Money market reform: What you need to know | Vanguard (2024)

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.

Liquidity fee

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.

Gates

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 fundmayimpose a fee of up to 2% on redemptions if a fund's weekly liquid assets fall below 30% of its total assets.

• A fundmustimpose 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 fundmayimpose 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.