Proposed Rule2021-27532
Money Market Fund Reforms
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
February 8, 2022
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is proposing amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The proposed amendments are designed to improve the resilience and transparency of money market funds. The proposal would remove the liquidity fee and redemption gate provisions in the existing rule, which would eliminate an incentive for preemptive redemptions from certain money market funds and could encourage funds to more effectively use their existing liquidity buffers in times of stress. The proposal would also require institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures to require redeeming investors to bear the liquidity costs of their decisions to redeem. The Commission is also proposing to increase the daily liquid asset and weekly liquid asset minimum liquidity requirements, to 25% and 50% respectively, to provide a more substantial buffer in the event of rapid redemptions. The proposal would amend certain reporting requirements on Forms N-MFP and N-CR to improve the availability of information about money market funds, as well as make certain conforming changes to Form N-1A to reflect our proposed changes to the regulatory framework for these funds. In addition, the Commission is proposing rule amendments to address how money market funds with stable net asset values should handle a negative interest rate environment. Finally, the Commission is proposing rule amendments to specify how funds must calculate weighted average maturity and weighted average life.
Full Text
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[Federal Register Volume 87, Number 26 (Tuesday, February 8, 2022)]
[Proposed Rules]
[Pages 7248-7356]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-27532]
[[Page 7247]]
Vol. 87
Tuesday,
No. 26
February 8, 2022
Part II
Securities and Exchange Commission
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17 CFR Parts 270 and 274
Money Market Fund Reforms; Proposed Rule
Federal Register / Vol. 87 , No. 26 / Tuesday, February 8, 2022 /
Proposed Rules
[[Page 7248]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 270 and 274
[Release No. IC-34441; File No. S7-22-21]
RIN 3235-AM80
Money Market Fund Reforms
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing amendments to certain rules that govern money market funds
under the Investment Company Act of 1940. The proposed amendments are
designed to improve the resilience and transparency of money market
funds. The proposal would remove the liquidity fee and redemption gate
provisions in the existing rule, which would eliminate an incentive for
preemptive redemptions from certain money market funds and could
encourage funds to more effectively use their existing liquidity
buffers in times of stress. The proposal would also require
institutional prime and institutional tax-exempt money market funds to
implement swing pricing policies and procedures to require redeeming
investors to bear the liquidity costs of their decisions to redeem. The
Commission is also proposing to increase the daily liquid asset and
weekly liquid asset minimum liquidity requirements, to 25% and 50%
respectively, to provide a more substantial buffer in the event of
rapid redemptions. The proposal would amend certain reporting
requirements on Forms N-MFP and N-CR to improve the availability of
information about money market funds, as well as make certain
conforming changes to Form N-1A to reflect our proposed changes to the
regulatory framework for these funds. In addition, the Commission is
proposing rule amendments to address how money market funds with stable
net asset values should handle a negative interest rate environment.
Finally, the Commission is proposing rule amendments to specify how
funds must calculate weighted average maturity and weighted average
life.
DATES: Comments should be received on or before April 11, 2022.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/submitcomments.htm">https://www.sec.gov/rules/submitcomments.htm</a>).
Paper Comments
<bullet> Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-22-21. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
website (<a href="http://www.sec.gov/rules/proposed.shtml">http://www.sec.gov/rules/proposed.shtml</a>). Comments are also
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Operating
conditions may limit access to the Commission's public reference room.
All comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Blair Burnett, David Driscoll, Adam
Lovell, or James Maclean, Senior Counsels; Angela Mokodean, Branch
Chief; or Brian Johnson, Assistant Director at (202) 551-6792,
Investment Company Regulation Office; Keri Riemer, Senior Counsel;
Penelope Saltzman, Senior Special Counsel; or Thoreau Bartmann,
Assistant Director, Chief Counsel's Office, (202) 551-6825; Viktoria
Baklanova, Analytics Office, Division of Investment Management,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment amendments to 17 CFR 270.2a-7 (rule 2a-7) and 17 CFR 270.31a-2
(rule 31a-2) under the Investment Company Act of 1940,\1\ Form N-1A
under the Investment Company Act and the Securities Act,\2\ and Forms
N-MFP and N-CR under the Investment Company Act.
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\1\ 15 U.S.C. 80a et seq.
\2\ 15 U.S.C. 77a et seq.
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Table of Contents
I. Introduction
A. Types of Money Market Funds and Existing Regulatory Framework
B. March 2020 Market Events
II. Discussion
A. Amendments To Remove Liquidity Fee and Redemption Gate
Provisions
1. Unintended Effects of the Tie Between the Weekly Liquid Asset
Threshold and Liquidity Fees and Redemption Gates
2. Removal of Redemption Gates From Rule 2a-7
3. Removal of Liquidity Fees From Rule 2a-7
B. Proposed Swing Pricing Requirement
1. Purpose and Terms of the Proposed Requirement
2. Operational Considerations
3. Tax and Accounting Implications
4. Disclosure
C. Amendments to Portfolio Liquidity Requirements
1. Increase of the Minimum Daily and Weekly Liquidity
Requirements
2. Consequences for Falling Below Minimum Daily and Weekly
Liquidity Requirements
3. Proposed Amendments to Liquidity Metrics in Stress Testing
D. Amendments Related to Potential Negative Interest Rates
E. Amendments To Specify the Calculation of Weighted Average
Maturity and Weighted Average Life
F. Amendments to Reporting Requirements
1. Amendments to Form N-CR
2. Amendments to Form N-MFP
G. Compliance Date
III. Economic Analysis
A. Introduction
B. Economic Baseline
1. Affected Entities
2. Certain Economic Features of Money Market Funds
3. Money Market Fund Activities and Price Volatility
C. Costs and Benefits of the Proposed Amendments
1. Removal of the Tie Between the Weekly Liquid Asset Threshold
and Liquidity Fees and Redemption Gates
2. Raised Liquidity Requirements
3. Stress Testing Requirements
4. Swing Pricing
5. Amendments Related to Potential Negative Interest Rates
6. Amendments to Disclosures on Form N-CR, Form N-MFP, and Form
N-1A
7. Amendments Related to the Calculation of Weighted Average
Maturity and Weighted Average Life
D. Alternatives
1. Alternatives to the Removal of the Tie Between the Weekly
Liquid Asset Threshold and Liquidity Fees and Redemption Gates
[[Page 7249]]
2. Alternatives to the Proposed Increases in Liquidity
Requirements
3. Alternative Stress Testing Requirements
4. Alternative Implementations of Swing Pricing
5. Liquidity Fees
6. Expanding the Scope of the Floating NAV Requirements
7. Countercyclical Weekly Liquid Asset Requirement
8. Alternatives to the Amendments Related to Potential Negative
Interest Rates
9. Alternatives to the Amendments Related to Processing Orders
Under Floating NAV Conditions for All Intermediaries
10. Alternatives to the Amendments Related to WAL/WAM
Calculation
11. Sponsor Support
12. Disclosures
13. Capital Buffers
14. Minimum Balance at Risk
15. Liquidity Exchange Bank Membership
E. Effects on Efficiency, Competition, and Capital Formation
F. Request for Comment
IV. Paperwork Reduction Act
A. Introduction
B. Rule 2a-7
C. Rule 31a-2
D. Form N-MFP
E. Form N-CR
F. Form N-1A
V. Initial Regulatory Flexibility Analysis
VI. Consideration of Impact on the Economy
VII. Statutory Authority
I. Introduction
Money market funds are a type of mutual fund registered under the
Investment Company Act of 1940 (``Act'') and regulated pursuant to rule
2a-7 under the Act.\3\ Money market funds are managed with the goal of
providing principal stability by investing in high-quality, short-term
debt securities, such as Treasury bills, repurchase agreements, or
commercial paper, and whose value does not fluctuate significantly in
normal market conditions. Money market fund investors receive dividends
that reflect prevailing short-term interest rates and have access to
daily liquidity, as money market fund shares are redeemable on demand.
The combination of limited principal volatility, diversification of
portfolio securities, payment of short-term yields, and liquidity has
made money market funds popular cash management vehicles for both
retail and institutional investors. Money market funds also provide an
important source of short-term financing for businesses, banks, and
Federal, state, municipal, and Tribal governments.
