SEC Alert! SEC Commissioner Hester M. Peirce on Today's Money Market Fund Reforms: "I could have supported the final money market fund rule if we had been equally prudent with respect to other elements of the rule." "Accordingly, I will be voting no today

https://www.sec.gov/news/statement/peirce-statement-air-dancers-flies-adoption-latest-money-market-fund-reforms

Thank you, Chair Gensler.  I am pleased that we are removing the tie between liquid asset thresholds and fees and gates and that we are not moving forward with swing pricing.  I could have supported the final money market fund rule if we had been equally prudent with respect to other elements of the rule.  But today’s adoption contains the same flaw that tanked the 2014 money market fund rulemaking—an insistence that our own judgment is superior to that of money market funds, their sponsors, their boards, and their shareholders.  Accordingly, I will be voting no today.

The final rule, drawing on the experience from March 2020, eliminates the link between liquidity fees and gates and weekly liquid assets dropping below 30 percent of fund assets.  As one commenter explained, “the general consensus” is “that the possibility of liquidity fees and gates increased uncertainty, created confusion in the market, and may have made it more difficult for a money market fund to manage redemptions.”[i]  The evidence of how poorly our rule functioned in a time of stress forms the basis for today’s elimination of the link between a particular liquidity threshold and fees and gates.  That change is good.

Having seen in 2020 that one regulatory mandate for money market funds did not work, we now grasp for another—mandatory fees for institutional prime and institutional tax-exempt funds.  Much like an air dancer—the inflatable tubular figure dancing to drum up business for a tire or furniture store near you—the Commission has the habit of lurching from one side to the other when regulating money market funds, and so it is with today’s amendments.  Just as we were in 2014 with fees and gates tied to liquidity thresholds, and again in December 2021 with swing pricing, we are once more convinced that we have found the solution to first-movers and share dilution.  We wobble from codifying consideration of redemption gates to forbidding it and mandating redemption fees instead.  We will not even allow fund boards the freedom to opt out of implementing them.[ii]

Even as we lurch our way through different solutions, we have yet to identify precisely the problem we are trying to solve.  The release speaks generally of the potential for early redeemers to dilute the fund at the expense of remaining fund investors, but we absolve ourselves of having to “conduct a data analysis on the extent to which money market fund shareholders have experienced dilution in the past” by saying we lack sufficient information.[iii]  How then can we know if the benefits to investors of the rule outweigh the costs to investors?  The dilution problem may not be material in money market funds, which are flush with short-term liquidity that (absent a regulatory incentive to sell longer-term assets first)[iv] can be used to meet redemptions without diluting remaining shareholders.[v]

We do not need a new solution to a problem that we have not shown to exist.  You might be saying, “Well, we can live with mandatory redemption fees; they are better than mandatory swing pricing.”  To the Commission’s credit, we listened to what commenters said; mandatory swing pricing is out.  But we are not making a serious effort to hear from commenters on mandatory liquidity fees.  The proposing release discussed the use of liquidity fees as an alternative to fight dilution costs in the proposal, but it also rejected that option, in part, because liquidity fees “could introduce additional operational complexity and cost,” and could “require more coordination with a fund’s service providers than swing pricing.”[vi]  Some commenters suggested that the burdens associated with liquidity fees would likely be less oppressive than those of swing pricing.[vii]

That many commenters found a liquidity fee preferable to swing pricing is hardly a full-throated endorsement of a liquidity fee.  Those same commenters also likely would prefer one fly in their soup to four, but I suspect that most would check none of the above if given that choice.  One commenter that addressed the rejected liquidity fee alternative said, “if properly constructed, such a fee potentially could serve as a more effective alternative than swing pricing.”[viii]  Put another way: show us your plan Commission, and we will tell you what we think.  Commenters spoke broadly about different approaches that could be taken—discretionary fees versus mandatory fees, and whether to employ multiple threshold triggers, for instance[ix]—but did not provide the particularized feedback that we need to guide the design of liquidity fees, which were one of fifteen rejected alternatives sketched out in the proposing release.

If we are determined to move forward with a liquidity fee mandate, we should go back out for comment to get the wisdom of commenters.  Among other information, we need to know:

whether the introduction of mandatory fees, contrary to their intended effect, will induce early redemptions;

the appropriateness of the 5% of net assets redemption trigger;

whether we should be mandating the use of a vertical slice of portfolio holdings to determine how much to charge redeeming investors;

whether a default liquidity fee of 1% makes sense;

what operational difficulties funds will encounter, including how feasible it will be to attain the cooperation of service providers in imposing the fees; and

whether institutional prime funds will survive this latest Commission silver bullet.

