The Securities and Exchange Commission (SEC) has voted to adopt new rules that affect the government of money market funds, form PF reporting requirements for large liquidity fund advisers, and technical amendments to forms N-CSR and N-1A.

Gary Gensler U.S. Securities and Exchange Commission Chair

The vote was 3-2, with the commissioners voting along party lines; all three Democrats voted to approve the new reg, while both Republicans voted against approving them. The item was the first one on the agenda in the SEC's open meeting this morning. Once the new, 424-page reg is published in the Federal Register, it will take effect 60 days thereafter, and the money fund liquidity fee mandate will then go into effect 12 months after that. (Here's a link to the SEC's fact sheet.)

"Today's adoption addresses these structural issues," said SEC chair Gary Gensler, referring to worries that a future liquidity crisis could hit money market funds with bigger dilution issues than in March 2020, in the early days of the pandemic lockdowns in the U.S.

Based on feedback, the amendments concerning a proposed rule will be updated to implement mandatory liquidity fees instead of swing pricing requirements, so as to impose fewer operational burdens, said Gensler.

The proposed rule stemmed from market events in March 2020, which were considered disruptive and showed that "liquidity can deteriorate rapidly and significantly," the SEC stated in a document. During the vote, the chair and commissioners referenced past SEC money market fund reforms from 2010 and 2014.

Republican Commissioners Hester Peirce and Mark Uyeda praised the new regs for backing away from the swing pricing proposal and for disconnecting liquidity thresholds and fees and gates. Yet they pushed back against the logic of the liquidity fee replacement and questioned the SEC staff for shifting all the focus to the liquidity fee idea without going through a fresh proposal process and comment period. (The SEC's initial money fund reform proposal this time around, unveiled back in December 2021, focused on swing pricing, though the proposal also included a number of alternatives, including liquidity fees. The comment period ended in April 2022.)

A key mutual fund industry trade group is already speaking out against the SEC's new reg, while supporting some pieces

"The SEC has missed the mark by forcing money market funds to adopt an expensive and complex mandatory fee on investors. There is no precedent for such a fee framework," states Eric Pan, CEO of the ICI. "Money market fund resiliency is an important issue that deserves full consideration. However, today’s decision does not seem to be a logical outworking from the proposal. The introduction of this mandatory fee sidelines a fund's fiduciary board of directors in favor of a one-size-fits-all solution."

The good work of the Commission is immediately undermined by the introduction of mandatory fees along with overly strict liquidity requirements. A significant new measure such as this should have been re-proposed by the SEC, with greater detail and allowing for public comment. That would lead to the thorough analysis that the rulemaking process demands. Markets and investors are better served by a regulatory process that is transparent, robust, and evidence driven.

 

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