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\3\ Money market funds are also sometimes called ``money market
mutual funds'' or ``money funds.''
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In March 2020, in connection with an economic shock from the onset
of the COVID-19 pandemic, certain types of money market funds had
significant outflows as investors sought to preserve liquidity.\4\ We
are proposing to amend rule 2a-7 to remove provisions in the rule that
appear to have contributed to investors' incentives to redeem from
certain funds during this period. For the category of funds that
experienced the heaviest outflows in March 2020 and in prior periods of
market stress, we are proposing a new swing pricing requirement that is
designed to mitigate the dilution and investor harm that can occur
today when other investors redeem--and remove liquidity--from these
funds, particularly when certain markets in which the funds invest are
under stress and effectively illiquid. We are also proposing to
increase liquidity requirements to better equip money market funds to
manage significant and rapid investor redemptions. In addition to these
reforms, we are proposing changes to improve transparency and
facilitate Commission monitoring of money market funds. We also propose
to clarify how certain money market funds would operate if interest
rates became negative. Finally, we propose to specify how funds must
calculate weighted average maturity and weighted average life.\5\
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\4\ See infra Section I.B (discussing these events in more
detail).
\5\ We have consulted and coordinated with the Consumer
Financial Protection Bureau regarding this proposed rulemaking in
accordance with section 1027(i)(2) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
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A. Types of Money Market Funds and Existing Regulatory Framework
Different types of money market funds exist to meet differing
investor needs. ``Prime money market funds'' hold a variety of taxable
short-term obligations issued by corporations and banks, as well as
repurchase agreements and asset-backed commercial paper.\6\
``Government money market funds,'' which are currently the largest
category of money market fund, almost exclusively hold obligations of
the U.S. Government, including obligations of the U.S. Treasury and
Federal agencies and instrumentalities, as well as repurchase
agreements collateralized by government securities.\7\ Compared to
prime funds, government money market funds generally offer greater
safety of principal but historically have paid lower yields. ``Tax-
exempt money market funds'' (or ``municipal money market funds'')
primarily hold obligations of state and local governments and their
instrumentalities, and pay interest that is generally exempt from
Federal income tax for individual taxpayers.\8\ Within the prime and
tax-exempt money market fund categories, some funds are ``retail''
funds and others are ``institutional'' funds. Retail money market funds
are held only by natural persons, and institutional funds can be held
by a wider range of investors, such as corporations, small businesses,
and retirement plans.\9\
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\6\ Commission staff regularly publish comprehensive data
regarding money market funds on the Commission's website, available
at <a href="https://www.sec.gov/divisions/investment/mmf-statistics.shtml">https://www.sec.gov/divisions/investment/mmf-statistics.shtml</a>.
This data includes information about the monthly holdings of prime
money market funds by type of security.
\7\ Some government money market funds generally invest at least
80% of their assets in U.S. Treasury obligations or repurchase
agreements collateralized by U.S. Treasury securities and are called
``Treasury money market funds.''
\8\ In this release, we also use the term ``non-government money
market fund'' to refer to prime and tax-exempt money market funds.
\9\ A retail money market fund is defined as a money market fund
that has policies and procedures reasonably designed to limit all
beneficial owners of the fund to natural persons. See 17 CFR 270.2a-
7(a)(21) (rule 2a-7(a)(21)).
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To some extent, different types of money market funds are subject
to different requirements under rule 2a-7. One primary example is a
fund's approach to valuation and pricing. Government and retail money
market funds can rely on valuation and pricing techniques that
generally allow them to sell and redeem shares at a stable share price,
typically $1.00, without regard to small variations in the value of the
securities in their portfolios.\10\ If the fund's stable share price
and market-based value per share deviate by more than one-half of 1%,
the fund's board may determine to adjust the fund's share price below
$1.00, which is also colloquially referred to as ``breaking the buck.''
\11\ Institutional prime and institutional tax-exempt money market
funds, however, are required to use a
[[Page 7250]]
``floating'' net asset value per share (``NAV'') to sell and redeem
their shares, based on the current market-based value of the securities
in their underlying portfolios rounded to the fourth decimal place
(e.g., $1.0000). These institutional funds are required to use a
floating NAV because their investors have historically made the
heaviest redemptions in times of market stress and are more likely to
act on the incentive to redeem if a fund's stable price per share is
higher than its market-based value.\12\
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\10\ Under the amortized cost method, a government or retail
money market fund's portfolio securities generally are valued at
cost plus any amortization of premium or accumulation of discount,
rather than at their value based on current market factors. The
penny rounding method of pricing permits such a money market fund
when pricing its shares to round the fund's NAV to the nearest 1%
(i.e., the nearest penny). Together, these valuation and pricing
techniques create a ``rounding convention'' that permits these money
market funds to sell and redeem shares at a stable share price
without regard to small variations in the value of portfolio
securities. See 17 CFR 270.2a-7(c)(i), (g)(1), and (g)(2). See
generally Valuation of Debt Instruments and Computation of Current
Price Per Share by Certain Open-End Investment Companies (Money
Market Funds), Investment Company Act Release No. 13380 (July 11,
1983) [48 FR 32555 (July 18, 1983)] (``1983 Adopting Release'').
Throughout this release, we generally use the term ``stable share
price'' or ``stable NAV'' to refer to the stable share price that
these money market funds seek to maintain and compute for purposes
of distribution, redemption, and repurchases of fund shares.
\11\ These funds must compare their stable share price to the
market-based value per share of their portfolios at least daily.
\12\ See Money Market Fund Reform; Amendments to Form PF,
Investment Company Act Release No. 31166 (July 23, 2014) [79 FR
47735 (Aug. 14, 2014)] (``2014 Adopting Release''). As stated in the
2014 Adopting Release, this incentive exists largely in prime money
market funds because these funds exhibit higher credit risk that
makes declines in value more likely (compared to government money
market funds).
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As of July 2021, there were approximately 318 money market funds
registered with the Commission, and these funds collectively held over
$5.0 trillion of assets.\13\ The vast majority of these assets are held
by government money market funds ($4.0 trillion), followed by prime
money market funds ($875 billion) and tax-exempt money market funds
($101 billion).\14\ Slightly less than half of prime money market
funds' assets are held by publicly offered institutional funds, with
the remaining assets almost evenly split between retail prime money
market funds and institutional prime money market funds that are not
offered to the public.\15\ The vast majority of tax-exempt money market
fund assets are held by retail funds.
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\13\ Money Market Fund Statistics, Form N-MFP Data, period
ending July 2021, available at: <a href="https://www.sec.gov/files/mmf-statistics-2021-07.pdf">https://www.sec.gov/files/mmf-statistics-2021-07.pdf</a>. This data excludes ``feeder'' funds to avoid
double counting assets.
\14\ Id.
\15\ Some asset managers establish privately offered money
market funds to manage cash balances of other affiliated funds and
accounts.
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The Commission adopted rule 2a-7 in 1983 and has amended the rule
several times over the years, including in response to market events
that have highlighted money market fund vulnerabilities.\16\ For
example, during 2007-2008, some prime money market funds were exposed
to substantial losses from certain of their holdings.\17\ At that time,
one money market fund ``broke the buck'' and suspended redemptions, and
many fund sponsors provided financial support to their funds.\18\ These
events, along with general turbulence in the financial markets, led to
a run primarily on institutional prime money market funds and
contributed to severe dislocations in short-term credit markets. The
U.S. Department of the Treasury and the Board of Governors of the
Federal Reserve System subsequently announced intervention in the
short-term markets that was effective in containing the run on prime
money market funds and providing additional liquidity to money market
funds.\19\
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\16\ See 1983 Adopting Release, supra footnote 10; see also
infra footnote 20.
\17\ For a more detailed account of these events, see Money
Market Fund Reform, Investment Company Act Release No. 28807 (June
30, 2009) [74 FR 32688 (July 8, 2009)], at section I.D.
\18\ See id. at paragraphs accompanying nn.41 and 44. At this
time, all money market funds generally were permitted to maintain
stable prices per share.
