By R. Jason Howard, J.D.
U.S. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.), Better Markets, and SIFMA have all submitted comments on the SEC's proposed amendments to certain rules that govern money market funds under the Investment Company Act of 1940.
Amendments. According to the SEC’s proposal, the amendments are designed to improve the resilience and transparency of money market funds. Under the proposal, the liquidity fee and redemption gate provisions would be removed from the existing rule, eliminating any incentive for preemptive redemptions from certain money market funds. This, according to the SEC, could encourage funds to more effectively use their existing liquidity buffers in times of market stress. Institutional prime and institutional tax-exempt money market funds would be required to implement swing pricing policies and procedures such that redeeming investors would be required to “bear the liquidity costs of their decisions to redeem.”
The Commission is also proposing that the daily liquid asset and weekly liquid asset minimum liquidity requirements be increased to 25 percent and 50 percent, respectively, to provide a more substantial liquidity buffer in the event of rapid redemptions. Certain reporting requirements on Forms N-MFP and N-CR would be amended to improve the availability of information about money market funds, and certain conforming changes would also be made to Form N-1A to reflect the proposed changes. In addition, the Commission is proposing rule amendments “to address how money market funds with stable net asset values should handle a negative interest rate environment,” with other amendments specifying how the weighted average maturity and weighted average life of funds must be calculated.
Comments. U.S. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.), Better Markets, and SIFMA all weighed in on the proposed amendments, submitting their comments on or before the April 11, 2022, deadline.
For his part, Senator Toomey’s comment letter espoused support for removal of the arbitrary threshold linking 30 percent weekly liquid assets to the imposition of fees and gates but stated that the “proposed requirements for swing pricing, enhanced liquidity risk, and adoption of policies for negative interest rates are not justified,” suggesting instead that all types of money market mutual funds should be allowed to adopt measures that best ensure their resiliency, including a stable net asset value.
On the matter, Senator Toomey wrote: “money market mutual funds are a valuable investment option for retail investors, an essential cash management tool for institutional investors, and a vital source of funding for governments and corporations. The U.S. economy faces sustained high inflation and will see the money supply decrease to combat this inflation. Given these conditions, the need for a product that allows investors to obtain a higher return on investment while facilitating the provision of much-needed capital to municipalities and corporations is as vital as ever.”
Better Markets also commented on the proposed amendments, stating that the reforms, although improvements, continue the SEC’s “piecemeal and inadequate approach to money market funds reform,” and are insufficient to avoid a bailout of money market funds during another period of market stress. Better Markets urged the SEC to “consider a more robust, complete, and effective set of reforms that, in combination, will significantly reduce the likelihood that the American taxpayer will once again be called upon to bail out money market funds and their investors.”
The Asset Management Group of the Securities Industry and Financial Markets Association, together with the Securities Industry and Financial Markets Association (collectively, SIFMA), also commented on the SEC’s proposed amendments, stating that SIFMA “remains troubled that aspects of the Proposed Rule would go too far in endangering the vitality of money market funds as a product.” SIFMA expressed concerns that some of the proposed reforms would “either obstruct the operation of money market funds or alter their indispensable characteristics, harming shareholders who rely on them as a cash management tool and issuers who depend on money market funds as an important source of financing.”