Money market funds are a type of mutual fund developed in the 1970s as an option for investors to purchase a pool of securities that generally provided higher returns than interest-bearing bank accounts. They have grown significantly in the ensuing decades.
There are many kinds of money market funds, including ones that invest primarily in government securities, tax-exempt municipal securities, or corporate and bank debt securities. In addition, money market funds are often structured to cater to different types of investors. Some funds are intended for retail investors, while other funds that typically require high minimum investments are intended for institutional investors. The rules governing money market funds vary based on the type of money market fund.
For example, money market funds that primarily invest in a variety of taxable short-term corporate and bank debt securities are generally referred to as prime funds. Government money market funds are defined as money market funds that invest 99.5% or more of their total assets in very liquid investments, namely, cash, government securities, and/or repurchase agreements that are collateralized fully with government securities. Retail money market funds are defined as money market funds that are generally limited to natural persons.
In response to the 2007-2008 financial crisis, the Commission adopted a series of amendments to its rules on money market funds in 2010 that were designed to make money market funds more resilient by reducing the interest rate, credit, and liquidity risks of their portfolios. Although these reforms improved money market fund resiliency, the Commission said at the time that it would continue to consider whether further, more fundamental changes to money market fund regulation might be warranted.
Accordingly, in 2014 the Commission voted to require a floating NAV for prime institutional money market funds and provide non-government money market funds with new tools — liquidity fees and redemption gates — to address runs. Institutional prime money market funds are now required to float their NAV like other mutual funds, but government money market funds and retail money market funds can continue to use special pricing and valuation conventions to try and keep their NAV at a stable $1.00 per share. In addition, all money market funds except government money market funds are allowed, and sometimes required (unless the board determines otherwise), to charge fees on redemptions (liquidity fees) and can even suspend redemptions temporarily (redemption gates) when certain circumstances occur. Government money market funds can voluntarily opt into using these tools when certain circumstances occur, if the ability to do so is disclosed in the fund prospectus.