Those concerned about the U.S. Securities and Exchange Commision's latest round of money market fund reforms won one battle yesterday and lost another.

Mark Toshiro Uyeda U.S. Securities and Exchange Commission Commissioner (R)

A majority of SEC commissioners approved a money fund regulation yesterday, as previously reported. (The folks on Allspring's global liquidity solutions team put together a three-page explanation of the new reg.) Three commissioners (the Democrats) voted in favor of the new reg, while two commissioners (the Republicans) voted against it. Their debate about the new regs highlights industry concerns about the reforms while also illuminating some points of agreement on both sides.

John Hunt, a partner at Sullivan & Worcester, notes that the five commissioners agreed on the parts of the new reg that remove the link between liquidity levels and the imposition of liquidity fees and gates. He also notes that all the commissioners agreed not to implement swing pricing for money funds. Those points of agreement drew praise from the leader of a key mutual fund industry trade group.

"The removal of the tie between minimum liquidity thresholds and fees and gates is a positive step — one we have long supported," states Eric Pan, president and CEO of the Investment Company Institute (ICI). "We applaud the Commission's recognition that swing pricing is not an appropriate regulatory tool."

The partisan (and industry) controversy, then, centers on other pieces of the new reg: namely, the creation of mandatory liquidity fees for institutional money (for investors exiting in "times of stress"), and the raising of money funds' minimum liquidity requirements (raising the minimum daily and weekly liquid asset requirements from 10 percent and 30 percent to 25 percent 50 percent, respectively) for all money funds (retail and institutional).

On the one hand, Commissioner Caroline Crenshaw argues that the new reg "will allow MMFs to weather the next storm and build a more resilient ecosystem." Commissioner Jaime Lizárraga agrees, adding that the new reg "should help reduce money market funds' susceptibility to risk, especially during adverse market events." And chair Gary Gensler asserts that the new reg "will make money market funds more resilient, liquid, and transparent, including in times of stress." The trio noted that the Fed and the U.S. Treasury stepped in to help out money funds amid prior market turmoil in 2008 and 2020.

"These two significant economic events make clear that these MMF products — which are often taken for granted as synonymous with stability — nonetheless can present structural, systemic, market concerns," Crenshaw states. "Today's rule draws upon lessons learned from both 2008 and 2020."

On the other hand, Commissioner Mark Uyeda warns that the SEC is repeating "the errors of the past," arguing that it was the SEC's last round of money fund reforms in 2014 that exacerbated money funds' 2020 woes, and he argues that the SEC staff has not shown how money fund shareholders were actually disadvantaged by heavy redemptions in 2020. Commissioner Hester Peirce likens the SEC to "an air dancer ... lurching from one side to the other when regulating money market funds."

"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," Peirce states. "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."

"The amendments impose blanket requirements on all institutional prime and institutional tax-exempt funds rather than allowing fund boards to make the decision in the best interest of their own funds' shareholders," states Carolyn McPhillips, president of the Mutual Fund Directors Forum (MFDF).

Critics of the new reg are also pushing back on procedural grounds. They note that, when this round of money fund regs was proposed back in 2021, swing pricing was the main feature with lots of details, while liquidity fees were one alternative mentioned. The details of the liquidity fee proposal were not separately proposed later, and there was no separate comment period. Peirce even raises concerns about the SEC meeting its "notice and comment obligations under the Administrative Procedure Act," effectively pointing out how opponents of the reg might challenge it later in court.

"We are concerned that the SEC adopted mandatory liquidity fees without giving the industry the opportunity to comment on the specific requirements of the rule," MFDF's McPhillips states.

"The good work of the Commission is immediately undermined by the introduction of mandatory fees along with overly strict liquidity requirements," ICI's Pan states:

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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