, as the operational costs of doing so 
are immediate and certain, while the benefits are largest in relatively 
rare times of liquidity stress. The final rule's application of 
liquidity fees by all institutional prime and institutional tax-exempt 
funds faced with large outflows is intended to ensure that liquidity 
fees are deployed in times of stress by all affected funds, protecting 
remaining fund investors from dilution costs when liquidity costs are 
highest.
---------------------------------------------------------------------------

    \622\ One commenter stated that a fund's board of independent 
directors would have reputational and legal incentives to apply a 
discretionary fee to prevent shareholder dilution regardless of 
whether other funds' boards apply fees. See Federated Hermes Comment 
Letter V.
---------------------------------------------------------------------------

    The Commission has also received comments that the removal of the 
tie between weekly liquid assets and gates and fees would have been 
sufficient, and that other amendments are unnecessary.\623\ We note 
that for reasons

[[Page 51466]]

discussed throughout, the Commission is adopting all of the amendments, 
which we believe can work in complementary ways to reduce liquidity 
externalities and run risk in money market funds, although each element 
of the final rule may have lower incremental benefits. The Commission 
has also received comments questioning whether any meaningful dilution 
occurs in money market funds.\624\ For example, one commenter stated 
that, from their own data and industry experience, no dilution was 
actually experienced and that, if dilution occurred, it would have been 
observable in a declining NAV during the stressed period in which money 
market funds experienced net redemptions.\625\ The Proposing Release 
documented declines in the distribution of money market fund NAVs 
during peak market stress of March 2020.\626\ However, because 
investors can redeem in response to anticipated or realized NAV dips, 
it is difficult to disentangle such effects from the dilution that 
results from forced sales to meet redemptions. Moreover, dilution costs 
exist--and are borne by remaining investors--even if funds do not fully 
exhaust their liquidity buffers and experience NAV dips from forced 
sales, and anti-dilution mechanisms are intended to address dilution 
costs that stem from a fund's liquidity becoming depleted, rather than 
necessarily fully exhausted. Finally, we do not observe dilution costs 
that would have occurred in absence of the Federal Reserve's facilities 
that may have prevented substantial declines in fund NAVs from forced 
sales to meet redemptions.
---------------------------------------------------------------------------

    \623\ See, e.g., Federated Hermes Comment Letter I; ICI Comment 
Letter.
    \624\ See, e.g., Federated Hermes Comment Letter I; SIFMA AMG 
Comment Letter; Capital Group Comment Letter; JP Morgan Comment 
Letter; Fidelity Comment Letter.
    \625\ See Federated Hermes Comment Letter II.
    \626\ See 87 FR 7297.
---------------------------------------------------------------------------

    Another commenter estimated the impact of swing pricing on its 
money market fund on March 16, 2020, and seemed to suggest that the 
impact would have been slightly more than 1 basis point.\627\ Another 
commenter analyzed the size of a swing factor adjustment if a fund held 
50% of its assets in weekly liquid assets and applied a 100-basis point 
upward move in market yield for all other holdings (a historically 
large move, according to the commenter) as a proxy of market impact. 
The commenter stated that, in this analysis, a fund's NAV would only 
move down by $0.0007.\628\ Importantly, this comment addresses the 
hypothetical impacts of specific interest rate shocks (rather than, for 
example, large firm-specific or sector-wide credit shocks) and do not 
revalue the entire fund portfolio based on market impacts of the 
liquidation of a pro-rata slice of the fund portfolio using transaction 
or quotation data. While dealer accommodation may allow money market 
funds to transact at bid or mid prices under normal market conditions, 
historical bid and mid estimates from pricing vendors may not reflect 
prices at which money market funds are able to transact when markets 
are under stress.\629\ In addition, evidence from the commercial paper 
market suggests that, during the liquidity stress of 2020, the 
commercial paper market exhibited a significant amount of stress 
reflected in spikes in the yield spread between commercial paper and 
Treasuries and in the commercial paper bid-ask spread, as can be seen 
in Figure 4. For example, bid-ask spreads of highly rated dealer-placed 
commercial paper reached between approximately 25 and 55 basis points 
at the height of the stress in March and April 2020 depending on 
maturity.\630\ In addition, we are aware of research showing that 
ultra-short bond exchange traded funds exhibited significant NAV 
discounts during the peak of market stress in March 2020.\631\ To the 
degree that ultra-short bonds may be somewhat comparable to the debt 
instruments held by money market funds, and to the extent that the 
magnitude of exchange traded fund discounts may proxy for liquidity 
costs of money market funds that hold similar assets, this could 
suggest nontrivial dilution costs during market stress.
---------------------------------------------------------------------------

    \627\ See, e.g., Capital Group Comment Letter.
    \628\ See Fidelity Comment Letter (stating that if the fund had 
30% WLA and the market impact factor was 150 basis points, the NAV 
would decline by $0.0014).
    \629\ For example, many dealers may not bid on certain issuer 
names altogether to avoid a flood of sell orders from prime money 
market funds and other short-term credit investors. See, e.g., 
Blackrock Comment Letter.
    \630\ See Capital Advisors Group, Institutional Cash Investments 
in the COVID-19 New Reality, available at http://www.capitaladvisors.com/wp-content/uploads/2020/05/Institutional-Cash-Investments-in-the-COVID-19-New-Reality.pdf. The negative bid/
ask spread seen during Mar. 2020 may reflect a dealer's willingness 
to bid on liquid CP and to sell more illiquid CP at a lower price.
    \631\ See Kenechukwu Anadu et al., Swing Pricing Calibration: A 
Simple Thought Exercise Using ETF Pricing Dynamics to Infer Swing 
Factors for Mutual Funds (SRA Note, Issue Number: 2022-06), 
available at https://www.bostonfed.org/-/media/Documents/Workingpapers/PDF/2022/sra-note-2206.pdf.

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

[[Page 51467]]

Figure 4--Differences Between Commercial Paper and Treasury Yields by 
Maturity and Type
[GRAPHIC] [TIFF OMITTED] TR03AU23.003

    Commercial paper is just one group of money market fund portfolio 
holdings, and data on certificates of deposit and municipal securities 
is scarce. Moreover, we do not have granular data about daily money 
market fund holdings and quotation data that would enable us to 
estimate the amount of dilution that could have been recaptured in 
March 2020 or the prevalence of other sources of dilution discussed in 
section IV.B. To the best of our knowledge, such data are not publicly 
available. In addition, order sizes, fund portfolio holdings, the 
liquidity management strategy used to meet redemptions, and execution 
quality may impact the precise dilution costs experienced by each fund.
    However, from the above data on short-term commercial paper and 
ultra-short bond exchange traded funds, in times of stress in short-
term funding markets, liquidity costs of money market funds can spike. 
To the degree that money market funds absorb redemptions out of liquid 
assets, and are unable to perfectly anticipate daily redemptions and 
ladder portfolio maturities accordingly, redemptions dilute investors 
remaining in the fund by reducing the amount of liquidity available to 
meet future redemptions. Moreover, the final rule would require funds 
to estimate market impact factors using the assumption of the sale of 
the pro-rata share of the fund portfolio holdings. Thus, had the final 
liquidity fee framework been in effect during market stress in March 
2020, we believe that many affected money market funds would have 
charged liquidity fees on redemptions, thereby reducing dilution of 
non-transacting shareholders and the impact of redemptions on affected 
funds.
ii. Costs
    Broadly, the final liquidity fee requirements may impose three 
groups of costs. First, as analyzed in section V, affected money market 
funds would bear reporting and recordkeeping burdens arising out of the 
final liquidity fee requirements.\632\ For money market fund boards 
that delegate liquidity fee determinations to the fund's adviser or 
officer, funds would also have burdens associated with establishing 
board-approved written guidelines for determining the application and 
size of liquidity fees, as well as the burdens of periodic board 
oversight of the delegate's determinations. Money market funds 
generally already have playbooks or other written materials related to 
the circumstances in which a fund's board may consider liquidity fees 
under the current rule. Funds may update these materials to conform to 
the final rule's requirements. The costs of board oversight of the 
delegate may include costs of preparing materials in advance of board 
meetings to describe any instances in which the delegate determined to 
impose a fee, as well as the factors the delegate considered in 
determining to impose a fee and the size of the fee.
---------------------------------------------------------------------------

    \632\ As discussed in section V.B, the Commission estimates the 
total annual costs attributable to the information collection 
requirements of the liquidity fee amendments under rule 2a-7 will be 
$1,228,659. This cost estimate includes both initial and ongoing 
costs with the former being amortized over three years. The 
estimated initial costs of the website disclosure amendments under 
rule 2a-7 is $84,966 for all affected funds, amortized over three 
years. As discussed in section V.E, the Commission estimates a total 
initial cost of updating disclosures to comply with the amendments 
to Form N-1A of $59,682 for all affected funds, amortized over three 
years. As discussed in section V.G, the Commission estimates a total 
annual cost of preserving records of liquidity fee computations of 
$97,347, which includes both internal and external costs.
---------------------------------------------------------------------------

    Second, affected money market funds may incur costs related to 
implementing an analytical framework required to implement the final 
liquidity fee requirements, including costs of estimating dilution 
under the vertical slice assumption. Section II discusses how affected 
money market funds may choose to comply with the vertical slice 
requirement. One commenter questioned the feasibility of estimating 
market impact using the vertical slice approach.\633\ Another commenter 
estimated their initial costs of implementing all parts of the proposal 
at between $10 to $20 million, with $2 to $4 million in annual ongoing 
costs (including staffing and personnel costs, legal fees, printing and 
mailing costs and fees to custodians).\634\ The commenter indicated 
that approximately two-thirds of these

[[Page 51468]]

estimated costs would be necessary to implement the swing pricing, 
disclosures and negative interest rate aspects of the proposal. The 
commenter also indicated that these expenses will be somewhat larger 
for larger fund families and their services providers, and somewhat 
smaller for smaller fund families and their services providers, but 
will not vary exactly in proportion to the size of the money market 
fund family. As discussed above, the Commission is modifying its 
approach to the negative interest rate aspects as proposed, is scaling 
back some of the more costly parts of the disclosure requirements, and 
is adopting a liquidity fee framework (which we believe may be less 
costly) in lieu of the proposed swing pricing requirement. However, if 
costs of the liquidity fee framework are of a comparable order of 
magnitude to the costs of the proposed swing pricing requirement at the 
fund level, an estimate of the initial compliance costs of the final 
liquidity fee framework based on that commenter's assumptions may 
therefore be between $6.7 million and $13.4 million, with between $1.3 
and $2.7 million in annual ongoing costs.\635\ However, as discussed 
throughout the release, a number of commenters indicated that liquidity 
fees may be far less costly and operationally complex than the proposed 
swing pricing requirement,\636\ and thus, these figures may 
overestimate the costs of the final liquidity fee framework.
---------------------------------------------------------------------------

    \633\ See ICI Comment Letter.
    \634\ See Federated Hermes Comment Letter I.
    \635\ These ranges correspond to two-thirds of the corresponding 
ranges provided by the commenter.
    \636\ See, e.g., ICI Comment Letter; Invesco Comment Letter; 
SIFMA AMG Comment Letter; Federated Hermes Comment Letter I; 
Federated Hermes Comment Letter II; Invesco Comment Letter; Schwab 
Comment Letter; Morgan Stanley Comment Letter; JP Morgan Comment 
Letter; BlackRock Comment Letter; State Street Comment Letter; 
Western Asset Comment Letter; IIF Comment Letter; Allspring Funds 
Comment Letter; Dechert Comment Letter.
---------------------------------------------------------------------------

    Third, the liquidity fee amendments would require intermediaries 
and service providers (such as broker-dealers, registered investment 
advisers, retirement plan record-keepers and administrators, banks, 
other registered investment companies, and transfer agents) that 
receive flows directly to apply fees to investors' redemptions and 
submit the proceeds to the fund, which may increase operational 
complexity and cost for intermediaries. While intermediaries and 
service providers to non-government money market funds should be 
equipped to impose liquidity fees under the current regulatory 
baseline, the final amendments will likely result in more frequent 
application of fees than what is observed currently given that no money 
market funds have imposed liquidity fees under the current rule. As 
discussed in section II.B., there are also differences between the 
current liquidity fee framework and the new mandatory liquidity fee 
framework that may affect how intermediaries apply fees, such as the 
requirement to apply fees based on same day net redemptions, and the 
likelihood such fees would vary day to day under stressed conditions. 
As a result, intermediaries may need to develop or modify policies, 
procedures, and systems designed to apply fees to individual investors 
and submit liquidity fee proceeds to the fund. In addition, liquidity 
fees may require more coordination with a fund's intermediaries and 
service providers, since each of them needs to impose fees on an 
investor-by-investor basis, which may be more difficult with respect to 
omnibus accounts. Moreover, some funds may choose to develop or modify 
policies and procedures reasonably designed to ensure intermediaries 
are appropriately and fairly applying the fees. Finally, to determine 
the liquidity fee amount, funds would need to receive information from 
intermediaries about gross redemptions for a given day. To the degree 
that some intermediaries may currently provide only net flow 
information to funds, intermediaries may need to update their 
arrangements with funds to send the gross amount of redemptions in a 
timely manner. Due to the costs that the liquidity fee amendments may 
impose on intermediaries and distribution networks of affected funds, 
money market funds may alter their intermediary distribution contracts, 
networks, and flow aggregation practices.
    The magnitude of such costs would depend on, among other things, 
intermediaries' current policies and procedures related to the 
imposition of liquidity fees under the current rule; future redemption 
patterns out of affected money market funds under normal conditions and 
under stress, and the liquidity costs thereof (which would affect how 
frequently fees would be applied under the final rule); how affected 
money market funds choose to structure their relationships with service 
providers and intermediaries; and the way in which affected funds may 
choose to alter their intermediary contracts, networks, and flow 
aggregation practices in response to the final rule. In the Proposing 
Release, the Commission was unable to quantify such burdens and costs 
and solicited comment and data that would inform this analysis. While 
commenters did not provide estimates or data that could inform 
estimates of such costs, a large number of commenters suggested that a 
liquidity fee framework would be far less costly and operationally 
complex than the proposed swing pricing requirement.\637\
---------------------------------------------------------------------------

    \637\ See, e.g., ICI Comment Letter; Invesco Comment Letter; 
SIFMA AMG Comment Letter; Federated Hermes Comment Letter I; 
Federated Hermes Comment Letter II; Invesco Comment Letter; Schwab 
Comment Letter; Morgan Stanley Comment Letter; JP Morgan Comment 
Letter; BlackRock Comment Letter; State Street Comment Letter; 
Western Asset Comment Letter; IIF Comment Letter; Allspring Funds 
Comment Letter; Dechert Comment Letter.
---------------------------------------------------------------------------

    The costs of the final liquidity fee amendments may be passed along 
in part or in full to institutional money market fund investors in the 
form of higher expense ratios or fees. In addition, to the degree that 
the final amendments result in liquidity fees being charged to 
redeemers (relative to the baseline of funds being able to assess the 
fees but not being required to assess them and never having assessed 
them), the final liquidity fee requirement will increase the 
variability of realized returns for redeeming investors in affected 
money market funds, particularly in times of market stress. Thus, these 
amendments may reduce demand of some investors for institutional prime 
and institutional tax-exempt money market funds. However, they may 
smooth NAV returns for non-redeeming investors as transactions costs 
would no longer detract from the fund NAV. Hence, as discussed above, 
the liquidity fee framework may also attract new investors, such as 
investors that tend to redeem infrequently, to prime and tax-exempt 
money market funds.
    If the final amendments reduce investor demand in some funds, they 
would lead to a decrease in assets under management of these money 
market funds, thereby potentially reducing the wholesale funding 
liquidity they provide to other market participants. A reduction in the 
number of money market funds and/or the amount of money market fund 
assets under management as a result of the final liquidity fee 
requirements would have a greater negative impact on money market fund 
sponsors whose fund groups consist primarily of money market funds, as 
opposed to sponsors that offer a more diversified range of mutual funds 
or engage in other financial activities (e.g., brokerage). However, the 
final amendments may also lead to an increase in demand for government 
money market funds, which

[[Page 51469]]

could dampen or offset the potential adverse effects of the final rule 
on the availability of short-term funding liquidity, and on fund 
sponsors whose fund groups consist primarily of government money market 
funds.
    In addition, the liquidity fee framework may reduce the willingness 
of some investors to hold prime and tax-exempt money market funds due 
to the possibility of a liquidity fee being applied. Such investors may 
reallocate capital into, for example, government money market funds. If 
the final amendments result in a shift in assets under management out 
of prime and tax-exempt money market funds and into government money 
market funds, they may influence costs of capital for issuers, such as 
municipalities and corporate issuers due to the need to raise capital 
from, for example, bank and bond financing. While we cannot estimate 
the magnitude of such potential impacts under the final rule, in the 
swing pricing context, one commenter estimated that the shift of 
balances out of prime money market funds would result in lost income 
and higher borrowing costs of roughly 2% to 3% per annum on the 
aggregate amount of prime money market fund balances shifted to 
alternative forms of intermediation, such as banks.\638\ Although swing 
pricing and liquidity fees can both charge redeeming investors for the 
liquidity costs they impose on a fund's non-redeeming investors, the 
final liquidity fee framework is tailored to reduce costs on funds and 
investors relative to the proposed swing pricing approach, as discussed 
in detail in sections II and IV.D, which may mitigate these effects.
---------------------------------------------------------------------------

    \638\ See, e.g., Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    Moreover, liquidity fees may increase the variability of realized 
returns of institutional investors especially during times of stress, 
which can reduce the attractiveness of such funds to such investors. 
Importantly, under the baseline, institutional funds experience NAV 
volatility and money market funds are already able to assess fees. 
Risk-averse investors that prefer to be able to redeem at NAV and 
without fees may have already shifted to government money market funds 
or bank accounts, for example, around the 2016 implementation of money 
market fund reforms. The final liquidity framework has been designed to 
mitigate these economic costs in several ways. First, the final 
liquidity fee requirements are tailored to the level of net 
redemptions. When daily net redemptions are low (at or below 5%), 
affected money market funds will not be required to assess liquidity 
fees.
    Second, as discussed in section II.B.2, affected money market funds 
will not be required to assess liquidity fees if a calculated fee is 
less than 0.01% of the value of shares redeemed, even if daily net 
redemptions exceed the 5% threshold. Thus, under normal market 
conditions, affected money market funds will not need to assess 
liquidity fees if their estimated liquidity costs are de minimis.
    Third, the 5% net redemption threshold for the application of 
mandatory liquidity fees will be applied on a daily basis, rather than 
on a pricing period basis as with the proposed swing pricing 
requirement. To the degree that affected money market funds may 
experience systematic intraday patterns of large redemptions and large 
subscriptions, this aspect of the final amendments may reduce the 
frequency with which funds must estimate liquidity costs, and the 
frequency with which intermediaries and service providers must assess 
and pass along the proceeds from liquidity fees.
    Further, we recognize that, while not required, some funds may 
choose to reduce the number of NAV strikes they offer or no longer 
offer multiple NAV strikes for operational ease. As discussed in 
section II, funds and intermediaries may also develop other approaches 
to address this issue. Depending on a given fund's approach, a 
redeeming investor may experience a reduction in its access to 
liquidity relative to current practices. In addition, different 
approaches may have differing effects on investors or raise tax or 
other considerations. Overall, we believe it is unlikely that the 
mandatory liquidity fee would result in a redeeming investor being 
unable to access same-day liquidity.
    The liquidity fee requirement may impose costs on investors seeking 
to redeem shares in funds they no longer wish to hold, such as in 
response to poor fund management, poor performance, or for other 
reasons. Under the final amendments, all redemptions out of an affected 
fund on a day the fund has net redemptions in excess of 5% of net 
assets, regardless of the cause for the redemption, will result in a 
liquidity fee being calculated and assessed, unless the fund's 
liquidity costs are de minimis. However, we believe that such a fee 
would be unlikely to affect an investor's decision to redeem from a 
fund the investor no longer wishes to hold for reasons that are 
persistent characteristics of a fund, such as the ability of an 
individual fund manager, and thus is less likely to be prone to a 
sudden wave of redemptions on a particular day. As such, we believe 
that the effect of the liquidity fee requirement on efficiency via 
market discipline will be limited. Moreover, the liquidity fee 
framework is intended to capture any liquidity costs that redemptions 
impose on affected funds and protect non-transacting investors from 
dilution costs.
    In addition, we believe that the final liquidity fee framework is a 
less costly anti-dilution tool relative to the proposal. Specifically, 
as discussed in section II, the costs of the liquidity fee framework 
are expected to be lower than those of the proposed swing pricing 
requirement. For example, many commenters stated that liquidity fees 
would be easier for money market funds to implement.\639\ Some 
commenters suggested that funds would be able to leverage and build off 
of their existing experience with liquidity fees under the current 
regulatory baseline,\640\ while commenters indicated that swing pricing 
is ill-suited for money market funds given the general lack of 
experience with swing pricing in the money market fund industry.\641\
---------------------------------------------------------------------------

    \639\ See, e.g., Federated Hermes Comment Letter II; Invesco 
Comment Letter; SIFMA AMG Comment Letter; Schwab Comment Letter; IIF 
Comment Letter; BlackRock Comment Letter.
    \640\ See, e.g., Federated Hermes Comment Letter II; Invesco 
Comment Letter; SIFMA AMG Comment Letter; Schwab Comment Letter; IIF 
Comment Letter.
    \641\ See Morgan Stanley Comment Letter; SIFMA AMG Comment 
Letter; IIF Comment Letter; Federated Hermes Comment Letter I; 
Federated Hermes Comment Letter II; Comment Letter of Senator Pat 
Toomey (Apr. 12, 2022) (``Senator Toomey Comment Letter''); Mutual 
Fund Directors Forum Comment Letter; see also Profs. Ceccheti and 
Schoenholtz Comment Letter.
---------------------------------------------------------------------------

b. Benefits and Costs of Specific Aspects of the Final Implementation 
of the Liquidity Fee Amendments
    The final liquidity fee requirement for institutional prime and 
institutional tax-exempt funds is characterized by six features. First, 
if a fund has net redemptions exceeding 5% on a given day, the fund 
must estimate the liquidity costs associated with those redemptions and 
assess a fee (unless the fee would be de minimis). Second, funds will 
use order flow information available within a reasonable period after 
the last NAV strike of the day to determine whether the 5% net 
redemption threshold has been reached. Third, the liquidity fee amount 
will be an estimate of the costs of selling a vertical slice of the 
fund's portfolio to meet the net redemptions. Fourth, if the fund 
cannot determine that amount based on current market conditions, a set 
default fee of 1% will apply. Fifth,

[[Page 51470]]

the mandatory liquidity framework would not cap mandatory liquidity 
fees triggered by the 5% net redemption threshold. Sixth, all non-
government money market funds could assess discretionary liquidity fees 
if the board (or its delegate) determines that fees are in the best 
interest of the fund, which may include situations in which net 
redemptions are at or below the 5% threshold. These features of the 
final rule aim to address the liquidity externalities that redeemers 
impose on investors remaining in the fund in a tailored manner and are 
expected to result in reductions in the first-mover advantage and run 
risk in institutional money market funds.
i. Fee Threshold: 5% Net Redemption Threshold
    Under the final amendments, when daily net redemptions exceed 5% of 
the fund's net assets, funds will be required to assess a liquidity fee 
(unless the fee would be de minimis), with the fee amount reflecting 
the fund's good faith estimate of the spread, other transaction (i.e., 
any charges, fees, and taxes associated with portfolio security sales), 
and market impact costs the fund would incur if it were to sell a pro 
rata share of each security in its portfolio to satisfy the amount of 
net redemptions (i.e., vertical slice). The final amendments may, thus, 
allow funds to recapture the liquidity costs of large redemptions, 
benefitting non-transacting shareholders and reducing liquidity 
externalities redeemers impose on other fund investors.
    The final framework will require funds to charge liquidity fees 
that include the spread cost. Relative to a model-generated mid price, 
striking a NAV at a model-generated bid price may result in less 
dilution of existing shareholders on days with net redemptions. To the 
degree that most funds are using model-generated bid prices from 
pricing vendors to strike the NAV, and assuming that these bid prices 
accurately reflect the bid price in the market, the primary benefit of 
the final liquidity fee requirements would operate through the market 
impact. Market impact costs are likely to be significant during periods 
in which funds face large redemptions and short-term funding markets 
are under stress, such that market impact costs are significant. These 
are also periods in which dilution costs and run risk in affected money 
market funds, and, hence, the benefits of liquidity fees, may be 
highest.
    Based on an analysis of historical daily redemptions out of 
institutional prime and institutional tax-exempt money market funds 
between December 2016 and October 2021 and as discussed in greater 
detail in section IV.D.4, net fund flows on most days are low. For 
example, Table 6 shows that an average of 3.2% of the 47 institutional 
prime and institutional tax-exempt money market funds that operated 
during that time period would have exceed the 5% net redemption 
threshold on any given day.

                             Table 6--Average Percentage of Institutional Money Market Funds per Day Above a Given Threshold
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                Net redemption threshold
               Institutional funds                  Average   ------------------------------------------------------------------------------------------
                                                   fund count       4%           5%           6%           7%           8%           9%          10%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Prime Only......................................           37          3.4          2.4          1.7          1.3          0.9          0.8          0.6
Prime + Tax-exempt..............................           47          4.4          3.2          2.4          1.8          1.4          1.1          0.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CraneData.

    Importantly, the 5% net redemption threshold may allow funds to 
recapture spread and market impact costs, and potentially prevent more 
of the dilution from large redemptions, as compared to higher 
thresholds. For example, as can be seen from Table 7, an analysis of 
CraneData on outflows during the week ending March 20, 2020, suggests 
that approximately 31% of ``fund days'' \642\ for institutional prime 
and institutional tax-exempt funds exceeded the 5% threshold. In 
contrast, only 11% of the fund days were in excess of 10%. This 
analysis suggests that the final rule's 5% threshold would have 
triggered mandatory liquidity fees for approximately one third of the 
time during the week of March 20, 2020. Relative to a higher net 
redemption threshold, under the final rule, the liquidity fee would 
trigger more often, potentially recapturing more dilution costs and 
having a greater effect on redemption incentives.
---------------------------------------------------------------------------

    \642\ ``Fund days'' refers to observations that consist of the 
set of daily redemptions for the funds in our sample. For example, a 
sample of 35 funds observed over 5 days produces a sample of 175 
fund days.

                             Table 7--Percentage of Fund Days Above a Redemption Threshold During the Week of March 20, 2020
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                Net redemption threshold
               Institutional funds                 Fund count ------------------------------------------------------------------------------------------
                                                                    4%           5%           6%           7%           8%           9%          10%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Prime Only......................................           35           43           34           31           25           19           16           12
Prime + Tax-exempt..............................           43           39           31           28           21           17           14           11
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CraneData.

    Overall, the net redemption threshold for the mandatory liquidity 
fee framework influences the number of funds that experience 
significant redemptions that generally would be required to assess a 
liquidity fee during severe market stress. In the swing pricing 
context, several commenters suggested the proposed 4% redemption 
threshold for applying a market impact factor was too low.\643\ Below 
we present additional analysis to further quantify the effects of the 
redemption threshold. Specifically, we conducted an analysis of the 
fraction of funds that would have dropped below certain liquid asset 
thresholds and would have been required to assess a liquidity fee 
during market stress of March 2020, had the final amendments been in 
place. This analysis may shed light on the fraction

[[Page 51471]]

of funds that would have been required to assess liquidity fees under 
different redemption thresholds.
---------------------------------------------------------------------------

    \643\ See, e.g., IIF Comment Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    First, we combine daily redemption patterns from 42 public 
institutional prime funds during the week ending March 20, 2020, with 
20 equally sized bins representing different weekly liquid asset 
distributions maturing across days 2 through 5 of the week (e.g., one 
such distribution would be characterized by 30% of weekly liquid assets 
maturing on day 2, 25% on day 3, 25% on day 4, 20% on day 5).\644\ This 
combination results in 840 series corresponding to hypothetical paths 
of liquidity during a period of stress.\645\ Given these paths, we 
determine the proportion of days on which a fee would be triggered as a 
percentage of days on which funds experience various declines in levels 
of liquidity. For example, Figure 5 plots the results for the paths for 
all funds starting with 25% in daily liquid assets and 50% in weekly 
liquid assets, with the fraction of days funds would generally have 
been required to assess a liquidity fee on the vertical axis, as a 
function of various levels for the net redemption threshold on the 
horizontal axis.\646\
---------------------------------------------------------------------------

    \644\ See section III.D.2.a and section III.D.2.a of the 
Proposing Release where the Commission used the same models to 
quantify the potential effect of various liquidity thresholds on the 
probability that money market funds would confront liquidity stress.
    \645\ Applying the 42 redemptions paths to different day 2 
through 5 weekly liquid asset distributions allows us to consider 
how funds' liquidity would have fared under alternate portfolios 
during the week of Mar. 20, 2020, while increasing the number of 
data points for the analysis.
    \646\ Additional models with higher levels of initial liquidity 
produced higher percentages of fund days for which funds that 
eventually dropped below a given threshold would have been required 
to apply liquidity fees as a function of the net redemption 
threshold.
---------------------------------------------------------------------------

Figure 5--One Week of Stress: Percentage of Fund Days That Drop Below a 
Given Daily Liquid Asset Threshold That Would Have Been Required To 
Apply a Liquidity Fee as a Function of the Redemption Threshold
[GRAPHIC] [TIFF OMITTED] TR03AU23.004

    Next, we extend a model employed by one commenter \647\ and conduct 
a similar analysis for more prolonged periods of stress, such as 3 to 5 
weeks of sustained redemptions using the weekly redemptions seen for 
the crisis week ending March 20, 2020, which could occur absent 
government intervention. Specifically, we combine weekly redemption 
patterns from 42 public institutional prime funds during the week 
ending March 20, 2020, with 1,744 public institutional prime portfolios 
observed in the monthly Form N-MFP filings over a period spanning 
October 2016 to February 2020.\648\ The portfolio assets are binned 
according to their maturities (ranging from 1 week to more than 10 
weeks). This combination results in 73,248 series corresponding to 
hypothetical paths of weekly liquidity during a hypothetical period of 
sustained stress.\649\ All funds enter the stress period with over 50% 
in weekly liquid assets. Figure 6 plots the results for a 3-week stress 
period, while Figure 7 plots the results for a 5 week stress 
period.\650\
---------------------------------------------------------------------------

    \647\ See ICI Comment Letter.
    \648\ See section IV.D.2.a for additional model details. To 
address the robustness of the results, different model scenarios, 
which removed redemption patterns associated with funds with weekly 
liquid assets below 35% that may have exasperated redemptions, did 
not change the result significantly.
    \649\ The redemption thresholds are adjusted so that weekly 
outflows are comparable to daily redemption thresholds. For 
instance, a 4% daily outflow sustained for a five day trading week 
implies a weekly outflow of about 18.5%.
    \650\ Since these figures chart weekly redemption rates, this 
analysis does not capture instances where net redemptions exceed a 
given redemption threshold on a single day, but the average weekly 
net redemption does not. Additional models extending the stress 
period out to 10 weeks produced lower percentages of weeks for which 
funds that dropped below a given threshold would have been required 
to apply liquidity fees as a function of the net redemption 
threshold.
---------------------------------------------------------------------------

Figure 6--Three Weeks of Stress: Percentage of Weeks During Which Funds 
That Dropped Below a Given Weekly Liquid Asset Threshold Would Have 
Been Required To Apply a Liquidity Fee as a Function of the Redemption 
Threshold

[[Page 51472]]

[GRAPHIC] [TIFF OMITTED] TR03AU23.005

Figure 7--Five Weeks of Stress: Percentage of Weeks During Which Funds 
That Dropped Below a Given Weekly Liquid Asset Threshold Would Have 
Been Required To Apply a Liquidity Fee as a Function of the Redemption 
Threshold
[GRAPHIC] [TIFF OMITTED] TR03AU23.006

    The above analyses show that, as the net redemption threshold 
rises, the frequency with which funds experiencing severe declines in 
their liquid assets would have been required to apply a liquidity fee 
declines. This analysis may be interpreted as quantifying the impact of 
the redemption threshold on how many funds with various levels of 
liquidity would have been required to apply a liquidity fee had the 
final amendments been in place under various durations of stress.
    Alternatively, we can examine the impact of the redemption 
threshold by analyzing fund outflows during the worst days of market 
stress in March 2020. This analysis may shed light on how the 
redemption threshold influences the scope of the liquidity fee 
requirements on days with the largest outflows out of all funds. 
Specifically, Table 8 and Figure 8, using CraneData, quantify the 
average percentage of fund days for which outflows exceeded various 
threshold levels over multiple time periods, including the worst 3, 5, 
and 10 days, measured by aggregate net redemptions, in March 2020.

                                 Table 8--Percentage of Fund Days for Institutional Prime Funds Above a Given Threshold
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                Net redemption threshold
                      Dates                         Average   ------------------------------------------------------------------------------------------
                                                   fund count       4%           5%           6%           7%           8%           9%          10%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Worst 3 days....................................           35           48           38           36           31           23           20           15
Worst 5 days....................................           35           43           34           31           25           19           16           12
Worst 10 days...................................           35           34           25           21           15           11           10            8
March 2020......................................           35           19           14           11            8            7            5            4

[[Page 51473]]

 
5 years Excl. March 2020........................           37          3.2          2.2          1.6          1.2          0.9          0.7          0.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CraneData.

Figure 8--Percentage of Fund Days for Institutional Prime Funds Above a 
Given Threshold
[GRAPHIC] [TIFF OMITTED] TR03AU23.007

    The final net redemption threshold impacts the number of funds that 
will be required to calculate liquidity fees under both normal and 
stressed conditions when faced with large outflows. Outflows in excess 
of the 5% net redemption threshold occur with some regularity even 
outside of stressed market environments. Accordingly, we consider the 
extent to which various redemption thresholds were crossed in recent 
years outside of the March 2020 stress event. We first conduct this 
analysis at the fund level for each year from 2017 to 2020. Table 9 and 
Figure 9, using CraneData, report the percentage of funds that, in a 
given year, would have exceeded a given redemption threshold on at 
least one day. This analysis helps inform the extent to which funds 
would have had to calculate a liquidity fee at least once in a given 
year had the final liquidity fee framework been in place and, thus, 
reflecting associated fixed costs.

          Table 9--Percentage of Institutional Prime Funds That Would Have Exceed the Net Redemption Threshold at Least One Day in a Given Year
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                Net redemption threshold
                      Year                          Average   ------------------------------------------------------------------------------------------
                                                   fund count       4%           5%           6%           7%           8%           9%          10%
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017............................................           33           79           79           76           70           64           55           52
2018............................................           31           84           81           74           68           58           52           42
2019............................................           32           72           69           63           53           47           38           31
2020............................................           35          100          100           97           89           83           74           63
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CraneData.

Figure 9--Percentage of Institutional Prime Funds That Would Have 
Exceed the Net Redemption Threshold at Least One Day in a Given Year

[[Page 51474]]

[GRAPHIC] [TIFF OMITTED] TR03AU23.008

    Next, Table 10 and Figure 10, using CraneData, report the 
distribution of fund day percentages that would have exceeded a given 
redemption threshold over 5 years (excluding March 2020). This analysis 
reflects the distribution of percentages on which the fee would have 
been charged industry-wide (as a percentage of fund-days over the 5-
year period) and, thus, reflects the variable cost associated with 
crossing the redemption threshold outside of a crisis period when 
liquidity costs are likely very low or zero.\651\ For example, net 
redemptions exceeded the 5% redemption threshold on 7.1% of fund days 
during this period.
---------------------------------------------------------------------------

    \651\ To illustrate the analysis, we observed around 37 funds 
over 1,228 trading days over five years. We thus have around 45,436 
(= 37 x 1,228) fund-day observations. A value on the Max curve (red 
line) of around 7.1% on the y-axis for a 5% threshold on the x-axis 
then means that net redemptions exceeded 5% threshold on 7.1%-or 87 
(= 7.1% x 1,228) in total--fund days.

                         Table 10--Distribution of Fund Days Percentages on Which a Fee Would Have Been Implemented Over 5 Years
                                                                 [Excluding March 2020]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Net redemption threshold
           Percentile           ------------------------------------------------------------------------------------------------------------------------
                                     0%         1%         2%         3%         4%         5%         6%         7%         8%         9%        10%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Max............................         74         32         21         14        9.0        7.1        5.2        4.4        3.1        3.0        2.4
75th...........................         53         27         15        8.7        5.3        3.8        2.6        1.7        1.1        1.0        0.9
Median.........................         49         20         10        5.5        3.3        2.2        1.3        1.0        0.9        0.5        0.3
25th...........................         46        8.1        3.7        1.5        1.0        0.5        0.5        0.3        0.2        0.0        0.0
Min............................         22        1.0        0.8        0.4        0.0        0.0        0.0        0.0        0.0        0.0        0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CraneData.

