Friday, February 05, 2021

SEC seeks comment on potential money market fund reform measures

By Brad Rosen, J.D.

The Securities and Exchange Commission is seeking comment on potential reform measures for money market funds, as highlighted in a recent report of the President’s Working Group on Financial Markets (“PWG”). As noted in the agency’s request, public comments on the potential policy measures will help inform consideration of reforms to improve the resilience of money market funds and broader short-term funding markets.

The President’s Working Group Report. As indicated in the SEC’s press release, the PWG studied the effects of the growing economic concerns related to the COVID-19 pandemic in March 2020 on short-term funding markets and, in particular, on money market funds. Moreover, the PWG report provided an overview of prior money market fund reforms in 2010 and 2014, as well as how different types of money market funds had evolved since the 2008 financial crisis.

In reviewing the events of March 2020, the report discussed significant outflows from prime and tax-exempt money market funds that occurred and how these funds experienced, and began to contribute to, general stress in short-term funding markets before the Federal Reserve, with the approval of the Department of the Treasury, established facilities to support short-term funding markets, including money market funds. The PWG report also observed that these events occurred despite prior reform efforts to make money market funds more resilient to credit and liquidity stresses and, as a result, less susceptible to redemption-driven runs.

Vulnerabilities and potential reforms. As a result of the vulnerabilities discovered with respect to money market funds, the PWG report concluded that the events of March 2020 demonstrated that more work is needed to reduce the risk that structural vulnerabilities in prime and tax-exempt money market funds will lead to or exacerbate stresses in short-term funding markets.

The report also identified various reform measures that policy makers could consider to improve the resilience of prime and tax-exempt money market funds and broader short-term funding markets. The report noted that many of these measures could be implemented by the SEC under its existing statutory authority, while others may require coordinated action by multiple agencies or the creation of new private entities.

Leadership weighs in. SEC Acting Chair Allison Herren Lee observed “Money market funds play a significant role in our short-term funding markets, and they are utilized by both large institutions and individual retail investors.” She added, “Comments received will assist the SEC and other relevant financial regulators in further analysis of potential reforms.”

SEC request for comments. The SEC is requesting public comment on the report, including the effectiveness of the previously enacted money market fund reforms and of implementing the potential policy measures described in the report. Commenters also are invited to discuss other topics that are relevant to potential money market fund reforms, including other approaches to reform. The SEC encourages commenters to submit empirical data and other information in support of their comments.

The public comment period will remain open for 60 days following publication of the comment request in the Federal Register.