The mandatory element of the liquidity fees is symptomatic of a broader theme in our approach to money market funds—regulatory, one-size-fits-all mandates.  A better approach would be to permit funds to choose approaches that work for them.  As one commenter put it, “Given regulators’ track record, it makes sense that fund managers and shareholders––not federal officials––should shoulder the responsibility of figuring out what investment structures provide the right incentives and options.”[x]

Despite my concerns, the final rule has some good features.  In addition to eliminating swing pricing, another positive change is the allowance of share cancellation in negative interest rate environments.  The best feature of the rule, of course, is its authors.  Thank you to the hardworking staff in the Divisions of Investment Management and Economic and Risk Analysis, and the Office of the General Counsel.  Working against aggressive deadlines, they are all under tremendous pressure, but they have been nothing but generous in their willingness to address my questions and concerns.  I do have several questions to ask you this morning:

We are raising the daily and weekly liquid assets requirements to 25% and 50% respectively.  We could simply have removed the tie between weekly liquid assets and gates and fees and then observed whether this or some additional measure was necessary.  Why didn’t we take an iterative approach?

While many commenters supported increasing the liquidity requirements, the increases we are adopting exceed what many commenters thought necessary or prudent.  Why are we raising the thresholds so dramatically?  A number of commenters suggested, for example, 20% and 40%.  Why not start there and raise them more later if evidence suggests that such increases are needed?  Is one of our goals to kill prime funds?

Do you anticipate that most money market funds will be managed to stay above the required thresholds even after the gate link is removed?

One commenter suggested a 40% requirement for retail prime funds “due to their stable investor base and less volatile redemptions.”[xi]  Why not have a lower requirement for retail funds?

We did not propose mandating liquidity fees for prime and tax-exempt funds.  In fact, we rejected them as likely being more costly than swing pricing.  How have we have met our notice and comment obligations under the Administrative Procedure Act?

How do the costs associated with the mandated liquidity fees compare to the dilution costs they are aimed at preventing?

Commenters asked us to exempt non-publicly offered central cash management funds from swing pricing.  Commenters highlighted the fact that redemption activity varied dramatically from publicly offered funds.  These same characteristics would justify an exemption from mandatory redemption fees, so why are we imposing mandatory liquidity fees on these types of funds?

Please walk me through the compliance periods, what commenters had to say about how much time they would need, and explain why we think they are sufficient.What Hester is against:

https://www.sec.gov/rules/final/2023/33-11211.pdf (424 pages!)Wut mean?:

The Securities and Exchange Commission (SEC) is making some changes to the rules that control money market funds. Money market funds are like a type of mutual fund that invests in highly liquid, short-term financial instruments. These changes are meant to make these funds more resilient and transparent.

1. No More Suspension of Redemptions: Previously, if a fund's liquidity (how quickly assets in the fund can be converted to cash) fell below a certain level, the fund's board could temporarily stop redemptions (investors getting their money back). This will no longer be allowed.
2. Liquidity Fees: The SEC is removing the link between liquidity levels and the possibility of liquidity fees. Instead, some money market funds will have to set up a system for liquidity fees that will better distribute the costs of providing liquidity to investors who are redeeming their shares.
3. Increased Liquid Asset Requirements: The minimum requirements for daily and weekly liquid assets are being increased to 25% and 50% respectively. This means funds need to have more assets that can be quickly converted to cash.
4. New Liquidity Fee Framework: Some money market funds will have to implement a new system for liquidity fees. This is designed to more fairly distribute the costs of providing liquidity to investors who are redeeming their shares.
5. Handling Negative Interest Rates: The SEC is also addressing how money market funds with stable net asset values (the value of a fund's total assets, minus its liabilities) can deal with a negative interest rate environment. They're allowing these funds to use share cancellation, but with certain conditions.
6. Calculating Maturity and Life: The SEC is specifying how funds should calculate the weighted average maturity (the average time it takes for securities in a fund to mature) and weighted average life (average length of time until the principal amount of its securities is repaid).
7. Reporting Requirements: There are also changes to certain reporting requirements and forms.Fact Sheet: https://www.sec.gov/files/33-11211-fact-sheet.pdf

Wut mean?:

Why This Matters: Money market funds are popular cash management vehicles for both retail and institutional investors. They provide short-term financing for businesses, banks, and governments. However, during the COVID-19 pandemic, large outflows from these funds led to stress on short-term funding markets. The new amendments aim to address these issues and improve the resilience and transparency of money market funds.