Figure 10--Distribution of Fund Days Percentages on Which a Fee Would 
Have Been Implemented Over 5 Years (Excluding March 2020)
[GRAPHIC] [TIFF OMITTED] TR03AU23.009


[[Page 51475]]


    In addition, large fund outflows may be seasonal. To quantify 
potential seasonality in fund outflows, we analyzed daily data from 
CraneData covering outflows out of institutional prime and 
institutional tax-exempt funds between December 1, 2016, and October 
28, 2021.\652\ The discussion below shows that there are significant 
outflow patterns by day of week and day of month among others. First, 
institutional prime funds tend to have more large outflows on Fridays, 
while institutional tax-exempt funds tend to have more large outflows 
on Thursdays, as can be seen from Figure 11.
---------------------------------------------------------------------------

    \652\ This analysis uses daily flows reported in CraneData on 
1,228 days between Dec. 2016 and Oct. 2021. As of Sept. 2021, 
CraneData covered 87% of the funds and 96% of total assets under 
management. Flows at the class level were aggregated to the fund 
level. Flows of feeder funds were aggregated for an approximation of 
flows for the corresponding master fund. For the purposes of this 
seasonality analysis, outflows during Mar. 2020 were omitted, 
because they may have been driven by stress and the purpose of the 
analysis is to examine seasonality of routine fund flows under 
normal market conditions.
---------------------------------------------------------------------------

Figure 11--Percentage of Institutional Prime Funds With Outflows Above 
a Given Threshold as a Function of the Day of the Week
[GRAPHIC] [TIFF OMITTED] TR03AU23.010

    Second, Figure 12 below shows that the last day of the month 
accounts for some of the largest outflows in excess of 5%.

Figure 12--Percentage of Funds With Outflows Above a Given Threshold as 
a Function of Days From the End of the Month
[GRAPHIC] [TIFF OMITTED] TR03AU23.011

    The above patterns are consistent with institutional investors 
relying on money market funds as a cash management tool (for example, 
to meet payroll, tax, and other obligations). Moreover, large fund 
outflows may be at least partly seasonal and unrelated to stress in 
underlying asset markets. Under the final rule, outflows in excess of 
5% would trigger the compliance costs related to the liquidity fee 
requirement and the market impact factor analysis on each day with 
large outflows.
    As discussed in the prior section, the implementation of liquidity 
fees is expected to give rise to compliance burdens and other costs on 
money market funds. These costs may be mitigated by four factors. 
First, many affected money market funds may already be using bid prices 
to strike the NAV. Second, the rule does not require a daily 
recalculation of market impact factors. As discussed in section II, in 
order to establish a good faith estimate of the market impact of 
selling a vertical slice of the fund's portfolio to meet net 
redemptions, a fund may document its estimates of the effect of selling 
different amounts of its portfolio securities on each security's price 
into pricing grids for different market conditions (such as periods of 
credit stress, liquidity rate stress, interest rate stress, or a 
combination of such stresses). The fund would refer to the appropriate 
grid that reasonably approximates current market conditions on days 
when its net redemptions exceed 5% to identify the market impact for 
the assumed amount to be sold under the required vertical

[[Page 51476]]

slice analysis. This may reduce the marginal costs of market impact 
factor calculations on days when funds experience net redemptions above 
5%. Third, as discussed in section II, funds would not be required to 
perform a security-by-security pricing analysis, and would be able to 
pool similar securities into categories for purposes of the market 
impact analysis. Fourth, as discussed in section II, under normal 
market conditions, the calculated liquidity fee amount generally is 
likely to be de minimis, mitigating the costs to redeeming shareholders 
on days of predictably large outflows when market conditions are normal 
and markets impacts (and, thus, liquidity externalities) are near zero.
    Finally, the Commission has considered how the net redemption 
threshold for the mandatory liquidity fees may interact with the final 
25% daily and 50% weekly liquid asset requirements. Specifically, Table 
11 below illustrates a theoretical relationship between constant daily 
outflow and the implied weekly outflow after 5 days. If a fund 
experiences 5 consecutive days of 5% outflows, it would experience 
cumulative 23% outflows by the end of the week. By contrast, if a fund 
experiences 5 consecutive days of 10% outflows, it would experience 
cumulative 41% outflows by the end of the week. While the final 50% 
weekly liquid asset requirement could be enough to cover the outflows 
for that week, depending on the maturity structure of weekly liquid 
assets, the fund may not have enough liquidity to cover redemptions 
over the course of the week. In that case, the liquidity fee may be 
useful to recapture liquidity costs and dis-incentivize any redemptions 
driven by a first-mover advantage as the wave of redemptions grows and 
the markets come under stress. Notably, this is a numerical example, 
and future patterns of redemptions under stress and portfolio maturity 
structures of affected funds, particularly the maturity structure of 
weekly liquid assets, as well as the way in which investors and money 
market funds respond to various provisions of the final rule, may 
influence the ability of funds to absorb redemptions out of daily or 
weekly liquidity. However, this analysis suggests that a higher 
redemption threshold for liquidity fees may reduce the amount of 
dilution costs recaptured by funds during redemption waves.

      Table 11--Cumulative Weekly Outflows After 5 Days of Outflows
------------------------------------------------------------------------
                                                              Cumulative
                                                                weekly
                       Daily outflows                          outflows
                                                                 (%)
------------------------------------------------------------------------
4%.........................................................           18
5%.........................................................           23
6%.........................................................           27
7%.........................................................           30
8%.........................................................           34
9%.........................................................           38
10%........................................................           41
------------------------------------------------------------------------

    Overall, the 5% net redemption threshold may result in some 
instances of the imposition of fees during normal market conditions, 
and funds would be required to estimate liquidity fees when the 
liquidity costs of large redemptions are very small. However, the 5% 
net redemption threshold may enhance the benefits of liquidity fees for 
non-transacting investors during redemption waves and under stressed 
conditions, which may serve to reduce self-fulfilling run incentives, 
protect non-transacting investors, and improve the resilience of money 
market funds.
    The Commission proposed a swing pricing requirement, under which, 
if net redemptions exceeded 4% divided by the number of pricing periods 
per day, the swing factor would be required to include not only the 
spread costs and other transaction costs, but also good faith estimates 
of the market impact of net redemptions. The Commission received 
comments stating that the threshold could act as a ``bright line'' that 
could actually lead to runs.\653\ While the final amendments replace 
the proposed swing pricing requirement with a liquidity fee framework 
and utilize a higher 5% net redemption threshold for the imposition of 
liquidity fees, the Commission has considered whether such a threshold 
in the liquidity fee framework could lead to run risk.
---------------------------------------------------------------------------

    \653\ See, e.g., IIF Comment Letter; Federated Hermes Comment 
Letter I.
---------------------------------------------------------------------------

    However, several aspects of the final rule are intended to mitigate 
any such incentives. The net redemption threshold for mandatory 
liquidity fees is based on same-day fund flows. As discussed in the 
prior section, we believe that the net redemption threshold is less 
susceptible to run risk than a weekly liquid asset threshold. Moreover, 
because mandatory liquidity fees are based on same-day net redemptions, 
an investor's decision to redeem directly influences the probability 
that a liquidity fee will be assessed to their redemption. Further, to 
the degree that institutional investors expect other investors have 
similar expectations of net redemptions from a fund, the incentive to 
strategically redeem shares ahead of other investors is diminished. 
Finally, under the final rule and as discussed in greater detail in 
section II.B and section IV.C.4.b.vi, funds may assess discretionary 
liquidity fees on days when net redemptions are at or below the 5% 
threshold. To the degree that fund boards (or their delegates) 
determine to apply discretionary fees, this element of the final rule 
may further reduce the ability of redeeming investors to strategically 
redeem ahead of the likely imposition of a liquidity fee. However, we 
recognize that funds may face disincentives to apply these liquidity 
fees and money market fund boards have not historically applied 
liquidity fees when they had the discretion to do so, which may reduce 
the effectiveness of this mitigating factor.
ii. Fee Threshold: Using Fund Flows Received Within a Reasonable Period 
After the Last NAV Strike Each Day
    In response to the proposed swing pricing requirement for money 
market funds, some commenters discussed difficulties in obtaining 
timely flow information to enable same-day NAV adjustments. While the 
final rule imposes a liquidity fee framework, rather than swing 
pricing, comments concerning flow timing and flow aggregation practices 
by money market funds informed the design of the redemption threshold 
for the liquidity fee framework. Specifically, some commenters 
indicated that institutional money market funds that offer same-day 
settlement may receive some flows overnight that will settle on a T+1 
basis, and thus some of these funds do not have final order flow 
information until the following morning. One commenter stated that one 
of its former institutional prime funds offered same-day settlement and 
therefore imposed order cut-off times, and these cut-off times were the 
same as the NAV strike time.\654\ Another commenter stated that its 
privately offered money market funds, in which other funds invest, do 
not have sufficient flow data because the flow data from the underlying 
investing funds is only available on a T+1 basis.\655\ Another 
commenter stated that, over a representative period, one of its 
institutional prime funds received 35.7% of trade notices after the 
fund's NAV calculation time of 3 p.m. ET, with

[[Page 51477]]

these trades receiving that day's NAV, but settling on a T+1 
basis.\656\ A few commenters requested that the Commission provide 
guidance that if a NAV is adjusted based on reasonable inquiry and 
estimates, a later determination that a fund did not have net 
redemptions for the pricing period would not constitute a NAV 
error.\657\
---------------------------------------------------------------------------

    \654\ See, e.g., Fidelity Comment Letter.
    \655\ See, e.g., Capital Group Comment Letter.
    \656\ See, e.g., Federated Hermes Comment Letter II.
    \657\ See, e.g., Capital Group Comment Letter; IDC Comment 
Letter.
---------------------------------------------------------------------------

    As discussed in section II, institutional money market funds often 
impose order cut-off times to be able to offer same-day settlement, 
which requires that funds complete Fedwire instructions before the 
Federal Reserve's 6:45 p.m. ET Fedwire cut-off time. Therefore, many 
institutional funds would have a sizeable portion of their daily flows 
within a reasonable period of time after the last pricing time of the 
day. However, complete flow information may not always be available to 
affected money market funds on the same day, and the availability of 
flow information may depend on fund intermediaries, how the fund set up 
custodian and omnibus accounts, and the timing for batching of orders 
and transmitting them, among other things. For example, funds may 
receive cancellations, or corrections of intermediary or investor 
errors, which modify the flows. In addition, funds or some fund share 
classes may settle some transactions on T+1 and still receive flow 
information from intermediaries that is eligible to receive the NAV as 
of the last pricing time. Thus, there will be circumstances in which 
the flow information a fund uses to determine whether it has crossed 
the net redemption threshold does not reflect the fund's full flows for 
that day.
    As discussed in section II.B.2.a, funds would be able to use flows 
received within a reasonable period after the last pricing time to 
determine whether the fund has crossed the 5% threshold. To the extent 
that a fund received additional flow information after determining that 
it crossed the 5% threshold, but before applying a liquidity fee, the 
fund could take the additional flow information into account when 
determining the amount of the liquidity fee. This element of the final 
liquidity fee framework will enable funds to assess liquidity fees 
without requiring costly changes to intermediaries' technological 
systems and order batching, validation, and transmission practices, 
earlier order cutoff times, fund distribution networks, or the 
reduction in the number of NAV strikes a day funds are able to offer.
    Moreover, as a result of this element of the final rule, liquidity 
fees will be assessed based on same-day outflows, rather than the 
previous day's flows. Information about historical flows may be 
generally available in, among others, subscription databases and other 
data feeds, while same-day flows are not predictable by investors at 
the time they place their orders. This reduces the risk that investors 
would be able to predict whether a liquidity fee will not apply on a 
given day and time redemptions accordingly to avoid the liquidity fee. 
In addition, under the final rule, redeemers will be charged for the 
liquidity costs of their redemptions, rather than for the costs of 
redemptions made by other investors on the previous day. Finally, this 
element of the final rule may allow funds to recapture more of the 
dilution costs of large redemptions on a given day, regardless of 
whether a fund experiences a wave of redemptions or individual days of 
large redemptions. Thus, this element of the final rule may enhance the 
benefits of the liquidity fee framework for dilution costs and run 
incentives.
    Fund flow information that is available within a reasonable period 
after the last pricing period of the day may under or overestimate ex 
post net redemptions on a given day. The direction and magnitude of the 
difference between ex ante estimated fund flows and ex post fund flows 
would depend on intraday redemption and subscription patterns of fund 
investors, a fund's reliance on various distribution channels, the 
timing of intermediaries' batch processing orders, including omnibus 
accounts, and the propensity of intermediaries and investors to preview 
delayed redemptions or subscriptions to fund managers. Thus, this 
element of the final rule may result in some instances of liquidity 
fees not being charged based on available flows when they would have 
been based on ex post flows, and vice versa. While institutional 
investors may theoretically have incentives to delay the submission of 
large redemption orders after the NAV is struck to reduce the 
likelihood that a liquidity fee is charged, an institutional investor 
must submit its orders before the fund calculates its NAV to receive 
that price.\658\ In addition, intermediaries face no such incentives. 
Crucially, intermediaries commonly have cutoff times to receive same 
day settlement, and it is intermediary technological systems and flow 
aggregation and transmission practices that may drive when funds 
receive orders. This may reduce the risk of strategic delays in the 
submissions of redemption flows. Moreover, as discussed in the previous 
sections, the Commission expects that any liquidity fees under normal 
market conditions will be very low, further reducing incentives for 
strategic order flow delays. Finally, as discussed in greater detail 
below, the final rule will also allow funds to charge discretionary 
fees even if same day outflows are below the 5% threshold, further 
reducing certainty about the imposition of liquidity fees around the 
threshold and mitigating the risk of strategic redemptions or order 
flow delays.
---------------------------------------------------------------------------

    \658\ See 17 CFR 270.22c-1.
---------------------------------------------------------------------------

    The final rule will require affected funds to apply a liquidity fee 
to all shares redeemed on the day the mandatory liquidity fee is 
triggered, which may impose some costs on funds currently offering 
multiple NAV strikes per day. Specifically, investors may redeem in 
earlier pricing periods, before the fund knows that it has crossed the 
net redemption threshold triggering the liquidity fee requirement for 
the day. In such circumstances, funds offering multiple NAV strikes 
would be required to develop a method for applying the fee to shares 
redeemed in earlier pricing periods on that day. Section II.B.2.a 
discusses various approaches funds may take to address this issue. In 
addition, some funds may choose to reduce the number of NAV strikes 
they offer or no longer offer multiple NAV strikes for operational 
reasons. Depending on how different funds respond to these amendments, 
redeeming investors may experience a reduction in their access to 
liquidity relative to the current baseline. However, the mandatory 
liquidity fees are unlikely to result in a redeeming investor being 
unable to access same-day liquidity.
iii. Fee Amount: Costs of Selling the Pro-Rata Share of Fund Holdings
    The costs and benefits of the final rule's requirements concerning 
the fee amount are informed by two sets of considerations.
    First, liquidity fees charged by a money market fund are intended 
to make investors indifferent between selling shares in the fund and 
selling the underlying assets if they were held by investors directly. 
The liquidity fee is not intended to disproportionally discourage sales 
out of money market funds relative to underlying assets, but rather to 
reduce dilution that may arise out of the fund structure.
    Second, smaller fees may preserve a first-mover advantage in 
redemptions out of money market funds suffering from short-term stress, 
while larger fees may lock investors into failing funds if

[[Page 51478]]

underlying portfolio holdings do not retain their value in the medium 
and long term. If a liquidity crunch is temporary and underlying fund 
holdings retain their value in the medium and long term (such as during 
March 2020, when issuers were not defaulting and redemptions were 
driven by a dash for cash), funds lose value primarily when they sell 
securities into stressed markets to meet redemptions. If, however, 
underlying fund holdings lose their value in the medium- and long-term, 
investors may run because of uncertainty about the extent of their 
fund's exposures to defaulting assets (such as during the 2008 
financial crisis). To the degree that money market fund investors face 
uncertainty about the underlying source of stress, they have an 
incentive to redeem in a flight to safety. In this setting, a fee that 
makes money market fund investors indifferent between redeeming or 
remaining in the fund is ex-post efficient in cases of liquidity 
stress, but ex-post inefficient in the latter scenario, as it is more 
likely to incentivize investors to stay in a failing fund. In sum, 
higher fees may slow redemptions out of money market funds, but the ex-
post efficiency of such effects may depend on the nature of the crisis.
    Under the final amendments, if an affected fund experiences net 
redemptions of more than 5% on a given day, it would be required to 
assess a liquidity fee that includes not only the spread costs and 
other transaction costs, but also good faith estimates of the market 
impact of sales to meet net redemptions. To the extent funds are able 
to estimate or forecast market impact costs accurately, the requirement 
to assess the market impact of sales to meet net redemptions when daily 
net redemptions exceed 5% would result in redeeming investors bearing 
not only the direct spread and transaction costs from their 
redemptions, but also the impact of their redemptions on the market 
value of the fund's holdings. This may allow shareholders remaining in 
the fund to capture more of the dilution cost of redemptions, which 
includes not only direct transaction costs and near-term price 
movements, but the impact of the redemptions on the fund's portfolio as 
a whole. However, the magnitude of this benefit may be reduced by the 
fact that the final amendments would only require the imposition of 
liquidity fees when an affected fund's daily net redemptions exceed 
5%.\659\
---------------------------------------------------------------------------

    \659\ See section IV.C.4.b.i. and section IV.D.4. for a 
quantitative analysis of the frequency with which affected money 
market funds may be expected to exceed the 5% daily net redemption 
threshold.
---------------------------------------------------------------------------

    Importantly, the mandatory liquidity fee framework will require 
funds to calculate the liquidity fee as if the fund were selling the 
pro-rata share of all of the fund's holdings, rather than, for example, 
assuming the fund would absorb redemptions out of daily liquid assets. 
If a fund were to absorb large redemptions out of daily or weekly 
liquid assets--and their ability to do so may be enhanced by the final 
amendments' increased liquidity requirements--the immediate transaction 
costs imposed on the funds would be lower. However, the fund would have 
less remaining daily and weekly liquidity and transacting shareholders 
would be diluting remaining investors in a manner not captured by 
estimated transaction costs. Thus, this aspect of the final amendments 
will make redeeming investors bear not just the immediate costs of 
covering redemptions, but also the costs of rebalancing the fund 
portfolio to the pre-redemption levels of liquid asset holdings.
    However, this element of the final rule will require redeeming 
shareholders to bear liquidity costs larger than the direct liquidity 
costs they may impose on the fund. Some commenters stated that this 
approach is fundamentally inconsistent with how money market funds 
operate because, given the nature of money market fund holdings, money 
market funds typically absorb redemptions out of daily and weekly 
liquid assets.\660\ However, assets other than daily and weekly liquid 
assets--such as municipal securities and commercial paper that do not 
mature in the near term--may become illiquid in times of stress and may 
need to be held to maturity by the fund. Thus, the realized transaction 
costs of most redemptions may be zero as funds absorb them out of daily 
liquidity, while the true liquidity costs of redemptions may consist of 
the depletion of daily and weekly liquidity during times of stress 
(when rebalancing is especially expensive) rather than the sale of 
illiquid assets. While there is a lack of research on portfolio 
rebalancing by money market funds, some research in a parallel open end 
fund context shows that funds may optimally rebuild cash buffers after 
outflows to prevent future forced sales of illiquid assets.\661\ To the 
degree that money market funds may also seek to rebalance liquid assets 
after large outflows, this may suggest that liquidity costs should be 
measured using a vertical slice assumption due to the cost of 
rebuilding liquidity after redemptions that deplete liquid assets.
---------------------------------------------------------------------------

    \660\ See, e.g., ICI Comment Letter; State Street Comment 
Letter.
    \661\ See, e.g., Yao Zeng, A Dynamic Theory of Mutual Funds and 
Liquidity Management (ESRB working paper no. 2017/42, Apr. 2017), 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3723389 (retrieved from SSRN Elsevier 
database).
---------------------------------------------------------------------------

    To the degree that this aspect of the final amendments could impose 
a cost on redeemers that is larger than the realized trading cost of 
their redemptions, it may reduce the attractiveness of affected money 
market funds to some investors. Importantly, when direct trading costs 
of redemptions are zero because redemptions are absorbed out of weekly 
liquid assets, redemptions still dilute non-transacting investors by 
leaving the fund depleted of liquidity. This aspect of the final 
amendments would require redeemers to internalize a greater share of 
the liquidity externalities that they impose on non-transacting 
investors. In addition, liquidity costs paid by redeemers under the 
liquidity fee requirement would flow back to remaining shareholders, 
dis-incentivizing redemptions and reducing the first-mover advantage 
during times of stress. This may attract longer-term investors into 
affected money market funds.
    The Commission has also received comments that market impact 
factors may be too difficult or costly to estimate and that this may 
give rise to errors in assessed fees.\662\ As discussed in section II, 
the final rule is tailored to address these concerns and reduce such 
costs in six ways. First, section II provides guidance on one method 
funds could use to make a good faith estimate of the costs of selling a 
vertical slice of the fund's portfolio to meet net redemptions using 
pricing grids relying on historical data. Second, consistent with the 
proposal, the final rule permits a fund to estimate liquidity costs for 
each type of security with the same or substantially similar 
characteristics, rather than analyze each security separately. Third, 
as discussed in section II and consistent with the proposal, it would 
be reasonable to assume a market impact of zero for the fund's daily 
and weekly liquid assets, since a fund could reasonably expect such 
assets to convert to cash without a market impact to fulfill 
redemptions (e.g., because the assets are maturing shortly).\663\ 
Fourth, since market impact costs of a transaction can be difficult to

[[Page 51479]]

estimate with certainty before a transaction occurs, the rule requires 
good faith estimates of these costs. Fifth, the final rule provides 
that if an institutional fund makes a good faith estimate that the 
amount of the liquidity fee would be below one basis point of the value 
of the shares redeemed, then the fund is not required to charge a 
liquidity fee.\664\ Sixth, where a fund is unable to produce good faith 
estimates of the costs of selling a vertical slice, for example, when 
underlying security markets are frozen and transactions are scarce, the 
fund would use a default liquidity fee, as discussed in greater detail 
in the section that follows.
---------------------------------------------------------------------------

    \662\ See, e.g., ICI Comment Letter.
    \663\ See Proposing Release, supra note 6, at section II.B.1.
    \664\ Amended rule 2a-7(c)(2)(iii)(D).
---------------------------------------------------------------------------

iv. Fee Amount: Default Fee When the Costs of Selling the Pro-Rata 
Share of Fund Holdings Cannot Be Calculated
    As a baseline matter, rule 2a-7 includes a default liquidity fee 
provision for non-government money market funds with weekly liquid 
assets falling below 10% of their total assets. Under the final rule, 
if affected money market funds are unable to estimate the costs of 
selling the pro-rata share of fund holdings in good faith and supported 
by data, they would assess a default liquidity fee of 1%.
    In the swing pricing context, the Commission received comments 
about difficulties in calculating transaction costs and market impact 
factors under tightly compressed timelines.\665\ In addition, one 
commenter referenced a lack of, or narrow, bid-ask spreads, making 
calculation particularly difficult.\666\ Another commenter questioned 
the feasibility of estimating market impact using the vertical slice 
approach.\667\
---------------------------------------------------------------------------

    \665\ See, e.g., SIFMA AMG Comment Letter; BlackRock Comment 
Letter; Capital Group Comment Letter.
    \666\ See, e.g., BlackRock Comment Letter.
    \667\ See, e.g., ICI Comment Letter.
---------------------------------------------------------------------------

    While the final rule imposes a liquidity fee framework, rather than 
a swing pricing requirement, the Commission has considered how 
difficulties in calculating the costs of selling the pro-rata share of 
fund holdings may impact operational feasibility of the liquidity fee 
requirement. Specifically, market impact factors and spread costs may 
be difficult to estimate precisely when many of the assets money market 
funds hold lack a liquid secondary market. This effect may be 
particularly acute in times of stress in short-term funding markets 
when transaction activity may freeze and trade and quotation data 
necessary for an accurate estimate of market impact factors may not be 
available. The ability of affected money market funds to assess a 
default liquidity fee under the final rule may enable affected money 
market funds to overcome these operational difficulties. Thus, the 
default liquidity fee may serve as an additional tool for affected 
money market funds facing redemption waves, and may reduce dilution of 
non-transacting shareholders and the first-mover advantage in 
redemptions.
    The default liquidity fee is fixed at 1% and does not vary 
depending on the size of redemption flows, conditions in short-term 
funding markets, or characteristics of a fund's portfolio holdings. 
Thus, the default liquidity fee may, under some circumstances, exceed 
the liquidity cost of redemptions, which poses a cost to redeemers; or 
fall short of accurately capturing the liquidity cost of redemptions, 
thereby failing to recapture the dilution costs of redemptions faced by 
non-transacting shareholders. However, to the degree that discounts 
experienced by ultra-short bond exchange traded funds in the peak 
market stress of March 2020 may serve as a proxy for liquidity costs of 
money market funds, the liquidity fee is generally consistent with the 
range of money market fund liquidity costs during the same period.\668\ 
Importantly, the default liquidity fee is not intended to precisely 
measure the liquidity cost of redemptions, but may enhance the ability 
of affected funds facing large redemptions to manage their liquidity in 
times of stress, reduce dilution costs borne by non-transacting 
investors, and decrease run risk. The final rule does not alter the 
amount of the default liquidity fee currently in effect under rule 2a-
7, but provides for a different scope of application of the default fee 
that is not tied to publicly observable levels of weekly liquid assets.
---------------------------------------------------------------------------

    \668\ See Anadu, Kenechukwu, et al., Swing Pricing Calibration: 
A Simple Thought Exercise Using ETF Pricing Dynamics to Infer Swing 
Factors for Mutual Funds (Jan 21, 2022), available at https://ssrn.com/abstract=4014689 (retrieved from SSRN Elsevier database).
---------------------------------------------------------------------------

    To the degree that investors may perceive the default liquidity fee 
to be large, they may seek to redeem out of affected money market funds 
earlier during the onset of stress, which may accelerate redemptions 
during milder periods of stress in short-term funding markets. However, 
affected money market funds may have strong reputational incentives to 
compete on fees and may limit the application of the default fee to 
rare times of severe market stress. Importantly, the baseline 
application of the default fee under rule 2a-7 is tied to a fund's 
publicly observable level of weekly liquid assets, whereas liquidity 
fees under the final rule are triggered by same day net redemptions and 
a fund's assessment of the liquidity costs of such redemptions. This is 
expected to reduce run risk in affected funds relative to the current 
baseline. Crucially, any liquidity fee, including the default fee, 
accrues to the fund's non-transacting shareholders and enhances fund 
performance, which can incentivize some investors to invest in affected 
money-market funds, particularly during times of stress.
v. Fee Caps
    The final rule would not cap mandatory liquidity fees triggered by 
the 5% net redemption threshold. Under the final rule, if an affected 
fund's good faith estimate of the liquidity cost of large redemptions, 
including spread and other transaction costs as well as market impact 
factors of the hypothetical sale of a pro-rata share of portfolio 
holdings, exceeds, for instance 2%, that larger fee would be assessed 
to redeeming investors on days on which a fund experiences net 
redemptions in excess of 5%. This element of the final rule will allow 
funds to recapture a greater share of the dilution costs of large 
redemptions and may reduce corresponding run risk, especially in times 
of stress.
    Some commenters suggested that a liquidity fee framework should 
include a cap on liquidity fees,\669\ for example, because a cap could 
provide investors with confidence that a fee would not exceed a 
specific threshold.\670\ We acknowledge that the possibility of a large 
uncapped liquidity fee being applied to redemptions may reduce the 
attractiveness of affected money market funds for some investors. 
However, the possibility of large uncapped fees may also attract other 
investors into money market funds because non-transacting shareholders 
benefit from larger liquidity fees being charged to redeemers.
---------------------------------------------------------------------------

    \669\ See, e.g., ICI Comment Letter; Morgan Stanley Comment 
Letter; SIFMA AMG Comment Letter; see also Federated Hermes Board 
Comment Letter.
    \670\ See, e.g., Federated Hermes Comment Letter I; Western 
Asset Comment Letter.
---------------------------------------------------------------------------

    Commenters indicated that it is difficult to imagine any scenario 
where the cost of liquidity would exceed 2%, given the nature of money 
market fund portfolio holdings and limits on weighted average maturity 
and weighted average life, as well as historical price movements within 
affected funds.\671\ We agree that funds are unlikely to charge fees in 
excess of 2% for three primary reasons. First, given the portfolio 
composition of affected money

[[Page 51480]]

market funds, market impact factors are extremely unlikely to exceed 2% 
even under times of severe stress. For example, as discussed in section 
IV.C.4.a, during the market stress of March 2020, commercial paper 
spreads generally ranged between 20 and 50 basis points across 
maturities, far lower than the 2% level. As another example, one 
commenter indicated that their transaction costs during the crisis week 
of September 2008 were less than 0.6%.\672\ Second, if short-term 
funding markets are under severe stress, there may be little 
transaction activity and funds may be unable to provide good faith 
estimates of the costs of selling the pro-rata slice of the fund 
portfolio, leading them to charge the default fee of 1%. Third, if 
funds are able to provide good faith estimates, but there is 
significant uncertainty about the costs of the vertical slice, for 
example, during severe stress, funds may face incentives from private 
party litigation to charge the default fee.
---------------------------------------------------------------------------

    \671\ Id.
    \672\ See, e.g., Comment Letter of Fidelity Investments on File 
No. S7-03-13 (Apr. 22, 2014), available at https://www.sec.gov/comments/s7-03-13/s70313-339.pdf (Exhibit 4). Importantly, this is 
an estimate of actual transaction costs incurred by the market 
participant and does not include market impact or the vertical slice 
assumption.
---------------------------------------------------------------------------

    Thus, large liquidity fees (potentially in excess of 2%) are likely 
to be charged only when funds do not have sufficient liquid assets to 
absorb redemptions, are unable to roll down assets into weekly liquid 
assets given expected future outflows, and have transaction data from 
liquidating portfolio securities to support a higher fee. If a fund 
board's (or its delegate's) good faith estimates of liquidity costs do 
exceed 2%, then the lack of a cap for mandatory liquidity fees will 
allow funds to recapture more of the dilution of redemptions and manage 
liquidity to meet future redemptions. This aspect of the final rule may 
provide affected funds with flexibility to impose larger fees in crisis 
conditions when liquidity costs are high, which may enhance their 
resilience to stress.
vi. Discretionary Fees
    Some commenters suggested that fund boards should have discretion 
to impose liquidity fees when in the best interest of the fund and its 
investors.\673\ The final amendments retain a discretionary liquidity 
fee provision, allowing non-government funds to charge discretionary 
liquidity fees when the majority of the fund board of directors (or its 
delegate) determine it to be in the best interest of the fund. The 
discretionary liquidity fee provision provides more discretion to fund 
boards (or their delegates) for determining when to impose fees and in 
what amount in comparison to the mandatory liquidity fee provision. 
While this discretion is generally consistent with the baseline, the 
final rule removes the regulatory weekly liquid asset threshold, which 
created incentives to redeem as funds approached the regulatory weekly 
liquid asset threshold.
---------------------------------------------------------------------------

    \673\ See, e.g., ICI Comment Letter; Schwab Comment Letter; 
Federated Hermes Comment Letter I; Federated Hermes Comment Letter 
II; Federated Hermes Board Comment Letter; Invesco Comment Letter; 
SIFMA AMG Comment Letter; Americans for Tax Reform Comment Letter.
---------------------------------------------------------------------------

    This aspect of the final rule may involve several benefits. First, 
it may provide a broader scope of money market funds, including retail 
and government funds, flexibility in using liquidity fees as an anti-
dilution tool.\674\ Moreover, it may allow institutional prime and 
institutional tax-exempt funds to charge liquidity fees earlier in the 
redemption wave or when liquidity costs of even smaller redemptions are 
particularly high. Thus, it may enhance the ability of money market 
funds to manage their liquidity and protect non-transacting 
shareholders by reducing the dilution costs of redemptions that they 
bear. Second, it may reduce the ability of redeeming investors to 
predict whether a liquidity fee would apply on any given day and 
strategically time redemptions around the likely application of 
liquidity fees. To the degree that affected money market funds will 
compete on liquidity fees and may face collective action problems, 
discretionary liquidity fees may be infrequently applied, reducing the 
above benefits of this element of the final amendments.
---------------------------------------------------------------------------

    \674\ Like the current rule 2a-7, a government money market fund 
may choose to rely on the ability to impose liquidity fees. See 
section II.
---------------------------------------------------------------------------

    Since liquidity fees charged to redeemers benefit non-transacting 
shareholders and may enhance reported fund performance, some fund 
managers may be incentivized to frequently charge discretionary 
liquidity fees. However, this incentive may be dampened or altogether 
outweighed by competitive pressures on reported fees and the 
sensitivity of fund flows to fees. In addition, the frequent assessment 
of discretionary fees would increase the variability of realized 
returns for redeemers and reduce the attractiveness of such funds for 
investors that rely on money market funds for cash management, which 
can create a counterbalancing market disincentive to the frequent 
application of discretionary fees. Moreover, the final rule would cap 
discretionary fees at 2%, which may reduce the ability of affected 
money market funds to overcharge redeemers for liquidity costs. 
Finally, the final rule requires fund boards or a delegate overseen by 
the board to make a determination that it is in the best interest of 
shareholders to assess such a fee.
5. Amendments Related to Potential Negative Interest Rates
    As discussed in the proposal, in the event stable NAV funds begin 
to experience negative yields, they will be able to convert to a 
floating NAV.\675\ As modified in this release, funds also will be able 
to engage in share cancellation (sometimes referred to as reverse 
distribution mechanism, or ``RDM'') in the event of negative yields. 
Funds engaging in share cancellation would be required to comply with 
specified conditions in the final rule, including that the fund provide 
timely, concise, and plain-English disclosure to investors.
---------------------------------------------------------------------------

    \675\ As discussed in section V.B, the Commission estimates the 
total annual costs attributable to the information collection 
requirements in the amendments allowing share cancellation will be 
$969,722 for all affected funds. This cost estimate includes both 
initial and ongoing costs with the former being amortized over three 
years.
---------------------------------------------------------------------------

    Allowing stable NAV funds to use a reverse distribution mechanism 
in the event of negative fund yields would reduce NAV fluctuations in a 
negative yield environment, which may preserve the use of stable NAV 
funds for sweep accounts. In the event money market fund yields turn 
negative, this amendment may, thus, allow more types of investors to 
continue to use these products than would be the case if the rule 
required all stable NAV money market funds to convert to a floating 
NAV. The Commission has received a number of comments in support of 
providing the flexibility of stable NAV funds to use an RDM or similar 
mechanism, in addition to the proposed conversion to a floating 
NAV.\676\ The Commission also recognizes that an RDM is economically 
equivalent to a floating NAV, and that many investors may prefer a 
stable NAV.
---------------------------------------------------------------------------

    \676\ 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.
---------------------------------------------------------------------------

    As discussed in section II, under an RDM, investors would observe a 
stable share price but a declining number of shares for their 
investment when a fund generates a negative gross yield. This may 
decrease the transparency and

[[Page 51481]]

salience of negative fund yields to investors, particularly for less 
sophisticated retail investors.\677\ Importantly, many stable NAV funds 
(government funds) are offered to a mix of more sophisticated 
institutional and retail clientele. This may give rise to informational 
asymmetries about the performance of the same stable NAV funds across 
investors and reduce comparability of performance across stable NAV 
funds. Crucially, these informational asymmetries may be mitigated by 
the final rule's requirement that stable NAV funds seeking to use an 
RDM provide timely, concise, and plain-English disclosures, including 
in prospectuses and in account statements or in a separate writing 
accompanying the account statements. While stable NAV funds seeking to 
use an RDM would bear costs of producing such disclosures, they would 
only choose to do so if the costs of disclosures arising out of the use 
of an RDM are lower than the costs of floating the NAV. Overall, as 
discussed in section II, investors may benefit from the ability to 
continue to invest in stable NAV funds when interest rates are 
negative, and the required disclosures may help inform investors about 
differences between an RDM and a floating NAV.
---------------------------------------------------------------------------

    \677\ See, e.g., Northern Trust Comment Letter; CFA Comment 
Letter.
---------------------------------------------------------------------------

    In contrast with the proposal, the final amendments do not require 
stable NAV money market funds to keep records identifying which 
intermediaries they were able to identify as being able to process 
orders at a floating NAV and to no longer transact with those 
intermediaries who are not able to process orders at a floating NAV. 
This aspect of the final rule obviates the need for intermediaries to 
upgrade their systems if they are unable to process transactions in 
stable NAV funds at a floating NAV. This may avoid disruptions to 
distribution networks of stable NAV funds if some of their 
intermediaries would be unable or unwilling to upgrade systems to 
process transactions at a floating NAV.
    The magnitude of these economic effects may be significantly 
attenuated by two factors. First, negative interest rates have not 
occurred in the United States, and persistent gross negative yields may 
be unlikely to occur.\678\ Hence, money market funds are not currently 
implementing RDMs and both the benefits and the costs of these 
amendments may not materialize. Second, stable NAV funds may not 
experience the same magnitude of redemptions observed in public 
institutional prime and institutional tax-exempt funds, for example in 
March 2020.\679\ Notably, in the long run, the initial shock of 
negative rates that leads to redemptions from money market funds might 
reverse due to the lack of alternative vehicles to store cash for a 
short term.
---------------------------------------------------------------------------

    \678\ The weighted average maturity (weighted average life) of 
money markets funds must be 60 (120) days or less, meaning it may 
take several weeks before securities with a positive yield mature 
and gross yields turn negative.
    \679\ See, e.g., ICI Comment Letter; Morgan Stanley Comment 
Letter.
---------------------------------------------------------------------------

