Money market reform

Learn more about SEC money market reform and institutional investors

Money market reform: Understanding the SEC rules

In 2016, Vanguard made several changes to its money market product lineup in response to new rules adopted by the Securities and Exchange Commission (SEC).

These changes did not significantly affect the management of our money market funds, and Vanguard continues to offer a stable net asset value (NAV) product for all investors. Most of these SEC rules went into effect on October 14, 2016. See the following sections below:


SEC designations

In its most recent rules, the SEC refers to three money market fund classifications: government, retail, and institutional.

SEC money market fund classifications

  Government Retail Institutional
Pricing Stable $1 NAV based on amortized cost Stable $1 NAV based on amortized cost Floating NAV based on market values
Eligibility All investors Limited All investors
Potential fees and gates No Yes Yes
Vanguard money market funds Federal Money Market Fund¹
Prime Money Market Fund² Not publicly available
  Treasury Money Market Fund¹ Municipal Money Market Fund²  
    State tax-exempt money market funds (CA, NJ, NY, and PA)²  

Fees and gates

Liquidity fees* and redemption gates** are separate tools that the SEC has made available to the board of directors of a money market fund to help mitigate the risk of a run on a fund. The SEC provides guidance as to when these tools can be utilized.

If a fund's weekly liquid assets fall below 30% of its total assets, the board may impose a liquidity fee of up to 2% on redemptions. Additionally, the board may suspend redemptions (i.e., impose a gate) for up to 10 business days in a 90-day period.

If weekly liquid assets*** fall below 10% of total assets, nongovernment funds must impose a 1% liquidity fee, unless the board determines it would not be in the fund's best interest.

Vanguard government money market funds, including Vanguard Federal Money Market Fund and Vanguard Treasury Money Market Fund, will not impose liquidity fees or redemption gates.

* A money market fund must impose (unless determined otherwise by its board) a liquidity fee of 1% on all redemptions if the money market fund's weekly liquid assets fall below 10% of total assets; a money market fund's board may impose a liquidity fee of up to 2% on all redemptions if the fund's weekly liquid assets fall below 30% of total assets.

** A money market fund's board may impose a temporary suspension of redemptions (for not more than 10 business days in any 90-day period) if the fund's weekly liquid assets fall below 30% of total assets.

*** Cash, U.S. Treasury securities, and certain other government securities with remaining maturities of 60 days or less, or securities that convert into cash within one week.

The liquidity of Vanguard Money Market Funds

Vanguard money market funds have maintained liquidity levels well above the stated thresholds. Daily and weekly liquidity data can be found for each fund:

We expect the fund to maintain liquidity levels above required thresholds and focus on maintaining liquidity levels above required amounts. Vanguard is prepared to assess fees or implement gates on nongovernment money market funds if it becomes necessary. That said, Vanguard intends to continue managing its money market funds so that we avoid dropping below the liquidity thresholds that could result in a fee or a gate.

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Eligibility for retail money market funds

Below is a summary of the types of investors who are eligible for retail money market funds. Investors not eligible for retail money market funds may invest in a government fund—such as Vanguard Federal Money Market Fund or Vanguard Treasury Money Market Fund—or an institutional fund.

Eligible

  • Participant-directed defined contribution (DC) plans
  • DC plan forfeiture accounts (and other suspense accounts)
  • Managed accounts
  • Section 403(b)(7) custodial accounts
  • Government or tax-exempt plans (section 457 plans)
  • Nonqualified plans

Not eligible

  • Defined benefit plans
  • Endowments and foundations
  • Corporations
  • Vanguard Retirement Savings Trust
  • Donor-advised funds (DAFs)

More about SEC designations

The SEC classifies money market investors as either retail or institutional. Historically, retail investors have behaved differently from institutional investors in a crisis and have been less likely to make large redemptions quickly in response to market events.

As such, the SEC has limited access to retail money market funds to "natural persons." This includes defined contribution plan participants who direct their own plan investments.

Other institutional investors, like defined benefit plans, endowments, foundations, and corporate treasury offices, are no longer eligible to invest in retail money market funds. They remain eligible to invest in government money market funds and floating NAV institutional money market funds.