\19\ The Treasury Department's Temporary Guarantee Program for
Money Market Funds temporarily guaranteed certain investments in
money market funds that participated in the program. The Federal
Reserve Board's Asset-Backed Commercial Paper Money Market Mutual
Fund Liquidity Facility extended credit to U.S. banks and bank
holding companies to finance their purchases of high-quality asset-
backed commercial paper from money market funds. See Press Release,
Treasury Department, Treasury Announces Guaranty Program for Money
Market Funds (Sept. 19, 2008), available at <a href="https://www.treasury.gov/press-center/press-releases/Pages/hp1161.aspx">https://www.treasury.gov/press-center/press-releases/Pages/hp1161.aspx</a>;
Press Release, Federal Reserve Board, Federal Reserve Board
Announces Two Enhancements to its Programs to Provide Liquidity to
Markets (Sept. 19, 2008), available at <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20080919a.htm">https://www.federalreserve.gov/newsevents/pressreleases/monetary20080919a.htm</a>.
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After the events of the 2008 financial crisis, the SEC adopted a
number of amendments to its money market fund regulations in 2010 and
2014.\20\ In 2010, the Commission adopted amendments to rule 2a-7 that,
among other things, for the first time required that money market funds
maintain liquidity buffers in the form of specified levels of daily and
weekly liquid assets.\21\ The amendments required that taxable money
market funds have at least 10% of their assets in cash, U.S. Treasury
securities, or securities that convert into cash (e.g., mature) within
one day (``daily liquid assets''), and that all money market funds have
at least 30% of assets in cash, U.S. Treasury securities, certain other
government securities with remaining maturities of 60 days or less, or
securities that convert into cash within one week (``weekly liquid
assets'').\22\ These liquidity buffers provide a source of internal
liquidity and are intended to help funds withstand high redemptions
during times of market illiquidity. The 2010 amendments also increased
transparency about a money market fund's holdings by introducing
monthly Form N-MFP reporting requirements and website posting
requirements. In addition, the Commission further limited the maturity
of a fund's portfolio, including by shortening the permitted weighted
average portfolio maturity and introducing a separate weighted average
life to limit the portion of a fund's portfolio held in longer-term
adjustable rate securities.
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\20\ Money Market Fund Reform, Investment Company Act Release
No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (``2010
Adopting Release''); 2014 Adopting Release, supra footnote 12.
\21\ 2010 Adopting Release, supra footnote 20. See rule 17 CFR
270.2a-7(c)(5)(ii) and (iii).
\22\ See 17 CFR 270.2a-7(a)(8) (rule 2a-7(a)(8)) (defining
``daily liquid assets'') and 17 CFR 270.2a-7(a)(28) (rule 2a-
7(a)(28)) (defining ``weekly liquid assets'').
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In 2014, the Commission further amended the rules that govern money
market funds. In these amendments the Commission provided the boards of
directors of non-government money market funds with new tools to stem
heavy redemptions by giving them discretion to impose a liquidity fee
or temporary suspension of redemptions (i.e., a gate) if a fund's
weekly liquid assets fall below 30%. These amendments also require all
non-government money market funds to impose a liquidity fee if the
fund's weekly liquid assets fall below 10%, unless the fund's board
determines that imposing such a fee is not in the best interests of the
fund. Additionally, in 2014 the Commission removed the valuation
exemption that permitted institutional non-government money market
funds to maintain a stable NAV, and required those funds to transact at
a floating NAV. The amendments provided guidance related to amortized
cost valuation, as well as introduced requirements for strengthened
diversification of money market funds' portfolios and enhanced stress
testing. The Commission also introduced a requirement that money market
funds report certain significant events on Form N-CR and made other
amendments to improve transparency, including additional website
posting requirements and amendments to Form N-MFP.
Following the 2014 amendments, government money market funds grew
substantially, while prime money market funds diminished in size, as
shown in the chart below.\23\
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\23\ While the Commission adopted the amendments in 2014, the
compliance date for the floating NAV requirement for institutional
prime and institutional tax-exempt funds and for the fee and gate
provisions for all prime and tax-exempt funds was October 14, 2016.
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BILLING CODE 8011-01-P
[[Page 7251]]
[GRAPHIC] [TIFF OMITTED] TP08FE22.002
The chart below depicts the distribution between retail and
institutional net assets in both prime and tax-exempt funds beginning
in October 2016.\24\
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\24\ The 2014 amendments introduced a regulatory definition of a
retail money market fund and implemented it in October 2016. Data on
institutional and retail prime and tax-exempt money market funds
prior to this time may not be fully comparable with current data
and, thus, Chart 2 covers a period beginning in October 2016.
[GRAPHIC] [TIFF OMITTED] TP08FE22.003
Finally, Table 1 below depicts the key requirements currently
applicable to each type of money market fund.
[[Page 7252]]
[GRAPHIC] [TIFF OMITTED] TP08FE22.004
BILLING CODE 8011-01-C
B. March 2020 Market Events
In March 2020, growing economic concerns about the impact of the
COVID-19 pandemic led investors to reallocate their assets into cash
and short-term government securities.\25\ These heavy asset flows
placed stress on short-term funding markets.\26\ For instance,
commercial paper and certificates of deposit markets in which prime
money market funds and other participants invest became ``frozen'' in
March 2020, making it more difficult to sell these instruments, which
have limited secondary trading even in normal times.\27\ Institutional
investors, in particular, sought highly liquid investments, including
government money market funds.\28\ In contrast, institutional prime and
tax-exempt money market funds experienced outflows beginning the week
of March 9, 2020, which accelerated the following week.\29\ Outflows
from retail prime and tax-exempt funds began the week of March 16, a
week after outflows in institutional funds began. Outflows from some
publicly offered institutional prime funds as a percentage of fund size
exceeded those in the September 2008 crisis, although the outflows in
dollar amounts were much smaller in March 2020, due in part to the
significant reductions in the size of prime money market funds that
occurred between September 2008 and March 2020.
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\25\ See SEC Staff Report on U.S. Credit Markets
Interconnectedness and the Effects of the COVID-19 Economic Shock
(Oct. 2020) (``SEC Staff Interconnectedness Report'') at 2,
available at <a href="https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf">https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf</a>.
\26\ Notably, this market stress in March 2020, including its
impact on money market funds, was more of a liquidity event than in
2008. In 2008 there were heightened concerns regarding the credit
quality of some money market funds' underlying holdings.
\27\ See SEC Staff Interconnectedness Report, supra footnote 25,
at 23.
\28\ More specifically, government money market funds had record
inflows of $838 billion in March 2020 and an additional $347 billion
of inflows in April 2020. See id. at 25.
\29\ Id.
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During the two-week period of March 11 to 24, publicly offered
institutional prime funds had a 30% redemption rate (about $100
billion), which included outflows of approximately 20% of assets during
the week of March 20 alone.\30\ The largest weekly redemption rate from
a single publicly offered institutional prime fund during this period
was around 55%, and the largest daily outflow was about 26%. In
contrast, privately offered institutional prime funds had redemptions
of 3% of assets during the week of March 20, and lost approximately 6%
of their total assets ($17 billion) from March 9 through 20.
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\30\ This discussion of the size of outflows in March 2020 is
based on the Report of the President's Working Group on Financial
Markets, Overview of Recent Events and Potential Reform Options for
Money Market Funds, infra footnote 39, and our additional analysis.
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Retail money market funds had lower levels of outflows than
publicly offered institutional funds. Retail prime funds had outflows
of approximately 11% of their total assets ($48 billion) in the last
three weeks of March 2020. Outflows from tax-exempt money market funds,
which are mostly retail funds, were approximately 8% of their total
assets ($12 billion) from March 12 through 25.
As prime money market funds experienced heavy redemptions, their
holdings of weekly liquid assets generally declined. However, these
declines were not commensurate with the level of redemptions. Available
data suggests that managers were actively managing their portfolios to
avoid having weekly liquid assets below 30% of their total assets by,
in some cases, selling other portfolio securities to meet redemptions.
