On February 4, 2021, the Securities and Exchange Commission (SEC) issued Investment Company Act Release No. IC-34188 (Release) requesting comment on potential reform measures aimed to improve the resilience of money market funds.1 The request stems from a December 2020 report (Report) of the President’s Working Group on Financial Markets (PWG), which studied the effects of the growing economic concerns related to the COVID-19 pandemic on short-term funding markets and money market funds.2 The PWG’s Report provides background on previous money market fund reforms in 2010 and 2014, discusses how money market funds have evolved since the 2008 financial crisis, and examines certain market stress and events in March 2020 that resulted from the COVID-19 pandemic. Without endorsing any specific measure, the Report concludes with a number of potential reform measures that could be used to address the risk that structural vulnerabilities in prime and tax-exempt money market funds will lead to or exacerbate stresses in short-term funding markets. The Release notes that some measures described in the Report may require coordinated action by the SEC and other agencies or the creation of new private entities.
Specifically, the Report outlines the merits and drawbacks of the following ten potential policy reform measures:
- Removal of the tie between money market fund liquidity and liquidity fee and redemption gate thresholds;
- Reform of conditions for imposing redemption gates;
- Minimum balance at risk (e.g., a portion of each shareholder’s balance in a money market fund account could be available for redemption only with a time delay to ensure that redeeming investors remain partially invested in the fund over a certain time period);
- Money market fund liquidity management changes (e.g., a new category of liquidity requirements, such as biweekly liquid assets; or new liquidity thresholds, such as a higher weekly liquid asset (WLA) threshold);
- Countercyclical WLA requirements (e.g., permitting minimum WLA requirements to automatically decline in certain circumstances, such as when net redemptions are large or when the SEC provides temporary relief from WLA requirements);
- Floating net asset value (NAV) requirement for all prime and tax-exempt money market funds (floating NAV requirement currently applies only to institutional prime and institutional tax-exempt money market funds);
- Swing pricing requirement (allows a fund to impose the costs stemming from redemptions directly on redeeming investors by adjusting the fund’s NAV downward when net redemptions exceed a threshold);
- Capital buffer requirements;
- Require liquidity exchange bank membership; and
- New requirements governing sponsor support.
The SEC is requesting public comment on the Report to enable the SEC and other relevant financial regulators to consider more comprehensively the potential measures identified above and help inform money market reforms. In its Release, the SEC is also seeking comments on the effectiveness of previously-enacted money market reforms and the potential effectiveness of implementing the policy measures listed above in addition to, or in place of, previously-enacted reforms. Specifically, the Release instructs commenters to address the effectiveness of the measures in:
- Addressing money market funds’ structural vulnerabilities that can contribute to stress in short-term funding markets;
- Improving the resilience and functioning of short-term funding markets; and
- Reducing the likelihood that official sector interventions will be needed to prevent or halt future money market fund runs, or to address stresses in short-term funding markets more generally.
The comment period will end 60 days after publication in the Federal Register (which has not occurred as of the date of this Client Alert). Particularly given the number of questions posed by the SEC to the industry, it is likely to draw a significant number of responses. Stay tuned and we will keep you apprised on developments.
Seward & Kissel LLP will continue to provide insight on any related developments. If you have any questions regarding the matters covered in this memo, please contact any member of our Registered Funds Group.