6. Disclosures
a. Benefits and Costs of the Prompt Notice of Liquidity Threshold 
Events on Form N-CR and Board Reporting
    The final amendments will require money market funds to file a Form 
N-CR report whenever a 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.
    As a baseline matter, daily and weekly liquid assets are currently 
required to be disclosed on fund websites on a daily basis. Relative to 
that baseline, the primary benefits of the final Form N-CR reporting 
requirement may be in providing additional information about the 
circumstances of a fund's significantly reduced liquidity levels. 
Information about the circumstances of a fund's significantly reduced 
liquidity levels may help investors better analyze a fund's liquidity 
management strategies and assess risks of dilution. The Commission has 
received comments that public reporting of liquidity threshold events 
can increase transparency of money market fund liquidity management 
practices to investors and may help increase the salience of a fund's 
daily and weekly liquid assets to investors, especially to less active 
and less sophisticated investors.\680\ Some commenters suggested this 
reporting should be confidential.\681\ As discussed in section II, we 
believe investors would benefit from having contextual information to 
understand the cause of a fund's declining liquidity, which may 
facilitate their assessment of a fund's risks and ability to meet 
redemptions. This requirement may enhance transparency about money 
market fund liquidity during times of stress.
---------------------------------------------------------------------------

    \680\ See, e.g., CFA Comment Letter; Better Markets Comment 
Letter.
    \681\ See, e.g., ICI Comment Letter; Federated Hermes Comment 
Letter I; Invesco Comment Letter; Schwab Comment Letter (expressing 
support for ICI's perspective); SIFMA AMG Comment Letter; Bancorp 
Comment Letter.
---------------------------------------------------------------------------

    Publication of notices surrounding liquidity threshold events may 
inform investors about the reasons behind the threshold event. To the 
degree that some funds' liquidity threshold events may be indicative of 
persistent liquidity problems or mismanagement of liquidity risk, and 
to the extent that notices may better inform investors about such 
causes (relative to baseline website disclosures of liquidity levels), 
publication of such notices may trigger investor redemptions out of the 
most distressed funds. While it is difficult to predict investor 
behavior, the final disclosure requirements may reduce information 
asymmetries between investors and funds about their liquidity 
management, and would provide funds with liquidity fees as a tool to 
manage redemptions, such that redeemers would be charged for the true 
liquidity cost of their redemptions. In addition, funds with lower 
weekly and daily liquid assets would charge higher fees due to higher 
market impact costs, and the liquidity fee under the vertical slice 
assumption would charge redeemers the liquidity costs they impose on 
the fund, further dis-incentivizing strategic redemptions.
    The final amendments will also require money market funds to notify 
their boards when they drop below the 12.5% daily and 25% weekly 
liquidity asset thresholds, as discussed in section II. Since the final 
amendments will require that liquidity threshold events are reported on 
Form N-CR, funds will likely routinely notify the board of such events 
without an explicit board notification requirement. One commenter noted 
that the current policies and procedures of its members typically 
include provisions to report to the board at specified levels of 
liquidity, thus suggesting that the proposed board reporting is already 
occurring in practice.\682\ To the degree that board reporting is 
already a part of best practices for fund managers, this would reduce 
the magnitude of the benefits and costs of this final requirement. 
However, to the degree that some fund boards may not be notified of 
some events subject to Form N-CR reporting or of significant declines 
in liquidity, the board notification requirement could enhance the 
oversight of fund boards over liquidity management, particularly during 
periods of stress.
---------------------------------------------------------------------------

    \682\ See, e.g., SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    The final amendments to Form N-CR will impose direct compliance 
costs by imposing reporting burdens discussed in section V.D.\683\ 
While we

[[Page 51482]]

acknowledge that Form N-CR filers may bear some additional reporting 
costs as a result of the amendments, as one commenter suggested, we 
believe these costs will generally be related to funds adjusting their 
systems to a different data language. Due to economies of scale, such 
costs may be more easily borne by larger fund families. In addition, 
the prompt notice requirement may give rise to two sets of costs. 
First, the requirement may lead fund managers to manage their 
portfolios specifically to try to avoid a reporting event, rather than 
in a way that is most efficient for fund shareholders. Second, this 
aspect of the final rule may result in money market fund managers 
spending compliance resources on amending Form N-CR to describe the 
circumstances of the liquidity threshold event, which may divert 
managerial resources away from managing redemptions in times of stress. 
Costs borne by money market funds may be passed along to investors in 
the form of higher fees and expenses. However, as discussed above, we 
believe such costs are justified by the promptness of the notice 
requirement which may enhance Commission oversight and transparency to 
investors, incentivize funds to closely monitor their liquidity levels, 
and ultimately better protect investors.
---------------------------------------------------------------------------

    \683\ As discussed in section V.D, the Commission estimates a 
total internal time cost of the information collection requirements 
associated with the amendments to Form N-CR of $8,244 and total 
annual external cost burden of $1,187 for all affected funds.
---------------------------------------------------------------------------

b. Benefits and Costs of the Form N-MFP Amendments
    Final amendments to Form N-MFP will require reporting of certain 
daily data points on a monthly basis, of securities that prime funds 
have disposed of before maturity, of the concentration of money market 
fund shareholders and the composition of institutional money market 
funds' shareholders, and of additional information about repurchase 
agreement transactions, among other changes. In addition, we are 
amending Form N-MFP to require money market funds to report the date on 
which the liquidity fee was applied and the amount of the liquidity fee 
applied by the fund.
    Broadly, the final amendments to Form N-MFP may make the form more 
usable by filers, regulators, and investors, and may increase 
transparency around money market fund activities in three ways. First, 
the requirement that the funds report daily information about their 
daily and weekly liquid assets, flows, and NAV will reduce costs of 
accessing this information relative to the baseline of routinely 
accessing and downloading information across many fund websites and 
will provide a long-term repository of this information for all funds. 
Second, additional information about fund repo activities will enable 
investors and the Commission to better assess fund liquidity risks and 
oversee the industry. Third, information about shareholder 
concentration and composition can help the Commission and investors 
understand and evaluate potential redemption and liquidity risks.
    In addition, the final amendments add disclosure requirements to 
Form N-MFP to capture information about the relevant funds' use of 
liquidity fees. These amendments are expected to benefit investors in 
money market funds by reducing information asymmetries between funds 
and investors about these funds' liquidity fee practices. Since 
liquidity fees have not been broadly used by U.S. money market funds, 
the purpose of the disclosure requirement is, thus, to inform investors 
about the manner in which affected money market funds implement the 
liquidity fee framework. Such transparency may result in greater 
allocative efficiency as investors with low tolerance of liquidity risk 
and costs may choose to reallocate capital to money market funds that 
have lower liquidity risk and costs. In addition, to the degree that 
uncertainty about the final liquidity fee framework may reduce the 
attractiveness of affected money market funds to investors, the final 
amendments requiring disclosures about liquidity fees may reduce 
information asymmetries between money market funds and their investors, 
which may dampen those adverse effects.
    The final amendments to Form N-MFP will impose initial and ongoing 
PRA costs, as discussed in section V below.\684\ The Commission 
continues to believe that money market funds generally already maintain 
the information they will be required to report on Form N-MFP pursuant 
to other regulatory requirements or in the ordinary course of business. 
However, the Commission continues to recognize that affected funds 
would incur some costs in reporting the information, particularly costs 
of reporting certain information with more frequency.\685\ Due to 
economies of scale, such costs may be more easily borne by larger fund 
families, and costs borne by money market funds may be passed along to 
investors in the form of higher fees and expenses. The Commission also 
received comments that the proposed requirements related to reporting 
of shareholder concentration and composition, as well as lot-level 
reporting may give rise to privacy and related costs,\686\ as well as 
predatory trading costs.\687\ As discussed in greater detail in section 
II, to reduce such costs and concerns, the final rule does not require 
money market money market funds to disclose the names of beneficial or 
record owners who hold 5% or more of the shares outstanding in the 
relevant class, but only the type of owner, as suggested by some 
commenters.\688\ In addition, as discussed in section II, the final 
rule does not impose lot-level reporting requirements.
---------------------------------------------------------------------------

    \684\ As discussed in section V.C, the Commission estimates a 
total annual internal time cost of the information collection 
requirements of the amendments to Form N-MFP of $601,002 and total 
annual external cost burden of $268,128 for all affected funds. The 
cost estimates include both initial and ongoing costs with the 
former being amortized over three years.
    \685\ See, e.g., Federated Hermes Comment Letter I.
    \686\ See, e.g., CFA Comment Letter; Federated Hermes Comment 
Letter I; Invesco Comment Letter; Dechert Comment Letter; Schwab 
Comment Letter; ICI Comment Letter; Bancorp Comment Letter; SIFMA 
AMG Comment Letter; Northern Trust Comment Letter; CCMR Comment 
Letter.
    \687\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
BlackRock Comment Letter; CCMR Comment Letter.
    \688\ See, e.g., Federated Hermes Comment Letter I; BlackRock 
Comment Letter.
---------------------------------------------------------------------------

    One commenter opposed the proposal to require liquidity, net asset 
value, and flow data to be reported as of the close of business on each 
business day of each month on the basis that it would be unduly 
burdensome and without any added benefit.\689\ As discussed in the 
proposal, daily data based on information collected from funds' 
websites provided by private data vendors can be incomplete, and may 
have limited utility for Commission oversight and analysis. Moreover, 
money market funds are, in general, already required to provide on 
their websites the same data that we are requiring be reported on Form 
N-MFP. Thus, we believe that the burdens of the proposed changes on 
money market funds may be small or de minimis. In addition, the final 
disclosures concerning liquidity fees may create incentives for money 
market funds to compete on this dimension. Specifically, institutional 
investors that use institutional money market funds for cash management 
and prefer lower or zero liquidity fees may move capital from money 
market funds that charged higher historical fees to funds with lower 
fees or those that have never charged fees. This may incentivize fund 
managers to manage their liquidity so as to avoid charging mandatory or 
discretionary fees. However, while

[[Page 51483]]

liquidity fees charge redeemers, they benefit investors remaining in 
the fund, which may make funds actively using liquidity fees more 
attractive to some investors.
---------------------------------------------------------------------------

    \689\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

c. Benefits and Costs of Requirements Related to Identifying 
Information on Form N-CR and Form N-MFP
    The final amendments will also require the registrant name, series 
name, related definitions, and LEIs for the registrant and series on 
Form N-CR. In addition, the final amendments will require money market 
funds to report LEIs for the series on Form N-MFP. The LEI is used by 
numerous domestic and international regulatory regimes for 
identification purposes.\690\ As such, requiring these additional 
disclosures could enable data users such as investors and regulators to 
cross-reference the data reported on Form N-CR with data reported on 
Form N-MFP and with data received from other sources more easily, 
thereby expanding the scope of information available to such data users 
in their assessments.\691\ All money market funds are already required 
to have registrant and series LEIs due to baseline Form N-CEN reporting 
requirements, as discussed in section II.F. The final amendments to 
Form N-MFP will also require other information to better identify 
different types of money market funds, such as amendments to better 
identify Treasury funds and funds that are used solely by affiliates 
and other related parties. These amendments will help the Commission 
and market participants to identify certain categories of money market 
funds more efficiently. However, the final requirements to improve 
identifying information may give rise to direct compliance costs 
associated with amending reporting on Forms N-CR and N-MFP, as 
discussed in section V.
---------------------------------------------------------------------------

    \690\ Other regulators with LEI requirements include the U.S. 
Federal Reserve, European Union's (E.U.'s) MiFid II regime, and 
Canada's IIROC; the LEI is also used by private market participants 
for risk management and operational efficiency purposes. See https://www.leiroc.org/lei/uses.htm.
    \691\ Fees and restrictions are not imposed for the usage of or 
access to LEIs.
---------------------------------------------------------------------------

    In addition to the entity identification information (e.g., 
registrant name, series name, related definitions, and LEIs) discussed 
above, the final amendments will also expand security identification 
information by adding a CUSIP requirement for collateral securities 
that money market funds report on Form N-MFP. CUSIP numbers are 
proprietary security identifiers and their use (including storage, 
assignment, and distribution) entails licensing restrictions and fees 
that vary based on factors such as the number of CUSIP numbers 
used.\692\ Money market funds are currently required to disclose CUSIP 
numbers for each holding they report on Form N-MFP.\693\ As such, the 
incremental compliance cost on money market funds associated with the 
CUSIP requirement, compared to the baseline, will be limited to those 
costs, if any, incurred by money market funds as a result of storing 
additional CUSIP numbers (to the extent money market funds do not 
already store CUSIP numbers for their collateral securities).\694\
---------------------------------------------------------------------------

    \692\ The CUSIP system (formally known as CUSIP Global Services) 
is owned by the American Bankers Association and managed by FactSet 
Research Systems Inc. See CGS History, available at https://www.cusip.com/about/history.html, and License Fees, available at 
https://www.cusip.com/services/license-fees.html.
    \693\ See Item C.3 of Form N-MFP.
    \694\ CUSIP license costs vary based upon, among other factors, 
the quantity of CUSIP numbers to be used, on a tiered model, with 
the lowest tier being up to 500 CUSIP numbers. See CGS License 
Structure, available at https://www.cusip.com/services/license-fees.html#/licenseStructure. Based on our understanding of current 
CUSIP licenses and usage among money market funds, we do not believe 
the CUSIP reporting requirement for collateral securities is likely 
to impose incremental compliance costs on money market funds by 
moving them into a new CUSIP license pricing tier.
---------------------------------------------------------------------------

    As discussed in section II, one commenter supported the CUSIP 
requirement and agreed that money market fund managers will not incur 
additional costs or burden due to the CUSIP requirement.\695\ By 
contrast, one commenter opposed the CUSIP requirement due to its 
limited utility and the costs involved.\696\ However, we believe the 
CUSIP requirement will be useful, because it will provide more precise 
and consistent identification of the securities that money market funds 
use as collateral, thus facilitating staff and public analysis of money 
market fund activity. Also, as noted, we do not believe the CUSIP 
requirement will cause money market funds to incur incremental 
additional costs, because they are subject to existing CUSIP reporting 
obligations.
---------------------------------------------------------------------------

    \695\ See ABA Comment Letter II. This commenter additionally 
asserted that a discussion of licensing restrictions is not relevant 
to the added CUSIP requirement under final amendments, and that the 
concept of CUSIP being proprietary has never applied to 
transactional use or regulatory reporting. However, the commenter 
did not specify which particular provisions in the license agreement 
set forth exceptions for regulatory reporting and transactional use.
    \696\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

d. Benefits and Costs of Structured Data Requirement for Form N-CR
    The final amendments will require money market funds to submit 
reports on Form N-CR using a structured, machine-readable data 
language--specifically, in an XML-based language created specifically 
for Form N-CR (``N-CR-specific XML'').\697\ Currently, money market 
funds submit reports on Form N-CR in HTML or ASCII, neither of which is 
a structured data language.\698\ As discussed in section II, the 
Commission received one comment that viewed the final structured data 
requirement as a reporting enhancement that will increase transparency 
for institutional and retail investors, and allow regulators and 
policymakers to better assess the state of the financial system.\699\ 
By contrast, one commenter opposed this requirement, indicating that a 
structured data language requirement is costly and not used by 
investors.\700\ This aspect of the final amendments may facilitate the 
use and analysis, both by the public and by the Commission, of the 
event-related disclosures reported by money market funds on Form N-CR, 
as compared to the current baseline. The improved usability of Form N-
CR could enhance market and Commission monitoring and analysis of 
reported events, thus providing greater transparency into potential 
risks associated with money market funds on an individual level and a 
population level.
---------------------------------------------------------------------------

    \697\ This would be consistent with the approach used for other 
XML-based structured data languages created by the Commission for 
certain specific EDGAR Forms, including Form N-CEN and Form N-MFP. 
See Current EDGAR Technical Specifications, available at https://www.sec.gov/edgar/filer-information/current-edgar-technical-specifications.
    \698\ See supra note 400.
    \699\ See, e.g., Western Asset Comment Letter.
    \700\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    Importantly, the incremental costs associated with requiring money 
market funds to submit reports on Form N-CR in N-CR-specific XML, 
compared to the baseline of submitting Form N-CR in HTML or ASCII, may 
be low given that money market funds already utilize XML-based 
languages to meet similar requirements in their other reporting, and 
can utilize their existing capabilities for preparing and submitting 
Form N-CR.\701\ In addition, money market funds will be given the 
option of filing Form N-CR using a fillable web form that will render 
into N-CR-specific XML in the Electronic Data Gathering, Analysis, and 
Retrieval (``EDGAR'') system, rather than filing directly in N-CR-
specific XML using the technical specifications published on the 
Commission's website. However, under the final rule, money market funds 
that choose to submit Form N-CR directly in N-CR-specific XML (rather 
than use the fillable web form) will

[[Page 51484]]

incur the incremental compliance costs of updating their existing 
preparation and submission processes to incorporate the new technical 
schema for N-CR-specific XML.\702\
---------------------------------------------------------------------------

    \701\ See supra note 400.
    \702\ See infra section V.
---------------------------------------------------------------------------

7. Calculation of Weighted Average Maturity and Weighted Average Life
    The Commission is adopting amendments to rule 2a-7 to specify that 
WAM and WAL must be calculated based on percentage of each security's 
market value in the portfolio, rather than based on amortized cost of 
each portfolio security. These amendments will enhance consistency and 
comparability of disclosures by money market funds in data reported to 
the Commission and provided on fund websites and, as discussed in 
section II, commenters generally supported these amendments.\703\ One 
commenter indicated that the fractional difference between the weighted 
average maturity and weighted average life calculated with amortized 
cost versus market value would not meaningfully impact a fund's 
weighted average maturity or weighted average life.\704\ As discussed 
above, while the difference between a fund's weighted average maturity 
or weighted average life calculated using amortized cost versus market 
value is likely to be small in many circumstances, it may be more 
significant 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. The Commission 
continues to believe that a consistent definition of WAM and WAL across 
funds can enhance transparency for investors seeking to assess the risk 
of various money market funds and may increase allocative efficiency. 
Moreover, greater comparability of WAM and WAL across money market 
funds may benefit investors and enhance Commission oversight of risks 
in money market funds.
---------------------------------------------------------------------------

    \703\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Capital Group Comment Letter.
    \704\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that these 
amendments are not expected to give rise to direct compliance costs. 
One commenter indicated that funds may be required to make additional 
operational changes to comply with the proposed calculation,\705\ but 
did not provide any estimates of related costs. The Commission is 
unable to quantify the costs of such potential operational changes 
because they may depend on the extent to which funds and fund families 
that use amortized cost in their WAM and WAL calculations are already 
equipped to use market value in such calculations and, if they are 
already equipped to do so, whether the ability to instead use market 
value is automated or requires manual involvement in the 
calculation.\706\ However, as discussed in section II, the Commission 
continues to believe that 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 
may limit the extent of operational changes needed.\707\ Importantly, 
these amendments may enhance the consistency of WAM and WAL 
calculations across funds, which may better inform investors and 
enhance Commission oversight.
---------------------------------------------------------------------------

    \705\ Id.
    \706\ For example, the commenter stated that its retail and 
government money market funds currently use amortized cost in their 
WAM and WAL calculations but are equipped to immediately shift to 
using market value if an issuer of portfolio securities had a credit 
problem. See Federated Hermes Comment Letter I.
    \707\ Money market funds that use a floating NAV use market 
values when determining a fund's NAV, while money market funds that 
maintain a stable NAV are required to use market values to calculate 
their market-based price at least daily.
---------------------------------------------------------------------------

8. Form PF Requirements for Large Liquidity Fund Advisers
    As discussed in section II, the amendments to section 3 of Form PF 
include requirements for additional and more granular information that 
large advisers to private liquidity funds will have to provide 
regarding operational information and assets, as well as portfolio 
holdings, financing, and investor information.
    The amendments will require large liquidity funds to report 
substantially the same information that money market fund will report 
on Form N-MFP. Thus, in combination with the final Form N-MFP 
amendments, Form PF amendments will help provide a more complete 
picture of the short-term financing markets, in which liquidity funds 
and money market funds invest. In turn, they may enhance the 
Commission's and FSOC's ability to assess the potential market and 
systemic risks presented by liquidity funds' activities.\708\ One 
commenter questioned the value added of the data.\709\ The Commission 
continues to believe that additional and more granular information in 
the final amendments will enable the Commission and FSOC to better 
assess liquidity funds' asset turnover, liquidity management and 
secondary market activities, subscriptions and redemptions, and 
ownership type and concentration. This information may be used to 
analyze funds' liquidity and the susceptibility of funds with specific 
characteristics to the risk of runs, which may give rise to systemic 
risk concerns. In addition, the information can be used for identifying 
trends in the liquidity funds industry during normal market conditions 
and for assessing deviations from those trends that could potentially 
serve as signals for changes in the short-term funding markets. Also, 
amendments to section 3 of Form PF will improve comparability of data 
across liquidity funds and money market funds, which may further 
enhance oversight.
---------------------------------------------------------------------------

    \708\ See, e.g., Better Markets Comment Letter on File No. S7-
01-22; Loubriel Comment Letter on File No. S7-01-22.
    \709\ See NYC Bar Comment Letter on File No. S7-01-22. For more 
general criticism of benefits of Form PF, see, e.g., Comment Letter 
of Alternative Investment Management Association and Alternative 
Credit Council on File No. S7-01-22 (Mar. 21, 2022); Comment Letter 
of Teachers Insurance and Annuity Association of America on File No. 
S7-01-22 (Mar. 21, 2022) (``TIAA Comment Letter on File No. S7-01-
22''); Comment Letter of Real Estate Board of New York (Mar. 21, 
2022). Some commenters argued that sophisticated investors do not 
require monitoring of their private fund investments, see, e.g., 
Comment Letter of Center for Capital Markets Competitiveness, U.S. 
Chamber of Commerce on File No. S7-01-22 (Mar. 21, 2022); Comment 
Letter of SIFMA on File No. S7-01-22 (Feb. 11, 2022).
---------------------------------------------------------------------------

    These additional tools and data may enable the Commission and FSOC 
to better anticipate and deal with potential systemic and investor harm 
risks associated with activities in the liquidity funds industry and 
overall markets for short-term financing. This may increase the 
resilience of short-term financing markets and enhance investor 
confidence in the U.S. markets for short-term financing, which could 
facilitate capital formation.
    The final amendments to Form PF will lead to certain additional 
costs for advisers of large liquidity funds. While we are unable to 
quantify the full costs of the final Form PF amendments for advisers of 
large liquidity funds, we are able to estimate some of the costs, 
specifically the costs related to information collection requirements 
as defined by the PRA. The information collection costs are quantified 
in section V.F.\710\ Advisers may pass along all or a portion of these 
costs to large liquidity fund investors, and the degree to which 
investors may ultimately bear such costs may depend on, among others, 
how advisers choose to comply with the final

[[Page 51485]]

amendments, competition among large liquidity fund advisers, and 
competition between large liquidity funds relative to money market 
funds, among others.
---------------------------------------------------------------------------

    \710\ As discussed in section V.F, the Commission estimates a 
total cost increase associated with the information collection 
requirements of amended Form PF of $9,931 per initial filing and 
$3,331 per quarterly filing.
---------------------------------------------------------------------------

    The costs to advisers of large liquidity funds may include both 
direct compliance costs and indirect costs, which may be relatively 
larger for smaller advisers.\711\ The final amendments aimed at 
improving data quality and comparability, such as requiring advisers to 
identify any ``other unique identifier'' they use to identify portfolio 
securities, may impose limited direct costs on advisers given that 
advisers already accommodate similar requirements in their current Form 
PF and Form ADV reporting and can utilize their existing capabilities 
for preparing and submitting an updated Form PF. Most of the costs are 
likely to arise from the requirements to report additional and more 
granular information on Form PF, such as requiring advisers to 
distinguish between U.S. Government agency debt categorized as a 
coupon-paying note and a zero-coupon note. For existing section 3, the 
direct costs associated with the final amendments to section 3 will 
mainly include an initial cost to set up a system for collecting and 
verifying additional more granular information, and limited ongoing 
costs associated with periodic reporting of this additional 
information.\712\
---------------------------------------------------------------------------

    \711\ Some commenters emphasized, generally, disproportionate 
costs of Form PF to smaller advisers. See, e.g., Comment Letter of 
Managed Funds Association on File No. S7-01-22 (Mar. 21, 2022); TIAA 
Comment Letter on File No. S7-01-22; Comment Letter of Real Estate 
Roundtable on File No. S7-01-22 (Mar. 21, 2022).
    \712\ Section V estimates direct internal compliance costs for 
existing section 3 filers associated with the preparation and 
reporting of additional and more granular information by large 
liquidity fund advisers. It is estimated that there will be no 
additional direct external costs and no changes to filing fees 
associated with the proposed amendments to section 3.
---------------------------------------------------------------------------

    Indirect costs for advisers will include the costs associated with 
other actions that advisers may decide to undertake in light of the 
additional reporting requirements. Specifically, to the extent that the 
final amendments provide an incentive for advisers to improve internal 
controls and devote additional time and resources to managing their 
risk exposures and enhancing investor protection, this may result in 
additional expenses for advisers, some of which may be passed on to the 
funds and their investors.
    Form PF collects confidential information about private funds and 
their trading strategies, and the inadvertent public disclosure of such 
competitively sensitive and proprietary information could adversely 
affect the funds and their investors. However, we anticipate that these 
adverse effects will be mitigated by certain aspects of the Form PF 
reporting requirements and controls and systems designed by the 
Commission for handling the data. For example, with the exception of 
select questions, such as those relating to restructurings/
recapitalizations of portfolio companies and investments in different 
levels of the same portfolio company by funds advised by the adviser 
and its related person, Form PF data generally could not, on its own, 
be used to identify individual investment positions. The Commission has 
controls and systems for the use and handling of the modified and new 
Form PF data in a manner that reflects the sensitivity of the data and 
is consistent with the maintenance of its confidentiality. The 
Commission has substantial experience with the storage and use of 
nonpublic information reported on Form PF.

D. Alternatives 713
---------------------------------------------------------------------------

    \713\ This discussion supplements the discussion of alternatives 
in other sections of the release.
---------------------------------------------------------------------------

1. Alternatives to the Removal of Temporary Redemption Gates
    The final amendments could have replaced the 30% weekly liquid 
asset threshold for the discretionary imposition of temporary 
redemption gates with a different threshold. This alternative would 
allow money market funds to impose gates during large redemptions to 
reduce some of the dilution costs during large redemptions. However, as 
discussed above, we believe that a weekly liquid asset threshold for 
gates could trigger runs on money market funds in times of stress. 
Under the final amendments, money market funds are still able to reduce 
dilution costs during large redemptions. Under current rule 22e-3, 
money market funds are permitted to impose permanent suspensions of 
redemptions where a fund's weekly liquid assets drop below 10% and the 
fund determines to liquidate the fund. In addition, institutional prime 
and institutional tax-exempt money market funds are required to charge 
mandatory liquidity fees based on a same day net redemption threshold 
that may be less susceptible to run risk, and money market funds retain 
broad flexibility with respect to the imposition of discretionary 
liquidity fees without any regulatory thresholds.
    The final amendments could also have modified the trigger for 
redemption gates. The final rule could have eliminated the tie between 
the possible imposition of gates and a weekly liquid asset threshold 
without eliminating funds' ability to impose gates outside of 
liquidation, for example, by allowing boards complete discretion in 
imposing gates.\714\ Alternatively, the final rule could have permitted 
funds to impose redemption gates after confidentially seeking 
regulatory approval. Under these alternatives, investors could, at any 
time, find themselves subject to a gate which would mean they would be 
unable to access their funds for cash management purposes. As a result, 
these alternatives would significantly reduce the usefulness of these 
funds for investors, as they function as a means of cash management. 
Moreover, there would be few if any offsetting benefits of these 
alternatives in terms of discouraging runs relative to the final rule.
---------------------------------------------------------------------------

    \714\ See, e.g., Federated Hermes Comment Letter I; Federated 
Hermes Board Comment Letter; Cato Inst. Comment Letter; Dechert 
Comment Letter.
---------------------------------------------------------------------------

2. Alternatives to the Removal of the Tie Between Weekly Liquid Assets 
and Discretionary Liquidity Fees
    The final amendments could have replaced the 30% weekly liquid 
asset threshold for the imposition of discretionary liquidity fees with 
a different weekly liquid asset threshold. This alternative would allow 
money market funds to impose discretionary liquidity fees during 
redemption waves to reduce some of the dilution costs of large 
redemptions. However, as discussed above, we believe that, compared to 
net redemption thresholds, weekly liquid asset thresholds leave funds 
more vulnerable to strategic redemptions. The mandatory and 
discretionary fees under the final rule are expected to provide tools 
for money market funds to address dilution while reducing incentives 
for strategic redemptions and corresponding run risk.
3. Alternatives to the Final Increases in Liquidity Requirements
a. Alternative Thresholds
    The final amendments could have included a variety of alternative 
daily and weekly liquid asset thresholds. More specifically, the 
Commission could have increased minimum liquidity thresholds to 20% 
daily liquid assets and 40% weekly liquid assets thresholds.\715\
---------------------------------------------------------------------------

    \715\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
BlackRock Comment Letter; JP Morgan Comment Letter; State Street 
Comment Letter; Western Asset Comment Letter; Invesco Comment 
Letter; Healthy Markets Association Comment Letter.

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

[[Page 51486]]

    In the Proposing Release, the Commission quantified the potential 
effect of various liquidity thresholds on the probability that money 
market funds would confront liquidity stress, modeling stress in 
publicly offered institutional prime fund portfolios using the 
distribution of redemptions observed during the week of March 16 to 20, 
2020, (``stressed week'') at various starting levels of daily and 
weekly liquid assets.\716\ Using the same methodology (and subject to 
the same caveats), Figure 13 below plots the probability that a fund 
will run out of daily liquid assets on a given day of the stressed week 
for a variety of thresholds, including those suggested by 
commenters.\717\ For the final thresholds of weekly liquid assets at 
50% and daily liquid assets at 25%, Figure 13 shows that about 8.4% of 
funds would deplete daily liquid assets and be unable to absorb 
redemptions out of daily liquid assets on at least one of the five 
stressed days. By contrast, a threshold of 20% daily liquid assets and 
40% weekly liquid assets would approximately double the estimate of 
funds that would deplete daily liquidity to meet redemptions on at 
least one of the days of a stressed week (to approximately 15.4%). As 
referenced above, the largest weekly and daily redemption during the 
week of March 16 to 20, 2020, was approximately 55% and 25% 
respectively. Thus, an approach aimed at eliminating the risk of funds 
having insufficient liquid assets to absorb redemptions (using 
redemption data from March 16 to 20, 2020) would require funds to hold 
more than 55% of weekly and at least 25% of daily liquid assets. Lower 
thresholds increase the probability that some funds may deplete their 
liquid assets to meet redemptions, but also reduce the adverse impacts 
described above.
---------------------------------------------------------------------------

    \716\ 87 FR 7310.
    \717\ See supra note 715. See also IIF Comment Letter 
(suggesting 20% daily liquid asset and 30% weekly liquid asset 
thresholds); Bancorp Comment Letter (suggesting 25% daily liquid 
asset and 40% weekly liquid asset thresholds); Morgan Stanley 
Comment Letter (suggesting 25% daily liquid asset and 45% weekly 
liquid asset thresholds).
---------------------------------------------------------------------------

Figure 13--The Probability That a Fund Will Run Out of Daily Liquid 
Assets Under Different Minimum Liquidity Thresholds
[GRAPHIC] [TIFF OMITTED] TR03AU23.012

    Similarly, Table 12 quantifies the daily probability that a 
publicly offered institutional prime fund depletes daily liquid assets 
to meet redemptions under four scenarios: the current baseline daily 
and weekly liquid asset thresholds, thresholds based on the largest 
daily and weekly redemption during the stressed week; proposed daily 
and weekly liquid assets thresholds; and several alternatives suggested 
by commenters.\718\ The baseline scenario would require no change for 
money market funds; the ``biggest redemptions'' alternative would 
require approximately 8% of all prime funds (including both 
institutional and retail prime funds) to increase their daily liquid 
assets and approximately 34% of all prime funds to increase their 
weekly liquid assets.
---------------------------------------------------------------------------

    \718\ See, e.g., IIF Comment Letter (suggesting 20% daily liquid 
asset and 30% weekly liquid asset thresholds); Bancorp Comment 
Letter (suggesting 25% daily liquid asset and 40% weekly liquid 
asset thresholds); Morgan Stanley Comment Letter (suggesting 25% 
daily liquid asset and 45% weekly liquid asset thresholds). Several 
commenters suggested thresholds of 20% daily liquid assets and 40% 
weekly liquid assets. See, e.g., ICI Comment Letter; SIFMA AMG 
Comment Letter; BlackRock Comment Letter; JP Morgan Comment Letter; 
State Street Comment Letter; Western Asset Comment Letter; Invesco 
Comment Letter; Healthy Markets Association Comment Letter.

[[Page 51487]]



 Table 12--Probability a Publicly Offered Institutional Prime Fund Runs Out of Liquidity Under the Baseline, Proposed Threshold, Biggest Redemptions and
                                                                4 Alternative Thresholds
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Starting liquidity          Probability that a fund depletes available liquidity on a given day
                                                 -------------------------------------------------------------------------------------------------------
                      Model                                                                                                                    At least
                                                    DLA (%)      WLA (%)     Day 1 (%)    Day 2 (%)    Day 3 (%)    Day 4 (%)    Day 5 (%)   one day (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Threshold...............................           10           30          9.5         21.5         22.3         18.6          3.3         32.3
Proposed Threshold..............................           25           50          2.4          1.8          4.8          4.8          1.2          8.5
Biggest Redemptions.............................           25           55          2.4          1.4          3.6          3.6          0.0          6.5
Alternative 1...................................           20           30          2.4          5.7         19.9         19.6          6.2         22.3
Alternative 2...................................           20           40          2.4          3.1         12.0         10.6          2.5         15.4
Alternative 3...................................           25           40          2.4          2.3          7.5          9.3          3.0         12.3
Alternative 4...................................           25           45          2.4          1.8          5.7          6.5          2.5         10.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Form N-MFP and CraneData.