Available evidence, supported by many comment letters in response to
the Commission's request for comment discussed below, suggested that
funds' incentives to maintain weekly liquid assets above the 30%
threshold were directly tied to investors' concerns about the
possibility of redemption gates and liquidity fees under our rules if a
fund drops below that threshold.\31\ Based on Form N-MFP
[[Page 7253]]
data providing the size of each fund's weekly liquid assets as of the
end of each week, between March 13 and March 20, the weekly liquid
assets of most money market funds changed by less than 5%. In
particular, institutional prime money market funds that were closer to
the 30% weekly liquid asset threshold tended to increase their weekly
liquid assets, while those with higher weekly liquid assets tended to
decrease their weekly liquid assets.\32\ One institutional prime fund's
weekly liquid assets fell below the 30% minimum threshold set forth in
rule 2a-7.\33\ To support liquidity of fund portfolios, two fund
sponsors provided support to three institutional prime funds by
purchasing commercial paper and certificates of deposit the funds
held.\34\
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\31\ See, e.g., Comment Letter of State Street Global Advisors
(Apr. 12, 2021) (``State Street Comment Letter''); Comment Letter of
Schwab Asset Management Solutions (Apr. 12, 2021) (``Schwab Comment
Letter''); Comment Letter of the Investment Company Institute (Apr.
12, 2021) (``ICI Comment Letter I''); Comment Letter of Wells Fargo
Funds Management, LLC (Apr. 12, 2021) (``Wells Fargo Comment
Letter''); Comment Letter of J.P. Morgan Asset Management (Apr. 12,
2021) (``JP Morgan Comment Letter''). See also, e.g., Li, Lei, Yi
Li, Marco Machiavelli, and Alex Xing Zhou, ``Runs and Interventions
in the Time of COVID-19: Evidence from Money Funds,'' working paper
(2020), available at <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3607593">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3607593</a> (``Li et al.'').
\32\ Based on our analysis, two-thirds of retail prime money
market funds and about half of institutional prime money market
funds increased their weekly liquid assets slightly during this
period.
\33\ The one money market fund that fell below the 30% threshold
did not impose a gate or fees.
\34\ As reported by these money market funds in their filings on
Form N-CR.
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On March 18, 2020, the Federal Reserve, with the approval of the
Department of the Treasury, broadened its program of support for the
flow of credit to households and businesses by taking steps to enhance
the liquidity and functioning of money markets with the establishment
of the Money Market Mutual Fund Liquidity Facility (``MMLF''). The MMLF
provided loans to financial institutions on advantageous terms to
purchase securities from money market funds that were raising
liquidity, thereby helping enhance overall market functioning and
credit provisions to the broader economy.\35\ MMLF utilization reached
a peak of just over $50 billion in early April 2020, or about 5% of net
assets in prime and tax-exempt money market funds at the time.\36\
Along with other Federal Reserve actions and programs to support the
short-term funding markets, the MMLF had the effect of significantly
slowing outflows from prime and tax-exempt money market funds.\37\ The
MMLF ceased providing loans in March 2021.\38\
---------------------------------------------------------------------------
\35\ Information about the MMLF is available on the Federal
Reserve's website at <a href="https://www.federalreserve.gov/monetarypolicy/mmlf.htm">https://www.federalreserve.gov/monetarypolicy/mmlf.htm</a>. The Federal Reserve Bank of Boston operated the MMLF.
\36\ See PWG Report, infra footnote 39, at 17. Institutional and
retail prime and tax-exempt money market funds were eligible to
participate in the MMLF. See also Federal Reserve Bank of New York
Staff Reports, no. 980, The Money Market Mutual Fund Liquidity
Facility (Sept. 2021) at text accompanying nn. 19 and 22, available
at <a href="https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr980.pdf">https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr980.pdf</a> (providing an analysis of prime funds'
participation in the MMLF and stating that through its life, the
MMLF extended loans to nine banks, which purchased securities from
30 institutional prime funds and 17 retail prime funds).
\37\ See, e.g., ``Federal Reserve Issues FOMC Statement'' (Mar.
15, 2020), available at <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm">https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm</a>; ``Federal Reserve Actions to
Support the Flow of Credit to Households and Businesses'' (Mar. 15,
2020), available at <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm">https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm</a>; ``Federal Reserve Board
Announces Establishment of a Commercial Paper Funding Facility
(CPFF) to Support the Flow of Credit to Households and Businesses''
(Mar. 17, 2020), available at <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317a.htm">https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317a.htm</a>; ``Federal Reserve
Board Announces Establishment of a Primary Dealer Credit Facility
(PDCF) to Support the Credit Needs of Households and Businesses''
(Mar. 17, 2020), available at <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317b.htm">https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317b.htm</a>; ``Federal Reserve
Board Broadens Program of Support for the Flow of Credit to
Households and Businesses by Establishing a Money Market Mutual Fund
Liquidity Facility (MMLF)'' (Mar. 18, 2020), available at <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20200318a.htm">https://www.federalreserve.gov/newsevents/pressreleases/monetary20200318a.htm</a>.
\38\ See supra footnote 35.
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Report of the President's Working Group on Financial Markets and the
Commission's Request for Comment
The President's Working Group on Financial Markets (``PWG'') issued
a report discussing these events and several potential money market
fund reform options in December 2020 (the ``PWG Report'').\39\ The
Commission issued a request for comment (the ``Request for Comment'')
on the various reform options discussed in the PWG Report, and the
comment period closed in April 2021.\40\ We received numerous comments
in response to the Request for Comment, which are discussed throughout
this release. Several of the reforms we are proposing in this release
were included as potential reform options in the PWG Report.\41\
---------------------------------------------------------------------------
\39\ See Report of the President's Working Group on Financial
Markets, Overview of Recent Events and Potential Reform Options for
Money Market Funds (Dec. 2020), available at <a href="https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf">https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf</a>.
\40\ Request for Comment on Potential Money Market Fund Reform
Measures in President's Working Group Report, Investment Company Act
Release No. 34188 (Feb. 4, 2021) [86 FR 8938 (Feb. 10, 2021)].
Comment letters received in response to the Request for Comment are
available at: <a href="https://www.sec.gov/comments/s7-01-21/s70121.htm">https://www.sec.gov/comments/s7-01-21/s70121.htm</a>.
\41\ After considering comments on the Commission's request for
comment, we are not proposing other reform options discussed in the
PWG Report. These other reform options included: (i) Reform of the
conditions for imposing redemption gates; (ii) minimum balance at
risk; (iii) countercyclical weekly liquid asset requirements; (iv)
floating NAVs for all prime and tax-exempt money market funds; (v)
capital buffer requirements; (vi) requiring liquidity exchange bank
(``LEB'') membership; and (vii) new requirements governing sponsor
support. The Commission has considered several of these reform
options in the past, including minimum balance at risk, floating
NAVs for a broader range of funds, capital buffers, and LEB
membership. See 2014 Adopting Release, supra footnote 12, at section
III.L. After considering comments, we believe the package of reforms
we are proposing is appropriately tailored to achieve our regulatory
goals. See infra Section III.D (discussing the reform alternatives
in the PWG Report that we are not proposing).
---------------------------------------------------------------------------
Reasons for Investors' Redemption Behavior
We considered several factors that may have driven investors'
redemptions during this period of market stress, including the
potential for the imposition of fees and gates as funds neared the 30%
weekly liquid asset threshold, declining NAVs, risk reduction, and
general concerns about the economic impact of the COVID-19 pandemic.
Evidence suggests that concerns about the potential for fees or gates
contributed to some investors' redemption decisions. For example, one
research paper indicated that institutional prime money market fund
outflows accelerated as funds' weekly liquid assets went closer to the
30% threshold.\42\ Another paper found that smaller institutional
investors redeemed more intensely from prime money market funds with
lower liquidity levels, whereas large institutional investors redeemed
heavily from prime money market funds regardless of fund liquidity
level.\43\ Weekly Form N-MFP data analyzed in Table 2 shows that most
of the largest asset outflows from institutional prime funds in the
third week of March 2020 were from those funds with weekly liquid
assets below 41%. The five institutional prime money market funds with
the lowest weekly liquid assets accounted for roughly 40% of the dollar
change in assets among all such money market funds. Although Table 2
shows that money market funds with weekly liquid assets closer to the
30% threshold had a higher percent of outflows during the week ending
March 20, 2020, some prime funds with higher levels of weekly liquid
assets also experienced large outflows.\44\ While Table 2 is based on
weekly data provided on Form N-MFP, a research report found that
---------------------------------------------------------------------------
\42\ See Li et al., supra footnote 31.
