The SEC held an open meeting to consider a recommendation to propose amendments to the Investment Company Act’s requirements applicable to money market funds.
Chairman White delivered opening remarks at the meeting, focusing on the necessity of making money market funds less susceptible to runs. Chairman White noted that, while money market funds have long served as an important investment vehicle for corporations, banks, and governments, the financial crisis of 2008 highlighted the susceptibility of these products to runs. To stop these runs, the SEC adopted a series of reforms in 2010 that increased the resiliency of money market funds.
Chairman White’s proposal is to take the critical next step which contains the following two alternative reforms that could be adopted separately or combined into a single reform package:
- Floating NAV – This proposed alternative would require that all institutional prime money market funds operate with a floating net asset value (“NAV”). That is, they could no longer value their entire portfolio at amortized cost. This approach would thus preserve the stable value fund product for those retail investors who have found it to be convenient and beneficial.
- Fees & Gates – This proposed alternative seeks to directly counter potentially harmful redemption behavior during times of stress. Under this model, non-government money market funds would be required to impose a two-percent liquidity fee if the funds’ level of weekly liquid assets fell below 15 percent of its total assets, unless the fund’s board determined that it was not in the best interest of the fund. That determination would be subject to the board’s fiduciary duty, and we believe it would be a high hurdle. After falling below the 15-percent weekly liquid assets threshold, the fund’s board would also be able to temporarily suspend redemptions in the fund for up to 30 days – or “gate” the fund.
These two alternatives are designed to address money market funds’ susceptibility to heavy redemptions, improve their ability to “manage and mitigate potential contagion from such redemptions,” and increase the transparency of their risks, while preserving, as much as possible, the benefits of money market funds. The SEC could adopt either alternative by itself or a combination of the two alternatives.
The SEC also proposed additional amendments that are designed to make money market funds more resilient by:
- increasing the diversification of their portfolios,
- enhancing their stress 2 testing, and
- increasing transparency by requiring money market funds to provide additional information to the SEC and to investors.
The proposal also includes amendments requiring investment advisers to certain unregistered liquidity funds, which can resemble money market funds, to provide additional information about those funds to the SEC in a somewhat revised Form PF.
Click here to view rule release in full (links externally to SEC website). Click here to see the description of the meeting from Delta Strategy Group.
Statements: Chairman White’s Opening Statement; Elisse B. Walter’s Opening Statement; Commissioner Troy Paredes’ Statement Regarding a Rule Proposal on Money Market Fund Reform; Commissioner Daniel Gallagher’s Statement Regarding Proposed Rules Regarding Money Market Funds; Commissioner Luis Aguilar’s Statement: ”Striving to Restructure Money Markets Funds to Address Potential Systemic Risk.”
See also: SIFMA Statement on SEC’s Proposed Money Market Fund Reform.