    The above estimates rely on a number of modeling assumptions. 
First, institutional prime fund redemptions were historically higher 
than redemptions out of retail funds, which may bias the analysis to 
overestimate the probability a retail or private institutional prime 
fund runs out of liquidity on a given day. Second, the analysis assumes 
that assets maturing on a given business day will be available at the 
end of that day. Third, the analysis assumes no assets are sold into a 
distressed market and redemptions are absorbed fully out of a fund's 
liquid assets. Fourth, the models do not include government agency 
securities with a maturity in excess of seven days, and assume Treasury 
securities have daily liquidity regardless of maturity and can be sold 
without any loss. Fifth, the analysis assumes that funds would go below 
the current rule's 30% weekly liquid asset minimum, continuing to meet 
redemptions out of liquid assets, rather than hold on to the weekly 
liquid assets as occurred in March 2020. As discussed above, the 
removal of the potential imposition of redemption gates from rule 2a-7, 
and the removal of the current use of weekly liquid asset thresholds 
for redemption gates and liquidity fees in the rule, may increase the 
willingness of money market funds to meet redemptions with daily and 
weekly liquid assets. Sixth, these estimates are based on redemption 
patterns in March 2020 and the distribution of future redemptions may 
differ, in part, as a result of the proposed amendments.
    In addition, this analysis does not capture the extent to which 
fund managers may be able to anticipate redemptions and pre-position 
fund liquidity ahead of time.\719\ However, their ability to do so may 
be hampered in times of severe stress when redemption patterns are more 
volatile and less predictable, and costs of portfolio rebalancing are 
higher. Specifically, we have analyzed aggregate portfolios of 
institutional prime and retail prime funds during market stress in 
March 2020. As can be seen from Figure 14 and Figure 15 below, 
institutional prime funds increases their daily liquid assets the week 
after peak market stress (week of March 27), rather than during the 
week of peak market stress (week of March 20) when they experienced 
large net redemptions. By contrast, retail prime funds experienced less 
net redemptions and were able pre-position their portfolios during peak 
stress week by increasing their daily liquid assets.\720\
---------------------------------------------------------------------------

    \719\ See, e.g., Federated Hermes Comment Letter I. The 
commenter also indicated that the analysis relies on a false 
assumption that there are no inflows into the fund which could be 
utilized to offset redemptions. Since this analysis uses net rather 
than gross redemption patterns during March 2020, historical 
subscription activity is captured in the stressed fund paths 
analyzed here.
    \720\ In general, prime funds increased their liquidity after 
the Mar. 2020 market dislocation by purchasing Treasury securities 
from inflows, maturing assets or selling longer-dated assets. For 
instance, between Feb. 28, 2020 and Aug. 31, 2020, retail prime 
money market funds decreased their portfolio percentage of 
commercial paper and certificates of deposit from 64% to 38%, while 
the percentage of Treasury debt and repos increased from 14% to 34%. 
Similarly, institutional prime money market funds decreased their 
portfolio percentage of commercial paper and certificates of deposit 
from 50% to 38%, while the percentage of Treasury debt and repos 
increased from 18% to 33%.
---------------------------------------------------------------------------

Figure 14--Aggregate Asset Changes of Institutional Prime Funds During 
2020, by Liquidity Bins

[[Page 51488]]

[GRAPHIC] [TIFF OMITTED] TR03AU23.013

Figure 15--Aggregate Asset Changes of Retail Prime Funds During 2020, 
by Liquidity Bins
[GRAPHIC] [TIFF OMITTED] TR03AU23.014

    The Commission has received comments \721\ that, under certain 
assumptions, a 20% daily and 40% weekly liquid asset threshold may be 
sufficient for funds to meet redemptions even if the stress lasts 10 
weeks. One commenter's analysis in support of these thresholds assumed 
that funds face a redemption rate of 16% and that fund portfolios have 
somewhat frontloaded maturity laddering. In addition, the analysis did 
not take into account how heterogeneity in portfolio construction 
across funds may influence the levels of liquidity available to meet 
redemptions. Notably, during the stress of March 2020, funds exhibited 
a distribution of outflows with some funds experiencing outflows double 
or triple the average redemption rate; portfolios reported on Form N-
MFP exhibited less frontloaded maturity structures than the commenter 
assumed; and heterogeneity in portfolio constructions mean that funds 
with longer dated securities would have less liquidity to meet 
redemptions. Additional analysis, described in greater detail below, 
aims to extend the commenter's modeling framework to take into account 
variations in redemption patterns and portfolio construction across 
funds.
---------------------------------------------------------------------------

    \721\ See, e.g., ICI Comment Letter.
---------------------------------------------------------------------------

    Out of the sample of 42 prime money market funds, we removed four 
funds with weekly liquid assets below 35%, following the commenter's 
methodology to account for the possibility that redemptions out of 
those funds were exacerbated by the threat of gates and fees as weekly 
liquid asset levels approached 30%.\722\ The average redemption rate 
for these four funds was approximately 28%, with the remaining 38 funds 
having an average redemption rate of 16%. Importantly, as can be seen 
from Figure 16, there were a number funds with weekly liquid assets in 
excess of 35% that had redemptions double and triple the 16% average.
---------------------------------------------------------------------------

    \722\ Additional models without removing the four funds with 
weekly liquid assets below 35% were constructed to compare with the 
commenter's results and to test the robustness of the models.
---------------------------------------------------------------------------

Figure 16--Weekly Redemptions in Prime Money Market Funds During the 
Week of March 20, 2020

[[Page 51489]]

[GRAPHIC] [TIFF OMITTED] TR03AU23.015

    Next, we examined 1,744 public institutional prime fund portfolios 
that filed on Form N-MFP between October 2016 and February 2020 and 
placed every security in the 1,744 portfolios into maturity bins by 
week (from 1 week to >10 week maturity). Setting initial weekly liquid 
assets for each portfolio based on a given fund's weekly liquid assets 
provided on Form N-MFP and assuming no gates or fees, we then stressed 
each portfolio for 10 weeks using weekly redemption rates of 38 prime 
money market funds observed during the stress week. Similar to the 
commenter's analysis, we assumed that each portfolio started with $10 
billion in total assets. Each week we calculated a new weekly liquid 
asset level for each portfolio based on the weekly liquid asset level 
the week before, the amount of assets that rolled over into the weekly 
liquid asset bin, and the weekly redemption rates. If the portfolio did 
not have enough weekly liquid assets to meet the weekly redemptions, 
then we assumed the longest dated assets were sold first with no 
haircuts. Under these assumptions, Figure 17 reports simulated changes 
in money market fund total assets after 10-weeks of redemptions. Figure 
17 shows that, considering the entire distribution of redemption rates 
in March 2020 rather than the average redemption rate of 16%, a number 
of funds run out of assets well before the 10 week mark.

Figure 17--Simulated Changes in Prime Money Market Fund Total Assets 
Under 10 Weeks of Stress, Using Historical Distribution of Redemption 
Rates for the Week of March 20, 2020
[GRAPHIC] [TIFF OMITTED] TR03AU23.016

    To further quantify these effects, Table 13 shows the distribution 
of weekly liquid assets in fund portfolios with starting weekly liquid 
assets of 40% when stressed with up to 10 weeks of redemptions using 38 
historical prime money market fund redemption rates in the stress week. 
As can be seen from Table 13, after one week of redemptions, 10% of 
fund portfolios with starting weekly liquid assets of 40% had less than 
or equal to 9% of weekly liquid assets remaining. By contrast, 10% of 
fund portfolios with starting weekly liquid assets of 50% had less than 
or equal to 28% of weekly liquid assets remaining. As another example, 
if fund portfolios enter the stress week with 40% in weekly liquid 
assets, a fifth have run out of weekly liquid assets to meet 
redemptions by week 2. At the same time, if fund portfolios enter the 
stress week with 50% in weekly liquid assets, a fifth of funds has 23% 
of weekly liquid assets remaining to meet redemptions.

[[Page 51490]]



      Table 13--Distribution of Weekly Liquid Assets (WLA) in Stressed Prime Money Market Fund Portfolios After 5 Weeks of Stress, Using Historical
                            Distribution of Redemption Rates in March 20, 2020 and Portfolio Composition Data From Form N-MFP
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          Distribution of WLA
               Week                WLA start -----------------------------------------------------------------------------------------------------------
                                                Min       5%      10%      20%      30%      40%      50%      60%      70%      80%      90%      Max
--------------------------------------------------------------------------------------------------------------------------------------------------------
1................................        40%       0%        3        9       20       27       30       33       35       38       40       42      60%
2................................         40        0        0        0        0       13       19       25       31       37       42       45       66
3................................         40        0        0        0        0        0        6       16       25       36       42       47       79
4................................         40        0        0        0        0        0        0        8       23       37       45       51      100
5................................         40        0        0        0        0        0        0        1       19       37       46       54      100
1................................         50        6       22       28       38       42       44       47       50       52       54       59       69
2................................         50        0        0        0       23       32       38       44       49       53       58       67       84
3................................         50        0        0        0        6       20       31       41       50       55       61       73       90
4................................         50        0        0        0        0       11       26       41       52       58       66       80      100
5................................         50        0        0        0        0        3       21       39       53       60       68       84      100
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Table 13 demonstrates two key results. First, when the historical 
distributions in prime money market fund redemption rates during the 
stress week in March 2020 and fund portfolio compositions are taken 
into account, a large share of stressed funds would run out of 
liquidity well before the 10 week mark suggested by some commenters. 
Second, funds that enter stress with 50% in weekly liquid assets have 
more weekly liquid assets to meet redemptions and are more likely 
survive a period of prolonged stress than funds that enter stress with 
40% in weekly liquid assets.
    Some commenters indicated that the proposed changes to the current 
fee and gate framework would allow funds to more freely use existing 
liquid assets to meet redemptions and, thus supported a more modest 
increase to the liquidity requirements.\723\ The analysis presented 
above excludes from the distribution of historical redemption rates 
funds that entered the stress week with less than 35% of weekly liquid 
assets. Since those funds were more likely to approach the 30% weekly 
liquid asset threshold for the imposition of gates and fees, 
redemptions out of those funds were more likely to have been triggered 
by the risk of gating or fees. Thus, weekly liquid assets may remain 
crucial for the ability of money market funds to meet redemptions 
during times of stress even in the absence of gating.
---------------------------------------------------------------------------

    \723\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Federated Hermes Comment Letter I; T. Rowe Price Comment Letter; 
Invesco Comment Letter.
---------------------------------------------------------------------------

    More broadly, as can be seen from the above, lower liquidity 
thresholds relative to the final amendments would allow funds to hold 
less liquid assets, increasing fund liquidity risks. However, lower 
thresholds would decrease the number of money market funds having to 
restructure their portfolios; would reduce the incentives of funds to 
take larger risks in the less liquid portion of their portfolios; and 
would reduce the concentration of liquidity in repos that are used by 
leveraged market participants for funding liquidity.
    Similarly, alternatives imposing higher minimum daily and weekly 
liquidity thresholds relative to the final amendments would require 
funds to hold more liquid assets, reducing the risk of fund 
liquidations or selloffs that may necessitate future government 
backstops. However, higher minimum liquidity thresholds would require a 
larger number of money market funds to reallocate their portfolios 
towards lower yielding investments. In addition, higher liquidity 
thresholds may lead funds to increase the risk in the remainder of 
their portfolios to attract investor flows or to keep fund yields from 
sliding below zero and ensure the viability of the asset class (the 
latter risk may be more pronounced in very low interest rate 
environments). Moreover, higher liquidity requirements may increase the 
availability of funding liquidity through repos to leveraged market 
participants, resulting in a higher levels of risk taking in less 
transparent and less regulated sectors of the financial system. The 
Commission continues to believe that the final liquidity thresholds 
balance these effects and are likely to allow more funds to have 
sufficient liquidity to meet redemptions during periods of liquidity 
stress.
b. Caps on Fund Holdings of Certain Assets
    As an alternative to increasing the minimum daily and weekly liquid 
asset requirements, the Commission considered adopting caps on money 
market fund holdings of certain assets, such as commercial paper and 
certificates of deposit. Commercial paper and certificates of deposit 
lack an actively traded secondary market and are difficult to value or 
sell during times of liquidity stress. As discussed in the Proposing 
Release, limiting money market fund holdings of such instruments may 
reduce run risk to the degree that the illiquidity of all or a portion 
of a fund's portfolio may create externalities from redeeming investors 
borne by investors remaining in the fund, which may incentivize early 
redemptions.
    However, this alternative relies on the assumption that commercial 
paper and certificates of deposit homogeneously reduce the liquidity of 
a fund's portfolio by more than other money market fund holdings across 
maturities. The Commission continues to recognize that these 
assumptions may not always hold for different money market funds and 
over different time horizons. Moreover, to the degree that investors 
prefer funds that deliver higher returns and money market funds benefit 
from investor expectations of implicit government backstops during 
times of liquidity stress, money market funds may react to this 
alternative by changing the maturity structure of their portfolios and 
reallocating into other securities with potentially higher liquidity 
risk. For example, money market funds may substitute short-term 
commercial paper and certificates of deposit that are classified as 
daily or weekly liquid assets with longer term commercial paper and 
certificates of deposit that would not be classified as daily or weekly 
liquid assets. Finally, because this alternative would involve defining 
the types of instruments subject to the cap, issuers may be able to 
create new financial instruments that are similar, and perhaps 
synthetically identical, to commercial paper and certificates of 
deposit along risk and return dimensions, but that would not be subject 
to the caps. The final approach, which would increase minimum daily and 
weekly liquid asset requirements, may reduce liquidity and run risk in 
money market funds without such

[[Page 51491]]

potential drawbacks, while ensuring funds have minimum liquidity to 
meet large redemptions.
    As another alternative, the final amendments could have replaced 
the minimum daily and weekly liquid asset thresholds with asset 
restrictions, such as imposing a minimum threshold for holdings of 
government securities \724\ and repos backed by government securities. 
Under the baseline, such assets are generally categorized as daily 
liquid assets. Thus, such an approach would have the effect of 
replacing minimum daily and weekly liquid asset thresholds with a 
single daily liquid asset threshold, and restricting the types of 
assets that would qualify as daily liquid assets. This alternative 
would reduce the liquidity risk of liquid assets held by money market 
funds, which may help them meet redemptions without transaction costs. 
However, waves of redemptions as experienced in 2008 and 2020 occur 
over multiple days, suggesting that money market funds need to have 
both daily and weekly liquidity to meet redemptions. Moreover, asset 
restrictions imposing large minimum thresholds for holdings of 
government securities would decrease not only the risk, but also the 
yield of money market funds and their attractiveness to investors, 
reducing the viability of the asset class in low interest rate 
environments. This approach would also further concentrate money market 
fund holdings in specific types of assets, which may increase the 
likelihood of funds selling the same assets to meet redemptions in 
times of stress.
---------------------------------------------------------------------------

    \724\ See, e.g., CCMR Comment Letter.
---------------------------------------------------------------------------

    Finally, under the baseline, funds falling below minimum liquid 
asset thresholds may not acquire any assets other than daily or weekly 
liquid assets, respectively, until funds meet those minimum thresholds. 
The final amendments will retain this baseline approach, while 
increasing the absolute daily and weekly liquid asset thresholds. As an 
alternative, the final amendments could have imposed penalties on funds 
or fund sponsors upon dropping below the required minimum liquidity 
threshold. Similarly, the final amendments could have imposed a minimum 
liquidity maintenance requirement, which would require that a money 
market fund maintain the minimum daily liquid asset and weekly liquid 
asset thresholds at all times instead of the current requirement to 
maintain the minimums immediately after the acquisition of an asset. 
During the market stress in 2020, funds experiencing large redemptions 
were reluctant to draw down on weekly liquid assets due to the 
existence of the threshold for the potential imposition of redemption 
fees and gates. Such alternatives may have a similar effect of 
penalizing money market funds for using liquidity when liquidity is 
most scarce, which may make money market funds reluctant to use daily 
and weekly liquid assets to meet large redemptions during market 
stress. As a result, money market funds would be incentivized to sell 
less liquid assets, such as longer maturity commercial paper, into 
distressed markets, rather than risk penalties and dropping below 
minimum liquidity maintenance requirements. This may increase 
transaction costs borne by redeeming investors and may result in money 
market fund redemptions magnifying liquidity stress in underlying 
securities markets.
4. Alternative Stress Testing Requirements
    As an alternative to the final amendments to stress testing 
requirements, the final amendments could have modified weekly liquid 
asset thresholds that funds must use for stress testing. For example, 
the final amendments could have required money market funds to perform 
stress testing using 15%, 20%, or 30% minimum weekly liquid asset 
thresholds. As another example, the final amendments could have 
required money market funds to use specific minimum daily and weekly 
liquid asset thresholds. Similarly, the Commission could have imposed 
explicit requirements regarding who would be responsible for 
determining the sufficient minimum level of liquidity for stress 
tests.\725\ These alternatives may reduce the discretion of boards and 
fund managers in stress testing. The Commission continues to recognize 
that stress testing design and optimum levels of liquidity will vary 
depending on the type of money market fund, investor concentration, 
investor composition, and historical distribution of redemption 
activity under stress, among other factors. Thus, alternatives 
establishing bright line thresholds for stress testing or limiting the 
ability of fund boards to delegate stress testing responsibilities 
could reduce the efficiency of the stress testing process and the 
usability of stress testing results for board and Commission oversight.
---------------------------------------------------------------------------

    \725\ See, e.g., T. Rowe Comment Letter.
---------------------------------------------------------------------------

    The Commission also could have required stress testing results to 
be disclosed to investors.\726\ This alternative could enable investors 
to better assess money market fund liquidity management and the 
vulnerability of various money market funds to liquidity stress. 
However, this alternative may also trigger self-fulfilling runs on more 
vulnerable money market funds, particularly in times of stress. 
Moreover, to the degree that funds anticipate the results of stress 
testing to become publicly disclosed, they may alter stress testing 
design, reducing its usability for board and Commission oversight.
---------------------------------------------------------------------------

    \726\ See, e.g., Systemic Risk Council Comment Letter.
---------------------------------------------------------------------------

5. Alternative Implementations of Liquidity Fees
a. Alternative Net Redemption Thresholds for Mandatory Liquidity Fees
    As described in section II.B above, the final amendments will 
require institutional funds to apply liquidity fees when they 
experience large net redemptions. Specifically, if daily net 
redemptions exceed 5% of the fund's net assets, funds are required to 
assess liquidity fees that reflect the fund's good faith estimate of 
the costs the fund would incur if it sold a pro rata amount of each 
security in its portfolio to satisfy the amount of net redemptions, 
including spread costs, other transaction costs (i.e., any other 
charges, fees, and taxes associated with portfolio security sales), and 
market impact costs the fund would incur if it were to sell a pro rata 
amount of each security in its portfolio to satisfy the amount of net 
redemptions (i.e., vertical slice). If the fund is not able to make a 
good faith estimate supported by data of its liquidity costs based on 
the sale of a vertical slice (e.g., if reliable transaction or 
quotation data for portfolio holdings are not available due to a freeze 
in short-term funding market activity), the fund would use a default 
liquidity fee of 1% of the value of share redeemed.
    The final amendments could have used a different net redemption 
threshold for the application of mandatory liquidity fees. As shown in 
the Proposing Release, Table 14 demonstrates that 5% of institutional 
prime and institutional tax-exempt money market funds had outflows that 
exceeded 3.7%.

[[Page 51492]]



                                                Table 14--Daily Flows of Institutional Money Market Funds
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Percentiles
               Institutional funds                  Average   ------------------------------------------------------------------------------------------
                                                   fund count       5%          10%          25%          50%          75%          90%          95%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Prime Only......................................           37         -3.5         -1.9         -0.5          0.0          0.6          2.2          3.9
Prime + Tax-exempt..............................           47         -3.7         -2.1         -0.5          0.0          0.6          2.3          4.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: This table reports the results of an analysis of daily flows reported in CraneData on 1,228 days between Dec. 2016 and Oct. 2021. As of Sept.
  2021, CraneData covered 87% of the funds and 96% of total assets. Flows at the class level were aggregated to the fund level. Flows of feeder funds
  were aggregated for an approximation of flows for the corresponding master fund.

    In the Proposing Release, the Commission proposed a swing pricing 
requirement, with a 4% net redemption threshold for market impact 
calculations, assessed on a pricing period rather than a daily basis. 
The Commission has received comment that the 4% threshold for applying 
a market impact factor was too low, particularly where the NAV is 
struck multiple times a day.\727\ The final amendments could have 
required a lower net redemption threshold, such as 4%, or a higher 
threshold, such as 8% or 10% for the liquidity fee threshold. 
Alternatively, the final amendments could have used different 
redemption thresholds for the liquidity fee requirement for 
institutional prime and institutional tax-exempt funds. Section 
IV.C.4.b.i quantifies how alternative redemption thresholds would 
influence the scope of the liquidity fee framework and associated 
benefits and costs. For example, Table 7 shows the average percentage 
of funds per month that would exceed a certain net redemption 
threshold. For instance, on average, we would expect approximately 1.4% 
of institutional prime or institutional tax-exempt funds to exceed the 
8% redemption threshold on any given day, while approximately 4.4% of 
institutional prime or institutional tax-exempt funds would exceed the 
4% redemption threshold on any given day.
---------------------------------------------------------------------------

    \727\ See, e.g., IIF Comment Letter; Bancorp Comment Letter.
---------------------------------------------------------------------------

    Higher (lower) net redemption thresholds for mandatory liquidity 
fees would reduce (increase) the number of days on which affected money 
market funds must estimate liquidity fees for portfolio securities, 
reducing (increasing) related costs and operational challenges. 
However, higher (lower) net redemption thresholds would also reduce 
(increase) the amount of dilution from redemptions that is recaptured 
by money market funds and accrue to non-transacting shareholders, 
especially in times of severe and/or prolonged stress. In addition, as 
discussed in section II.B.2.a, a higher redemption threshold for the 
imposition of liquidity fees may lead investors to expect that they 
will not incur a fee as long as they redeem early enough in a crisis, 
which may provide an incentive to redeem earlier in a redemption wave 
and contribute to the first-mover advantage. As discussed above, we 
believe that the final liquidity thresholds balance these effects and 
are likely to allow more funds to have sufficient liquidity to meet 
redemptions during periods of liquidity stress.
    As another alternative, the final amendments could have required 
funds to set their own net redemption triggers on a fund-by-fund basis, 
with reference to each fund's historical flows.\728\ For example, each 
fund could have been required to determine the trading days for which 
it had its highest flows over a set time period, and set its net 
redemption threshold based on the 5% of trading days with the highest 
redemptions.\729\ Such alternatives could allow funds to customize 
their liquidity fee thresholds to their historical redemption flows. 
However, they may also result in under-application of fees by funds 
with higher run risk and over-application of fees by funds with lower 
run risk. For example, funds with volatile redemption histories and 
high investor concentration could avoid the application of liquidity 
fees in times of stress if they have had large historical redemptions, 
whereas funds with smooth redemption histories and low investor 
concentration would have to apply fees even in the face of low 
redemptions in absolute terms. In addition, these alternatives may 
reduce the comparability of money market fund returns for investors 
because liquidity fees, including the associated market impact 
calculations, influence reported fund returns. Finally, such 
alternatives may create strategic incentives for fund complexes to open 
and close funds depending on historical redemption activity. For 
example, to the degree that the estimation of liquidity fees may be 
burdensome or to the extent that there may be incentives from fund 
flows not to apply liquidity fees, fund families may choose to close 
funds that experienced high redemptions to avoid the application of 
liquidity fees.
---------------------------------------------------------------------------

    \728\ As another possibility, the final amendments could have 
allowed funds discretion over which historical period could be 
chosen. However, because money market funds may not internalize the 
externalities that their liquidity management imposes on investors 
in the same asset class, they may not be incentivized to use such 
discretion in a way that mitigates those externalities. For example, 
some affected funds may choose a historical time period that results 
in liquidity fee thresholds that are too high, so that liquidity 
fees are rarely applied. Moreover, because liquidity fees would 
influence reported returns, the alternative may reduce the 
comparability of money market fund returns for investors.
    \729\ As another alternative, the rule could have required 
policies and procedures regarding the choice of a threshold percent 
level based on historical data.
---------------------------------------------------------------------------

b. Alternative Allowing the Exclusion of Pre-Announced Redemptions From 
the Net Redemption Threshold for Mandatory Liquidity Fees
    Under the final amendments, all institutional prime and 
institutional tax-exempt money market funds will be required to apply 
liquidity fees during days with net redemptions in excess of 5% of fund 
net assets, unless the estimated liquidity fee is below 1 basis point. 
In addition to the final rule's de minimis exception, the final rule 
could have allowed funds to exclude from the 5% net redemption 
threshold redemption requests that were pre-announced by investors to a 
fund a reasonable period in advance. To the degree that fund managers 
are able to pre-position their portfolio liquidity to meet anticipated 
large redemptions, this alternative could result in fewer instances in 
which funds would be required to estimate liquidity fees when liquidity 
costs are de minimis. Moreover, this alternative would incentivize 
investors to pre-announce their large redemption requests to fund 
managers in order to reduce the possibility of a liquidity fee, and 
these pre-announced redemption requests may enhance efficiency of 
liquidity management by money market funds. At this time, we believe 
that the final rule may result in similar benefits because, under 
normal market conditions, the liquidity costs of a fund with pre-
positioned liquidity meeting anticipated redemptions generally would be 
de minimis. However, unlike the alternative, if a fund is not able to 
pre-position its daily or weekly liquidity in anticipation of pre-
announced

[[Page 51493]]

redemptions and liquidity costs are above de minimis (for example, in 
stressed market conditions), pre-announced redemptions could still 
dilute non-transacting investors, and funds would be required to charge 
a liquidity fee to redeemers under the final rule.
    The final rule could have allowed funds to exclude from the 5% net 
redemption threshold redemption requests that were pre-announced by 
investors to funds a reasonable period in advance instead of the final 
rule's de minimis exception. At this time, we believe that such an 
alternative may be more costly to funds and investors than the de 
minimis exception in the final rule, as an exception for pre-announced 
redemptions could increase uncertainty about when the exception applies 
(e.g., what period of time before the day of redemption is reasonable 
and provides sufficient time for the fund to pre-position itself) and 
may incentivize investors to pre-announce redemptions that they may not 
ultimately carry through, which would create inefficiencies in the 
fund's liquidity management. Moreover, the final rule's de minimis 
exception may be more efficient than the pre-announced redemption 
exception because money market fund investors may face unexpected cash 
needs and may be unable to pre-announce their large redemptions.
c. Greater Discretion in the Liquidity Fee Framework
    Under the final amendments, all institutional prime and 
institutional tax-exempt money market funds would be required to apply 
liquidity fees during days with net redemptions in excess of 5% of fund 
net assets. The Commission has considered several alternatives that 
would give funds greater discretion over both the triggers for 
liquidity fees, liquidity fee amounts, and potential caps. For example, 
the rule could require funds to adopt specific procedures regarding the 
potential imposition of liquidity fees.\730\ Similarly, the final rule 
could have left the application and calculation of liquidity fees to 
fund discretion, while requiring fund boards to consider certain 
specified factors when determining whether to implement a liquidity 
fee.\731\ As a related alternative, the final rule could have provided 
institutional fund boards broad discretion to impose liquidity fees 
when in the best interest of the fund and its investors.\732\ As 
another alternative, the final rule could have made the application of 
liquidity fees optional.
---------------------------------------------------------------------------

    \730\ See, e.g., Federated Hermes Comment Letter I; ICI Comment 
Letter; Americans for Tax Reform Comment Letter; CFA Comment Letter.
    \731\ See, e.g., ICI Comment Letter.
    \732\ See ICI Comment Letter; Schwab Comment Letter; Federated 
Hermes Comment Letter I; Federated Hermes Comment Letter II; 
Federated Hermes Board Comment Letter; Invesco Comment Letter; SIFMA 
AMG Comment Letter; Americans for Tax Reform Comment Letter.
---------------------------------------------------------------------------

    These alternatives may allow institutional funds not to implement 
liquidity fees or to implement a liquidity fee framework with higher 
liquidity fee thresholds and lower liquidity fee amounts (for example, 
without estimating market impacts of a hypothetical sale of the 
vertical slice). Relative to the final amendments, these alternatives 
may allow funds to better tailor their liquidity management and 
liquidity fee design to investor composition, portfolio and asset 
characteristics, and prevailing market conditions. This alternative may 
also avoid operational costs and challenges of liquidity fees for some 
funds. To the degree that the implementation of mandatory liquidity 
fees under the final rule may result in higher fees charged to 
redeemers, which can reduce the attractiveness of affected funds to 
investors, these alternatives may decrease potential adverse impacts of 
liquidity fees on the size of the institutional money market fund 
sector, the number of institutional money market funds available to 
investors, and the availability of wholesale funding liquidity in the 
financial system. However, these alternatives would decrease 
comparability of fund returns and benefits of the liquidity fee 
framework.
    The operational costs of implementing liquidity fees are immediate 
and certain, while the benefits are largest in relatively rare times of 
liquidity stress. Moreover, affected funds may not internalize the 
externalities that they impose on investors in the same asset classes 
or the externalities that redeeming investors impose on investors 
remaining in the fund. While money market funds may have governance 
structures in place and reputational incentives to manage liquidity to 
meet redemptions--and fund sponsors may have chosen to provide sponsor 
support in the past--institutional money market funds also face 
disincentives from investor behavior and collective action problems. 
Specifically, to the degree that institutional investors may use 
institutional prime and institutional tax-exempt funds for cash 
management and may be sensitive to liquidity fees, funds that start 
charging liquidity fees on large redemptions when other funds are not 
may experience follow-on redemption waves. As a result, institutional 
money market funds may be reluctant to be the first to start charging 
liquidity fees, even if all such funds recognize the value of charging 
redeeming investors for the liquidity costs of redemptions.
    Thus, these alternatives could reduce the likelihood that funds use 
liquidity fees as an anti-dilution tool. This may reduce or eliminate 
important benefits of the final liquidity fee requirement, including 
protecting non-transacting investors from dilution, reducing first-
mover advantage and run risk, and reducing liquidity externalities 
money market funds may impose on market participants transacting in the 
same asset classes. In addition, relative to the final amendments, 
these alternatives would increase fund manager discretion over the 
choice of liquidity fee thresholds, size of liquidity fees, and the 
application of liquidity fees in general, which may reduce the 
comparability of money market fund returns for investors. Finally, in 
the absence of a prescribed trigger for liquidity fees, fund boards may 
default to relying on weekly liquid asset thresholds to trigger 
liquidity fees.\733\ As discussed in section IV.C.1 above, weekly 
liquid asset thresholds may magnify, rather than dampen, liquidity 
externalities in money market funds, the first-mover advantage in 
investor redemptions, and run risk in money market funds.
---------------------------------------------------------------------------

    \733\ See, e.g., Allspring Funds Comment Letter.
---------------------------------------------------------------------------

    Importantly, as discussed in section IV.C.4.b, the final rule would 
allow institutional money market funds to impose discretionary 
liquidity fees on days with net redemptions at or below 5% of the 
fund's net assets. A combination of mandatory liquidity fees on days 
with large net redemptions and discretionary liquidity fees on days 
with smaller net redemptions may reduce dilution cost, run risk, and 
fund resilience when faced with large redemption waves and during times 
of stress, while providing funds with greater flexibility in routine 
liquidity management.
    As a related alternative, the final amendments could have required 
institutional funds to apply liquidity fees as in the final rule, but 
without a requirement to estimate market impact factors. Alternatively, 
the final amendments could have made the use of market impact factors 
in liquidity fee calculations less prescriptive and more principles-
based or optional in their entirety. These alternatives would reduce 
the likelihood and frequency with which affected money market

[[Page 51494]]

funds would estimate market impacts in their liquidity fee 
calculations, which may reduce costs and operational challenges of 
doing so. However, this may reduce the frequency and size of liquidity 
fees and the benefits of liquidity fees for non-transacting 
shareholders.
    Increased discretion in liquidity fee calculations may allow funds 
to tailor the calculation of liquidity costs to individual portfolio 
and asset characteristics and prevailing market conditions. This may 
make liquidity fees a more precise measure of liquidity costs assessed 
to redeeming investors. However, because liquidity fees influence 
reported fund returns, greater discretion over the calculation of 
liquidity fees may reduce the comparability of money market fund 
returns for investors. Moreover, because money market funds may not 
internalize the externalities that their liquidity management practices 
may impose on investors in the same asset class, they may not be 
incentivized to use such discretion in a way that mitigates those 
externalities. Specifically, funds may compete on liquidity fees and 
may face flow incentives to impose lower fees, and this alternative may 
result in assessed liquidity fees being too low to recapture the 
dilution costs of redemptions.
d. Other Liquidity Fee Thresholds, Tiered Liquidity Fees, and 
Alternative Default Fees
    The Commission has considered a variety of alternatives to the 
final liquidity fee framework. For example, given baseline delays in 
order flows across various fund intermediary networks, the final rule 
could have required affected money market funds to impose liquidity 
fees conditional on a previous day's net redemptions exceeding 5% or 
some other threshold from the previous day. This alternative could 
improve precision of the threshold determination by allowing funds to 
use more complete flow information. However, this alternative may 
involve three significant groups of costs. First, redeeming investors 
would be able to more accurately predict whether a liquidity fee would 
be assessed on a particular trading day and the following day.\734\ 
This may trigger redemptions on days in which fees would not be 
applied, magnifying the first-mover advantage in money market fund 
redemptions and reducing resilience of affected money market funds 
under stress. Second, days with large net redemptions may be followed 
by days with smaller net redemptions, especially outside of redemption 
waves. The alternative imposing a fee on next day's redemptions based 
on previous day's flows may capture less dilution costs compared to the 
final rule. Third, under this alternative, redeemers on a given day 
would be charged a liquidity fee based on the transaction activity of 
redeemers on a previous day, which can pose fairness concerns.
---------------------------------------------------------------------------

    \734\ See 17 CFR 270.2a-7(h)(10)(ii)(C) (requiring a money 
market fund to update its website each business day to provide its 
net inflows or outflows as of the end of the preceding business 
day).
---------------------------------------------------------------------------

    The final rule could have triggered fees based on a fund's sale of 
portfolio securities, instead of the level of net redemptions, and 
could have tied the size of the fee to ex post transaction costs and 
market impacts of security sales. In the swing pricing context, one 
commenter indicated that security sales are a better barometer of 
dilution than net redemptions.\735\ To the degree that most affected 
money market funds may meet redemptions out of daily or maturing weekly 
liquid assets, this approach could result in a less frequent imposition 
of liquidity fees. However, the final rule will allow funds to assume 
that the market impact of weekly liquid assets of zero and includes a 
de minimis exception for liquidity fees. Thus, under the final rule, 
most funds are also unlikely to assess liquidity fees under normal 
market conditions. To the degree that this alternative results in less 
frequent imposition of liquidity fees, especially in times of stress, 
it could involve lower costs of implementing the liquidity fee approach 
for affected money market funds--costs that are likely to be passed 
along to money market fund investors. Moreover, the size of the fee 
under this alternative would be derived from transaction data of each 
fund, which may increase the degree of precision in estimates of spread 
and market impact costs of redemptions.
---------------------------------------------------------------------------

    \735\ See, e.g., Capital Group Comment Letter.
---------------------------------------------------------------------------

    However, this alternative may have significant costs relative to 
the final rule. Specifically, the alternative may reduce the amount of 
dilution costs affected money market funds recapture for the benefit of 
non-transacting shareholders relative to the final approach. If a fund 
is forced to sell portfolio securities during market stress, they are 
likely to sell less illiquid portfolio holdings first. A fee based only 
on the transaction costs and market impacts of the securities actually 
sold by a fund to meet redemptions would undercharge redeemers for the 
liquidity costs they impose on the remaining investors. Thus, relative 
to the final rule's requirement to estimate fees on the assumption of 
the sale of the pro-rata slice of portfolio securities, the alternative 
would reduce the benefits of the liquidity fee framework for the 
protection of non-transacting investors and run incentives in affected 
money market funds. Moreover, under stressed conditions, short-term 
funding markets may freeze and money market funds may be unable to sell 
portfolio securities, so the alternative may result in low or zero 
liquidity fees being assessed precisely when dilution costs are 
greatest. The final amendments may result in larger and more frequent 
liquidity fees being assessed, less dilution of non-transacting 
investors, and overall lower run risk in affected money market funds.
    The final rule could have relied on alternative bright line 
approaches, whereby liquidity fees would trigger automatically upon 
certain events. For example, the final rule could have tied the trigger 
of mandatory liquidity fees to a specific net redemption level or 
weekly liquid assets threshold. As a related alternative, the liquidity 
fee framework could have included dual triggers based on net 
redemptions and liquidity levels, with both triggers being required for 
the imposition of a liquidity fee.\736\ For example, the rule could 
have triggered liquidity fees based on net redemptions of more than 10% 
and drops in liquidity of more than 50% below required weekly liquid 
asset levels, which could be indicative of potential stress. As another 
alternative, liquidity fees could be triggered, at least in part, based 
on a specified amount of net redemptions over multiple days.\737\ For 
example, funds could be required to charge a 2% liquidity fee when they 
experience net redemptions of 15% over the course of two consecutive 
trading days. As another example, a fee could be triggered in the event 
of 5% net redemptions over three consecutive days, in addition to an 
occurrence of a Form N-CR reportable event. These alternatives may 
improve the ability of investors to forecast whether a liquidity fee 
would be imposed across time and may reduce the incidence with which 
funds would be required to impose liquidity fees relative to the final 
rule. The final rule's same-day net redemption trigger may be less 
forecastable and less susceptible to

[[Page 51495]]

strategic redemptions and run risk relative to these alternatives.
---------------------------------------------------------------------------

    \736\ See, e.g., ICI Comment Letter; IIF Comment Letter; 
BlackRock Comment Letter; JP Morgan Comment Letter; Invesco Comment 
Letter; SIFMA AMG Comment Letter.
    \737\ See, e.g., Morgan Stanley Comment Letter; State Street 
Comment Letter.
---------------------------------------------------------------------------

    The Commission also received comments recommending tying the 
application of liquidity fees to stress as indicated, for example, by 
weekly liquid assets instead of net redemptions.\738\ While significant 
declines in a fund's weekly liquid assets can reflect fund-specific 
liquidity stress and contribute to dilution of non-transacting 
shareholders, the weekly liquid asset threshold is more susceptible to 
strategic redemptions, as discussed in section IV.C.4 above. We believe 
that the final rule would result in larger liquidity fees under 
stressed conditions while reducing incentives for strategic redemptions 
incentives in three ways. First, the final rule would require that 
funds calculate market impacts based on the costs of selling the pro-
rata slice of the fund portfolio, which would be higher under stress, 
as discussed in greater detail below. Second, where liquidity costs are 
below one basis point of the value of the shares redeemed, such as 
under normal conditions and outside of stress, funds would not be 
required to assess liquidity fees. Third, if markets are so stressed 
that transactions are scarce and funds are unable to estimate the costs 
of selling the pro-rata slice of the fund portfolio, funds would apply 
a default liquidity fee of 1%.
---------------------------------------------------------------------------

    \738\ See, e.g., ICI Comment Letter.
---------------------------------------------------------------------------

    As another alternative, the Commission could have tiered liquidity 
fees depending on net redemptions and/or liquid asset thresholds. For 
example, some commenters suggested that affected funds could be 
required to charge liquidity fees of: (1) 0.25% if net redemptions are 
10% or more and weekly liquid assets are less than 30% but at least 
20%; (2) 1% if weekly liquid assets are less than 20% but at least 10%; 
and (3) 2% if weekly liquid asset are less than 10%.\739\ Other 
commenters suggested tiered liquidity fees based solely on declines in 
liquidity.\740\ For example, the final rule could have imposed a tiered 
fee structure for mandatory liquidity fees that would range from 0.5%, 
1%, or 2% depending on whether weekly liquid assets were 20%-30%, 10%-
20%, or less than 10%, respectively. These determinations could rely on 
the prior day's weekly liquid assets or on weekly liquid assets as of 
the end-of-day NAV calculation for these determinations.
---------------------------------------------------------------------------

    \739\ See, e.g., BlackRock Comment Letter; JP Morgan Comment 
Letter.
    \740\ See, e.g., ICI Comment Letter; Western Asset Comment 
Letter.
---------------------------------------------------------------------------