\43\ See BIS Quarterly Review: International banking and
financial market developments, Bank for International Settlements
(Mar. 2021), available at <a href="https://www.bis.org/publ/qtrpdf/r_qt2103.pdf">https://www.bis.org/publ/qtrpdf/r_qt2103.pdf</a>.
\44\ For example, two institutional prime money market funds
with outflows greater than 40% had weekly liquid assets of 46% and
48%.
---------------------------------------------------------------------------
[[Page 7254]]
weekly liquid assets dropped during the third week of March 2020, but
started to recover by the end of the week.\45\
---------------------------------------------------------------------------
\45\ For example, on March 16 there were two institutional prime
money market funds with weekly liquid assets less than 35%, six on
March 18, and three on March 20. See ICI Report, Experiences of US
Money Market Funds During the Covid-19 Crisis (Nov. 2020) (``ICI MMF
Report''), available at <a href="https://www.ici.org/pdf/20_rpt_covid3.pdf">https://www.ici.org/pdf/20_rpt_covid3.pdf</a>.
---------------------------------------------------------------------------
Beyond concerns about the potential imposition of fees or gates,
general declines in liquidity levels may have been a concern for
investors because the declines can signify that a fund may be less
equipped to handle redemptions in the near-term. While declining
liquidity on its own likely contributed to some investors' redemption
decisions, a few commenters provided information from investor surveys
suggesting that the potential for gates, and to a somewhat lesser
extent the potential of liquidity fees, was a more common concern among
investors.\46\
---------------------------------------------------------------------------
\46\ See infra footnote 73 (discussing these surveys).
[GRAPHIC] [TIFF OMITTED] TP08FE22.005
We also considered the possibility that declining market-based
prices for retail and institutional non-government funds contributed to
investors' redemptions in March 2020. For retail funds that maintain a
stable NAV, declining market-based prices can contribute to investor
concerns that these funds may ``break the buck'' (i.e., have market-
based prices below $0.9950) and re-price their shares below $1.00. Most
retail prime and tax-exempt money market funds experienced declining
market-based prices in March 2020. However, only one retail tax-exempt
fund reported a market-based price below $0.9975, and that fund
subsequently received sponsor support in the form of a capital
contribution to reduce the deviation between the fund's market-based
price and its stable price per share.\47\ Moreover, retail prime and
tax-exempt money market funds with lower market-based prices did not
experience larger outflows than other retail prime and tax-exempt money
market funds, so these funds' flows in March 2020 appear to have been
unrelated to market-based prices. Like retail funds, most institutional
prime and tax-exempt money market funds experienced declines in their
market-based prices in March 2020. However, none of the market-based
prices dropped below $0.9975. Staff analysis and an external study did
not find a
[[Page 7255]]
correlation between market prices and institutional prime fund
redemptions during this time.\48\
---------------------------------------------------------------------------
\47\ PWG Report, supra footnote 39, at 15.
\48\ See Baklanova, Kuznits, and Tatum, ``Prime MMFs at the
Onset of the Pandemic: Asset Flows, Liquidity Buffers, and NAVs,''
SEC Staff Analysis (Apr. 15, 2021) (``Prime MMFs at the Onset of the
Pandemic Report'') at 5, available at <a href="https://www.sec.gov/files/prime-mmfs-at-onset-of-pandemic.pdf">https://www.sec.gov/files/prime-mmfs-at-onset-of-pandemic.pdf</a>. Any statements therein
represent the views of the staff of the Division of Investment
Management. These statements are not a rule, regulation, or
statement of the U.S. Securities and Exchange Commission. The
Commission has neither approved nor disapproved their content. Such
statements, like all staff statements, have no legal force or
effect: They do not alter or amend applicable law, and they create
no new or additional obligations for any person. See also Li et al.,
supra footnote 31.
---------------------------------------------------------------------------
We also considered the potential relationship between a money
market fund's portfolio holdings and investors' redemption behavior.
Investor redemption behavior differed based on the overall nature of a
money market fund's portfolio, given that government money market funds
had significant inflows and prime money market funds had large
outflows. However, unlike the events of 2008, redemptions from prime
money market funds did not appear to be correlated to a fund's
particular holdings. For instance, prime money market funds with the
largest holdings of commercial paper and certificates of deposit did
not experience greater redemptions than other prime funds, even though
the commercial paper and certificates of deposit markets were
experiencing greater strains in March 2020 than other markets in which
money market funds invest.\49\
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\49\ The five institutional prime money market funds with the
highest concentration of commercial paper and certificates of
deposit accounted for roughly 3% of the dollar change in assets
among all institutional prime money market funds. These five funds
each held between 71% and 83% of their assets in commercial paper
and certificates of deposit. In aggregate, these five funds held $31
billion in assets on March 13, 2020, and experienced a combined
outflow of $3 billion, or roughly 10% of their total assets, during
the week of March 20, 2020.
---------------------------------------------------------------------------
Beyond factors that relate to the regulatory framework for money
market funds, there are other factors that may have had a relationship
to investors' redemption incentives in March 2020. As some commenters
suggested, general uncertainty of a global health crisis and fears of
possible business disruptions and economic downturns in the real
economy as people stayed at home resulted in investors becoming
increasingly risk averse and seeking to preserve or increase
liquidity.\50\ Some commenters also asserted that some institutional
investor redemptions were ordinary course redemptions that otherwise
would have occurred, irrespective of the pandemic and market stress, to
meet near-term cash needs, including for operating cash, to make
quarterly corporate tax payments, or to meet payroll expenses.\51\
---------------------------------------------------------------------------
\50\ See, e.g., ICI Comment Letter I; JP Morgan Comment Letter;
Comment Letter of the Vanguard Group, Inc. (Apr. 12, 2021)
(``Vanguard Comment Letter''); Comment Letter of Federated Hermes,
Inc. (Apr. 12, 2021) (``Federated Hermes Comment Letter I'').
\51\ See, e.g., Comment Letter of Invesco (Apr. 12, 2021)
(``Invesco Comment Letter'') (stating that prime money market funds
experienced increased redemptions leading up to the quarterly
corporate tax deadline); Federated Hermes Comment Letter I (citing a
Carfang Group survey in which 50% of surveyed corporate treasurers
who redeemed from institutional prime funds in March 2020 stated
that they were doing so to meet operating cash needs); Comment
Letter of the Securities Industry and Financial Markets Association
Asset Management Group (Apr. 12, 2021) (``SIFMA AMG Comment
Letter'') (stating that tax return filings for partnerships and S-
corporations were due on March 16, 2020, and many businesses had
biweekly or semimonthly payroll expenses around the same time).
---------------------------------------------------------------------------
In addition, our staff identified some relationships between the
size of outflows and the type of adviser to the fund or the size of the
fund. This revealed that publicly offered prime institutional money
market funds managed by bank-affiliated advisers had the most outflows
in March 2020.\52\ Money market funds complexes with lower assets under
management in publicly offered prime institutional money market funds
also generally had larger outflows during this time.\53\
---------------------------------------------------------------------------
\52\ See Prime MMFs at the Onset of the Pandemic Report, supra
footnote 48, at 3. The analysis in this report concluded that the
largest outflows in mid-March 2020 were from the publicly offered
prime institutional money market funds with advisers owned by
banking firms. The funds with advisers owned by the largest U.S.
banks designated as global systemically important banks (``G-SIBs'')
accounted for 56% of the outflows in the third week of March, even
though these funds managed only around 28% of net assets in publicly
offered prime institutional money market funds.
\53\ Id at 3.
