Direct answer: In July 2023, the SEC adopted significant amendments to Rule 2a-7, effective in April and October 2024. The most investor-relevant changes: mandatory liquidity fees replaced the prior discretionary redemption gate/fee framework for institutional prime and institutional municipal money market funds, minimum weekly liquid asset requirements were raised, and certain small retail and government funds gained clearer exemptions. The changes aimed to reduce the risk of fund runs during market stress.
What Changed: Money Market Fund Reforms (2024)
Key Takeaways
- Mandatory liquidity fees (required when weekly liquid assets fall below 30% of total assets) replaced the discretionary gates that were associated with fund runs in 2020; the SEC determined gates increased rather than reduced run risk by signaling distress.
- Institutional prime money market funds must now impose a liquidity fee of 1% (or higher based on dilution, up to 2%) when weekly liquid assets fall below 30% of total assets; the fee applies to all redemptions on days when the threshold is breached.
- Retail prime and retail municipal money market funds have the option (not the requirement) to impose a discretionary liquidity fee of up to 2% when weekly liquid assets fall below 10% of total assets.
- Government money market funds (holding at least 99.5% government securities) are not subject to mandatory liquidity fees and remain the lowest-risk money market option.
- Minimum daily liquid asset requirements increased from 10% to 25% and weekly requirements from 30% to 50% of total assets for prime and municipal funds.
Why the SEC Changed the Framework
The prior framework (2016 reforms) required institutional prime funds to float their NAV (cannot maintain $1.00 stable NAV) and allowed discretionary redemption gates when weekly liquid assets fell below 30%. In March 2020, as COVID-19 caused market stress, institutional prime money market funds experienced significant redemption pressure; the government had to intervene with the Money Market Mutual Fund Liquidity Facility to stabilize the market. SEC analysis found that the threat of gates caused preemptive redemptions, accelerating outflows rather than stopping them, because investors tried to leave before the gate closed. The 2023 reforms eliminated discretionary gates for institutional prime funds and replaced them with liquidity fees.
How the Mandatory Liquidity Fee Works
Under the 2024 reforms, when an institutional prime or institutional municipal fund's weekly liquid assets fall below 30% of total assets, the fund board must impose a fee on all redemptions equal to the greater of 1% or the fee that approximates the dilution cost of the redemption to remaining shareholders (up to 2%). The fee is paid to the fund (not the fund company), compensating remaining shareholders for the liquidity cost of large redemptions during stress. From an investor perspective, this means large redemptions from prime funds during market stress will face a fee; government money market funds have no such requirement.
What This Means for Investors Using Money Market Funds
For most retail investors holding retail prime or government money market funds, the 2024 changes are largely invisible under normal conditions. Government money market funds (by far the most popular for individual investors) are exempt from the new liquidity fee framework. Retail prime funds can apply optional fees only in extreme stress conditions (below 10% weekly liquid assets). The changes are most relevant for institutional investors holding large positions in prime funds who may face fees during periods of market dislocation.
Comparing Government vs. Prime Funds Post-Reform
The yield difference between government and prime money market funds narrowed significantly after the 2010s reforms made prime funds structurally less attractive (floating NAV for institutional, gate risk). The 2024 reforms further reduce the attractiveness of institutional prime funds for investors who require liquidity certainty, because the mandatory fee introduces an uncertainty that government funds do not carry. For investors who need certainty that they can redeem at $1.00 NAV without a fee, government money market funds are the appropriate choice; the modest yield premium of prime funds (typically 0.05% to 0.20%) does not compensate most investors for the liquidity risk.
Frequently Asked Questions
Does the 2024 reform apply to my retail money market fund in my brokerage account?
Most individual investors hold government money market funds (in sweep accounts and as savings alternatives), which are exempt from the mandatory fee provisions. If you are in a retail prime fund, optional discretionary fees can apply only when weekly liquid assets fall below 10%, an extreme stress condition. Check your fund's prospectus for its fund type (government, retail prime, or institutional prime) and the specific provisions that apply.
How does the SEC decide when money market funds are in stress?
The SEC does not intervene in day-to-day money market fund operations; fund boards monitor and report weekly liquid asset ratios. When a fund's weekly liquid assets fall below specified thresholds, the mandatory provisions trigger automatically based on the fund's own accounting, not external regulatory instruction. The EDGAR reporting system receives weekly liquid asset reports from funds, and the SEC can monitor market-wide liquidity conditions.
What happened to money market funds that broke the buck historically?
The Reserve Primary Fund (2008) and one other small fund have broken the buck in recent history. In 2008, the Treasury and Federal Reserve intervened with guarantees and facilities that stabilized the broader market. No retail money market fund has ever broken the buck; the 2008 event was an institutional prime fund. The 2020 stress event did not produce any fund breaking the buck because government intervention occurred rapidly. For government money market funds, the underlying assets (Treasury and agency securities) have not defaulted, making a structural break-the-buck event implausible without a U.S. government default.