    Relative to the final rule, these alternatives may reduce costs of 
implementing the liquidity fee framework by eliminating costs of 
estimating spread and other transaction costs of net redemptions, as 
well as market impacts of a hypothetical sale of the vertical slice. 
Moreover, alternatives that would impose tiered liquidity fees based on 
daily or weekly liquid assets (without consideration of net 
redemptions) would eliminate costs of reviewing same-day net 
redemptions. Thus, these alternatives would require funds to impose 
higher fees in the face of declining liquidity and larger redemptions, 
which may proxy for larger liquidity costs of redemptions.
    As discussed above, we believe that weekly liquid asset thresholds 
may be subject to greater run risk than a net redemption threshold. 
Moreover, by having solely fixed liquidity fee levels, these 
alternatives may over- or under-charge redeemers for the liquidity 
costs of their redemptions. In contrast, the final rule will generally 
require each fund to make a good faith estimate of the liquidity costs 
of meeting each day's worth of net redemptions under a given set of 
market conditions on that day. This may increase the accuracy with 
which liquidity fees price dilution costs, protecting non-transacting 
investors from dilution without over-charging redeemers. Importantly, 
under the final rule, the liquidity fee will be lower when a fund's 
weekly liquid assets are higher because the rule will allow funds to 
assume that weekly liquid assets have a market impact of zero, 
resulting in similar economic benefits of tiering.
    Finally, the final rule could have included different default 
liquidity fees that funds would be able to charge if they are unable to 
produce good faith estimates of the liquidity costs of redemptions. For 
example, the Commission could have scaled the default liquidity fee of 
1% in the final rule to a fund's liquid asset levels (for example, by 
multiplying it by one minus the level of weekly liquid assets, or by 
one minus the level of daily liquid assets, at the end of the same or 
previous day). Such alternatives to the default fee may more closely 
resemble the costs of a hypothetical sale of the vertical slice, as 
funds with higher liquid assets would charge lower default fees in 
times of stress, when they are better able to absorb redemptions out of 
liquid assets with a zero haircut. However, this approach could reduce 
the fee that funds charge redeemers in times of stress and, given that 
fund liquidity levels are publicly disclosed, could contribute to 
incentives to redeem before a fund's liquidity is depleted. Moreover, 
this alternative may create an incentive for funds to hold onto weekly 
liquid assets in times of stress, when the costs of the vertical slice 
are difficult to estimate and funds are most likely to use the default 
fee. The final rule's 1% default fee is consistent with the current 
baseline and is a significant fee for money market funds that are used 
as cash vehicles. Moreover, the default fee is intended to apply 
precisely when accurate data on liquidity costs for portfolio 
securities is not available and does not replace individual fund 
estimates of market impacts of a hypothetical sale of the vertical 
slice. Importantly, funds may have incentives to use default fees only 
in historically rare periods of stress, when transaction and quotation 
activity in short-term funding markets freezes and data needed to 
estimate liquidity costs of redemptions are not available.
e. Other Alternative Implementations of Liquidity Fees
    The final amendments could have required institutional funds to 
assess a liquidity fee on all days with net redemptions, rather than 
only on days when net redemptions exceed 5%. Alternatives requiring 
funds to apply liquidity fees when net redemptions are below the 5% 
threshold may enhance the expected economic benefits of liquidity fees. 
However, these alternatives would impose greater costs on institutional 
funds related to calculating spread, transaction, and market impacts 
when net redemptions are low. As discussed in the baseline, money 
market funds generally hold high levels of daily and weekly liquid 
assets, and the final amendments would require money market funds to 
hold even higher levels of these assets. As a result, unless both net 
redemptions and price uncertainty are large, institutional funds may be 
able to absorb redemptions of transacting investors without imposing 
large liquidity costs on the remaining investors.
    The final amendments could have allowed funds to calculate the 
liquidity fees under the assumption that the fund would absorb 
redemptions out of liquid assets (the so-called horizontal slice of the 
fund portfolio) or otherwise provide funds with flexibility to 
determine the costs based on how they would satisfy redemptions on a 
given day. Money market funds may manage their liquidity so as to be 
able to absorb redemptions out of daily and weekly liquid assets, 
rather than having to sell a pro-rata share of their portfolio 
holdings. Moreover, the final amendments would require money market 
funds to hold higher levels of

[[Page 51496]]

daily and weekly liquid assets. Assets that are not daily and weekly 
liquid assets can be less liquid and generally may need to be held to 
maturity by the fund. Thus, the alternative would allow funds to avoid 
charging liquidity fees if they are able to, for example, absorb 
redemptions out of more liquid assets. This may reduce uncertainty for 
investors about the magnitude of the potential liquidity fee, 
especially when liquidity is not scarce. However, this alternative 
would result in redeeming investors not being charged for the true 
liquidity costs of redemptions, which consist not only of the immediate 
costs of liquidating fund assets, but also of the cost of leaving the 
fund more depleted of liquidity and thus more vulnerable to future 
redemptions.
    As another alternative, the final amendments could have required 
that affected money market funds calculate the liquidity fee based on 
the fund's best estimate of the liquidity costs of redemptions, rather 
than following the approach prescribed in the final rule. Under this 
alternative, liquidity fees may more accurately capture the costs of 
redemptions as funds would be able to tailor fees to their liquidity 
management strategies (whether that is, for example, liquidating pro-
rata shares of portfolio holdings, absorbing redemptions out of daily 
or weekly liquidity, or some other approach). However, this alternative 
would increase fund discretion in the calculation of liquidity fees, 
reduce comparability of fees across money market funds, and fund 
manager incentives may not be aligned with incentives to accurately 
estimate liquidity costs of redemptions. For example, larger liquidity 
fees benefit the fund and can improve reported fund performance. At the 
same time, disclosures about historical fees can incentivize fund 
managers to apply excessively low fees to attract investors.
6. Swing Pricing
    In lieu of the final liquidity fee framework, the Commission could 
have adopted the swing pricing requirement similar to the mandatory 
liquidity fee framework, or as proposed. The swing pricing alternative 
has several important differences from the final liquidity fee 
framework, and these differences give rise to different economic 
benefits, costs, and operational challenges. As discussed in the 
Proposing Release and in section II, swing pricing and liquidity fees 
can both charge redeeming investors for the liquidity costs they impose 
on a fund and allow funds to recapture the liquidity costs of 
redemptions for non-redeeming investors. However, the swing pricing 
alternative may have several effects relative to the final liquidity 
fee framework.
    First, the final liquidity fee framework may be more transparent 
than a swing factor adjustment to the fund's NAV, as redeeming 
investors would more clearly see application of a separate fee. Some 
commenters stated that a liquidity fee would be less confusing and more 
transparent with respect to the liquidity costs redeeming investors 
incur because investors are more familiar with the concept of liquidity 
fees (that exist in the current rule) and because the size of the swing 
factor is not readily observable in the fund's share price.\741\
---------------------------------------------------------------------------

    \741\ See, e.g., Morgan Stanley Comment Letter; SIFMA AMG 
Comment Letter; Federated Hermes Comment Letter II.
---------------------------------------------------------------------------

    Second, under the swing pricing alternative, subscribers enter at a 
lower price. This creates an incentive to subscribe that may be 
important when liquidity is scarce and a fund is facing a wave of 
redemptions. However, some commenters indicated that a liquidity fee 
would be a more direct way to pass along liquidity costs and, unlike 
swing pricing, would do so without providing a discount to subscribing 
investors or adding volatility to the fund's NAV.\742\
---------------------------------------------------------------------------

    \742\ See, e.g., ICI Comment Letter; Federated Hermes Comment 
Letter II; JP Morgan Comment Letter.
---------------------------------------------------------------------------

    Third, there may be significant operational challenges and time 
pressures of swing pricing \743\ that reduce investor access to same 
day liquidity.\744\ Specifically, commenters expressed concern that 
swing pricing may inhibit a fund's ability to offer features such as 
same-day settlement and multiple NAV strikes per day due to concerns 
that swing pricing would delay a fund's ability to determine its 
NAV.\745\ Under the swing pricing alternative, a fund has to analyze 
flows and costs before publishing its NAV for each pricing period. In 
contrast, under the final liquidity fee framework, funds may have more 
time after publishing the NAV to finalize the liquidity fee 
determination and only need to perform the analysis once per day. One 
commenter indicated that a liquidity fee framework could better 
preserve same-day liquidity for investors than swing pricing because 
liquidity fees are already operationally feasible for many money market 
funds and present fewer implementation challenges.\746\ Because 
institutional money market funds typically offer same-day settlement, 
the final liquidity fee framework would also involve time pressures, 
albeit less acute.
---------------------------------------------------------------------------

    \743\ See, e.g., ICI Comment Letter; Northern Trust, Capital 
Group Comment Letter; JP Morgan Comment Letter.
    \744\ See, e.g., Northern Trust Comment Letter; BlackRock 
Comment Letter.
    \745\ See, e.g., Capital Group Comment Letter; State Street 
Comment Letter; ICI Comment Letter; Federated Hermes Comment Letter 
II; SIFMA AMG Comment Letter; BNY Mellon Comment Letter.
    \746\ See IIF Comment Letter.
---------------------------------------------------------------------------

    Fourth, some commenters argued that swing pricing is ill-suited for 
money market funds given the general lack of experience with swing 
pricing in the money market fund industry,\747\ and indicated that 
liquidity fees would be easier for money market funds to implement, 
allowing funds to leverage their existing experience with liquidity 
fees under current rules.\748\
---------------------------------------------------------------------------

    \747\ See Morgan Stanley Comment Letter; SIFMA AMG Comment 
Letter; IIF Comment Letter; Federated Hermes Comment Letter I; 
Federated Hermes Comment Letter II; Senator Toomey Comment Letter; 
Mutual Fund Directors Forum Comment Letter; see also Profs. Ceccheti 
and Schoenholtz Comment Letter.
    \748\ See, e.g., Federated Hermes Comment Letter II; Invesco 
Comment Letter; SIFMA AMG Comment Letter; Schwab Comment Letter; IIF 
Comment Letter.
---------------------------------------------------------------------------

    Fifth, the Proposing Release recognized that swing pricing may 
increase costs of tax reporting. Specifically, the swing pricing 
alternative may increase tax reporting burdens for investors if the 
requirement prevents an investor from using the NAV method of 
accounting for gain or loss on shares in a floating NAV money market 
fund or affects the availability of the exemption from the wash sale 
rules for redemptions of shares in these funds. Several commenters 
stated that swing pricing would increase tax reporting burdens because 
wash sale rules may apply to redemptions in floating NAV money market 
funds using swing pricing.\749\ In contrast, the tax implications of 
liquidity fees are already settled. In addition, liquidity fees have 
fewer accounting implications for funds because other types of mutual 
funds have used fees and money market funds are already subject to a 
liquidity fee framework.\750\
---------------------------------------------------------------------------

    \749\ See, e.g., Northern Trust Comment Letter; Capital Group 
Comment Letter; ICI Comment Letter; SIFMA AMG Comment Letter; 
Federated Hermes Comment Letter II; Americans for Tax Reform Comment 
Letter.
    \750\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    As discussed in section II, many commenters expressed broad 
concerns about the swing pricing proposal and its potential effect on 
institutional money market funds and investors. One commenter indicated 
that the swing pricing requirement is based on false assumptions, 
including the assumption that liquidity fees did not work during market 
stress of 2020, that fund boards will not implement liquidity fees, and

[[Page 51497]]

that swing pricing will not eliminate a key tenet of money market funds 
(availability of intraday and same day liquidity), among others.\751\ 
Moreover, the commenter stated that empirical studies about the effects 
of swing pricing on redemptions in a crisis cited in the proposal do 
not support the swing pricing requirement.\752\ While we disagree with 
this assertion, we are not adopting the swing pricing requirement for 
money market funds. Section II, section IV.4, and the above discussion 
highlight the effects of the liquidity fees tied to weekly liquid 
assets in March 2020 on redemption behavior, fund flow disincentives to 
implement liquidity fees, and the potential effects of swing pricing on 
the availability of same-day and intraday liquidity, among other 
things. In light of this analysis and commenter input,\753\ we believe 
that, on balance, the final liquidity fee framework may be a more 
operationally feasible and efficient way to reduce dilution of fund 
investors and facilitate liquidity risk management by money market 
funds while reducing costs and unintended effects on the money market 
fund industry and investors.
---------------------------------------------------------------------------

    \751\ See Federated Hermes Comment Letter I.
    \752\ See Federated Hermes Comment Letter I discussing, for 
example, Dunhong Jin, et al., Swing Pricing and Fragility in Open-
End Mutual Funds, 35 Rev. Fin. Stud. 1, 1-50 (2022).
    \753\ For example, a number of commenters indicated that swing 
pricing would reduce the viability of institutional prime funds as 
an asset class and that most if not all institutional investors will 
abandon funds subject to swing pricing. See, e.g., Federated Hermes 
Comment Letter I. Also see, e.g., ICI Comment Letter; Capital Group 
Comment Letter; JP Morgan Comment Letter; BlackRock Comment Letter.
---------------------------------------------------------------------------

7. Expanding the Scope of the Floating NAV Requirements
    The final amendments could have expanded the floating NAV 
requirements to a broader scope of money market funds. For example, the 
final amendments could have imposed floating NAV requirements on all 
prime money market funds, but not on tax-exempt funds. As another 
alternative, the final amendments could have imposed floating NAV 
requirements on all prime and tax-exempt money market funds.\754\ 
Finally, the final amendments could have required that all money market 
funds float their NAVs.\755\
---------------------------------------------------------------------------

    \754\ See, e.g., Schwab Comment Letter.
    \755\ See, e.g., Americans for Tax Reform Comment Letter; Better 
Markets Comment Letter.
---------------------------------------------------------------------------

    Expanding the scope of the floating NAV requirements beyond 
institutional prime and institutional tax-exempt funds would involve 
several benefits. First, a floating NAV may increase transparency about 
the risk of money market fund investments. Portfolios of money market 
funds give rise to liquidity, interest rate, and credit risks--risks 
that are relatively low under normal market conditions, but may be 
magnified during market stress. To the degree that investors in stable 
NAV funds are currently treating them as if they were holding U.S. 
dollars due to a lack of transparency about risks of such funds, 
expanding the scope of the floating NAV requirements may enhance 
investor protections and enable investors to make more informed 
investment decisions. Some commenters indicated that such an 
alternative could clarify to investors that there is investment risk in 
these products and that money market funds differ from insured bank 
deposits, as well as reduce the likelihood that official sector 
interventions and taxpayer support will be needed to halt future 
runs.\756\
---------------------------------------------------------------------------

    \756\ See, e.g., Schwab Comment Letter; Better Markets Comment 
Letter.
---------------------------------------------------------------------------

    Second, these alternatives could reduce run risk in affected stable 
NAV funds.\757\ Specifically, floating the NAV may reduce the first-
mover advantage in redemptions, partly mitigating investor incentives 
to run. A floating NAV requirement could discourage herd redemption 
behavior across all prime money market funds and may reduce the 
advantages of sophisticated investors that redeem quickly under 
stressed conditions. Third, floating the NAV of a broader range of 
money market funds could more accurately capture their role in asset 
transformation and corresponding risks. Retail prime and retail tax-
exempt funds have risky portfolio holdings, with some of the underlying 
holdings of retail money market funds similar to those of institutional 
prime funds, which experienced significant stress in 2020. Expanding 
the floating NAV requirements to all money market funds would result in 
a consistent regulatory treatment of money market funds and put them on 
par with other mutual funds. Moreover, it may enhance the allocative 
efficiency in the money market fund industry and may enhance 
competition between floating NAV and stable NAV funds. To the degree 
that the disparate treatment of floating NAV and stable NAV funds led 
to a significant migration of institutional investments from prime and 
tax-exempt money market funds to government money market funds, 
alternatives expanding the scope of the floating NAV requirement to all 
money market funds may lead to outflows from government money market 
funds back into prime and tax-exempt sectors.
---------------------------------------------------------------------------

    \757\ See, e.g., Schwab Comment Letter.
---------------------------------------------------------------------------

    However, retail investors have exhibited a lower propensity to run 
in prior market stress periods than institutional investors. 
Additionally, government funds tend to receive inflows rather than 
outflows during periods of market stress. These factors would reduce 
the benefits of a floating NAV in terms of reducing run risk for retail 
and government funds. Further, the final rule's increase in liquidity 
requirements may decrease the portfolio and redemption risks of retail 
funds, as the final rule will require these funds to maintain liquidity 
levels that are high in comparison to historical redemptions these 
funds have experienced, further reducing the benefits of a floating NAV 
requirement.
    At the same time, the alternatives would impose significant costs. 
First, such alternatives may reduce the attractiveness of affected 
money market funds to investors and may result in significant 
reductions in the size of the money market fund sector. One commenter 
noted that adopting a floating NAV for all funds may cause investors to 
reallocate capital into cash accounts subject to deposit insurance, 
with adverse effects on wholesale funding liquidity and access to 
capital for issuers.\758\ To the extent that retail investors use money 
market funds as a safe, cash-like product, floating the NAV of stable 
NAV funds may lead investors to reallocate capital into cash accounts 
subject to deposit insurance. This would reduce retail investors' 
ability to receive market rates for their cash management investments.
---------------------------------------------------------------------------

    \758\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    Second, the Commission continues to recognize that if the floating 
NAV alternatives resulted in a decrease in the size of the money market 
fund industry, they would adversely impact the availability of 
wholesale funding liquidity and access to capital for issuers. A 
reduction of wholesale funding liquidity available to arbitrageurs may 
magnify mispricing across securities markets. Similarly, a reduction in 
the size of affected money market funds or the money market fund 
industry as a whole may increase the costs of or decrease access to 
capital for issuers in short-term funding markets.
    Third, the floating NAV alternative may involve significant 
operational, accounting, and tax challenges. In particular, 
alternatives involving switching retail funds from stable NAV to 
floating NAV may create accounting and tax complexities for some retail 
investors. For instance, some retail

[[Page 51498]]

investors might not use the NAV method of accounting for gains and 
losses on money market fund shares.\759\ In addition, a floating NAV 
requirement may be incompatible with popular cash management tools such 
as check-writing and wire transfers that are currently offered for many 
stable NAV money market fund accounts, as well as the use of stable NAV 
money market funds by sweep vehicles.\760\
---------------------------------------------------------------------------

    \759\ See supra note 260 and accompanying text (discussing the 
NAV method).
    \760\ See supra paragraph accompanying note 345.
---------------------------------------------------------------------------

8. Countercyclical Weekly Liquid Asset Requirements
    The final rule could have imposed countercyclical weekly liquid 
asset requirements. For instance, during periods of market stress, the 
minimum weekly liquid asset threshold could decrease, for example, by 
50%. The final amendments could have specified the definitions of 
market stress that would trigger a change in weekly liquid asset 
thresholds. Alternatively, the final amendments could have specified 
that decreases in weekly liquid asset thresholds would be triggered by 
Commission administrative order or notice.
    As discussed in the Proposing Release, such alternatives could help 
clarify that money market funds' liquidity buffers are meant for use in 
times of stress and may provide assurance to investors that funds may 
utilize their liquidity reserves to absorb redemptions. To the degree 
that these alternatives may increase the willingness of affected funds 
to absorb redemptions out of daily or weekly liquid assets during times 
of stress, these alternatives may reduce liquidity costs borne by fund 
investors and may reduce incentives to redeem.
    The Commission has not received comment in support of this 
alternative, but has received comment that countercyclical liquidity 
requirements are unnecessary.\761\ Specifically, the commenter asserted 
that if there is no regulatory link between the level of liquidity and 
the potential imposition of fees or gates, money market fund managers 
will naturally be able to use liquid assets in a countercyclical way. 
The commenter further emphasized that countercyclicality would be 
challenging to administer by a regulator.
---------------------------------------------------------------------------

    \761\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    Investor redemptions out of institutional prime and institutional 
tax-exempt funds during market stress of 2020 demonstrated a high level 
of sensitivity of redemptions to threshold effects. The Commission 
continues to believe that any decrease in regulatory minimum thresholds 
may create investor concerns about liquidity stress in money market 
funds and trigger an increase in investor redemptions. Moreover, under 
the final amendments, affected money market funds will not be 
prohibited from operating below the daily or weekly liquid asset 
requirements. Importantly, the elimination of the tie between liquidity 
thresholds and fees and gates may more efficiently incentivize funds to 
use their liquidity buffers in times of stress, while removing 
threshold effects around weekly liquid asset levels.
9. Amendments Related to Potential Negative Interest Rates
    As an alternative, the Commission could have restricted how money 
market funds may react to possible future market conditions resulting 
in negative fund yields by prohibiting, as proposed, money market funds 
from reducing the number of shares outstanding to seek to maintain a 
stable net asset value per share or stable price per share. In tandem, 
the Commission could have required, as proposed, that government and 
retail money market funds to keep records identifying intermediaries 
able to process orders at a floating NAV and to no longer transact with 
intermediaries that are not able to process orders at a floating NAV, 
as proposed.
    To the degree that, relative to the final rule, a floating NAV 
provides greater transparency to investors by showing daily 
fluctuations in the NAV, this alternative may increase transparency of 
stable NAV performance for investors in the event of a negative 
interest rate environment.\762\ However, these relative benefits may be 
dampened, if not eliminated, by the final rule's disclosure 
requirements about the board's determination to use an RDM as well as 
account statement disclosures. The alternative requirement related to 
fund intermediaries may facilitate a transition of stable NAV funds to 
floating NAV in a negative yield environment. One commenter also 
indicated that this alternative may result in greater global 
consistency among money market funds after the ultimate discontinuation 
of share cancellation under the European Money Market Funds 
Regulation.\763\
---------------------------------------------------------------------------

    \762\ See, e.g., Northern Trust Comment Letter; CFA Comment 
Letter.
    \763\ See, e.g., Northern Trust Comment Letter.
---------------------------------------------------------------------------

    However, this alternative may impose significant operational 
burdens and costs on investors. Many investors in stable NAV funds may 
prefer a stable NAV investment even in a negative rate environment, and 
this alternative would eliminate this possibility.\764\ In addition, 
for some investors, transitioning to a floating NAV could be even more 
complex and confusing than an RDM.\765\ Finally, a floating NAV 
requirement may be incompatible with popular cash management tools such 
as check-writing and wire transfers that are currently offered for many 
stable NAV money market fund accounts.
---------------------------------------------------------------------------

    \764\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Federated Hermes Comment Letter I; Allspring Funds Comment Letter.
    \765\ BNY Mellon Comment Letter.
---------------------------------------------------------------------------

    The alternative requirement that stable NAV funds determine that 
their intermediaries have the capacity to process the transactions at 
floating NAV and the related recordkeeping requirements would also 
impose burdens on such funds. For example, affected money market funds 
may have to review their contracts with intermediaries, and some 
contracts may need to be renegotiated. Funds would have flexibility in 
how they make this determination for each financial intermediary, which 
may reduce these costs for some funds. Moreover, intermediaries that 
are currently unable to process transactions in stable NAV funds at a 
floating NAV may need to upgrade their processing systems to be able to 
continue to transact in government and retail funds. Many financial 
intermediary platforms that operate cash sweep programs and bank-like 
services using an infrastructure that does not accommodate a floating 
share price may be unable or unwilling to do so.\766\ To that effect, 
the alternative may adversely impact the size of intermediary 
distribution networks of some funds, which can limit access or increase 
the costs of investor access to some affected funds. Thus, the 
alternative may present operational difficulties for intermediaries 
offering stable NAV funds and may reduce the ability of investors to 
use stable NAV funds for sweep accounting and other cash management 
services. Overall, the final rule and its disclosure requirements may 
serve to maintain similar transparency to the alternative, without 
adverse effects on the ability of investors to have a stable NAV in the 
event of negative yields.
---------------------------------------------------------------------------

    \766\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Federated Hermes Comment Letter I; Morgan Stanley Comment Letter; 
BNY Mellon Comment Letter.
---------------------------------------------------------------------------

    As another alternative, the final amendments could have mandated 
that in the event of persistent negative interest rates, all stable NAV 
funds must use an RDM. Requiring stable NAV funds to use an RDM would 
eliminate

[[Page 51499]]

NAV fluctuations in a negative yield environment, which may preserve 
the use of stable NAV funds for sweep accounting. Such an alternative 
may, thus, preserve or increase demand for government and retail money 
market funds relative to the final rule. This alternative may also 
increase comparability across stable NAV funds relative to the final 
rule. However, such an alternative would eliminate valuable flexibility 
for stable NAV funds to float the NAV, which may be optimal for some 
funds given their investor clientele and capabilities of their 
intermediary networks.
10. Amendments Related to WAL/WAM Calculation
    The final rule will amend rule 2a-7 to require that WAM and WAL are 
calculated based on the percentage of each security's market value in 
the portfolio, as proposed. The Commission could have instead based the 
calculation on amortized cost of each portfolio security. Similar to 
the final amendments, such an alternative would also enhance 
consistency and comparability of disclosures by money market funds in 
data reported to the Commission and provided on fund websites. Thus, 
the alternative would achieve the same benefits as the final amendments 
in terms of enhancing transparency for investors and enhancing the 
ability of the Commission to assess the risk of various money market 
funds and increasing allocative efficiency. However, relative to the 
final amendments, the alternative may give rise to higher compliance 
costs. While all money market funds are required to determine the 
market values of portfolio holdings, no such requirement exists for 
amortized costs of portfolio securities. Thus, funds that do not 
currently estimate amortized costs would be required to do so for the 
WAL and WAM calculation. Moreover, the Commission continues to believe 
that amortized cost may be a poor proxy of a security's value if market 
conditions change drastically due to, for example, liquidity or credit 
stress, and if the fund is unable to hold the security until maturity. 
This may distort WAL and WAM calculations during market dislocations--
when comparable and accurate information about fund risks may be most 
important for investment decisions.
    While commenters generally supported the proposed approach,\767\ 
one commenter disagreed with the proposed changes, but also with the 
alternative calculating WAM and WAL based on amortized cost of the 
portfolio instead of market value.\768\ Specifically, the commenter 
stated that it calculates WAM and WAL using market value for floating 
NAV money market funds and amortized cost for retail and government 
money market funds. The commenter also stated that the only meaningful 
difference in these methodologies would be if one of the issuers of the 
portfolio securities had a credit problem, in which case the fund would 
immediately shift to using market value.\769\ Further, the commenter 
stated that the fractional difference between the WAM and WAL 
calculated with amortized cost versus market value would not change 
either number calculated in actual days, rather than fractions of a 
day, and that any changes relative to the regulatory baseline would 
necessitate operational changes.
---------------------------------------------------------------------------

    \767\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Capital Group Comment Letter.
    \768\ See Federated Hermes Comment Letter I.
    \769\ Id.
---------------------------------------------------------------------------

    Differences between the WAM and WAL calculated with amortized cost 
versus market value may vary across funds and over time. As discussed 
above, 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. We 
continue to believe that consistency and comparability of disclosures 
related to fund WAM and WAL across different money market funds and 
different types of money market funds may enhance Commission oversight 
and be valuable to investors, and we believe that requiring funds to 
use a uniform approach to the WAM and WAL calculations at all times 
mitigates any concerns about a fund not moving, or being slow to move, 
to a market-based value during times when there could be meaningful 
differences. In light of the above considerations, we continue to 
believe the final approach may be a more efficient way of accomplishing 
such comparability.
11. Form PF Amendments for Large Liquidity Fund Advisers
    The Commission could have adopted Form PF amendments for large 
liquidity fund advisers with a greater level of detail requested. 
Alternatively, the Commission could have adopted the final Form PF 
amendments without including some or all of the new reporting 
requirements. For example, the final amendments could have amended Form 
PF without requiring new disclosures related to repurchase agreement 
transactions or related to investor information. Relative to the final 
amendments, alternatives that reduce (increase) the amount of 
information required to be reported in Form PF may have reduced 
(increased) the benefits of the reporting requirements as well as the 
direct and indirect costs borne by large liquidity fund advisers. As 
discussed above, one commenter questioned the value added of the 
proposed additional reporting,\770\ and other commenters generally 
criticized the purported benefits of enhanced Form PF reporting.\771\ 
Importantly, compliance with reporting requirements may involve 
significant fixed costs. As a result, the elimination of one or several 
items from the final amendments may not lead to a proportional 
reduction in direct costs. Moreover, these alternatives would not align 
reporting of large liquidity funds with that of money market funds, 
which invest in the same short-term funding markets. The final 
amendments may present a more complete and comparable picture of the 
short-term financing markets in which liquidity funds invest, and in 
turn, enhance the Commission and FSOC's ability to monitor and assess 
short-term financing markets and facilitate better regulatory oversight 
of those markets and their participants.
---------------------------------------------------------------------------

    \770\ See supra note 709 and accompanying text; see also NYC Bar 
Comment Letter on File No. S7-01-22.
---------------------------------------------------------------------------

12. Disclosures
a. Eliminating Website Disclosure of Fund Liquidity Levels
    The final amendments could have eliminated the requirement that 
money market funds post their daily and weekly liquid asset levels on 
their websites. As discussed above, the Commission understands that the 
public nature of fund liquid asset disclosures, in combination with the 
regulatory thresholds for the potential imposition of fees and gates, 
may have triggered a run on institutional money market funds and made 
other funds reluctant to use liquid assets to absorb redemptions if it 
meant approaching or falling below the regulatory threshold. Commenters 
have generally not discussed this alternative, although one commenter 
stated that the website disclosure should not be eliminated because, 
once the link of a potential fee or gate imposition is removed, the 
incentive for investors to monitor and redeem based

[[Page 51500]]

on liquidity is mitigated. The final amendments would partly mitigate 
run incentives surrounding disclosures of weekly liquid assets, by 
removing the tie between weekly liquid assets and the potential 
imposition of fees and gates, but also increasing minimum daily and 
weekly liquidity requirements and imposing a requirement to promptly 
report liquidity threshold events. Moreover, money market funds play an 
important asset transformation role and inherently carry liquidity 
risks. We continue to believe that public disclosures of money market 
fund liquidity convey important information to investors about the 
liquidity risks of their investments.
b. Alternatives to Form N-MFP Amendments
    The Commission could have adopted Form N-MFP amendments without 
including some or all of the new reporting requirements.\772\ While 
these alternatives may have reduced compliance burdens compared to the 
final amendments, compliance with disclosure requirements may involve 
significant fixed costs. As a result, the elimination of one or several 
items from the final amendments may not lead to a proportional 
reduction in compliance burdens. Moreover, information about repurchase 
agreement transactions, fund liquidity management, investor 
concentration and composition, and sales of securities into the market 
would provide important benefits of transparency for investors and 
would enhance Commission oversight.
---------------------------------------------------------------------------

    \772\ See, e.g., Federated Hermes Comment Letter I; ICI Comment 
Letter; SIFMA AMG Comment Letter; BlackRock Comment Letter; CCMR 
Comment Letter.
---------------------------------------------------------------------------

    The final amendments will require the disclosure of every liquidity 
fee in the reporting period by date. Alternatively, the final 
amendments could have required the disclosure of less information about 
when the fund applied liquidity fees. For example, the final amendments 
could have required disclosure of the lowest, median, and highest 
liquidity fee a fund applied in a given reporting period. Commenters 
did not generally discuss such alternatives or alternatives to similar 
proposed reporting requirements for swing pricing. Alternatives 
involving less information about fund liquidity fee practices and 
eliminating current website disclosures of daily fund flows would 
reduce the scope of the economic benefits and costs of the final 
amendments described above. To the degree that disclosures of liquidity 
fees may make liquidity fees more salient to investors and may lead 
funds to compete on fees, alternatives involving less disclosure about 
liquidity fees can reduce those effects. Moreover, to the degree that 
granular disclosure about historical liquidity fees can incentivize or 
inform strategic redemption behavior, alternatives involving less 
disclosure about liquidity fees can reduce those effects.
c. Alternatives to Form N-CR Amendments
    The final amendments could have defined a liquidity threshold event 
for purposes of board notification and/or Form N-CR reporting to 
reflect a specified percentage decline from a fund's preferred weekly 
liquid asset and daily liquid asset.\773\ Relative to the final rule, 
such an approach could offer additional flexibility for funds in 
setting up their board reporting and oversight of liquidity management. 
The magnitude of such benefits may be small if board notification 
thresholds are lower than Form N-CR reporting thresholds because fund 
managers are likely to keep the board apprised of any liquidity events 
triggering Form N-CR reporting. In addition, to the degree that these 
alternatives would allow funds to set up different Form N-CR reporting 
thresholds, they would reduce comparability of Form N-CR reported 
events for investors. Moreover, funds and fund managers may be 
incentivized by competitive pressures to reduce the salience of their 
liquidity threshold events, leading them to select thresholds for board 
and Form N-CR reporting that are lower than those in the final rule.
---------------------------------------------------------------------------

    \773\ See, e.g., ICI Comment Letter.
---------------------------------------------------------------------------

    The final amendments could also have required money market funds to 
make notices concerning liquidity threshold events public with a delay 
(e.g., 15, 30, or 60 days). As a related alternative, the Commission 
could have triggered the Form N-CR reporting requirement in the final 
rule if a fund is 50% below each of the daily and weekly liquidity 
requirements for a period of consecutive days.\774\ As another 
alternative, the final amendments could have required that some or all 
information about the liquidity threshold event be kept confidential 
upon filing. Under the baseline, such funds are required to report 
daily and weekly liquid assets daily on fund websites. Relative to the 
final rule, these alternatives would introduce delays to the reporting 
of liquidity threshold events to investors on Form N-CR, reduce the 
frequency of such reporting, or decrease the amount of information in 
liquidity threshold event notices available to investors. To the degree 
that the publication of such notices provides investors with additional 
information about fund liquidity management and can trigger investor 
redemptions out of funds with low levels of weekly and daily liquid 
assets, the alternatives may reduce the risk of redemptions around 
liquidity thresholds and the increase the willingness of funds to 
absorb redemptions out of their weekly liquid assets relative to the 
final amendments.\775\ However, relative to the final amendments, the 
alternatives would reduce the availability of a central source that 
investors could use to identify when money market funds fall more than 
50% below liquidity requirements and understand the circumstances 
leading to the decline in liquidity. The delayed reporting alternative 
also would reduce the amount of information available to investors 
surrounding the context for the liquidity threshold events as notices 
are likely to clarify reasons for the threshold event. Thus, the 
alternative would reduce transparency for investors around liquidity 
management of affected money market funds, which may reduce allocative 
efficiency. Notably, a delay in publication of the notices may increase 
staleness of the information in the notices available to investors.
---------------------------------------------------------------------------

    \774\ See, e.g., Federated Hermes Comment Letter I.
    \775\ See, e.g., Dechert Comment Letter.
---------------------------------------------------------------------------

    In addition, the final rule could have amended Form N-CR to include 
some of the new collections of information on Form N-MFP. For example, 
the final rule could have amended Form N-CR to include information 
about sales of securities into the market of prime funds that exceed a 
particular size. This alternative would enhance the timeliness of such 
reporting. Thus, the alternative may enhance transparency about fund 
liquidity management for investors, which may enhance informational and 
allocative efficiency and Commission oversight. However, the 
alternative would increase direct reporting burdens related to the 
filing of Form N-CR--costs that may flow through in part or in full to 
end investors in the form of fund expenses. Moreover, timely reporting 
of prime funds' sales of portfolio securities may signal fund liquidity 
stress to investors even where funds may be able to maintain their 
daily and weekly liquidity levels. This may influence investor 
decisions to redeem out of reporting funds; thus, relative to the final 
amendments, the alternative may place heavier redemption pressure on 
reporting funds.