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Connection Between Money Market Fund Outflows and Stress in Short-Term
Funding Markets
In markets for private short-term debt instruments, such as
commercial paper and certificates of deposit, conditions significantly
deteriorated in the second week of March 2020. Spreads for commercial
paper and certificates of deposits began widening sharply, and new
issuances declined and shifted to shorter tenors.\54\ While there is
limited secondary activity in these markets even in normal times,
several industry commenters discussed particular difficulties selling
commercial paper in March 2020.\55\ Moreover, where money market funds
were able to sell commercial paper during this period, increased
selling activity from institutional prime funds may have contributed to
stress in these markets as discussed below.
---------------------------------------------------------------------------
\54\ PWG Report, supra footnote 39, at 11.
\55\ See infra footnote 202 and accompanying paragraph.
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Using Form N-MFP data, we observed that retail prime and privately
offered institutional prime funds did not sell significantly more long-
term portfolio securities (i.e., securities that mature in more than a
month) in March 2020 relative to their typical averages. Publicly
offered institutional prime funds, however, increased their sales of
long-term securities in March 2020 to 15% of total assets during this
time period, which includes assets sold to the MMLF and sponsors,
compared to a 4% monthly average during the period from October 2016
through February 2020. In March 2020, these funds sold around $52
billion in certificates of deposit and commercial paper with maturities
greater than one month.\56\ Of this amount, approximately $4 billion
was sold to fund sponsors, as reported on Form N-CR. Combining this
data with data provided by an industry group's member survey and
Federal Reserve data on the balance of the MMLF, prime money market
funds sold an estimated $80 billion in commercial paper and
certificates of deposit in March 2020, with approximately 5% ($4
billion) of that total sold to sponsors, 66% ($53 billion) pledged to
the MMLF, and 29% ($23 billion) sold in the secondary market.\57\ Thus,
we find that prime money market funds, particularly institutional
funds, were engaging in greater than normal selling activity in these
markets which, when combined with similar selling from other market
participants such as hedge funds and bond mutual funds, both
contributed to, and were impacted by, stress in short-term funding
markets.\58\
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\56\ This analysis is based on longer-term holdings that these
funds reported on Form N-MFP in February 2020 but that they did not
report holding in March 2020. The estimate includes $24.3 billion in
certificates of deposit and $28.1 billion in commercial paper.
\57\ Our analysis of available data suggests that of the $80
billion in commercial paper and certificates of deposit sold in
March 2020, about $70 billion had maturities greater than a month
and about $10 billion had maturities less than a month. As of April
1, 2020, the MMLF balance was close to $53 billion according to the
Federal Reserve's weekly data, available at <a href="https://www.federalreserve.gov/releases/h41/20200402/">https://www.federalreserve.gov/releases/h41/20200402/</a>. See ICI Comment
Letter I (providing information about money market fund selling
activity in March 2020 based on a member survey).
\58\ See, e.g., SEC Staff Interconnectedness Report, supra
footnote 25, at 4. At the end of February 2020, prime money market
funds offered to the public owned about 19% of commercial paper
outstanding. See PWG Report, supra footnote 39, at 11.
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[[Page 7256]]
Conditions in short-term municipal debt markets also worsened
rapidly in March 2020. Stresses in short-term municipal markets
contributed to pricing pressures and outflows for tax-exempt money
market funds which, in turn, contributed to increased stress in
municipal markets.\59\ Table 2 shows that as tax-exempt money market
funds experienced heightened redemptions in the third week of March
2020 of 9.2%, they reduced their holdings (e.g., tender option bonds
and variable rate demand notes) by $12.9 billion that week.
---------------------------------------------------------------------------
\59\ See PWG Report, supra footnote 39, at 12. See also SEC
Staff Interconnectedness Report, supra footnote 25, at 27.
---------------------------------------------------------------------------
One commenter suggested that the overall issue in the municipal
securities market in March 2020 was selling pressure from many market
participants, and not selling pressure from tax-exempt money market
funds, which make up only a small portion of the overall market.\60\
This commenter suggested that other market participants were raising
cash by selling short-term municipal securities, which caused
meaningful discounts on the market value of those securities and
consequently placed downward pressure on market-based NAVs of tax-
exempt money market funds. The commenter also stated that longer-term
municipal money market securities, and not variable rate demand notes,
bore the brunt of the market stress in March 2020. Another commenter
suggested that tax-exempt money market funds sold longer-term holdings
in March 2020 to maintain an average weighted maturity of not more than
60 days, rather than to maintain weekly liquid assets above 30% (given
that these funds typically hold much higher levels of weekly liquid
assets).\61\ Our analysis found that tax-exempt money market funds sold
a larger amount of portfolio securities with maturities of more than a
month in March 2020 than they typically do. Retail tax-exempt money
market funds sold 16% of total assets of such holdings during this
period, compared to a monthly average of 3% during the period from
October 2016 through February 2020. Institutional tax-exempt money
market funds increased their sales of longer-term securities from 5% of
total assets during the period from October 2016 through February 2020
to 24% in March 2020. Similar to what we observed with prime money
market funds, tax-exempt funds engaged in greater than normal selling
activity.\62\
---------------------------------------------------------------------------
\60\ Vanguard Comment Letter.
\61\ Comment Letter of Stephen Keen (Apr. 28, 2021). This
commenter also disagreed with a statement in the PWG Report that a
spike in the SIFMA index yield caused a drop in market-based NAVs of
tax-exempt money market funds. The commenter suggested that it is
more likely that the fund reporting a market-based NAV below $0.9775
had already realized losses from earlier portfolio sales and sold
longer-term holdings in response to redemptions in March, with the
March redemptions increasing the significance of the realized
losses.
\62\ Although the tax-exempt money market funds held only $127
billion in assets in the third week of March 2020, they, like other
larger market participants, found it difficult to sell assets during
this period of market stress.
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II. Discussion
A. Amendments To Remove Liquidity Fee and Redemption Gate Provisions
1. Unintended Effects of the Tie Between the Weekly Liquid Asset
Threshold and Liquidity Fees and Redemption Gates
Under current rule 2a-7, a money market fund has the ability to
impose liquidity fees or redemption gates (generally referred to as
``fees and gates'') after crossing a specified liquidity threshold.\63\
A money market fund may impose a liquidity fee of up to 2%, or
temporarily suspend redemptions for up to 10 business days in a 90-day
period, if the fund's weekly liquid assets fall below 30% of its total
assets and the fund's board of directors determines that imposing a fee
or gate is in the fund's best interests.\64\ Additionally, a non-
government money market fund is required to impose a liquidity fee of
1% on all redemptions if its weekly liquid assets fall below 10% of its
total assets, unless the board of directors of the fund determines that
imposing such a fee would not be in the best interests of the fund.\65\
Separately, a money market fund is required to provide daily disclosure
of the percentage of its total assets invested in weekly liquid assets
(as well as daily liquid assets) on its website to provide transparency
to investors and increase market discipline.\66\
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\63\ Government funds are permitted, but not required, to impose
fees and gates, as discussed below.
\64\ If, at the end of a business day, a fund has invested 30%
or more of its total assets in weekly liquid assets, the fund must
cease charging the liquidity fee (up to 2%) or imposing the
redemption gate, effective as of the beginning of the next business
day. See 17 CFR 270.2a-7(c)(2)(i)(A) and (B), and (ii)(B).
\65\ The board also may determine that a lower or higher fee
would be in the best interests of the fund. See 17 CFR 270.2a-
7(c)(2)(ii)(A).
\66\ 17 CFR 270.2a-7(h)(10)(ii); 2014 Adopting Release, supra
footnote 12, at section III.E.9.a.
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Fees and gates were intended to serve as redemption restrictions
that would provide a ``cooling off'' period to temper the effects of a
short-term investor panic and preserve liquidity levels in times of
market stress, as well as better allocate the costs of providing
liquidity to redeeming investors.\67\ However, these provisions did not
achieve these objectives during the period of market stress in March
2020. Based on available evidence, even though no money market fund
imposed a fee or gate, the possibility of the imposition of a fee or
gate appears to have contributed to incentives for investors to redeem
and for money market fund managers to maintain weekly liquid asset
levels above the threshold, rather than use those assets to meet
redemptions.\68\ These tools therefore appear to have potentially
increased the risks of investor runs without providing benefits to
money market funds as intended. As a result, and after considering
comments, we are proposing to remove the tie between liquidity
thresholds and fee and gate provisions and, moreover, to remove fee and
gate provisions from rule 2a-7 entirely.\69\
---------------------------------------------------------------------------
\67\ See 2014 Adopting Release, supra footnote 12, at section
III.L.1.a.
