What you need to know about money market reform
What's money market reform?
Money market reform is a set of SEC rule amendments meant to address any potential financial instability that could be caused by money market funds. The amendments took effect on October 14, 2016.
Here are the key elements:
- Establishes 3 categories of money market funds—retail, government, and institutional.
- Restricts who can invest in retail money market funds.
- Continues to seek a stable $1 net asset value (NAV) for retail and government funds, but requires institutional funds to have floating NAVs like other mutual funds.
- Allows certain funds to impose liquidity fees and temporarily suspend withdrawals (known as gates) in certain circumstances.
Securities and Exchange Commission
The agency of the federal government that regulates mutual funds, registered investment advisers, the stock and bond markets, and broker-dealers. The SEC was established by the Securities Exchange Act of 1934.
Net asset value
The price of a fund share. It's calculated by dividing the total assets, minus liabilities, allocated to a specific share class by the number of shares outstanding for that class.
A fee (up to 2%) that may be charged by a money market fund when you sell fund shares. The fee is imposed at the discretion of the fund's board if weekly liquid assets drop below 30%. The fee is intended to help the stability of the fund during times of extreme market duress.
A money market fund's ability to temporarily suspend withdrawals during periods of financial instability for up to 10 business days in a 90-day period if weekly liquid assets drop below 30%.
What's behind the SEC rules
The move for money market fund reform grew out of the 2007–2008 financial crisis.
The Reserve Primary Fund, which invested in Lehman Brothers debt, "broke the buck," meaning its net asset value (NAV) dropped below $1 per share.
This event prompted significant redemptions by institutional money market fund investors, putting the funds under severe stress.
Although retail (individual) activity was less volatile, with purchases and redemptions largely offsetting each other, the SEC felt it had to address concerns that money market funds may contribute to financial instability.
The final amendments to money market rules that were made in 2014 aim to protect shareholders from the impacts that a flood of redemptions could have on money market funds. The amendments are also intended to give fund managers time to respond to requests in a more thoughtful, prudent manner.
Understanding liquidity fees & gates
Liquidity fees and gates are tools to help money market fund managers keep the funds stable during times of extreme market duress. Under the rules:
- A fund may impose a fee of up to 2% on redemptions if a fund's weekly liquid assets fall below 30% of its total assets.
- A fund must impose a 1% fee on redemptions (with the option of imposing a fee of up to 2%) if a fund's weekly liquid assets fall below 10% of its total assets—unless the fund's board determines a fee would not be in the fund's best interest.
- A fund may impose a gate—that is, suspend redemptions—for up to 10 business days in a 90-day period.
The fees and gates rules only apply to retail and institutional funds, although government funds may voluntarily adopt them if the fees and gates are previously disclosed to investors.
The boards of directors of Vanguard's government funds have decided to impose neither fees nor gates.
Money market reform and you
Investors can invest in a federal money market fund, which is a government fund, and/or a tax-exempt municipal money market fund,* which is a retail fund.
- Our government funds (the Cash Reserves Federal Money Market Fund and the Federal Money Market Fund**) seek to maintain a stable $1 NAV. Vanguard Federal Money Market Fund is the only fund that can be used to settle brokerage trades and isn't subject to the liquidity fee or redemption gate requirements.
- Our 3 tax-exempt retail municipal funds* (1 national and 2 state municipal money market funds) seek to maintain a stable $1 NAV.
*The fund is only available to retail investors (natural persons). You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1 per share, it cannot guarantee it will do so. The fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.
footnote**You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.
All investing is subject to risk, including the possible loss of the money you invest.
While U.S. Treasury or government agency securities provide substantial protection against credit risk, they do not protect investors against price changes due to changing interest rates. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.