[[Page 51501]]

    With respect to the structured data requirement for Form N-CR, the 
final amendments could have required Form N-CR to be submitted in the 
Inline eXtensible Business Reporting Language (Inline XBRL), rather 
than in N-CR-specific XML. We did not receive any comments on this 
alternative. As with N-CR-specific XML, Inline XBRL is a structured 
data language and would provide similar benefits to investors (e.g., 
facilitating analysis of the event-related disclosures reported by 
money market funds on Form N-CR and thereby providing more transparency 
into potential risks associated with money market funds). From a filer 
compliance perspective, money market funds have experience complying 
with Inline XBRL compliance requirements, because they are required to 
tag prospectus risk/return summary disclosures on Form N-1A in Inline 
XBRL.\776\ This existing experience would counter the incremental 
implementation cost of complying with an Inline XBRL requirement under 
the alternative.
---------------------------------------------------------------------------

    \776\ See Instruction C.3.g to Form N-1A; 17 CFR 232.405(b)(2). 
Effective July 2024, money market funds will also be subject to 
Inline XBRL requirements for shareholder reports they file on Form 
N-CSR. See Tailored Shareholder Reports Adopting Release, supra note 
347; 17 CFR 232.405(b)(2).
---------------------------------------------------------------------------

    However, unlike N-CR-specific XML, which the Commission would 
create specifically for Form N-CR submissions on EDGAR, Inline XBRL is 
an existing data language that is maintained by a public standards 
setting body, and it is used for different disclosures across various 
Commission filings (and for uses outside of regulatory disclosures). 
Due to the number of individual transactions that might be reported as 
Form N-CR data and the constrained nature of the content of Form N-CR 
and the absence of a clear need for the N-CR disclosures to be used 
outside the Form N-CR context, the alternative to include an Inline 
XBRL requirement might result in formatting for human readability of 
tabular data within a web browser that provides no additional 
analytical insight. This would likely include more complexity than is 
called for by the disclosures on Form N-CR, thus potentially making the 
disclosures more burdensome to use for analysis and possibly muting the 
benefits to investors of a structured data requirement, compared to the 
final rule's N-CR-specific XML requirement.
13. Sponsor Support
    The final amendments could have required money market fund sponsors 
to provide explicit sponsor support to cover dilution costs. As 
discussed in the Proposing Release, dilution occurs because 
shareholders remaining in the fund effectively buy back shares at NAV 
from redeeming investors. The assets underlying those shares are 
eventually sold at a price that may differ from that NAV for the 
reasons described in the baseline, causing dilution in some cases. This 
alternative may significantly change incentives around the liquidity 
mismatch between money market fund assets and liabilities. 
Specifically, this alternative would give fund sponsors a more direct 
incentive to manage the amount of dilution risk they impose on a fund 
via their choice of fund investments.
    As discussed in the Proposing Release, directly exposing the 
sponsor, rather than money market fund investors, to the dilution risk 
associated with the difference between NAV and the ultimate liquidation 
value of the fund's underlying securities could have several benefits. 
First, money market funds may have a stronger incentive to overcome any 
operational impediments that expose them to unnecessary risk. Second, 
the amount of required operating capital to process redemptions/
subscriptions would be higher for money market funds that held 
relatively less liquid securities, and money market funds would have to 
charge higher fees to raise that capital. Such fees would externalize 
the costs of investing in less liquid assets via money market funds. As 
those fees increase, money market funds that hold less liquid assets 
might become less desirable to investors, and money market fund 
investors might select into other structures, such as closed-end funds, 
that are a more natural fit with illiquid assets. These benefits may be 
reduced to the degree that the sponsor support requirement may 
incentivize money market funds to take additional risks to recoup the 
sponsor's costs or may incentivize fund managers to increase risk 
taking due to the backstop of the sponsor support.
    The effects of sponsor support on investors may be mixed. Sponsor 
support may increase the ability of investors to redeem their shares in 
full without bearing liquidity costs. However, sponsor support could 
lead some investors to believe that their investments carry no risk and 
may make investors less discerning in their choice of money market fund 
allocations. Moreover, sponsor support reduces investor risk only to 
the degree that fund sponsors are well capitalized and easily capable 
of providing sponsor support. Uncertainty surrounding the ability of 
the sponsor to provide support to the money market fund could trigger a 
wave of shareholder redemptions, particularly during stressed 
conditions.
    The Commission has received comment that such an alternative 
approach may significantly disrupt the money market fund industry.\777\ 
First, it would make sponsoring money market funds a capital intensive 
business, which may create barriers to entry into the money market fund 
industry, disadvantage smaller funds and fund complexes, and increase 
concentration. Second, it may cause fund sponsors to opt, instead, for 
other open-end funds, ETFs, or closed-end funds as vehicles for certain 
less liquid assets. Third, since the costs of sponsor support may be 
passed along to investors in part or in full in the form of, for 
example, higher expense ratios, it may reduce fund yields after 
expenses. These factors are, thus, likely to reduce the attractiveness 
of money market funds to investors and the number of available money 
market funds, adversely impacting investor choice and the efficiency of 
investors' portfolio allocations. The alternative, may thus, 
significantly reduce the number of fund sponsors offering money market 
funds and the number of money market funds available to investors. 
These adverse effects may flow through to institutions, such as banks, 
and to leveraged participants, such hedge funds, that rely on banks for 
liquidity and capital formation.
---------------------------------------------------------------------------

    \777\ See, e.g., CCMR Comment Letter, Fidelity Comment Letter; 
see also 87 FR 7320.
---------------------------------------------------------------------------

14. Capital Buffers
    The final amendments could have required that money market funds 
maintain a capital or ``NAV'' buffer,\778\ or a specified amount of 
additional assets available to absorb daily fluctuations in the value 
of the fund's portfolio securities. For example, one option would 
require that stable NAV money market funds have a risk-based NAV buffer 
of up to 1% to absorb day-to-day fluctuations in the value of the 
funds' portfolio securities. Floating NAV money market funds could 
reserve their NAV buffers to absorb fund losses under rare 
circumstances only, such as when a fund suffers a large drop in NAV or 
is closed. The required minimum size of a fund's NAV buffer could be 
determined based on the composition of the money market fund's 
portfolio, with specified buffer requirements for daily

[[Page 51502]]

liquid assets, other weekly liquid assets, and all other assets.
---------------------------------------------------------------------------

    \778\ Capital (or ``NAV'') buffers, which could be structured in 
a variety of ways, can provide dedicated resources within or 
alongside a fund to absorb losses and can serve to absorb 
fluctuations in the value of a fund's portfolio, reducing the cost 
to taxpayers in case of a run. See President's Working Grp. on Fin. 
Mkts., supra note 544.
---------------------------------------------------------------------------

    Some commenters supported the use of capital buffers as a mechanism 
to stabilize money market funds in times of market stress.\779\ One 
commenter indicated that operationalizing the capital buffer by adding 
a loss-bearing, subordinated class of liabilities would not require 
changing the structure of current money market fund shares, but would 
make them less risky by converting them into senior liabilities.\780\ 
Some commenters suggested the use of a bank safety standard that would 
implement a capital requirement of 3 to 4% of unsecured, non-government 
assets and suggested that such a buffer would only depress returns by 
approximately 5 basis points (0.05%).\781\ One commenter indicated that 
capital buffers would aid money market funds by providing a layer of 
protection for investors, reducing the incentive to run in a crisis, 
and reducing the incentive for prime money market funds to take 
excessive risk.\782\ This commenter also suggested the use of a 
subordinated share class that would absorb losses ahead of longer-term 
investors and, in exchange for bearing potential losses, the 
subordinated shareholders would be paid a risk premium.\783\ This 
commenter also suggested an alternative approach that would require 
funds to buy capital protection from a regulated bank.\784\ Other 
commenters stated that capital buffers would allow money market funds 
to sustain broad-based declines in asset values and to continue funding 
shareholder redemptions without resorting to fire sales that further 
depress share values in times of stress.\785\ One commenter suggested 
that a mandatory buffer would reduce moral hazard and increase 
discipline in the management of money market funds, increasing investor 
confidence that money market funds could weather market stress.\786\
---------------------------------------------------------------------------

    \779\ See, e.g., Profs. Ceccheti and Schoenholtz Comment Letter; 
Prof. Hanson et al. Comment Letter; Better Markets Comment Letter; 
Systemic Risk Council Comment Letter.
    \780\ See Profs. Ceccheti and Schoenholtz Comment Letter.
    \781\ See, e.g., Profs. Ceccheti and Schoenholtz Comment Letter; 
Prof. Hanson et al. Comment Letter.
    \782\ See Prof. Hanson et al. Comment Letter.
    \783\ Id.
    \784\ Id.
    \785\ See, e.g., Better Markets Comment Letter; Systemic Risk 
Council Comment Letter.
    \786\ See Better Markets Comment Letter.
---------------------------------------------------------------------------

    The capital buffer alternative may have four benefits. First, 
capital buffers may add ex ante loss-absorption capacity to a money 
market fund that could mitigate money market fund investors' risk of 
losses.\787\ This may reduce the incentive to redeem shares quickly in 
response to small losses or concerns about the liquidity of the money 
market fund portfolio, particularly during periods of severe liquidity 
stress.
---------------------------------------------------------------------------

    \787\ See, e.g., President's Working Grp. on Fin. Mkts., supra 
note 544.
---------------------------------------------------------------------------

    Second, a NAV buffer would require money market funds to provide 
explicit sponsor support rather than the implicit and uncertain support 
under the current baseline. This would require funds to internalize 
some of the cost of the discretionary capital support sometimes 
provided to money market funds and to define in advance how losses will 
be allocated. In addition, a NAV buffer could reduce fund managers' 
incentives to take risk beyond what is desired by fund shareholders 
because investing in less risky securities reduces the probability of 
buffer depletion.
    Third, a NAV buffer may also provide counter-cyclical capital to 
the money market fund industry because once a buffer is funded it 
remains in place regardless of redemption activity. With a buffer, 
redemptions increase the relative size of the buffer because the same 
dollar buffer now supports fewer assets. The NAV buffer, thus, 
strengthens the ability of the fund to absorb further losses, reducing 
investors' incentive to redeem shares.
    Fourth, by reducing the NAV variability in money market funds, a 
NAV buffer may facilitate and protect capital formation in short-term 
financing markets during periods of modest stress. A NAV buffer could 
enable funds to absorb small losses and thus could reduce the need to 
trade into stressed markets. Thus, by adding resiliency to money market 
funds and enhancing their ability to absorb losses, a NAV buffer may 
benefit capital formation in the long term. A more stable money market 
fund industry may produce more stable short-term funding markets, which 
could provide more reliability as to the demand for short-term credit 
to the economy.
    The Commission has also received comments that did not support the 
use of capital buffers and suggesting that such a mechanism would 
decrease the utility and attractiveness of money market funds and cause 
fund sponsors to exit the industry.\788\ One commenter suggested that 
capital buffers are unnecessary and would severely and negatively 
impact shareholders, stating that capital buffers would not have been 
useful in March 2020 because buffers pertain to asset quality rather 
than liquidity, and noting also that institutional prime funds already 
operate with a floating NAV, which effectively addresses asset quality 
in a manner analogous to capital buffers.\789\ This commenter suggested 
that if buffers are funded by retaining rather than distributing 
income, the buffers would take a significant amount of time to 
accumulate and, if funded by fund sponsors, managing money market funds 
would no longer be economically feasible.\790\ Some commenters stated 
that even modestly sized capital buffers would substantially increase 
the cost of operating prime money market funds, to an extent that would 
likely prevent sponsors from offering such funds.\791\
---------------------------------------------------------------------------

    \788\ See, e.g., ICI Comment Letter; Fidelity Comment Letter; 
CCMR Comment Letter.
    \789\ See Fidelity Comment Letter.
    \790\ Id.
    \791\ See, e.g., CCMR Comment Letter.
---------------------------------------------------------------------------

    The Commission continues to believe that this alternative may give 
rise to significant direct and indirect costs. In terms of direct 
costs, capital buffer requirements may be challenging to design and 
administer. First, from the standpoint of design of capital buffers, 
calibrating the appropriate size of the buffer as well as establishing 
the parameters for when a floating NAV fund should use its NAV buffer 
could present operational and implementation difficulties and, if not 
done effectively, could contribute to self-fulfilling runs on funds 
experiencing large redemptions. Second, from the standpoint of 
administering capital buffers, floating NAV funds would need to 
establish policies and procedures around the use of buffers, 
replenishing capital buffers when they are depleted and raising 
requisite financing, regulatory reporting, and investor disclosures 
about buffers, among other things. Depending on how a capital buffer is 
structured (e.g., as sponsor provided capital or as a subordinated 
share class requiring shareholder approval), the alternative may 
involve other administrative, accounting, tax, and legal challenges and 
costs for fund sponsors and investors.
    Importantly, the alternative may also involve three sets of 
indirect costs. First, the Commission continues to believe that the 
alternative would result in opportunity costs associated with 
maintaining a NAV buffer. Those contributing to the buffer would deploy 
valuable scarce resources to maintain a NAV buffer rather than being 
able to use the funds elsewhere. Estimates of these opportunity costs 
are not possible because the relevant data is not currently available 
to the Commission.

[[Page 51503]]

    Second, entities providing capital for the NAV buffer, such as the 
fund sponsor, would expect to be paid a return that sets the market 
value of the buffer equal to the amount of the capital contribution. 
Since a NAV buffer is designed to absorb the same amount of risk 
regardless of its size, the promised yield, or cost of the buffer, 
increases with the relative amount of risk it is expected to absorb 
(also known as a leverage effect).
    Third, money market funds with buffers may avoid holding riskier 
short-term debt securities (like commercial paper) and instead hold a 
higher amount of low yielding investments like cash, Treasury 
securities, or Treasury repos. This could lead money market funds to 
hold more conservative portfolios than investors may prefer, given 
tradeoffs between principal stability, liquidity, and yield. Moreover, 
the costs of establishing and maintaining a capital buffer would 
decrease returns to fund investors. The increased costs and decreased 
returns of a capital buffer requirement may decrease the size of the 
money market fund sector, which would affect short-term funding 
markets, and could lead to increased industry concentration. Moreover, 
this may alter competition in the money market fund industry as capital 
buffer requirements may be easier to comply with for bank-sponsored 
funds, funds that are members of large fund families, and funds that 
have a large parent.
    Crucially, a NAV buffer does not protect shareholders completely 
from the possibility of heightened rapid redemption activity during 
periods of market stress, particularly in periods where the buffer is 
at risk of depletion, such as during March 2020. As the buffer becomes 
impaired (or if shareholders believe the fund may suffer a loss that 
exceeds the size of its NAV buffer), shareholders have an incentive to 
redeem shares quickly because, once the buffer fails, shareholders will 
experience sudden losses. Thus, the Commission continues to believe 
that capital buffers are unlikely to have prevented the liquidity 
stresses that arose in March 2020. At the same time, capital buffers 
could lead some investors to believe that their investments carry no 
risk, which may influence investor allocations and adversely impact 
allocative efficiency.
15. Minimum Balance at Risk
    The final amendments could have required that a portion of each 
shareholder's recent balance in a money market fund be available for 
redemption only with a time delay. Under the alternative, all 
shareholders could redeem most of their holdings immediately without 
being restricted by the minimum balance at risk. This alternative also 
could include a requirement to put a portion of redeeming investors' 
holdback shares first in line to absorb losses that occur during the 
holdback period. A floating NAV fund could be required to use a minimum 
balance at risk mechanism to allocate losses only under certain rare 
circumstances, such as when the fund has a large drop in NAV or is 
closed.
    Such an alternative could provide some benefits to money market 
funds. First, it would subordinate a portion of redeeming investors' 
shares to put them at greater risk if the fund suffers a loss, forcing 
redeeming shareholders to absorb liquidity costs during periods of 
severe market stress when liquidity is particularly costly and 
allocating liquidity costs to investors demanding liquidity when the 
fund itself is under stress.\792\ Redeeming shareholders would bear 
first losses when the fund first depletes its buffer and then the 
fund's value falls below its stable share price within 30 days after 
their redemption. If the fund sells assets to meet redemptions, the 
costs of doing so would be incurred while the redeeming investor is 
still in the fund because of the delay in redeeming holdback shares. 
Third, it would provide the fund with a period of time to obtain cash 
to satisfy the holdback portion of a shareholder's redemption. This may 
provide time for potential losses in fund portfolios to be avoided 
since distressed securities could trade at a heavy discount in the 
market but may ultimately pay in full at maturity.
---------------------------------------------------------------------------

    \792\ See, e.g., President's Working Grp. on Fin. Mkts., supra 
note 544.
---------------------------------------------------------------------------

    The Proposing Release recognized that implementing such an 
alternative would involve operational challenges and direct 
implementation costs. Such costs include costs of converting existing 
shares or issuing new holdback and subordinated holdback shares; 
changes to systems that would allow record-keepers to account for and 
track the minimum balance at risk and allocation of unrestricted, 
holdback, or subordinated holdback shares in shareholder accounts; and 
systems to calculate and reset average account balances and restrict 
redemptions of applicable shares. In addition, commenters indicated 
that such costs would extend to intermediaries and service providers 
and would be significant.\793\ Funds subject to a minimum balance at 
risk may also have to amend or adopt new governing documents to issue 
different classes of shares with different rights: unrestricted shares, 
holdback shares, and subordinated holdback shares.
---------------------------------------------------------------------------

    \793\ See, e.g., Fidelity Comment Letter.
---------------------------------------------------------------------------

    Moreover, this alternative would give rise to a number of indirect 
costs. First, the alternative may have different and unequal effects on 
investors in stable NAV and floating NAV money market funds. During the 
holdback period, investors in a stable NAV fund would only experience 
losses if the fund breaks the buck. Investors in a floating NAV fund, 
however, are always exposed to changes in the fund's NAV and would 
continue to be exposed to such risk for any shares held back. These 
differential effects could reduce investor demand for floating NAV 
money market funds.
    Second, under the MBR alternative, there would still be an 
incentive to redeem in times of fund and market stress. The alternative 
could force shareholders that redeem more than a certain percent of 
their assets to pay for any losses, if incurred, on the entire 
portfolio on a ratable basis. The contingent nature of the way losses 
are distributed among shareholders forces early redeeming investors to 
bear the losses they are trying to avoid. Money market funds may choose 
to meet redemptions by selling assets that are the most liquid and have 
the smallest capital losses. Once a fund exhausts its supply of liquid 
assets, it may sell less liquid assets to meet redemption requests, 
possibly at a loss. If in fact assets are sold at a loss, the value of 
the fund's shares could be impaired, motivating shareholders to be the 
first to leave.
    Third, the minimum balance at risk alternative would involve a loss 
of liquidity for redeeming investors akin to a partial redemption gate, 
which may reduce the utility of money market funds for investors and 
may cause fund sponsors to exit the industry.\794\ Commenters stated 
that the alternative would alter money market funds significantly and 
drive investors and intermediaries away from the product to unregulated 
or less-regulated investment options, causing disruption to the short-
term financing markets.\795\ Another commenter also opposed the 
alternative and suggested that it reduces liquidity for retail and 
institutional investors.\796\
---------------------------------------------------------------------------

    \794\ Id.
    \795\ Id.
    \796\ See Americans for Tax Reform Comment Letter.
---------------------------------------------------------------------------

    Fourth, the alternative may not have addressed the liquidity 
stresses that

[[Page 51504]]

occurred in March 2020.\797\ The minimum balance at risk alternative 
generally impairs the liquidity of money market fund investments. To 
the degree that many investor redemptions in March 2020 were driven by 
exogenous liquidity needs (arising out of the Covid-19 pandemic), the 
Commission continues to believe that, under the alternative, investors 
would still have strong incentives to redeem assets they could in order 
access liquidity.
---------------------------------------------------------------------------

    \797\ See, e.g., Fidelity Comment Letter; ICI Comment Letter.
---------------------------------------------------------------------------

16. Liquidity Exchange Bank Membership
    In the Proposing Release, the Commission discussed an alternative 
requiring prime and tax-exempt money market funds to be members of a 
private liquidity exchange bank (``LEB''). The LEB would be a chartered 
bank that would provide a liquidity backstop during periods of market 
stress. Money market fund members and their sponsors would capitalize 
the LEB through initial contributions and ongoing commitment fees, for 
example. During times of market stress, the LEB would purchase eligible 
assets from money market funds that need cash, up to a maximum amount 
per fund. The intent of the LEB would be to diminish investors' 
incentive to redeem in times of market stress while having the benefit 
of pooling liquidity resources rather than requiring each money market 
fund to hold higher levels of liquidity separately.
    This alternative, as well as broader industry-wide insurance 
programs, could mitigate the risk of liquidity runs in money market 
funds and their detrimental impacts on investors and capital formation. 
In the Proposing Release, the Commission discussed how the alternative 
could replace money market funds' historical reliance on discretionary 
sponsor support, which has covered capital losses in money market funds 
in the past but, as discussed above, also contributes to these funds' 
vulnerability to liquidity runs. In addition, some sort of collective 
emergency insurance fund could be helpful to reduce the moral hazard of 
funds that may be reliant on future Federal Reserve facilities in times 
of market stress.
    The Commission has received several comments in response to the 
proposal, which discussed the LEB alternative, and these comments did 
not support the LEB alternative as a realistic solution to improve 
money market funds' resiliency or limit future runs on money market 
funds.\798\ Commenters emphasized two key sets of costs. First, a LEB 
would be complicated and require significant time and money to develop 
and operate.\799\ Second, pooling capital from various money market 
funds could raise moral hazard and conflict of interest concerns, 
because money market funds relying on the LEB would not have an 
incentive to improve their own liquidity management.\800\
---------------------------------------------------------------------------

    \798\ See, e.g., ICI Comment Letter; Fidelity Comment Letter; 
Americans for Tax Reform Comment Letter.
    \799\ See, e.g., Fidelity Comment Letter; Americans for Tax 
Reform Comment Letter.
    \800\ Id.
---------------------------------------------------------------------------

    As discussed in the proposal, the LEB alternative may not 
significantly reduce the contagion effects from heavy redemptions at 
money market funds without undue costs. Specifically, because of the 
difficulties and costs involved in creating effective risk-based 
pricing for insurance and additional regulatory structures necessary to 
offset adverse incentive effects of membership in the LEB, this 
alternative has the potential to create moral hazard and encourage 
excessive risk-taking by money market funds. If the alternative 
increases moral hazard and decreases corresponding market discipline, 
it may in fact increase rather than decrease money market funds' 
susceptibility to liquidity runs. These incentives may be countered by 
imposing a very costly regulatory structure and risk-based pricing 
system; however, related costs are likely to be passed along to 
investors and may reduce the attractiveness of money market funds 
relative to bank products and other cash management tools. Finally, it 
may be difficult to create private insurance at an appropriate cost and 
of sufficient capacity for a several trillion-dollar industry that 
tends to have highly correlated tail risk.
17. Alternative Compliance and Filing Periods
    The Commission considered alternative compliance dates for various 
aspects of the final amendments. First, the removal of the existing 
redemption gate provision and the link between weekly liquid assets and 
the imposition of a liquidity fee in rule 2a-7 are effective when the 
final rule is effective. As an alternative, the Commission could have 
adopted these provisions with a longer (such as a 6 month or a 12 
month) effective date. Such alternatives would provide affected money 
market funds with more time to comply with these amendments. We believe 
that the removal of these provisions will be simple to implement.\801\ 
Moreover, as discussed throughout this release, the Commission 
understands that the tie between weekly liquid asset thresholds and 
fees and gates did not provided intended benefits during March of 2020, 
but likely contributed to investor redemptions during the peak of 
market stress. Thus, these amendments may reduce self-fulfilling run 
incentives that may arise out of the tie between weekly liquid assets 
and redemption gates or fees, and alternatives delaying the effective 
date of these amendments may contribute to run risk in affected money 
market funds.
---------------------------------------------------------------------------

    \801\ See State Street Comment Letter.
---------------------------------------------------------------------------

    Second, the final amendments to minimum liquidity requirements have 
a compliance date that is 6 months after the effective date. As an 
alternative, these amendments could have been adopted with a longer 
compliance period, such as 12 months.\802\ This alternative would 
provide additional time for affected funds to comply with the amended 
minimum liquidity requirements. For example, to the degree that some 
affected money market funds would have to change their portfolio 
composition by holding new assets, such funds would be required to make 
a determination that each security is an ``eligible'' security 
presenting minimal credit risk to the fund and have corresponding 
written records about the review. In addition, money market funds 
typically roll over assets when they mature and, if funds are required 
to change their portfolio composition to comply with the final rule, 
they may have to adjust this rollover process in favor of shorter-term 
securities of the same or similar issuers. To the degree that some 
investors may seek to reallocate their investments out of affected 
money market funds and into other cash management tools, a longer 
compliance period may allow funds time to stabilize their portfolios in 
the aftermath of potential investor redemptions. Finally, a longer 
compliance period may be especially valuable for funds most affected by 
other requirements of the final rule, such as the liquidity fee and 
reporting requirements. However, as discussed in section II.H, 
amendments to the liquidity minimums under rule 2a-7 represent 
increases to an existing framework, and as quantified in sections 
IV.C.2 and IV.D.2, many funds already maintain daily and weekly 
liquidity levels close to the newly adopted minimums. Moreover, the 
current rising rate environment may incentivize

[[Page 51505]]

affected money market funds to increase their daily and weekly 
liquidity and decrease the overall fund maturity, to take advantage of 
the increase in yields. To the degree that many affected funds may 
already be in compliance with the new thresholds, the benefits of these 
alternative compliance periods relative to the final rule may be 
limited. For instance, weighted average daily liquid asset level of 
affected funds is currently above 50%, with weighted average weekly 
liquid asset level currently above 60% of a fund's portfolio, well 
above the thresholds imposed by the final rule.\803\
---------------------------------------------------------------------------

    \802\ See, e.g., ICI Comment Letter; State Street Comment 
Letter.
    \803\ See Money Market Fund Statistics Form N-MFP Data, 
available at https://www.sec.gov/files/mmf-statistics-2023-03.pdf.
---------------------------------------------------------------------------

    Third, the Commission could have adopted alternative compliance 
dates for the mandatory and discretionary liquidity fee requirements. 
Under the final rule, affected funds will have to comply with the 
mandatory liquidity framework within 12 months after the effective 
date, and the discretionary liquidity framework within 6 months of that 
date. The Commission considered several related alternatives. For 
example, the final rule could have included a 2-year compliance period 
for the mandatory liquidity fee framework, as recommended by commenters 
for the proposed swing pricing requirement.\804\ As another 
alternative, the final rule could have included a 1-year compliance 
period for the discretionary liquidity framework. Similarly, the final 
rule could have included the same 2-year or 1-year compliance period 
for both the mandatory and the discretionary liquidity frameworks. 
These alternatives would provide affected money market funds with 
additional time to adapt their operations and systems, coordinate with 
intermediaries and third party vendors, and implement the required 
policies and procedures. Notably, unlike the swing pricing framework, 
affected funds may already be familiar with liquidity fees due to their 
baseline ability to impose liquidity fees when the fund's weekly liquid 
assets fall below 30% under the current rules and the current 
requirement to impose a default liquidity fee when a fund's weekly 
liquid assets fall below 10% unless the board determines such a fee is 
not in the fund's best interests. Thus, many funds and their 
intermediaries may be positioned to more efficiently comply with the 
amended liquidity fee framework compared to the proposed swing pricing 
requirements. Importantly, such alternatives would delay the 
implementation of liquidity fees as an anti-dilution tool and reduce 
the amount of dilution recaptured by funds benefitting non-redeeming 
investors until the compliance date, relative to the final rule.
---------------------------------------------------------------------------

    \804\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter; 
Invesco Comment Letter; State Street Comment Letter; Bancorp Comment 
Letter; Federated Hermes Comment Letter I; Capital Group Comment 
Letter; CCMR Comment Letter.
---------------------------------------------------------------------------

    Fourth, the Commission has considered alternative effective dates 
for the disclosure requirements in the final rule. For example, the 
final rule could have included a 12 month implementation period for any 
new and revised reporting requirements as suggested by some commenters 
in response to the proposal.\805\ As another alternative, the final 
rule could have included an 18 or 24 month implementation period for 
all reporting and disclosure requirements as suggested by other 
commenters.\806\ Similar to the above alternatives regarding longer 
compliance periods for the liquidity fee framework, such alternatives 
could reduce costs and provide greater flexibility to affected money 
market funds in complying with the final amendments. However, as 
discussed in section II.H, the final rule removes several of the 
proposed reporting requirements that are likely to be among the most 
burdensome for affected funds, including the proposed requirements 
about lot-level reporting and disaggregated reporting for repurchase 
agreements in Form N-MFP and Form PF. Such modifications to the final 
amendments may reduce compliance burdens on filers relative to the 
proposal. While the final disclosure and reporting requirements will 
still pose cost increases on affected funds, as estimated in section V 
(PRA), the Commission continues to believe that the final disclosure 
and reporting amendments will result in important benefits for 
transparency to investors and Commission oversight. As discussed in 
section II.H, we believe that the implementation period for amendments 
to disclosures in the final rule provides adequate time for affected 
funds and advisers to compile and review the information that must be 
disclosed. The Commission also could have adopted alternative filing 
periods for various forms. For example, the Commission could have 
extended the filing period for Form N-MFP to 7, 8, or 10 business days 
after the end of each month instead of the current 5 business day 
filing period. Such alternatives would increase the amount of time 
affected funds have to review and verify reported data and information, 
which can reduce the risk of error in the submitted data and 
information to the Commission. Importantly, as discussed in section II, 
the final rule will remove some of the most data intensive reporting 
requirements of lot-level reporting and disaggregated reporting of 
repurchase agreements, which may reduce these benefits of the 
alternatives relative to the final rule. Moreover, such alternatives 
would increase filing delays and reduce the timeliness of information 
available to investors and to the Commission. These effects may be 
particularly acute in times of market stress, when there may be greater 
investor scrutiny of money market funds and their liquidity risk.
---------------------------------------------------------------------------

    \805\ See, e.g., ICI Comment Letter; Invesco Comment Letter; 
State Street Comment Letter.
    \806\ See T. Rowe Comment Letter.
---------------------------------------------------------------------------

E. Effects on Efficiency, Competition, and Capital Formation

    The final amendments are intended to reduce run risk, mitigate the 
liquidity externalities transacting investors impose on non-transacting 
investors, and enhance the resilience of money market funds, which may 
serve to protect money market fund investors. To the degree that the 
final amendments would increase the resilience of money market funds, 
they may also enhance the availability of wholesale funding liquidity 
to market participants and increase their ability to raise capital, 
particularly during severe market stress, facilitating capital 
formation. In addition, the final amendments may reduce the probability 
that runs would result in future government interventions in securities 
markets, inform investors about liquidity risks of their money market 
fund investments, and enhance the ability of investors to optimize 
their portfolio allocations, contributing to greater informational and 
allocative efficiency.
    The final amendments may enhance the efficiency of liquidity 
provision. Specifically, money market funds and issuers of short-term 
debt that money market funds hold benefit from perceived government 
backstops and the safety and soundness of the financial system. When 
the liquidity of underlying assets in money market fund portfolios is 
impaired, investors benefit from selling money market fund shares 
before or instead of selling assets that funds hold. Thus, in times of 
market stress, liquidity demand may be directed to money market funds 
even though the relative cost of liquidity in money market funds may be 
greater, resulting in inefficient provision of liquidity. While the 
final amendments would not result in money market funds fully 
internalizing the costs of investing

[[Page 51506]]

in illiquid assets, to the degree that the final amendments would 
reduce the need for future implicit government backstops in times of 
stress, the final amendments may result in more efficient provision of 
liquidity.
    Moreover, the final liquidity fee framework may enhance allocative 
efficiency. To the degree that some institutional investors may not be 
aware of the dilution risk of affected money market funds, the 
liquidity fee requirement may increase investor awareness of such 
risks. As discussed above, the liquidity fee requirement could cause 
some investors to move their assets to government money market funds to 
avoid the possibility of paying liquidity costs of redemptions. 
Government money market funds may be a better match for these 
investors' preferences, however, in that government money market funds 
face lower liquidity costs and these investors may be unwilling to bear 
any liquidity costs. In addition, the liquidity fee framework may also 
attract new investors, such as investors that tend to redeem 
infrequently, into prime and tax-exempt money market funds. Moreover, 
this aspect of the final rule may dampen spillovers of run risk from 
money market funds to other vehicles and markets in times of stress.
    The final disclosure requirements are expected to enhance 
informational efficiency. To the degree that some investors may 
currently be uninformed about liquidity risks of money market fund 
investments, the liquidity fee and disclosure requirements may increase 
transparency about liquidity costs transacting investors impose on 
remaining fund investors and liquidity risks in money market funds. 
While many investors may use money market funds as cash equivalents, 
money market funds use capital subject to daily or intraday redemptions 
to invest in portfolios that may include less liquid assets. This gives 
rise to liquidity risk and liquidity externalities between transacting 
and non-transacting investors, as discussed throughout the release. The 
possibility that a fund may charge a liquidity fee as a result of net 
redemptions, as well as the final disclosure requirements may help 
inform investors about the liquidity risks inherent in money market 
funds and liquidity costs of redemptions, particularly during times of 
stress. To the degree that greater transparency about liquidity risk of 
money market funds may lead some risk averse investors to use other 
instruments, such as banking products, in lieu of money market funds 
for cash management, allocative efficiency may increase.
    The final amendments may have three groups of competitive effects. 
First, amendments to liquidity requirements may affect competition 
among prime money market funds. As discussed in detail in section 
IV.C.2, many affected funds already have liquidity levels that would 
meet or exceed the final minimum daily and weekly liquid asset 
thresholds. However, other funds would have to rebalance their 
portfolios to come into compliance with the final amendments, which may 
reduce the yields they are able to offer investors. The final 
amendments may, thus improve the competitive standing of funds that 
currently have higher levels of daily and weekly liquidity relative to 
funds that currently do not and may, thus, be able to offer higher 
yields to investors.
    Second, the final amendments may influence the competitive standing 
of prime money market funds relative to government money market funds. 
The elimination of redemption gates and removal of the link between 
weekly liquid assets and liquidity fees may reduce the risk of runs on 
prime money market funds and may protect the value of investments of 
non-transacting shareholders. However, the final amendment's liquidity 
fee framework may increase the variability of prime money market funds 
returns, while higher liquidity requirements may reduce the yields they 
are able to offer to investors. This may reduce their attractiveness to 
investors and may result in a greater reallocation of capital from 
prime to government funds, bank deposit accounts, and other types of 
liquid vehicles.
    Third, due to economies of scale, costs of the final amendments may 
be more easily borne by larger money market fund families and their 
service providers.\807\ To the degree that such costs may be 
significant for some money market fund families, this may contribute to 
consolidation in the money market fund industry and reduce the number 
of intermediaries offering non-government money market funds to 
investors. Some or all of the costs of the final amendments may also be 
passed along to fund investors in the form of higher expense ratios or 
reduced availability of certain fund offerings. However, as discussed 
throughout this release, the final amendments have been tailored to 
reduce compliance costs, while preserving the benefits to investors, 
funds, and securities markets, which may partly mitigate these effects.
---------------------------------------------------------------------------

    \807\ See, e.g., Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    The final amendment's increases to the minimum liquidity thresholds 
may reduce access to and increase costs of raising capital for some 
issuers of short-term debt, thereby potentially negatively affecting 
capital formation. Moreover, to the degree that raising liquidity 
thresholds may reduce money market fund yields and to the extent that 
liquidity fees may increase uncertainty about investors' redemption 
costs, the final amendments may reduce the viability of prime money 
market funds as an asset class. This reallocation may be efficient to 
the extent that government money market funds or banking products, if 
insured and if such insurance is correctly priced, may be more suitable 
for cash management by liquidity risk averse investors. Moreover, 
banking entities insured by the Federal Deposit Insurance Corporation 
(FDIC) pay deposit insurance assessments, whereas money market funds do 
not internalize any portion of government interventions or 
externalities they impose on other investors in the same asset 
classes.\808\
---------------------------------------------------------------------------

    \808\ If some of the funds flow out of the money market fund 
sector and into the banking sector, and if potential future stresses 
in the banking sector require government intervention, this could, 
under some circumstances, increase the magnitude of such 
intervention. See, e.g., Federated Hermes Comment Letter I. However, 
flows between the banking and money market fund sectors may be 
highly sensitive to, among others, the spread between money market 
fund and bank rates. In addition, during the recent stresses in the 
banking sector in 2023, funds flowed out of certain banks and into 
certain money market funds, pointing to a trend to diversify 
portfolios across asset classes, as discussed in further detail in 
section IV.B.1.b.
---------------------------------------------------------------------------

    Nevertheless, potential decreases in the size of the prime money 
market fund sector may have adverse follow-on effects on capital 
formation and the availability of wholesale funding liquidity to 
issuers and institutions seeking to arbitrage mispricings across 
markets. Issuers may respond to such changes by shifting their 
commercial paper and certificate of deposit issuance toward longer 
maturity instruments, which may reduce their exposure to rollover risk.
    These aspects of the final amendments may be borne 
disproportionately by global or foreign banking organizations that rely 
on money market funds for dollar funding. Specifically, some research 
has explored the effects of outflows from prime money market funds into 
government money market funds around the 2014 money market fund reforms 
on business models and lending activities of foreign banking 
organizations in the U.S. To the degree that the final amendments would 
result in further outflows from prime money market funds, banking 
organizations reliant on unsecured funding from money market funds may

[[Page 51507]]

reduce arbitrage positions and investments in illiquid assets, rather 
than reducing lending.\809\ However, reduced wholesale dollar funding 
from money market funds may also lead to a reduction in capital 
formation through dollar lending by affected banks, which may reduce 
the dollar borrowing ability of firms reliant on affected banks.\810\
---------------------------------------------------------------------------

    \809\ See, e.g., Alyssa Anderson et al., Arbitrage Capital of 
Global Banks (Finance and Economics Discussion Series 2021-032. 
Washington: Board of Governors of the Federal Reserve System, May 
2021), available at https://doi.org/10.17016/FEDS.2021.032. See also 
Thomas Flanagan, Funding Stability and Bank Liquidity (Working 
Paper, Mar. 2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3555346 (retrieved from SSRN Elsevier 
database).
    \810\ See, e.g., Victoria Ivashina, et al., Dollar Funding and 
the Lending Behavior of Global Banks, 130 Q.J. Econ. 1241, 1241-1281 
(2015).
---------------------------------------------------------------------------

    The final amendments related to the methods of calculation of 
weighted average maturity and weighted average life may increase 
consistency and comparability of disclosures by money market funds in 
data reported to the Commission and provided on fund websites. These 
amendments, therefore, may reduce informational asymmetries between 
funds and fund investors about interest rate and liquidity risk 
exposures across fund portfolios. To the degree that consistency and 
comparability of WAM and WAL information may inform investors and may 
influence their capital allocation decisions, the final amendments may 
improve allocative efficiency. The final amendments related to the 
calculation of WAM and WAL are not expected to affect competition and 
capital formation.
    The final amendments related to Form PF reporting requirements for 
large liquidity fund advisers may enhance the Commission's and FSOC's 
oversight, which may promote better functioning and more stable short-
term funding markets and may, thus, lead to increases in efficiency of 
such markets and may facilitate capital formation in large liquidity 
funds. The additional, more granular, and timely data collected on the 
amended Form PF about large liquidity fund advisers may help reduce 
uncertainty about risks in the U.S. financial system and inform and 
frame regulatory responses to future market events and policymaking. It 
may also help develop regulatory tools and mechanisms that could 
potentially be used to make future systemic crisis episodes less likely 
to occur and less costly and damaging when they do occur. In addition, 
these amendments may improve the efficiency and effectiveness of the 
Commission's and FSOC's oversight of large liquidity fund advisers by 
enabling them to manage and analyze information related to the risks 
posed by large liquidity funds more quickly, more efficiently, and more 
consistently. Form PF amendments for large liquidity fund advisers are 
not expected to have significant effects on competition.