\68\ See supra Section I.B.
\69\ We also propose to remove related disclosure and reporting
provisions that require funds to disclose certain information about
the possibility of fees and gates in their prospectuses and to
report any imposition of fees or gates on Form N-CR, on the fund's
website, and in its statement of additional information. See Items
4(b)(1)(ii) and 16(g)(1) of current Form N-1A; Parts E, F, and G of
current Form N-CR; 17 CFR 270.2a-7(h)(10)(v).
---------------------------------------------------------------------------
Commenters broadly supported removal of the tie between weekly
liquid asset thresholds and the potential imposition of fees and
gates.\70\ Many commenters stated that this tie contributed to
investors' incentives to redeem in March 2020 as funds' weekly liquid
assets declined.\71\ Commenters suggested that, although the rule
allows but does not require a fund's board to impose redemption gates
or liquidity fees when the fund drops below the 30% weekly liquid asset
threshold, investors viewed the 30% threshold as a bright line
prompting redemptions.\72\
[[Page 7257]]
Some commenters also provided information suggesting that concerns
about the potential imposition of fees or gates contributed to
institutional investors' decisions to redeem.\73\ One commenter stated
that these concerns, combined with investors' ability to track weekly
liquid asset levels on a daily basis, drove investors' redemption
behavior.\74\ A few commenters suggested that investors were more
concerned about the potential for temporary suspensions of redemptions
than the potential for liquidity fees.\75\ In addition, a few
commenters stated that retail investors were less sensitive to concerns
about potential fees or gates than institutional investors.\76\
---------------------------------------------------------------------------
\70\ See e.g., ICI Comment Letter I; SIFMA AMG Comment Letter;
Comment Letter of Fidelity Management & Research Company LLC (Apr.
12, 2021) (``Fidelity Comment Letter''); Comment Letter of Northern
Trust Asset Management (Apr. 12, 2021) (``Northern Trust Comment
Letter''); Schwab Comment Letter; Comment Letter of Professors of
Finance, Stanford Graduate School of Business, and The University of
Chicago Booth School of Business (Apr. 9, 2021) (``Prof. Admati et
al. Comment Letter''); Comment Letter of Healthy Markets Association
(Apr. 19, 2021) (``Healthy Markets Comment Letter'').
\71\ See, e.g., ICI Comment Letter I; Vanguard Comment Letter;
Fidelity Comment Letter; Prof. Admati et al. Comment Letter; Comment
Letter of U.S. Chamber of Commerce Center for Capital Markets
Competitiveness (Apr. 12, 2021) (``CCMC Comment Letter'').
\72\ See Schwab Letter; ICI Comment Letter I; Comment Letter of
the Investment Company Institute (May 12, 2021) (``ICI Comment
Letter II''); JP Morgan Comment Letter; Wells Fargo Comment Letter.
\73\ See, e.g., JP Morgan Comment Letter (discussing an informal
survey of institutional investor clients in which respondents, on
average, identified the potential for gates as the most important
factor affecting their decisions to redeem among several possible
factors the survey identified); Federated Hermes Comment Letter I
(citing a survey of 39 treasury managers in which 49% of the
treasurers decreased their holdings of prime money market funds in
March 2020 and, of those treasurers, 87% mentioned the potential of
``redemption hurdles'' as a factor in their decision to redeem).
\74\ ICI Comment Letter I.
\75\ See Invesco Comment Letter (stating that investors were
less concerned about the price of their shares and more concerned
about not having access to their shares, particularly for investors
who were bolstering their liquidity positions ahead of what was an
unknown situation in March 2020); ICI Comment Letter I (stating that
investors view access to their money as paramount in stress periods
and are less concerned with ``losing a few pennies'' through, for
example, a fee); ICI Comment Letter II.
\76\ See, e.g., ICI Comment Letter I (stating that retail prime
money market funds did not exhibit the same pattern of increasing
redemptions as a fund neared the 30% threshold, despite the fact
that retail prime funds are subject to the same fee and gate
provisions as institutional prime funds); Fidelity Comment Letter.
---------------------------------------------------------------------------
Several commenters also discussed the effect of the connection
between liquidity thresholds and fees and gates on money market fund
managers' behavior in March 2020. These commenters stated that, rather
than use weekly liquid assets, some managers sold longer-dated
securities to meet redemptions to avoid falling below the 30%
threshold.\77\ Commenters asserted that these sales led to losses for
funds and their remaining investors, and contributed to downward
pricing pressure on the underlying securities.\78\ A few commenters
also suggested that the pressure for money market funds to maintain
liquidity buffers well above the 30% threshold exacerbated market
stress in March 2020 as most money market funds were seeking liquidity
at the same time to maintain or build their buffers in the face of
redemptions.\79\ Commenters also recognized that, in a few instances,
fund sponsors provided financial support by purchasing securities from
affiliated institutional prime money market funds to prevent these
funds from dropping below the 30% weekly liquid asset threshold.\80\
One commenter stated that, prior to the 2014 reforms that created the
connection between liquidity thresholds and fees and gates, money
market funds regularly used their liquidity buffers and had weekly
liquid assets below the 30% threshold without adverse consequences.\81\
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\77\ See, e.g., State Street Comment Letter; ICI Comment Letter
I; JP Morgan Comment Letter.
\78\ See, e.g., JP Morgan Comment Letter.
\79\ See Schwab Comment Letter; State Street Comment Letter
(stating that the commenter observed that institutional prime money
market funds held, on average, weekly liquid assets of approximately
45% during March 2020).
\80\ See, e.g., ICI Comment Letter I; Wells Fargo Comment
Letter.
\81\ ICI Comment Letter I (stating that for the more than 6
years the 30% weekly liquid asset threshold was in effect but not
connected to fee and gate provisions, 68% of prime money market
funds and 10% of tax-exempt money market funds dropped below the 30%
threshold at least once, and at least one prime money market fund
was below this threshold in nearly each week during this period).
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We recognize that the current fee and gate provisions did not have
their intended effect in March 2020 and, instead, appear to have
contributed to some of the stress that some money market funds and
short-term funding markets faced during that period. Some investors may
have feared that if they were not the first to exit their fund, there
was a risk that they could be subject to gates or fees, and this
anticipatory, risk-mitigating perspective potentially further
accelerated redemptions. As discussed above, our analysis and external
research are consistent with commenters' views on investor behavior and
found that prime and tax-exempt money market funds whose weekly liquid
assets approached the 30% threshold had, on average, larger outflows in
percentage terms than other prime and tax-exempt money market
funds.\82\
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\82\ See supra Section I.B (discussing our analysis and external
papers).
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2. Removal of Redemption Gates From Rule 2a-7
We are proposing to remove the ability of a money market fund to
impose redemption gates under rule 2a-7, as suggested by some
commenters.\83\ For example, a few commenters suggested that gates be
eliminated from rule 2a-7 entirely, or that funds be permitted to
suspend redemptions only under extraordinary circumstances, such as in
anticipation of a fund liquidation in accordance with rule 22e-3.\84\
One of these commenters suggested that, given the strong investor
aversion to gates and the likelihood that liquidation would be a
consequence of any board determination to impose a gate, the current
gate provisions contemplated for fund liquidations in existing rule
22e-3 may be sufficient.\85\ Based on the experience in March 2020, we
are concerned that redemption gates may not be an effective tool for
money market funds to stem heavy redemptions in times of stress due to
money market fund investors'--who typically invest in money market
funds for cash management purposes--general sensitivity to being unable
to access their investments for a period of time and tendency to redeem
from such funds preemptively if they fear a gate may be imposed. Under
the proposal, a money market fund would continue to be able to suspend
redemptions to facilitate an orderly liquidation of the fund under rule
22e-3. Rule 22e-3 generally allows a money market fund to suspend
redemptions if, among other conditions, (1) the fund, at the end of a
business day, has invested less than 10% of its total assets in weekly
liquid assets or, in the case of a government or retail money market
fund, the fund's price per share has deviated from its stable price
(i.e., it has ``broken the buck'') or the fund's board determines that
such a deviation is likely to occur, and (2) the fund's board has
approved the fund's liquidation. We continue to believe that the
ability to suspend redemptions in these circumstances can help address
the significant run risk and potential harm to shareholders.