What’s Required:

1. Increased Minimum Liquidity Requirements: The minimum liquidity requirements for money market funds will be increased to 25% for daily liquid assets and 50% for weekly liquid assets. This will help funds manage significant and rapid investor redemptions in stressed market conditions.
2. Removal of Temporary Redemption Gates: The ability for money market funds to temporarily suspend redemptions will be removed. This will reduce the risk of investor runs on money market funds during periods of market stress.
3. Liquidity Fee Requirement: Institutional prime and institutional tax-exempt money market funds will be required to impose mandatory liquidity fees when a fund experiences daily net redemptions that exceed 5% of net assets, unless the fund’s liquidity costs are de minimis.
4. Handling Negative Interest Rate Environment: Retail and government money market funds may handle a negative interest rate environment either by converting from a stable share price to a floating share price or by reducing the number of shares outstanding to maintain a stable net asset value per share.
5. Reporting Requirements: The amendments will modify certain reporting forms to reflect the amendments to the regulatory framework for money market funds.

What’s Next: The rule amendments will become effective 60 days after publication in the Federal Register. The reporting form amendments will become effective June 11, 2024. The Commission is adopting a tiered approach to the transition periods for the other final amendments.Press Release: https://www.sec.gov/news/press-release/2023-129

The Securities and Exchange Commission today adopted amendments to certain rules that govern money market funds under the Investment Company Act of 1940.
The amendments will increase minimum liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The amendments will also remove provisions in the current rule that permit a money market fund to suspend redemptions temporarily through a gate and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold. These changes are designed to reduce the risk of investor runs on money market funds during periods of market stress.
To address concerns about redemption costs and liquidity, the amendments will require institutional prime and institutional tax-exempt money market funds to impose liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets, unless the fund’s liquidity costs are de minimis. In addition, the amendments will require any non-government money market fund to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund. These amendments are designed to protect remaining shareholders from dilution and to more fairly allocate costs so that redeeming shareholders bear the costs of redeeming from the fund when liquidity in underlying short-term funding markets is costly.
“Money market funds – nearly $6 trillion in size today – provide millions of Americans with a deposit alternative to traditional bank accounts,” said SEC Chair Gary Gensler. “Money market funds, though, have a potential structural liquidity mismatch. As a result, when markets enter times of stress, some investors – fearing dilution or illiquidity – may try to escape the bear. This can lead to large amounts of rapid redemptions. Left unchecked, such stress can undermine these critical funds. I support this adoption because it will enhance these funds’ resiliency and ability to protect against dilution. Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress. That benefits investors.”
Separately, the amendments will also modify certain reporting forms that are applicable to money market funds and large private liquidity funds advisers.
The rule amendments will become effective 60 days after publication in the Federal Register with a tiered transition period for funds to comply with the amendments. The reporting form amendments will become effective June 11, 2024.TLDRS:

• Money market funds are like parking spots for cash for both everyday and big-time investors. They're also a source of quick cash for businesses, banks, and governments.
  But during the COVID-19 pandemic, a lot of money was pulled out of these funds, causing some stress in the market.
• The SEC is making changes to make these funds more resilient and transparent.
• Hester is against this.

What’s Required:

1. More Liquid Assets: Money market funds will need to have more assets that can be quickly turned into cash. This is to help them handle large, quick withdrawals in tough market conditions.
2. No More Suspension of Redemptions: Funds won't be able to temporarily stop investors from withdrawing their money. This is to prevent a rush of investors trying to pull out their money during market stress.
3. Liquidity Fee Requirement: Some types of money market funds will have to charge a fee if they have a lot of withdrawals in one day, unless the cost of providing the cash is very small. This is to protect the investors who remain in the fund.
4. Handling Negative Interest Rates: Some funds may have to change their share price from a fixed amount to a fluctuating amount or reduce the number of shares to keep the value per share stable if interest rates go below zero.
5. Reporting Requirements: Funds will have to change how they report certain information to reflect the new rules.

What’s Next: The new rules will start 60 days after they're published in the Federal Register. Changes to how funds report information will start on June 11, 2024. The SEC is giving funds different amounts of time to adjust to the other changes.

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