V. Paperwork Reduction Act

A. Introduction

    Certain provisions of the final amendments to rule 2a-7 and Forms 
N-1A, N-CR, N-MFP, and PF contain ``collection of information'' 
requirements within the meaning of the PRA.\811\ The Commission 
published a request for comment on changes to these collection of 
information requirements in the Proposing Release and the Form PF 
Proposing Release and submitted these requirements to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA.\812\ The titles for the existing collections of information are: 
(1) ``Rule 2a-7 under the Investment Company Act of 1940, Money market 
funds'' (OMB Control No. 3235-0268); (2) ``Form N-1A under the 
Securities Act of 1933 and under the Investment Company Act of 1940, 
registration statement of open-end management investment companies'' 
(OMB Control No. 3235-0307); (3) ``Rule 30b1-8 under the Investment 
Company Act of 1940, Current report for money market funds and Form N-
CR, Current report, money market fund material events'' (OMB Control 
No. 3235-0705); (4) ``Rule 30b1-7 under the Investment Company Act of 
1940, Monthly report for money market funds and Form N-MFP, Monthly 
schedule of portfolio holdings of money market funds'' (OMB Control No. 
3235-0657); (5) ``Form PF and Rule 204(b)-1'' (OMB Control Number 3235-
0679); and (6) ``Rule 31a-2: Records to be preserved by registered 
investment companies, certain majority-owned subsidiaries thereof, and 
other persons having transactions with registered investment 
companies'' (OMB Control No. 3235-0179).\813\ An agency may not conduct 
or sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \811\ 44 U.S.C. 3501 through 3521.
    \812\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \813\ For the Commission's notice requesting comment on changes 
to the collection of information requirements in Form PF, see Form 
PF Proposing Release, supra note 14.
---------------------------------------------------------------------------

B. Rule 2a-7

    The final amendments to rule 2a-7 create new collection of 
information requirements and modify or remove existing requirements. 
These final amendments include: (1) removing the provisions that link 
liquidity thresholds and board determinations regarding potential 
imposition of redemption gates and liquidity fees, and related changes 
to website disclosure requirements; (2) new provisions that require 
institutional prime and institutional tax-exempt money market funds to 
adopt a liquidity fee framework and allow non-government money market 
funds to apply discretionary liquidity fees, and the associated board 
review, approved guidelines, and ongoing oversight; (3) new provisions 
requiring a money market fund to identify in its written stress testing 
procedures the minimum liquidity levels for stress testing; and (4) new 
provisions that permit a stable NAV fund to engage in share 
cancellation in a negative interest rate environment and the associated 
board determination and investor disclosure requirements.
    The respondents to these collections of information will be money 
market funds. We estimate that there are 294 money market funds subject 
to rule 2a-7, although the new collections of information would each 
apply to certain subsets of money market funds, as reflected in the 
below table.\814\ The new collections of information are mandatory for 
the identified types of money market funds that rely on rule 2a-7, 
except that the collection related to use of share cancellation will be 
necessary only for those funds seeking to use share cancellation 
instead of converting to a floating NAV. The final amendments are 
designed to enable Commission staff in its examinations of money market 
funds to determine compliance with the rule. To the extent the 
Commission receives confidential information pursuant to the 
collections of information, such information will be kept confidential, 
subject to the provisions of applicable law.\815\
---------------------------------------------------------------------------

    \814\ Based on Form N-MFP filings, there were 294 money market 
funds as of Mar. 2023.
    \815\ See, e.g., 5 U.S.C. 552. Exemption 4 of the Freedom of 
Information Act provides an exemption for trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential. Exemption 8 of the Freedom of 
Information Act provides an exemption for matters that are contained 
in or related to examination, operating, or condition reports 
prepared by, or on behalf of, or for the use of an agency 
responsible for the regulation or supervision of financial 
institutions.
---------------------------------------------------------------------------

    In our most recent PRA submission for rule 2a-7, we estimated the 
annual aggregate compliance burden to comply

[[Page 51508]]

with the collection of information requirement of rule 2a-7 is 293,516 
burden hours with an internal cost burden of $73,612,364 and an 
external cost burden estimate of $52,300,000.\816\
---------------------------------------------------------------------------

    \816\ The most recent rule 2a-7 PRA submission was approved in 
2022 (OMB Control No. 3235-0268). This includes a correction of a 
typographical error regarding the currently approved external cost 
estimate, which is reflected as $73,612,364 but should have been 
$52,300,000 as shown in the supporting statement. The estimates in 
the Proposing Release were based on earlier approved estimates 
(337,328 hours and $38,100,454 external cost burden), and these 
earlier approved estimates are reflected in the ``Proposed 
Estimates'' section of Table 15.
---------------------------------------------------------------------------

    While the Commission did not receive any comments specifically 
addressing the estimated PRA burdens in the Proposing Release 
associated with the amendments to rule 2a-7, it did receive comments 
suggesting that implementation of some of the elements of the proposed 
amendments, including the associated collections of information, may be 
more burdensome than the Commission estimated at proposal.\817\ 
However, several of the revisions made to the final amendments help 
alleviate many of the burdens commenters discussed in relation to the 
proposal, including for instance, burdens related to the proposed swing 
pricing requirements. We have adjusted the proposal's estimated annual 
burden hours and total time costs to reflect changes from the proposal, 
changes in the number of money market funds, and updated wage rates.
---------------------------------------------------------------------------

    \817\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Western Asset Comment Letter.
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the amendments to rule 2a-7.

[[Page 51509]]

[GRAPHIC] [TIFF OMITTED] TR03AU23.041


[[Page 51510]]


[GRAPHIC] [TIFF OMITTED] TR03AU23.042


[[Page 51511]]



C. Form N-MFP

    The final amendments to Form N-MFP include additional data 
collection and certain technical improvements that will assist our 
monitoring and analysis of money market funds. We are adopting 
amendments to: (1) increase the frequency of certain data points from 
weekly to daily; (2) collect new information about securities that have 
been disposed of before maturity; (3) collect new information about the 
composition and concentration of money market funds' shareholders; (4) 
collect new information about the use of liquidity fees and share 
cancellation; and (5) collect additional information about repurchase 
agreement transactions, as well as certain other information about the 
fund's portfolio securities. We are also adopting amendments to improve 
identifying information about the fund, including changes to better 
identify different categories of government money market funds, changes 
to identify privately offered funds that are used for internal cash 
management purposes, and amendments to provide the name and other 
identifying information for the registrant, series, and class. The 
final amendments to Form N-MFP also include several changes to clarify 
current instructions or items. In a change from the proposal, we are 
not adopting amendments to require funds to report lot-level 
information about portfolio securities (e.g., the acquisition date for 
each security) or report disaggregated information about securities 
subject to repurchase agreements in all circumstances, among other 
changes.
    The information collection requirements on Form N-MFP are designed 
to improve the availability of information about money market funds and 
assist the Commission in analyzing the portfolio holdings of money 
market funds, and thereby augment our understanding of the risk 
characteristics of individual money market funds and money market funds 
as a group, as well as industry trends. The final amendments enhance 
our oversight of money market funds and our ability to monitor and 
respond to market events. Preparing a report on Form N-MFP is mandatory 
for money market funds, and responses to the information collections 
will not be kept confidential.
    The respondents to these collections of information will be money 
market funds. The Commission estimates there are 294 money market funds 
that report information on Form N-MFP although certain components of 
the proposed new collections of information would apply to certain 
subsets of money market funds, as reflected in the below table. We 
estimate that 35% of money market funds (or 103 money market funds) 
license a software solution and file reports on Form N-MFP in house. We 
estimate that the remaining 65% of money market funds (or 191 money 
market funds) retain the services of a third party to provide data 
aggregation and validation services as part of the preparation and 
filing of reports on Form N-MFP on the fund's behalf. We understand 
that the required data in the final amendments to Form N-MFP generally 
are already maintained by money market funds pursuant to other 
regulatory requirements or in the ordinary course of business. 
Accordingly, for the purposes of our analysis, we do not believe that 
the final amendments add significant burden hours for filers of Form N-
MFP.
    In our most recent PRA submission for Form N-MFP, we estimated the 
annual aggregate compliance burden to comply with the collection of 
information requirement of Form N-MFP is 44,263 burden hours with an 
internal cost burden of $14,385,475 and an external cost burden 
estimate of $2,613,300.\818\
---------------------------------------------------------------------------

    \818\ This estimate is based on the last time the PRA submission 
for the rule's information collection was approved in 2022 (OMB 
Control No. 3235-0657). The estimates in the Proposing Release were 
based on earlier approved estimates (64,667 hours and $3,179,700 
external cost burden), and these earlier approved estimates are 
reflected in the ``Proposed Estimates'' section of Table 16.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that the proposed amendments 
would require a money market fund to spend up to an additional 9 burden 
hours complying with the proposed amendments.\819\ The Commission did 
not receive public comment regarding the PRA estimates for Form N-MFP 
in the Proposing Release. We did, however, receive comments suggesting 
that lot-level reporting and reporting disaggregated information about 
securities subject to repurchase agreements when the securities are 
issued by the same issuer would be burdensome.\820\ After considering 
comments, we are not adopting those proposed requirements. We are 
revising our PRA estimates for the final amendments to reflect the 
changes from the proposed amendments, and updated data and wage rates.
---------------------------------------------------------------------------

    \819\ As reflected in Table 16, certain components of the 
proposed amendments would apply to certain subsets of money market 
funds and therefore, the estimated additional annual hour burdens of 
the full scope of the proposed new collections of information would 
apply to the subject fund.
    \820\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
BlackRock Comment Letter; CCMR Comment Letter; Federated Hermes 
Comment Letter I.
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the amendments to Form N-MFP.

[[Page 51512]]

[GRAPHIC] [TIFF OMITTED] TR03AU23.043

D. Form N-CR

    The amendments to Form N-CR will require a fund to file a report 
publicly when its investments are more than 50% below the minimum 
weekly liquid asset or daily liquid asset requirements. The amendments 
also 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 we believe other 
disclosure about the imposition of liquidity fees is more appropriate 
than Form N-CR disclosure under the final

[[Page 51513]]

rule's amended liquidity fee framework. In addition, the final 
amendments will require money market funds to file Form N-CR reports in 
a custom XML data language. The information collection requirements are 
designed to assist Commission staff in its oversight of money market 
funds and its ability to respond to market events. We estimate that 
there are 294 money market funds subject to Form N-CR reporting 
requirements, but a fund is required to file a report on Form N-CR only 
when a reportable event occurs.\821\ Compliance with the disclosure 
requirements of Form N-CR is mandatory for money market funds, and the 
responses to the disclosure requirements will not be kept confidential.
---------------------------------------------------------------------------

    \821\ Based on Form N-MFP filings, there were 294 money market 
funds as of Mar. 2023.
---------------------------------------------------------------------------

    In our most recent PRA submission for Form N-CR, we estimated that 
we would receive, in the aggregate, an average of 6 reports filed on 
Form N-CR per year. We also estimated the annual aggregate compliance 
burden to comply with the collection of information requirement of Form 
N-CR is 51 burden hours with an internal cost burden of $19,839, and an 
external cost burden estimate of $6,111.\822\
---------------------------------------------------------------------------

    \822\ The most recent Form N-CR PRA submission was approved in 
2021 (OMB Control No. 3235-0705).
---------------------------------------------------------------------------

    The Commission did not receive public comment regarding the PRA 
estimates for Form N-CR in the Proposing Release. We have adjusted the 
proposal's estimated annual burden hours and total time costs, however, 
to reflect updated data and wage rates.
    Our most recent PRA submission for Form N-CR based the burden 
estimates on the number of Form N-CR reports filed between 2018 and 
2020, and no funds filed reports related to liquidity fees or 
suspensions of redemptions during that period (or at any other time). 
As a result, we do not believe that removing the items from Form N-CR 
related to liquidity fees and suspensions of redemptions would affect 
the current burden estimates.
    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the amendments to Form N-CR.

[[Page 51514]]

[GRAPHIC] [TIFF OMITTED] TR03AU23.044


[[Page 51515]]



E. Form N-1A

    The final amendments to Form N-1A modify the narrative risk 
disclosure that money market funds must provide in their summary 
prospectuses. The modifications affect all types of money market funds 
and include changes pertaining to liquidity fees and suspensions of 
redemptions that are more likely to affect prime and tax-exempt money 
market funds. Further, the amendments streamline the information a fund 
will be required to disclose in its SAI about any liquidity fees 
imposed during the prior 10 years and removes SAI disclosure related to 
the suspension of redemptions. We estimate that streamlining the 
required SAI disclosure will not affect the current estimated burdens 
of Form N-1A because while we are reducing the amount of information a 
fund must report when it has imposed a liquidity fee, the mandatory 
liquidity fee requirement in the final rule will likely result in 
institutional funds imposing liquidity fees more frequently than under 
the current rule. Compliance with the disclosure requirements of Form 
N-1A is mandatory for money market funds, and the responses to the 
disclosure requirements will not be kept confidential.
    The purpose of the information collection requirements on Form N-1A 
is to meet the filing and disclosure requirements of the Securities Act 
and the Investment Company Act and to enable funds to provide investors 
with information necessary to evaluate an investment in the fund. The 
final amendments to Form N-1A are designed to provide investors with 
information about a fund's use of liquidity fees, which investors can 
use to inform their investment decisions.
    The respondents to these collections of information will be money 
market funds. The Commission estimates there are 294 money market funds 
that are subject to Form N-1A, although aspects of the new collections 
of information related to liquidity fees and the removal of temporary 
suspensions of redemptions generally will only apply to prime and tax-
exempt money market funds. The Commission estimates there are 111 prime 
and tax-exempt money market funds.
    In our most recent PRA submission for Form N-1A, we estimated the 
annual aggregate burden to comply with the collection of information 
requirement of Form N-1A is 1,672,077 burden hours with an internal 
cost burden of $474,392,078, and an external cost burden estimate of 
$132,940,008.\823\
---------------------------------------------------------------------------

    \823\ The most recent Form N-1A PRA submission was approved in 
2019 (OMB Control No. 3235-0307).
---------------------------------------------------------------------------

    The Commission did not receive public comment regarding the PRA 
estimates for Form N-1A in the Proposing Release. We have adjusted the 
proposal's estimated annual burden hours and internal time costs, 
however, to reflect changes in the final rule (e.g., the removal of the 
proposed swing pricing requirement, which means affected money market 
funds will not be required to provide swing pricing disclosure) and 
updated wage rates and data.
    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the amendments to Form N-1A.

[[Page 51516]]

[GRAPHIC] [TIFF OMITTED] TR03AU23.045


F. Form PF

    The final amendments to Form PF revise existing reporting 
requirements for large liquidity fund advisers. Large liquidity fund 
advisers generally include any adviser managing a liquidity fund and 
having at least $1 billion in combined regulatory assets under 
management attributable to liquidity funds and registered money market 
funds as of the end of any month in the prior fiscal quarter.\824\
---------------------------------------------------------------------------

    \824\ See Instruction 3 to Form PF.
---------------------------------------------------------------------------

    The final amendments are designed to provide the Commission and 
FSOC with a more complete picture of the short-term financing markets 
in which liquidity funds invest and, in turn, enhance the Commission's 
and FSOC's ability to assess the potential market and systemic risks 
presented by liquidity funds' activities and facilitate our oversight 
of those markets and their participants. The final amendments will 
update reporting requirements in section 3 of Form PF, which relates to 
reporting requirements for large liquidity fund advisers. Therefore, 
the final amendments will affect large liquidity fund advisers and the 
estimated collection of information burdens below are limited to this 
affected group of Form PF filers. The

[[Page 51517]]

revised collection of information is mandatory for large liquidity fund 
advisers.
    Responses to the information collection will be kept confidential 
to the extent permitted by law.\825\ Form PF elicits non-public 
information about private funds and their trading strategies, the 
public disclosure of which could adversely affect the funds and their 
investors. The SEC does not intend to make public Form PF information 
that is identifiable to any particular adviser or private fund, 
although the SEC may use Form PF information in an enforcement action 
and to assess potential systemic risk.\826\ SEC staff issues certain 
publications designed to inform the public of the private funds 
industry, all of which use only aggregated or masked information to 
avoid potentially disclosing any proprietary information.\827\ The 
Advisers Act precludes the SEC from being compelled to reveal Form PF 
information except (1) to Congress, upon an agreement of 
confidentiality; (2) to comply with a request for information from any 
other Federal department or agency or self-regulatory organization for 
purposes within the scope of its jurisdiction; or (3) to comply with an 
order of a court of the United States in an action brought by the 
United States or the SEC.\828\ Any department, agency, or self-
regulatory organization that receives Form PF information must maintain 
its confidentiality consistent with the level of confidentiality 
established for the SEC.\829\ The Advisers Act requires the SEC to make 
Form PF information available to FSOC.\830\ For advisers that are also 
commodity pool operators or commodity trading advisers, filing Form PF 
through the Form PF filing system is filing with both the SEC and 
Commodity Futures Trading Commission (CFTC).\831\ Therefore, the SEC 
makes Form PF information available to FSOC and the CFTC, pursuant to 
Advisers Act section 204(b), making the information subject to the 
confidentiality protections applicable to information required to be 
filed under that section. Before sharing any Form PF information, the 
SEC requires that any such department, agency, or self-regulatory 
organization represent to the SEC that it has in place controls 
designed to ensure the use and handling of Form PF information in a 
manner consistent with the protections required by the Advisers Act. 
The SEC has instituted procedures to protect the confidentiality of 
Form PF information in a manner consistent with the protections 
required in the Advisers Act.\832\
---------------------------------------------------------------------------

    \825\ See 5 CFR 1320.5(d)(2)(vii) and (viii).
    \826\ See 15 U.S.C. 80b-10(c).
    \827\ See, e.g., Private Funds Statistics, issued by staff of 
the SEC Division of Investment Management's Analytics Office, which 
we have used in this PRA as a data source, available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
    \828\ See 15 U.S.C. 80b-4(b)(8).
    \829\ See 15 U.S.C. 80b-4(b)(9).
    \830\ See 15 U.S.C. 80b-4(b)(7).
    \831\ See 2011 Form PF Adopting Release, supra note 494.
    \832\ See 5 CFR 1320.5(d)(2)(viii).
---------------------------------------------------------------------------

    In our most recent PRA submission for Form PF, we estimated the 
annual aggregate burden to comply with the collection of information 
requirement of Form PF is 409,768 burden hours and an external cost 
burden estimate of $3,628,850.\833\
---------------------------------------------------------------------------

    \833\ The most recent Form PF PRA submission was approved in 
2021 (OMB Control No. 3235-0679).
---------------------------------------------------------------------------

    We did not receive public comment regarding the estimated burdens 
of the proposed amendments to section 3 of Form PF, which is the only 
section affected by the final amendments. However, in the broader 
context of the Commission's proposed amendments to Form PF, we received 
general comments indicating that we underestimated the burdens to 
implement the proposed amendments to the form.\834\ We are not 
adjusting our estimates in response to these comments because it is 
unclear that these commenters were referring to the proposed amendments 
to section 3 and, moreover, we are not adopting certain proposed 
reporting requirements, such as required lot-level reporting and 
disaggregated reporting for securities subject to repurchase agreements 
in all circumstances, which may reduce the burden for filers. We have 
adjusted the proposal's estimated annual burden hours and total time 
costs to reflect updated wage rates and data.
---------------------------------------------------------------------------

    \834\ See, e.g., Alternative Investment Management Association 
Limited and the Alternative Credit Council Comment Letter (Mar. 21, 
2022) on File No. S7-0122; Investment Adviser Association Comment 
Letter (Mar. 21, 2022) on File No. S7-01-22; Form PF Proposing 
Release, supra note 14. The comment letters on Form PF Proposing 
Release (File No. S7-01-22) are available at: https://www.sec.gov/comments/s7-01-22/s70122.htm.
---------------------------------------------------------------------------

    The tables below summarize our PRA initial and ongoing annual 
burden estimates associated with the amendments to Form PF.

                  Table 19--Annual Hour Burden Proposed and Final Estimates for Initial Filings
----------------------------------------------------------------------------------------------------------------
                                          Number of
                                        respondents =                             Hours per      Aggregate hours
            Respondent \1\                aggregate     Hours per                 response      amortized over 3
                                          number of      response             amortized over 3      years \4\
                                        responses \2\                             years \3\
----------------------------------------------------------------------------------------------------------------
Large Liquidity Fund Advisers:
    Proposed Estimate................           \5\ 1          202    / 3 =                 67                67
    Final Estimate...................           \6\ 1          202    / 3 =                 67                67
    Previously Approved..............               2          200  ........               588             1,176
    Change...........................             (1)            2  ........             (521)           (1,109)
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ We expect that the hourly burden will be most significant for the initial report because the adviser will
  need to familiarize itself with the new reporting form and may need to configure its systems in order to
  efficiently gather the required information. In addition, we expect that some large liquidity fund advisers
  will find it efficient to automate some portion of the reporting process, which will increase the burden of
  the initial filing but reduce the burden of subsequent filings.
\2\ This concerns the initial filing; therefore, we estimate one response per respondent. The proposed and final
  changes are due to using updated data to estimate the number of advisers.
\3\ We amortize the initial time burden over three years because we believe that most of the burden would be
  incurred in the initial filing. We use a different methodology to calculate the estimate than the methodology
  staff used for the previously approved burdens. We believe the previously approved burdens for initial filings
  inflated the estimates by using a methodology that included subsequent filings for the next two years, which,
  for quarterly filers, included 11 subsequent filings. For the requested burden, we calculate the initial
  filing, as amortized over the next three years, by including only the hours related to the initial filing, not
  any subsequent filings. This approach is designed to more accurately estimate the initial burden, as amortized
  over three years. Changes are due to using the revised methodology, and changes to section 3 of Form PF.
\4\ (Number of responses) x (hours per response amortized over three years) = aggregate hours amortized over
  three years. Changes are due to (1) using updated data to estimate the number of advisers and (2) the new
  methodology to estimate the hours per response, amortized over three years.
\5\ In the case of the proposed estimates, Private Funds Statistics show 23 large liquidity fund advisers filed
  Form PF in the fourth quarter of 2020. Based on filing data from 2016 through 2020, an average of 1.5 percent
  of them did not file for the previous due date. (23 x 0.015 = 0.345 advisers, rounded up to 1 adviser.)
\6\ In the case of the final estimates, Private Funds Statistics show 21 large liquidity fund advisers filed
  Form PF in the third quarter of 2022. Based on filing data from 2017 through 2021, an average of 1.5 percent
  of them did not file during the prior year. (21 x 0.015 = 0.32 advisers, rounded up to 1 adviser.)


[[Page 51518]]


                                 Table 20--Annual Hour Burden Proposed and Final Estimates for Ongoing Quarterly Filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Number of                 Number of
                          Respondent \1\                             respondents                responses              Hours per              Aggregate
                                                                    (advisers) \2\                 \3\                  response                hours
--------------------------------------------------------------------------------------------------------------------------------------------------------
Large Liquidity Fund Advisers:
    Proposed Estimate............................................           \4\ 22        x              4        x            71        =         6,248
    Final Estimate...............................................           \5\ 20        x              4        x            71        =         5,680
    Previously Approved..........................................               20        x              4        x            70        =         5,600
    Change.......................................................                0  ........             0  ........            1  ........           80
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ We estimate that after an adviser files its initial report, it will incur significantly lower costs to file ongoing quarterly reports, because much
  of the work for the initial report is non-recurring and likely created system configuration and reporting efficiencies.
\2\ Changes to the number of respondents are due to using updated data to estimate the number of advisers.
\3\ Large liquidity fund advisers file quarterly.
\4\ In the case of the proposed estimates, Private Funds Statistics show 23 large liquidity fund advisers filed Form PF in the fourth quarter of 2020.
  We estimated that one of them filed an initial filing, as discussed in Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings.
  (23 total large liquidity fund advisers--1 adviser who made an initial filing = 22 advisers who make ongoing filings.)
\5\ In the case of the final estimates, Private Funds Statistics show 21 large liquidity fund advisers filed Form PF in the third quarter of 2022. We
  estimated that one of them filed an initial filing, as discussed in Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings. (21
  total large liquidity fund advisers--1 adviser who made an initial filing = 20 advisers who make ongoing filings.)


                                      Table 21--Proposed and Final Annual Monetized Time Burden of Initial Filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                              Aggregate
                                                                                              Per response             Aggregate              monetized
                                                                     Per response               amortized              number of             time burden
                          Respondent \1\                                 \2\                  over 3 years             responses              amortized
                                                                                                   \3\                    \4\                   over 3
                                                                                                                                                years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Large Liquidity Fund Advisers:
    Proposed Estimate............................................      \5\ $64,893    / 3 =        $21,631        x             1        =       $21,631
    Final Estimate...............................................       \6\ 73,391    / 3 =         24,644        x    1 response        =        24,644
    Previously Approved..........................................           63,460  ........  ............        x             2        =       126,920
    Change.......................................................            9,931  ........  ............  ........          (1)  ........    (102,276)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ We expect that the monetized time burden will be most significant for the initial report, for the same reasons discussed in Table 19: Annual Hour
  Burden Proposed and Final Estimates for Initial Filings. Accordingly, we anticipate that the initial report will require more attention from senior
  personnel, including compliance managers and senior risk management specialists, than will ongoing annual and quarterly filings. Changes are due to
  using (1) updated hours per response estimates, as discussed in Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings, (2)
  updated aggregate number of responses, as discussed in Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings, and (3) updated
  wage estimates. Changes to the aggregate monetized time burden, amortized over three years, also are due to amortizing the monetized time burden,
  which the previously approved estimates did not calculate, as discussed below.
\2\ For the hours per response in each calculation, see Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings.
\3\ We amortize the monetized time burden for initial filings over three years, as we do with other initial burdens in this PRA, because we believe that
  most of the burden would be incurred in the initial filing. The previously approved burden estimates did not calculate this.
\4\ See Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings.
\5\ In the case of the proposed estimates, for large liquidity fund advisers, we estimated that for the initial report, of a total estimated burden of
  202 hours, approximately 60 percent would most likely be performed by compliance professionals and approximately 40 percent would most likely be
  performed by programmers working on system configuration and reporting automation (that is approximately 121 hours for compliance professionals and 81
  hours for programmers). Of the work performed by compliance professionals, we anticipated that it would be performed equally by a compliance manager
  at a cost of $316 per hour and a senior risk management specialist at a cost of $365 per hour. Of the work performed by programmers, we anticipated
  that it would be performed equally by a senior programmer at a cost of $339 per hour and a programmer analyst at a cost of $246 per hour. (($316 per
  hour x 0.5) + ($365 per hour x 0.5)) x 121 hours = $41,200.50. (($339 per hour x 0.5) + ($246 per hour x 0.5)) x 81 hours = $23,692.50. $41,200.50 +
  $23,692.50 = $64,893.
\6\ In the case of the final estimates, for large liquidity fund advisers, we estimate that for the initial report, of a total estimated burden of 202
  hours, approximately 60 percent will most likely be performed by compliance professionals and approximately 40 percent will most likely be performed
  by programmers working on system configuration and reporting automation (that is approximately 121 hours for compliance professionals and 81 hours for
  programmers). Of the work performed by compliance professionals, we anticipate that it will be performed equally by a compliance manager at a cost of
  $360 per hour and a senior risk management specialist at a cost of $416 per hour. Of the work performed by programmers, we anticipate that it will be
  performed equally by a senior programmer at a cost of $386 per hour and a programmer analyst at a cost of $280 per hour. (($360 per hour x 0.5) +
  ($416 per hour x 0.5)) x 121 hours = $46,948. (($386 per hour x 0.5) + ($280 per hour x 0.5)) x 81 hours = $26,973. $46,958 + $26,973 = $73,931.


             Table 22--Proposed and Final Annual Monetized Time Burden of Ongoing Quarterly Filings
----------------------------------------------------------------------------------------------------------------
                                                                           Aggregate                 Aggregate
               Respondent \1\                  Per response                number of              monetized time
                                                    \2\                    responses                  burden
----------------------------------------------------------------------------------------------------------------
Large Liquidity Fund Advisers:
    Proposed Estimate.......................     \3\ $20,022        x           \4\ 88        =       $1,761,936
    Final Estimate..........................      \5\ 22,791        x           \6\ 80        =        1,823,280
    Previously Approved.....................       29,216.25        x     80 responses        =        2,337,300
    Change \7\..............................      (6,425.25)        0        (514,020)
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ We expect that the monetized time burden will be less costly for ongoing quarterly reports than for initial
  reports, for the same reasons discussed in Table 20: Annual Hour Burden Proposed and Final Estimates for
  Ongoing Quarterly Filings. Accordingly, we anticipate that senior personnel will bear less of the reporting
  burden than they would for the initial report. Changes are due to using (1) updated wage estimates, (2)
  updated hours per response estimates, as discussed in Table 20: Annual Hour Burden Proposed and Final
  Estimates for Quarterly Filings, and (2) updated aggregate number of responses. Changes to estimates
  concerning large liquidity fund advisers primarily appear to be due to correcting a calculation error, as
  discussed below.
\2\ For the proposed estimates, we estimated that quarterly reports would be completed equally by (1) a
  compliance manager at a cost of $316 per hour, (2) a senior compliance examiner at a cost of $243, (3) a
  senior risk management specialist at a cost of $365 per hour, and (4) a risk management specialist at a cost
  of $203 an hour. ($316 x 0.25 = $79) + ($243 x 0.25 = $60.75) + ($365 x 0.25 = $91.25) + ($203 x 0.25 =
  $50.75) = $281.75, rounded to $282 per hour. For the final estimates, we estimate that quarterly reports would
  be completed equally by (1) a compliance manager at a cost of $360 per hour, (2) a senior compliance examiner
  at a cost of $276, (3) a senior risk management specialist at a cost of $416 per hour, and (4) a risk
  management specialist at a cost of $232 an hour. ($360 x 0.25 = $90) + ($276 x 0.25 = $69) + ($416 x 0.25 =
  $104) + ($232 x 0.25 = $58) = $321. To calculate the cost per response for each respondent, we used the hours
  per response from Table 20: Annual Hour Burden Proposed and Final Estimates for Quarterly Filings.
\3\ In the case of the proposed estimates, cost per response for large liquidity fund advisers: $282 per hour x
  71 hours per response = $20,022 per response.
\4\ In the case of the proposed estimates, 22 large liquidity fund advisers x 4 responses annually = 88
  aggregate responses.
\5\ In the case of the final estimates, cost per response for large liquidity fund advisers: $321 per hour x 71
  hours per response = $22,791 per response.
\6\ In the case of the final estimates, 20 large liquidity fund advisers x 4 responses annually = 80 aggregate
  responses.

[[Page 51519]]

 
\7\ The previously approved estimates appear to have mistakenly used a different amount of hours per response
  (105 hours), rather than the actual estimate for large liquidity fund advisers (which was 70 hours per
  response), causing the monetized time burden to be inflated in error. Therefore, the extent of these changes
  are primarily due to using the correct hours per response, which we now estimate as 71 hours, as discussed in
  Table 20: Annual Hour Burden Proposed and Final Estimates for Quarterly Filings. Correcting for the error in
  the previously approved estimates would result in a prior estimate of approximately $19,460 per quarterly
  filing ($278 per hour x 70 hours per response = $19,460) and a change of approximately $3,331 per quarterly
  filing associated with the final amendments ($22,791--$19,460 = $3,331).


                                        Table 23--Proposed and Final Annual External Cost Burden for Ongoing Quarterly Filings as Well as Initial Filings
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                         Aggregate
                                                                                                                                  External                                external
                                                                                  Filing                    External              cost of                                 cost of       Total
                                                           Number of             fee per           Total    cost of               initial            Number of            initial     aggregate
                    Respondent \1\                       responses per            filing           filing   initial                filing             initial              filing      external
                                                         respondent \2\            \3\              fees     filing              amortized          filings \6\          amortized     cost \8\
                                                                                                              \4\                  over 3                                  over 3
                                                                                                                                 years \5\                               years \7\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Large Liquidity Fund Advisers
    Proposed Estimate.................................                4     x        $150     =      $600    $50,000    / 3 =       $16,667     x             1     =       $16,667  \9\ $30,467
    Final Estimate....................................                4     x         150     =       600     50,000    / 3 =        16,667     x             1     =        16,667  \10\ 29,267
    Previously Approved...............................                4     x         150     =       600     50,000                            x             2     =       100,000      113,200
    Change............................................                0                 0               0          0                                        (1)            (83,333)     (83,933)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ We estimate that advisers would incur the cost of filing fees for each filing. For initial filings, advisers may incur costs to modify existing systems or deploy new systems to support
  Form PF reporting, acquire or use hardware to perform computations, or otherwise process data required on Form PF.
\2\ Large liquidity fund advisers file quarterly.
\3\ The SEC established Form PF filing fees in a separate order. Since 2011, filing fees have been and continue to be $150 per quarterly filing. See Order Approving Filing Fees for Exempt
  Reporting Advisers and Private Fund Advisers, Advisers Act Release No. 3305 (Oct. 24, 2011) [76 FR 67004 (Oct. 28, 2011)].
\4\ In the previous PRA submission for the rules, staff estimated that the external cost burden for initial filings would range from $0 to $50,000 per adviser. This range reflected the fact
  that the cost to any adviser may depend on how many funds or the types of funds it manages, the state of its existing systems, the complexity of its business, the frequency of Form PF
  filings, the deadlines for completion, and the amount of information the adviser must disclose on Form PF. We continue to estimate that the same cost range would apply.
\5\ We amortize the external cost burden of initial filings over three years, as we do with other initial burdens in this PRA, because we believe that most of the burden would be incurred in
  the initial filing. The previously approved burden estimates did not calculate this.
\6\ See Table 19: Annual Hour Burden Proposed and Final Estimates for Initial Filings.
\7\ Changes to the aggregate external cost of initial filings, amortized over three years are due to (1) using updated data and (2) amortizing the external cost of initial filings over three
  years, which the previously approved PRA did not calculate.
\8\ Changes to the total aggregate external cost are due to (1) using updated data and (2) amortizing the external cost of initial filings over three years, which the previously approved PRA
  did not calculate.
\9\ In the case of the proposed estimates, Private Funds Statistics show 23 large liquidity fund advisers filed Form PF in the fourth quarter of 2020. (23 large liquidity fund advisers x $600
  total filing fees) + $16,667 total external costs of initial filings, amortized over three years = $30,467 aggregate cost.
\10\ In the case of the final estimates, Private Funds Statistics show 21 large liquidity fund advisers filed Form PF in the third quarter of 2022. (21 large liquidity fund advisers x $600
  total filing fees) + $16,667 total external costs of initial filings, amortized over three years = $29,267 aggregate cost.

G. Rule 31a-2

    Section 31(a)(1) of the Investment Company Act requires registered 
investment companies and certain others to maintain and preserve 
records as prescribed by Commission rules. Rule 31a-1 specifies the 
books and records that must be maintained. Rule 31a-2 specifies the 
time periods that entities must retain certain books and records, 
including those required to be maintained under rule 31a-1. The 
retention of records, as required by rule 31a-2, is necessary to ensure 
access by Commission staff to material business and financial 
information about funds and certain related entities. This information 
will be used by the Commission staff to evaluate fund compliance with 
the Investment Company Act and regulations thereunder. We are adopting 
amendments to require money market funds to retain books and records 
containing schedules evidencing and supporting each computation of a 
liquidity fee pursuant to rule 2a-7(c)(2). The respondents to these 
collections of information will be money market funds. The new 
collections of information are mandatory for the money market funds 
subject to rule 2a-7(c)(2). We estimate that there are 111 money market 
funds that will be subject to the collection of information 
requirements related to liquidity fees. To the extent the Commission 
receives confidential information pursuant to the collections of 
information, such information will be kept confidential, subject to the 
provisions of applicable law.\835\
---------------------------------------------------------------------------

    \835\ See supra note 815.
---------------------------------------------------------------------------

    In our most recent Paperwork Reduction Act submission for rule 31a-
2, we estimated the annual aggregate compliance burden to comply with 
the collection of information requirement of rule 31a-2 is 606,982 
burden hours with an internal cost burden of $52,200,418 and an 
external cost burden estimate of $111,751,674.\836\
---------------------------------------------------------------------------

    \836\ The most recent rule 31a-2 PRA submission was approved in 
2022 (OMB Control No. 3235-0179). The estimates in the Proposing 
Release were based on earlier approved estimates (696,464 hours and 
$115,372,485 external cost burden), and these earlier approved 
estimates are reflected in the ``Proposed Estimates'' section of 
Table 24.
---------------------------------------------------------------------------

    The Commission did not receive public comment regarding the PRA 
estimates for the proposed amendments to rule 31a-2 in the Proposing 
Release. We have adjusted the proposal's estimated annual burden hours 
and internal time costs, however, to reflect changes in the final rule 
(e.g., providing for mandatory and discretionary liquidity fees under 
rule 2a-7, instead of the proposed swing pricing requirement, which 
applied to a smaller subset of funds) and updated wage rates and data.
    The table below summarizes our PRA annual burden estimates 
associated with the proposed amendments to rule 31a-2.

