SEC Chair Gensler addresses the Investment Company Institute on fund proposals

By Jay Fishman, J.D.

SEC Chair Gary Gensler spoke to the Investment Company Institute (ICI) about Commission fund proposals at the ICI’s Leadership Summit held in Washington D.C. from May 23rd to May 25th. Gensler specifically remarked upon new SEC proposed rule amendments for money market and open-end funds and also addressed short-term and collective investment funds that banks solely manage because the SEC has no authority over them.

Gensler weaved into his discussion the history of the 1940-promulgated Investment Company and Investment Adviser Acts, along with the ICI’s 1940 formation, to acknowledge the terrific strides these Acts and the ICI have made in reversing the negative consequences of the 1929 Great Depression, together with SEC 2014 and 2016 rules to prevent the 2008 financial crisis’s harsh effects from occurring again. But he emphasized the need for updated regulatory initiatives because the potential for investor losses, i.e., dilution of funds, is higher—even on comparatively safe money market funds—because of trillions of dollars now at stake in assets (including risky digital assets).

SEC proposals. Money market funds. The Commission’s proposed amendments to its 2014 money market fund reforms, Gensler said, are needed more than ever since these funds now stand at $5.8 trillion and have increased by $717 billion last year when interest rates were rising. The following proposals would help protect investor funds particularly during cycles of market stress by:

• Preventing money market funds from imposing redemption limits, thus sustaining fund liquidity for investors;
• Enhancing liquidity requirements; and
• Adding swing pricing and alternatives regarding liquidity fees but solely for institutional prime and tax-exempt money market funds.

Open-end funds. The open-end fund proposals would:

1. Update the SEC’s 2016 liquidity rule by creating minimum standards for liquidity classifications in order to prevent open-end funds from overestimating their investment liquidity;
2. Set forth pricing alternatives, i.e., swing pricing or liquidity fees, so that particularly during times of market stress, redeeming shareholders bear the appropriate costs associated with their redemptions; and
3. Shorten the lag between when investors’ orders are placed and when the fund receives those orders; doing so can lessen risk.

Bank regulatory products. Gensler proclaimed that the SEC is currently discussing with the banking industry two products exclusively regulated by banks, namely short-term investment funds and collective investment funds. He emphasized a regulatory gap needs to be closed involving the liquidity of these investments. Specifically, banking rules for these investments lack limits on illiquidity because there is: (a) no limit on leverage; (b) no requirement for regular reporting on investor holdings; and (c) no requirement to have an independent board.