SEC on guard in adopting money market fund reforms

The final rule, first proposed in December 2021, is aimed at improving the transparency and resiliency of money market funds, particularly in times of economic stress. The SEC cited the Covid-19 pandemic as a test to the market’s resiliency that exposed concerns the agency sought to address via rulemaking.

The new rule, as highlighted in an SEC fact sheet:

• Increases minimum liquidity requirements for money market funds;
• Removes provisions that permit funds to temporarily suspend redemptions through a gate and impose liquidity fees if their weekly liquid assets fall below a certain threshold; and
• Requires institutional prime and institutional tax-exempt funds to impose liquidity fees—instead of initially proposed swing pricing requirements—when experiencing daily net redemptions that exceed 5 percent of net assets.

The changes take effect 60 days after publication in the Federal Register. Related reporting amendments to Form PF will become effective June 11, 2024.

This is the third round of money market reforms since 2010, and the agency’s Republican commissioners made it a point to focus on the negative effects of its 2014 effort that had granted the ability for money market funds to impose liquidity fees or redemption gates after crossing a specified liquidity threshold.

“The 2014 reforms exacerbated the very problems that they were supposed to address,” said Commissioner Mark Uyeda in a statement.

“[T]oday’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,” stated Commissioner Hester Peirce.

Uyeda and Peirce each voted against the rule adoption.

The agency’s Democrats, led by Chair Gary Gensler, instead focused on the potential impact of the rule to “make money market funds more resilient, liquid, and transparent, including in times of stress.”

However, Commissioner Caroline Crenshaw noted she will keep a close eye “to ensure that the protections we put in place now are the right ones.”

Also Wednesday, the SEC announced it proposed amendments to its Customer Protection Rule to require certain broker-dealers to increase the frequency of computations of net cash owed to customers and other broker-dealers from weekly to daily. The proposal will be open for comment for at least 60 days.