[[Page 51520]]

[GRAPHIC] [TIFF OMITTED] TR03AU23.046

VI. Regulatory Flexibility Act Certification

    The Commission certified, pursuant to section 605(b) of the 
Regulatory Flexibility Act of 1980 (``RFA'') \837\ that, if adopted, 
the proposed amendments to rule 2a-7, rule 31a-2, Forms N-MFP and N-CR 
under the Investment Company Act, Form N-1A under the Investment 
Company Act and the Securities Act, and Form PF under the Investment 
Advisers Act would not have a significant economic impact on a 
substantial number of small entities. The Commission included these 
certifications in section V of the Proposing Release and section V of 
the Form PF Proposing Release and requested comment on the 
certifications. Commenters did not respond to the requests for comment 
regarding the Commission's certifications, although some commenters 
discussed the potential effects of the proposed amendments on smaller 
money market funds or smaller private funds.\838\ While we considered 
these comments, we continue to believe that the economic impact of the 
amendments on small entities will not be significant. With respect to 
the amendments for money market funds, only one money market fund is a 
small entity based on information in filings submitted to the 
Commission.\839\ As for the Form PF amendments affecting large 
liquidity fund advisers, by definition no small entity on its own would 
be a large liquidity fund adviser subject to reporting on Form PF.\840\ 
Large liquidity fund advisers that are required to report on Form PF 
are SEC-registered

[[Page 51521]]

investment advisers that advise at least one liquidity fund and manage, 
collectively with their related persons, at least $1 billion in 
combined liquidity fund and money market fund assets.\841\
---------------------------------------------------------------------------

    \837\ 5 U.S.C. 605(b).
    \838\ See, e.g., Federated Hermes Comment Letter I; IDC Comment 
Letter; see also 2023 Form PF Adopting Release, supra note 494, at 
n.432.
    \839\ Under the Investment Company Act, an investment company is 
considered a small business or small organization if it, together 
with other investment companies in the same group of related 
investment companies, has net assets of $50 million or less as of 
the end of its most recent fiscal year. See 17 CFR 270.0-10.
    \840\ For purposes of the Advisers Act and the RFA, an 
investment adviser generally is a small entity if it: (1) has assets 
under management having a total value of less than $25 million; (2) 
did not have total assets of $5 million or more on the last day of 
the most recent fiscal year; and (3) does not control, is not 
controlled by, and is not under common control with another 
investment adviser that has assets under management of $25 million 
or more, or any person (other than a natural person) that had total 
assets of $5 million or more on the last day of its most recent 
fiscal year. See 17 CFR 275.0-7.
    \841\ See Instruction 3 to Form PF.
---------------------------------------------------------------------------

    While the final amendments include some modifications to the 
Commission's proposal, as discussed more fully above in section II, we 
believe these modifications generally will reduce the burdens of the 
proposal. Moreover, we do not believe that these modifications alter 
the basis upon which the certifications in the Proposing Release and 
the Form PF Proposing Release were made. Accordingly, we certify that 
the final rule will not have a significant economic impact on a 
substantial number of small entities.

Statutory Authority

    The Commission is adopting the rule and form amendments contained 
in this document under the authority set forth in the Investment 
Company Act, particularly sections 6, 8, 22, 24, 30, 31, and 38 thereof 
[15 U.S.C. 80a-1 et seq.]; the Advisers Act, particularly sections 
204(b) and 211(e) thereof [15 U.S.C. 80b-1 et seq.]; the Securities 
Act, particularly sections 5, 6, 7, 10, and 19 thereof [15 U.S.C. 77a 
et seq.]; and the Exchange Act, particularly section 23 thereof [15 
U.S.C. 78a et seq.].

List of Subjects in 17 CFR Parts 270, 274, and 279

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Rule and Form Amendments

    For the reasons set out in the preamble, title 17, chapter II of 
the Code of Federal Regulations is amended as follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
1. The general authority citation for part 270 continues to read as 
follows:

    Authority:  15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless 
otherwise noted.
* * * * *

0
2. Amend Sec.  270.2a-7 by:
0
a. Revising paragraph (c)(2);
0
b. Adding paragraph (c)(3);
0
c. Revising paragraphs (d)(1)(ii) and (iii) and (d)(4)(ii) and (iii);
0
d. Adding paragraph (f)(4);
0
e. In paragraphs (g)(8)(i) introductory text and (g)(8)(ii)(A), 
removing the words ``have invested at least ten percent of its total 
assets in weekly liquid assets'' and adding, in their place, the words 
``maintain the sufficient liquidity levels identified in its written 
procedures''; and
0
f. Revising paragraphs (h)(10) introductory text, (h)(10)(i)(B)(2), 
(h)(10)(iii), (iv), and (v), and (j).
    The revisions and additions read as follows:


Sec.  270.2a-7  Money market funds.

* * * * *
    (c) * * *
    (2) Liquidity fees. Except as provided in paragraph (c)(2)(v) of 
this section, and notwithstanding section 27(i) of the Act (15 U.S.C. 
80a-27(i)) and Sec.  270.22c-1:
    (i) Discretionary liquidity fees. If the fund's board of directors, 
including a majority of the directors who are not interested persons of 
the fund, determines that a liquidity fee is in the best interests of 
the fund, the fund must institute a liquidity fee (not to exceed two 
percent of the value of the shares redeemed).
    (A) Duration and application of discretionary liquidity fee. Once 
imposed, a discretionary liquidity fee must be applied to all shares 
redeemed and must remain in effect until the money market fund's board 
of directors, including a majority of the directors who are not 
interested persons of the fund, determines that imposing such liquidity 
fee is no longer in the best interests of the fund.
    (B) Government money market funds. The requirements of this 
paragraph (c)(2)(i) do not apply to a government money market fund. A 
government money market fund may, however, choose to rely on the 
ability to impose discretionary liquidity fees consistent with the 
requirements of this paragraph (c)(2)(i) and any other requirements 
that apply to liquidity fees (e.g., Item 4(b)(1)(ii) of Form N-1A 
(Sec.  274.11A of this chapter)).
    (ii) Determination, duration, and application of mandatory 
liquidity fees. If a money market fund that is not a government money 
market fund or a retail money market fund has total daily net 
redemptions that exceed five percent of the fund's net assets, or such 
smaller amount of net redemptions as the board determines, based on 
flow information available within a reasonable period after the last 
computation of the fund's net asset value on that day, the fund must 
apply a liquidity fee to all shares that are redeemed at a price 
computed on that day, in an amount determined pursuant to paragraph 
(c)(2)(iii) of this section.
    (iii) Amount of mandatory liquidity fees. The amount of a mandatory 
liquidity fee must be determined pursuant to paragraph (c)(2)(iii)(A) 
of this section, except as provided in paragraph (c)(2)(iii)(C) or (D) 
of this section.
    (A) Good faith estimate of liquidity costs. The fee amount must be 
based on a good faith estimate, supported by data, of the costs the 
fund would incur if it sold a pro rata amount of each security in its 
portfolio to satisfy the amount of net redemptions, including:
    (1) Spread costs, such that the fund is valuing each security at 
its bid price, and any other charges, fees, and taxes associated with 
portfolio security sales; and
    (2) Market impacts for each security. The fund must determine 
market impacts by first establishing a market impact factor for each 
security, which is a good faith estimate of the percentage change in 
the value of the security if it were sold, per dollar of the amount of 
the security that would be sold if the fund sold a pro rata amount of 
each security in its portfolio to satisfy the amount of net redemptions 
under current market conditions and, second, multiplying the market 
impact factor by the dollar amount of the security that would be sold. 
A fund may assume a market impact of zero for its daily liquid assets 
and weekly liquid assets.
    (B) Cost estimates by type of security. For purposes of paragraph 
(c)(2)(iii)(A) of this section, a fund may estimate costs and market 
impacts for each type of security with the same or substantially 
similar characteristics and apply those estimates to all securities of 
that type rather than analyze each security separately.
    (C) Default fee amount. If the costs of selling a pro rata amount 
of each portfolio security cannot be estimated in good faith and 
supported by data, the liquidity fee amount is one percent of the value 
of shares redeemed.
    (D) De minimis exception. A fund is not required to apply a 
liquidity fee if the amount of the fee determined under paragraph 
(c)(2)(iii)(A) of this section is less than 0.01% of the value of the 
shares redeemed.
    (iv) Variable contracts. Notwithstanding section 27(i) of the Act 
(15 U.S.C. 80a-27(i)), a variable insurance contract issued by a 
registered separate account funding variable insurance contracts or the 
sponsoring insurance company of such separate account may apply a 
liquidity fee pursuant to paragraph (c)(2) of this section to contract 
owners who allocate all or a portion of their contract value to a 
subaccount of the separate account that is either a money market fund 
or

[[Page 51522]]

that invests all of its assets in shares of a money market fund.
    (v) Master feeder funds. Any money market fund (``feeder fund'') 
that owns, pursuant to section 12(d)(1)(E) of the Act (15 U.S.C. 80a-
12(d)(1)(E)), shares of another money market fund (``master fund'') may 
not impose liquidity fees under paragraph (c)(2) of this section, 
provided however, that if a master fund, in which the feeder fund 
invests, imposes a liquidity fee pursuant to paragraph (c)(2) of this 
section, then the feeder fund shall pass through to its investors the 
fee on the same terms and conditions as imposed by the master fund.
    (3) Share cancellation. A money market fund may not reduce the 
number of its shares outstanding to seek to maintain a stable net asset 
value per share or stable price per share unless:
    (i) The money market fund calculates its share price pursuant to 
paragraph (c)(1)(i) of this section;
    (ii) The fund has negative gross yield as a result of negative 
interest rates (``negative interest rate event'');
    (iii) The 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; and
    (iv) Timely, concise, and plain English disclosure is provided to 
investors about the fund's share cancellation practices and their 
effects on investors, including:
    (A) 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
    (B) 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.
    (d) * * *
    (1) * * *
    (ii) Maintain a dollar-weighted average portfolio maturity 
(``WAM'') that exceeds 60 calendar days, with the dollar-weighted 
average based on the percentage of each security's market value in the 
portfolio; or
    (iii) Maintain a dollar-weighted average portfolio maturity that 
exceeds 120 calendar days, determined without reference to the 
exceptions in paragraph (i) of this section regarding interest rate 
readjustments (``WAL'') and with the dollar-weighted average based on 
the percentage of each security's market value in the portfolio.
* * * * *
    (4) * * *
    (ii) Minimum daily liquidity requirement. The money market fund may 
not acquire any security other than a daily liquid asset if, 
immediately after the acquisition, the fund would have invested less 
than twenty-five percent of its total assets in daily liquid assets. 
This provision does not apply to tax exempt funds.
    (iii) Minimum weekly liquidity requirement. The money market fund 
may not acquire any security other than a weekly liquid asset if, 
immediately after the acquisition, the fund would have invested less 
than fifty percent of its total assets in weekly liquid assets.
* * * * *
    (f) * * *
    (4) Notice to the board of directors. (i) The money market fund 
must notify its board of directors within one business day following 
the occurrence of:
    (A) The money market fund investing less than twelve and a half 
percent of its total assets in daily liquid assets; or
    (B) The money market fund investing less than twenty-five percent 
of its total assets in weekly liquid assets.
    (ii) Following an event described in paragraph (f)(4)(i) of this 
section, the money market fund must provide its board of directors with 
a brief description of the facts and circumstances leading to such 
event within four business days after occurrence of the event.
* * * * *
    (h) * * *
    (10) Website disclosure of portfolio holdings and other fund 
information. The money market fund must post prominently on its website 
the following information:
    (i) * * *
    (B) * * *
    (2) Category of investment (indicate the category that identifies 
the instrument from among the following: U.S. Treasury Debt; U.S. 
Government Agency Debt, if categorized as coupon-paying notes; U.S. 
Government Agency Debt, if categorized as no-coupon discount notes; 
Non-U.S. Sovereign, Sub-Sovereign and Supra-National debt; Certificate 
of Deposit; Non-Negotiable Time Deposit; Variable Rate Demand Note; 
Other Municipal Security; Asset Backed Commercial Paper; Other Asset 
Backed Securities; U.S. Treasury Repurchase Agreement, if 
collateralized only by U.S. Treasuries (including Strips) and cash; 
U.S. Government Agency Repurchase Agreement, collateralized only by 
U.S. Government Agency securities, U.S. Treasuries, and cash; Other 
Repurchase Agreement, if any collateral falls outside Treasury, 
Government Agency and cash; Insurance Company Funding Agreement; 
Investment Company; Financial Company Commercial Paper; Non-Financial 
Company Commercial Paper; and Other Instrument. If Other Instrument, 
include a brief description);
* * * * *
    (iii) A schedule, chart, graph, or other depiction showing the 
money market fund's net asset value per share (which the fund must 
calculate based on current market factors before applying the amortized 
cost or penny-rounding method, if used), rounded to the fourth decimal 
place in the case of funds with a $1.0000 share price or an equivalent 
level of accuracy for funds with a different share price (e.g., $10.000 
per share), as of the end of each business day during the preceding six 
months, which must be updated each business day as of the end of the 
preceding business day.
    (iv) A link to a website of the Securities and Exchange Commission 
where a user may obtain the most recent 12 months of publicly available 
information filed by the money market fund pursuant to Sec.  270.30b1-
7.
    (v) For a period of not less than one year, beginning no later than 
the same business day on which the money market fund files an initial 
report on Form N-CR (Sec.  274.222 of this chapter) in response to the 
occurrence of any event specified in Part C of Form N-CR, the same 
information that the money market fund is required to report to the 
Commission on Part C (Items C.1, C.2, C.3, C.4, C.5, C.6, and C.7) of 
Form N-CR concerning such event, along with the following statement: 
``The Fund was required to disclose additional information about this 
event on Form N-CR and to file this form with the Securities and 
Exchange Commission. Any Form N-CR filing submitted by the Fund is 
available on the EDGAR Database on the Securities and Exchange 
Commission's internet site at https://www.sec.gov.''
* * * * *
    (j) Delegation. The money market fund's board of directors may 
delegate to the fund's investment adviser or officers the 
responsibility to make any determination required to be made by the 
board of directors under this section other than the determinations 
required by paragraphs (c)(1) (board findings), (c)(3) (share 
cancellation), (f)(1) (adverse events), (g)(1) and (2) (amortized cost 
and penny rounding procedures), and (g)(8) (stress testing procedures) 
of this section.
    (1) Written guidelines. The board of directors must establish and 
periodically review written guidelines

[[Page 51523]]

(including guidelines for determining whether securities present 
minimal credit risks as required in paragraphs (d)(2) and (g)(3) of 
this section and guidelines for determining the application and size of 
liquidity fees as required in paragraph (c)(2) of this section) and 
procedures under which the delegate makes such determinations.
    (2) Oversight. The board of directors must take any measures 
reasonably necessary (through periodic reviews of fund investments and 
the delegate's procedures in connection with investment decisions, 
periodic review of the delegate's liquidity fee determinations under 
paragraph (c)(2) of this section, and prompt review of the adviser's 
actions in the event of the default of a security or event of 
insolvency with respect to the issuer of the security or any guarantee 
or demand feature to which it is subject that requires notification of 
the Commission under paragraph (f)(2) of this section by reference to 
Form N-CR (Sec.  274.222 of this chapter) to assure that the guidelines 
and procedures are being followed.

0
3. Amend Sec.  270.31a-2 by revising paragraph (a)(2) to read as 
follows:


Sec.  270.31a-2  Records to be preserved by registered investment 
companies, certain majority-owned subsidiaries thereof, and other 
persons having transactions with registered investment companies.

    (a) * * *
    (2) Preserve for a period not less than six years from the end of 
the fiscal year in which any transaction occurred, the first two years 
in an easily accessible place, all books and records required to be 
made pursuant to Sec.  270.31a-1(b)(5) through (12) and all vouchers, 
memoranda, correspondence, checkbooks, bank statements, cancelled 
checks, cash reconciliation, cancelled stock certificates, and all 
schedules evidencing and supporting each computation of net asset value 
of the investment company shares, including schedules evidencing and 
supporting each computation of an adjustment to net asset value of the 
investment company shares based on swing pricing policies and 
procedures established and implemented pursuant to Sec.  270.22c-
1(a)(3), all schedules evidencing and supporting each computation of a 
liquidity fee by a money market fund pursuant to Sec.  270.2a-7(c)(2), 
and other documents required to be maintained by Sec.  270.31a-1(a) and 
not enumerated in Sec.  270.31a-1(b).
* * * * *

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
4. The general authority citation for part 274 continues to read as 
follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and 80a-37 unless 
otherwise noted.
* * * * *

0
5. Amend Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) by:
0
a. Revising Item 4(b)(1)(ii);
0
b. Revising Item 16(g);
0
c. Removing instructions 2 and 3 to Item 16(g)(1); and
0
d. Revising Item 27A(i).

    Note:  Form N-1A is attached as Appendix A to this document. 
Form N-1A does not appear in the Code of Federal Regulations.


0
6. Amend Form N-CSR (referenced in Sec. Sec.  249.331 and 274.128) by:
0
a. Revising the header to the instruction to paragraph (a) and (b) of 
Item 7 to read ``Instructions to paragraphs (a) and (b)'';
0
b. Redesignating the current instruction to Item 7 as Instruction 1; 
and
0
c. Adding Instruction 2 to Item 7.

    Note:  Form N-CSR is attached in Appendix B to this document. 
Form N-CSR does not appear in the Code of Federal Regulations.


0
7. Revise Form N-MFP (referenced in Sec.  274.201).

    Note:  Form N-MFP is attached as Appendix C to this document. 
Form N-MFP does not appear in the Code of Federal Regulations.


0
8. Amend Form N-CR (referenced in Sec.  274.222) by:
0
a. Revising the General Instructions in Sections A, C, D, and F, and 
Parts A and C;
0
b. Removing Parts E, F, and G and replacing them with new Part E; and
0
c. Redesignating Part H to Part F.

    Note:  Form N-CR is attached as Appendix D to this document. 
Form N-CR does not appear in the Code of Federal Regulations.

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 
1940

0
9. The authority citation for part 279 continues to read as follows:

    Authority:  The Investment Advisers Act of 1940, 15 U.S.C. 80b-
1, et seq., Pub. L. 111-203, 124 Stat. 1376.

0
10. Amend Form PF (referenced in Sec.  279.9) by revising section 3 and 
the Glossary of Terms.

    Note:  Form PF is attached as Appendix E to this document. Form 
PF does not appear in the Code of Federal Regulations.


    By the Commission.

    Dated: July 12, 2023.
Vanessa A. Countryman,
Secretary.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendix A--Form N-1A

Form N-1A

* * * * *

Item 4. Risk/Return Summary: Investments, Risks, and Performance

* * * * *
    (b) * * *
    (1) * * *
    (ii)(A) If the Fund is a Money Market Fund that is not a 
government Money Market Fund, as defined in Sec.  270.2a-7(a)(14) or 
a retail Money Market Fund, as defined in Sec.  270.2a-7(a)(21), 
include the following statement:
    You could lose money by investing in the Fund. Because the share 
price of the Fund will fluctuate, when you sell your shares they may 
be worth more or less than what you originally paid for them. The 
Fund may impose a fee upon sale of your shares. The Fund generally 
must impose a fee when net sales of Fund shares exceed certain 
levels. An investment in the Fund is not a bank account and is not 
insured or guaranteed by the Federal Deposit Insurance Corporation 
or any other government agency. The Fund's sponsor is not required 
to reimburse the Fund for losses, and you should not expect that the 
sponsor will provide financial support to the Fund at any time, 
including during periods of market stress.
    (B) If the Fund is a Money Market Fund that is a government 
Money Market Fund, as defined in Sec.  270.2a-7(a)(14), or a retail 
Money Market Fund, as defined in Sec.  270.2a-7(a)(21), and that is 
subject to the requirements of Sec.  270.2a-7(c)(2)(i) of this 
chapter or is not subject to the requirements of Sec.  270.2a-
7(c)(2)(i) pursuant to Sec.  270.2a-7(c)(2)(i)(B) of this chapter, 
but has chosen to rely on the ability to impose liquidity fees 
consistent with the requirements of Sec.  270.2a-7(c)(2)(i), include 
the following statement:
    You could lose money by investing in the Fund. Although the Fund 
seeks to preserve the value of your investment at $1.00 per share, 
it cannot guarantee it will do so. The Fund may impose a fee upon 
sale of your shares. An investment in the Fund is not a bank account 
and is not insured or guaranteed by the Federal Deposit Insurance 
Corporation or any other government agency. The Fund's sponsor is 
not required to reimburse the Fund for losses, and you should not 
expect that the sponsor will provide financial support to the Fund 
at any time, including during periods of market stress.
    (C) If the Fund is a Money Market Fund that is a government 
Money Market Fund, as defined in Sec.  270.2a-7(a)(14), that is not 
subject to the requirements of Sec.  270.2a-

[[Page 51524]]

7(c)(2)(i) of this chapter pursuant to Sec.  270.2a-7(c)(2)(i)(B) of 
this chapter, and that has not chosen to rely on the ability to 
impose liquidity fees consistent with the requirements of Sec.  
270.2a-7(c)(2)(i), include the following statement:
    You could lose money by investing in the Fund. Although the Fund 
seeks to preserve the value of your investment at $1.00 per share, 
it cannot guarantee it will do so. An investment in the Fund is not 
a bank account and is not insured or guaranteed by the Federal 
Deposit Insurance Corporation or any other government agency. The 
Fund's sponsor is not required to reimburse the Fund for losses, and 
you should not expect that the sponsor will provide financial 
support to the Fund at any time, including during periods of market 
stress.
    Instruction. If an affiliated person, promoter, or principal 
underwriter of the Fund, or an affiliated person of such a person, 
has contractually committed to provide financial support to the 
Fund, and the term of the agreement will extend for at least one 
year following the effective date of the Fund's registration 
statement, the statement specified in Item 4(b)(1)(ii)(A), Item 
4(b)(1)(ii)(B), or Item 4(b)(1)(ii)(C) may omit the last sentence 
(``The Fund's sponsor is not required to reimburse the Fund for 
losses, and you should not expect that the sponsor will provide 
financial support to the Fund at any time, including during periods 
of market stress.''). For purposes of this Instruction, the term 
``financial support'' includes any capital contribution, purchase of 
a security from the Fund in reliance on Sec.  270.17a-9, purchase of 
any defaulted or devalued security at par, execution of letter of 
credit or letter of indemnity, capital support agreement (whether or 
not the Fund ultimately received support), performance guarantee, or 
any other similar action reasonably intended to increase or 
stabilize the value or liquidity of the fund's portfolio; however, 
the term ``financial support'' excludes any routine waiver of fees 
or reimbursement of fund expenses, routine inter-fund lending, 
routine inter-fund purchases of fund shares, or any action that 
would qualify as financial support as defined above, that the board 
of directors has otherwise determined not to be reasonably intended 
to increase or stabilize the value or liquidity of the fund's 
portfolio.
* * * * *

Item 16. Description of the Fund and Its Investments and Risks

* * * * *
    (g) Money Market Fund Material Events. If the Fund is a Money 
Market Fund disclose, as applicable, the following events:
    (1) Imposition of Liquidity Fees. During the last 10 years, any 
occasion on which the Fund has imposed a liquidity fee pursuant to 
Sec.  270.2a-7(c)(2).

Instructions

    1. With respect to each such occasion, disclose: the dates the 
Fund imposed a liquidity fee pursuant to Sec.  270.2a-7(c)(2) and 
the size of the liquidity fee imposed on each of those dates.
* * * * *

Item 27A. Annual and Semi-Annual Shareholder Report

* * * * *
    (i) Availability of Additional Information. Provide a brief, 
plain English statement that certain additional Fund information is 
available on [the Fund's] website. Include plain English references 
to, as applicable, the Fund's prospectus, financial information, 
holdings, and proxy voting information, including the information 
described in Instructions 2 and 3 to Item 17(f) of Form N-1A. A Fund 
also may refer to other information available on this website, 
including the information described in Instruction 2 to paragraphs 
(a) and (b) of Item 7 of Form N-CSR, if it reasonably believes that 
shareholders likely would view the information as important.

Instructions

* * * * *
    3. If a Fund (or financial intermediary through which shares of 
the Fund may be purchased or sold) receives a request for the Fund's 
proxy voting record by phone or email, the Fund (or financial 
intermediary) must send the information disclosed in the Fund's most 
recently filed report on Form N-PX in a human-readable format, 
within three business days of receipt of the request, by first-class 
mail or other means designed to ensure equally prompt delivery.
    4. If a Fund has a website, it must make publicly available free 
of charge the information disclosed in the Fund's most recently 
filed report on Form N-PX on or through its website as soon as 
reasonably practicable after filing the report with the Commission. 
The information disclosed in the Fund's most recently filed report 
on Form N-PX must be in a human-readable format and remain available 
on or through the Fund's website for as long as the Fund remains 
subject to the requirements of rule 30b1-4 (17 CFR 270.30b1-4). A 
Fund may satisfy the requirement to provide this information in a 
human-readable format by providing a direct link to the relevant 
HTML-rendered Form N-PX report on EDGAR.
* * * * *

Appendix B--Form N-CSR

FORM N-CSR

* * * * *

Item 7. Financial Statements and Financial Highlights for Open-End 
Management Investment Companies.

* * * * *
    Instructions to paragraphs (a) and (b).
    1. The financial statements and financial highlights filed under 
this Item must be audited and be accompanied by any associated 
accountant's report, as defined in rule 1-02(a) of Regulation S-X 
[17 CFR 210.1-02(a)], except that in the case of a report on this 
Form N-CSR as of the end of a fiscal half-year, the financial 
statements and financial highlights need not be audited.
    2. In the case of a Money Market Fund, Schedule I--Investments 
in securities of unaffiliated issuers [17 CFR 210.12-12B] may be 
omitted from its financial statements, provided that: (a) the Fund 
states in the report that the Fund's complete schedule of 
investments in securities of unaffiliated issuers is available (i) 
without charge, upon request, by calling a specified toll-free 
telephone number; (ii) on the Fund's website, if applicable; and 
(iii) on the Commission's website at http://www.sec.gov; and (b) 
whenever the Fund (or financial intermediary through which shares of 
the Fund may be purchased or sold) receives a request for the Fund's 
schedule of investments in securities of unaffiliated issuers, the 
Fund (or financial intermediary) sends a copy of Schedule I--
Investments in securities of unaffiliated issuers within 3 business 
days of receipt by first-class mail or other means designed to 
ensure equally prompt delivery.
* * * * *

Appendix C--Form N-MFP

BILLING CODE 8011-01-P

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BILLING CODE 8011-01-C

Form N-MFP

Monthly Schedule of Portfolio Holdings of Money Market Funds

    Form N-MFP is to be used by registered open-end management 
investment companies, or series thereof, that are regulated as money 
market funds pursuant to rule 2a-7 under the Investment Company Act of 
1940 (``Act'') (17 CFR 270.2a-7) (``money market funds''), to file 
reports with the Commission pursuant to rule 30b1-7 under the Act (17 
CFR 270.30b1-7). The Commission may use the information provided on 
Form N-MFP in its regulatory, disclosure review, inspection, and 
policymaking roles.

General Instructions

A. Rule as to Use of Form N-MFP

    Form N-MFP is the public reporting form that is to be used for 
monthly reports of money market funds required by section 30(b) of the 
Act and rule 30b1-7 under the Act (17 CFR 270.30b1-7). A money market 
fund must report information about the fund and its portfolio holdings 
as of the last business day or any subsequent calendar day of the 
preceding month. The Form N-MFP must be filed with the Commission no 
later than the fifth business day of each month, but may be filed any 
time beginning on the first business day of the month. Each money 
market fund, or series of a money market fund, is required to file a 
separate form. If the money market fund does not have any classes, the 
fund must provide the information required by Part B for the series. A 
money market fund is not required to respond to an item that is wholly 
inapplicable. If an item requests information that is not applicable 
(for example, a company does not have an LEI), respond N/A.
    A money market fund may file an amendment to a previously filed 
Form N-MFP at any time, including an amendment to correct a mistake or 
error in a previously filed form. A fund that files an amendment to a 
previously filed form must provide information in response to all items 
of Form N-MFP, regardless of why the amendment is filed.

[[Page 51539]]

B. Application of General Rules and Regulations

    The General Rules and Regulations under the Act contain certain 
general requirements that are applicable to reporting on any form under 
the Act. These general requirements should be carefully read and 
observed in the preparation and filing of reports on this form, except 
that any provision in the form or in these instructions shall be 
controlling.

C. Filing of Form N-MFP

    A money market fund must file Form N-MFP in accordance with rule 
232.13 of Regulation S-T. Form N-MFP must be filed electronically using 
the Commission's EDGAR system.

D. Paperwork Reduction Act Information

    A registrant is not required to respond to the collection of 
information contained in Form N-MFP unless the Form displays a 
currently valid Office of Management and Budget (``OMB'') control 
number. Please direct comments concerning the accuracy of the 
information collection burden estimate and any suggestions for reducing 
the burden to the Secretary, Securities and Exchange Commission, 100 F 
Street NE, Washington, DC 20549-1090.
    The OMB has reviewed this collection of information under the 
clearance requirements of 44 U.S.C. 3507.

E. Definitions

    References to sections and rules in this Form N-MFP are to the 
Investment Company Act of 1940 [15 U.S.C. 80a] (the ``Investment 
Company Act''), unless otherwise indicated. Terms used in this Form N-
MFP have the same meaning as in the Investment Company Act or related 
rules, unless otherwise indicated.
    As used in this Form N-MFP, the terms set out below have the 
following meanings:
    ``Cash'' means demand deposits in depository institutions and cash 
holdings in custodial accounts.
    ``Class'' means a class of shares issued by a Multiple Class Fund 
that represents interests in the same portfolio of securities under 
rule 18f-3 [17 CFR 270.18f-3] or under an order exempting the Multiple 
Class Fund from sections 18(f), 18(g), and 18(i) [15 U.S.C. 80a-18(f), 
18(g), and 18(i)].
    ``Fund'' means the Registrant or a separate Series of the 
Registrant. When an item of Form N-MFP specifically applies to a 
Registrant or a Series, those terms will be used.
    ``Government Money Market Fund'' means a money market fund as 
defined in 17 CFR 270.2a-7(a)(14).
    ``LEI'' means, with respect to any company, the ``legal entity 
identifier'' assigned by or on behalf of an internationally recognized 
standards setting body and required for reporting purposes by the U.S. 
Department of the Treasury's Office of Financial Research or a 
financial regulator.
    ``Master-Feeder Fund'' means a two-tiered arrangement in which one 
or more Funds (or registered or unregistered pooled investment 
vehicles) (each a ``Feeder Fund'') holds shares of a single Fund (the 
``Master Fund'') in accordance with section 12(d)(1)(E) [15 U.S.C. 80a-
12(d)(1)(E)].
    ``Money Market Fund'' means a registered open-end management 
investment company, or series thereof, that is regulated as a money 
market fund pursuant to rule 2a-7 (17 CFR 270.2a-7) under the 
Investment Company Act of 1940.
    ``Retail Money Market Fund'' means a money market fund as defined 
in 17 CFR 270.2a-7(a)(21).
    ``RSSD ID'' means the identifier assigned by the National 
Information Center of the Board of Governors of the Federal Reserve 
System, if any.
    ``Securities Act'' means the Securities Act of 1933 [15 U.S.C. 77a-
aa].
    ``Series'' means shares offered by a Registrant that represent 
undivided interests in a portfolio of investments and that are 
preferred over all other series of shares for assets specifically 
allocated to that series in accordance with rule 18f-2(a) [17 CFR 
270.18f-2(a)].
    ``Value'' has the meaning defined in section 2(a)(41) of the Act 
(15 U.S.C. 80a-2(a)(41)).

Appendix D--Form N-CR

Form N-CR

* * * * *

General Instructions

A. Rule as to Use of Form N-CR

    Form N-CR is the public reporting form that is to be used for 
current reports of money market funds required by section 30(b) of 
the Act and rule 30b1-8 under the Act. A money market fund must file 
a report on Form N-CR upon the occurrence of any one or more of the 
events specified in Parts B-F of this form. Unless otherwise 
specified, a report is to be filed within one business day after 
occurrence of the event. A report will be made public immediately 
upon filing. If the event occurs on a Saturday, Sunday, or holiday 
on which the Commission is not open for business, then the report is 
to be filed on the first business day thereafter.
* * * * *

C. Information To Be Included in Report Filed on Form N-CR

    Upon the occurrence of any one or more of the events specified 
in Parts B-F of Form N-CR, a money market fund must file a report on 
Form N-CR that includes information in response to each of the items 
in Part A of the form, as well as each of the items in the 
applicable Parts B-F of the form.

D. Filing of Form N-CR

    A money market fund must file Form N-CR in accordance with rule 
232.13 of Regulation S-T. Reports on Form N-CR must be filed 
electronically using the Commission's Electronic Data Gathering, 
Analysis, and Retrieval (``EDGAR'') system in accordance with 
Regulation S-T. Consult the EDGAR Filer Manual and Appendices for 
EDGAR filing instructions.
* * * * *

F. Definitions

    References to sections and rules in this Form N-CR are to the 
Investment Company Act (15 U.S.C. 80a), unless otherwise indicated. 
Terms used in this Form N-CR have the same meaning as in the 
Investment Company Act or rule 2a-7 under the Investment Company 
Act, unless otherwise indicated.
    In addition, the following definitions apply:
    ``Fund'' means the registrant or a separate series of the 
registrant.
    ``LEI'' means, with respect to any company, the ``legal entity 
identifier'' as assigned by a utility endorsed by the Global LEI 
Regulatory Oversight Committee or accredited by the Global LEI 
Foundation.
    ``Registrant'' means the investment company filing this report 
or on whose behalf the report is filed.
    ``Series'' means shares offered by a Registrant that represent 
undivided interests in a portfolio of investments and that are 
preferred over all other series of shares for assets specifically 
allocated to that series in accordance with rule 18f-2(a) (17 CFR 
270.18f-2(a)).
* * * * *

Part A: General Information

* * * * *
    Item A.2 Name of registrant.
    Item A.3 CIK Number of registrant.
    Item A.4 LEI of registrant.
    Item A.5 Name of series.
    Item A.6 EDGAR Series Identifier.
    Item A.7 LEI of series.
    Item A.8 Securities Act File Number.
    Item A.9 Provide the name, email address, and telephone number 
of the person authorized to receive information and respond to 
questions about this Form N-CR.
* * * * *

Part C: Provision of Financial Support to Fund

* * * * *
    Item C.6 Security supported (if applicable). Disclose the name 
of the issuer, the title of the issue (including coupon or yield, if 
applicable), at least two identifiers,

[[Page 51540]]

if available (e.g., CUSIP, ISIN, CIK, LEI), and the date the fund 
acquired the security.
* * * * *

Part E: Liquidity Threshold Event

    If a fund has invested less than: (i) 25% of its total assets in 
weekly liquid assets or (ii) 12.5% of its total assets in daily 
liquid assets, disclose the following information:
    Item E.1 Initial date on which the fund invested less than 25% 
of its total assets in weekly liquid assets, if applicable.
    Item E.2 Initial date on which the fund invested less than 12.5% 
of its total assets in daily liquid assets, if applicable.
    Item E.3 Percentage of the fund's total assets invested in both 
weekly liquid assets and daily liquid assets as of any dates 
reported in Items E.1 or E.2.
    Item E.4 Brief description of the facts and circumstances 
leading to the fund investing less than 25% of its total assets in 
weekly liquid assets or less than 12.5% of its total assets in daily 
liquid assets, as applicable.
    Instruction. A report responding to Items E.1, E.2, and E.3 is 
to be filed within one business day after occurrence of an event 
contemplated in this Part E. An amended report responding to Item 
E.4 is to be filed within four business days after occurrence of an 
event contemplated in this Part E.

Part F: Optional Disclosure

    If a fund chooses, at its option, to disclose any other events 
or information not otherwise required by this form, it may do so 
under this Item F.1.
    Item F.1 Optional disclosure.
    Instruction. Item F.1 is intended to provide a fund with 
additional flexibility, if it so chooses, to disclose any other 
events or information not otherwise required by this form, or to 
supplement or clarify any of the disclosures required elsewhere in 
this form. Part F does not impose on funds any affirmative 
obligation. A fund may file a report on Form N-CR responding to Part 
F at any time.
* * * * *

Appendix E-Form PF

BILLING CODE 8011-01-P

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[FR Doc. 2023-15124 Filed 8-2-23; 8:45 am]
BILLING CODE 8011-01-C