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Comparing Vanguard options

  Vanguard Prime Money Market Fund Vanguard Federal Money Market Fund Vanguard Treasury Money Market Fund Vanguard Retirement Savings Trust*
Underlying securities High-quality commercial paper, certificates of deposit, bankers' acceptances, short-term securities issued by the U.S. Treasury and agencies of the U.S. government, and repurchase agreements collateralized by such securities Short-term securities issued by the U.S. Treasury and agencies of the U.S. government, and repurchase agreements collateralized by such securities Invests solely in short-term securities issued by the U.S. Treasury Short- to intermediate-term synthetic contracts backed by high-quality-credit fixed income investments issued by traditional insurance companies and banks
Average maturity 41 days 48 days 51 days 3.1 years (duration)
Risk exposure profile • Income
• Interest rate risk
• Manager risk
• Credit risk
• Industry concentration risk
• Income
• Interest rate risk
• Manager risk
• Credit risk
• Income
• Interest rate risk
• Manager risk
• Income
• Interest rate risk
• Event risk
• Credit risk
• Manager risk
SEC fees and gates policy applies Yes No No No
Stable or floating NAV? Stable Stable Stable Stable
Eligible investors Only investors designated as "retail" investors All investors are eligible All investors are eligible Defined contribution plan participants

Source: Vanguard, as of November 15, 2017.
* Vanguard Retirement Savings Trust is not a money market fund and therefore is not subject to the SEC's rules on money market funds.

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Vanguard cash management solutions

SEC money market reform has forced some clients to rethink their short-term investment needs.

Certain institutional clients are no longer eligible to invest in retail money market funds, while the potential imposition of a fee or gate is prompting others to review their options.

The current interest rate environment further complicates the matter, as current yield differences between money market products are minimal.

The classic risk/reward decision

Investors should weigh the yield difference against the implications of potential imposition of fees and gates if fund liquidity falls below certain thresholds. Prime Money Market Fund may impose fee and gate requirements; Federal and Treasury Money Market Funds will not.

Alternatively, defined contribution plan sponsors may consider a stable value fund as an alternative option for their participants.

Ultimately, investors will need to determine the extent to which the possibility of fees and gates is offset by the potential for extra yield.

Short-term fixed income options. After an extended period of low interest rates, many investors moved some portion of their cash allocation into higher-yielding short-term fixed income options.

In doing so, they have taken on additional risk, as these products, by design, have floating NAVs, invest in less liquid securities (relative to money market securities), and have longer durations.

Investors will need to balance this risk with their return expectations and may want to consider a broader set of cash/short-duration products to determine the appropriate product or combination of products to achieve their desired outcomes.

Vanguard short-term fixed income options

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Considerations for institutional investors

In light of the SEC money market rules, institutional investors have a variety of issues to think about.

For certain institutional investors, choice is limited:
Endowments and foundations, defined benefit plans, and corporate treasury managers

These investors are not eligible to invest in retail-designated money market funds. For institutional investors—including endowments, foundations, defined benefit plans, and corporate cash managers—interested in stable NAV money market funds, the options are limited to government money market funds, like Vanguard Federal Money Market Fund and Vanguard Treasury Money Market Fund. Those who desire additional yield from their cash investments may consider floating NAV institutional money market funds or other cash management strategies.

Defined contribution plans

During the process of developing the new rules, the SEC consulted with the U.S. Department of Labor, which confirmed that a money market fund—with the ability to impose fees and gates—is still an appropriate investment option for DC retirement plans.

We believe all plan sponsors would benefit from evaluating their plan's money market options in relation to the following considerations:

  • What role(s) does a cash equivalent investment play in your lineup (investment allocation versus liquidity bucket) for participants?
  • What are your participants' preferences (liquidity or safety versus yield)?
  • How will participants be impacted (in the unlikely event of the application of a temporary fee or gate)?

Money market funds are required to comply with eligibility or fee and gate requirements. As is the case with all plan decisions and policies, plan sponsors will need to evaluate their cash management goals and participant needs, confirm investment selections, and document their process and rationale.

¹ 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 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.

² 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 $1.00 per share, it cannot guarantee it will do so. The fund may impose a fee upon the 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.

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.

Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax. We recommend that you consult a tax advisor about your individual situation.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.

Vanguard Managed Account Program is provided by Vanguard Advisers, Inc., a registered investment advisor.

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OUR CASH/SHORT-DURATION FUND LINEUP

Money market

U.S. short-term fixed income

Stable value