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\83\ See Vanguard Comment Letter; Comment Letter of Western
Asset Management Company, LLC (Apr. 12, 2021) (``Western Asset
Comment Letter''); see also JP Morgan Comment Letter; ICI Comment
Letter I.
\84\ See Vanguard Comment Letter (noting the negative potential
consequences if gates remain in the rule text); Western Asset
Comment Letter (recommending that gates be permitted only under
extraordinary circumstances, such as when a fund is in severe
difficulties or in anticipation of liquidation); JP Morgan Comment
Letter (suggesting either that the gate provision be removed from
the rule or that rule 2a-7 grant boards the discretion to impose
gates at any time if they deem it to be in the best interest of the
fund).
\85\ See JP Morgan Comment Letter.
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Some commenters suggested other ways of removing the tie between
the weekly liquid asset threshold and a fund's ability to impose a
gate. For example, some suggested that fund boards should have
discretion to impose gates at any time they determine doing so is in
the best interests of the fund.\86\
[[Page 7258]]
One commenter stated that some institutional investors may still redeem
preemptively when a fund's weekly liquid assets approach the 30%
threshold out of fear of a gate, but asserted that granting the board
discretion without a liquidity threshold tie would reduce the incentive
for a large percentage of shareholders to preemptively redeem. The
commenter also suggested this approach could materially improve the
functioning of money market funds in any future liquidity events and
could be easily implemented within the existing regulatory
framework.\87\ A few other commenters recommended that any reform
should maintain a regulatory link between the weekly liquid asset
threshold and the imposition of gates, but that the weekly liquid asset
threshold should be lowered to 10% or 15%.\88\ These commenters
expressed concern that without clear regulatory protocol on when money
market funds could implement gates, boards might face too much pressure
in making this decision and investors may have additional uncertainty,
which could negatively affect investor redemption decisions.
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\86\ See e.g., Wells Fargo Comment Letter; Federated Hermes
Comment Letter I; Comment Letter of the Institute of International
Finance (Apr. 12, 2021) (``Institute of International Finance
Comment Letter''); Comment Letter of the American Bankers
Association (Apr. 12, 2021) (``ABA Comment Letter''); JP Morgan
Comment Letter; ICI Comment Letter I; Comment Letter of Federated
Hermes, Inc. (Sept. 13, 2021) (``Federated Hermes Comment Letter
III'') (suggesting the rule identify certain types of information
that a fund's board could consider requesting from the adviser to
inform this decision).
\87\ Wells Fargo Comment Letter.
\88\ Comment Letter of Dreyfus Cash Investment Strategies (Apr.
12, 2021) (``Dreyfus Comment Letter''); Comment Letter of T. Rowe
Price (Apr. 12, 2021) (``T. Rowe Price Comment Letter''); Comment
Letter of BlackRock, Inc. (Apr. 12, 2021) (``BlackRock Comment
Letter'').
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We are not proposing a gate provision, either with or without an
associated liquidity threshold, to limit the potential for investor
uncertainty and de-stabilizing preemptive investor redemption behavior
regarding the potential use of gates during stress events. Based on
investor behavior in March 2020, we are concerned that voluntary gates
may not be imposed, and if imposed, could lead to the closure of the
fund in question. Rule 22e-3 under the Act provides a mechanism for a
fund to suspend redemptions to facilitate an orderly liquidation, so we
believe that this provision provides adequate flexibility for
liquidating funds without incentivizing de-stabilizing investor
redemption behavior during stress events. In addition, without a
specific regulatory threshold or other specific guidelines to govern
the imposition of gates, it may be difficult for a fund's board to
determine whether it is in the fund's best interests to impose a
voluntary gate. We are concerned that the discretionary ability of the
board to impose gates could add uncertainty in times of market stress,
and investors may decide to redeem at this time simply to avoid the
potential imposition of a gate. Such preemptive redemptions could
increase pressure on fund liquidity during periods of market stress.
We request comment on our proposal to remove from rule 2a-7 the
ability of money market funds to impose redemption gates and to retain
the availability of a suspension under the terms set forth in rule 22e-
3, including the following:
1. Should we, as proposed, no longer allow money market funds to
impose redemption gates under rule 2a-7? Are there circumstances,
beyond those covered by rule 22e-3, in which the ability of a money
market fund to impose a gate or suspend redemptions would provide
benefits to money market funds and short-term funding markets?
2. Instead of removing the ability to impose gates from rule 2a-7,
should we retain gates as an available tool for money market funds? If
so, should we modify the current provision to remove the tie between
gate determinations and liquidity thresholds? Should a fund board be
able to impose a gate any time it determines that doing so is in the
best interests of the fund? If so, should a fund have to opt in ex ante
to having gates as a potential tool? In what circumstances would it
likely be in the fund's best interests to impose a gate? Would a board
impose a gate in practice and, if so, what are the practical
consequences of any such decision? Would it be effective to require a
fund to adopt board-approved policies and procedures that identify the
circumstances in which the fund would impose a gate? If so, what
factors should those policies and procedures consider for purposes of
when to impose a gate? How would this approach affect investor and fund
behavior? For example, would investors be likely to redeem preemptively
in times of stress out of concern that a fund may impose a gate, or
would investors view a redemption gate as unlikely under this approach?
3. If we retain the connection between redemption gates and
liquidity thresholds, what liquidity threshold should we use to permit
a board to impose a redemption gate? For example, should the liquidity
threshold remain at 30% weekly liquid assets, increase to 50% weekly
liquid asset in connection with our proposal to increase liquidity
requirements, or be lower than the current 30% threshold (e.g., 10% or
15% weekly liquid assets)? Should the board's ability to impose a
redemption gate instead be tied to a daily liquid asset threshold, such
as the current 10% threshold, the proposed 25% threshold discussed
below, or a lower threshold, such as 5%? How would these changes affect
investor and fund behavior? Are there other ways we should modify
provisions related to redemption gates to make them less likely to
incentivize preemptive redemptions in times of stress?
4. Should we allow certain types of money market funds to impose
redemption gates, but not others? For example, are retail investors
less sensitive to the potential imposition of gates, such that allowing
retail funds to impose gates is less likely to contribute to incentives
to redeem preemptively? Alternatively, should we only allow
institutional funds to impose gates given that these funds historically
have experienced higher levels of redemptions in times of stress?
5. If we retain a redemption gate provision in rule 2a-7, would the
board's ability to impose a redemption gate reduce the need for, or
otherwise affect, other regulatory provisions we are proposing (e.g.,
the swing pricing requirement for institutional prime and institutional
tax-exempt money market funds, increased liquidity requirements for all
money market funds)?
3. Removal of Liquidity Fees From Rule 2a-7
We also are proposing to remove from rule 2a-7 the provisions
allowing or requiring money market funds to impose liquidity fees once
the fund crosses certain liquidity thresholds. As a general matter, we
believe investors are less sensitive to the possibility of bearing
liquidity costs than they are to the possibility of redemption
gates.\89\ We also continue to believe it is important for
institutional prime and institutional tax-exempt money market funds to
have a tool to cause redeeming investors to bear the costs of liquidity
if they redeem during a period of stress. However, we do not believe
the current liquidity fee provisions in rule 2a-7 achieve this goal. In
March 2020, no money market funds imposed liquidity fees, despite the
fact that many institutional prime and tax-exempt funds were
experiencing significant outflows and some were selling
[[Page 7259]]
portfolio holdings to meet redemptions, sometimes at a significant loss
due to wider spreads given liquidity conditions in the market at that
time.\90\ In part, this is due to the design of the current rule, given
that only one institutional prime fund had weekly liquid assets below
the 30% threshold and could have therefore imposed a liquidity fee.
---------------------------------------------------------------------------
\89\ See supra footnote 75 (discussing comment letters that
expressed the view that the possibility of redemption gates was a
greater concern for investors in March 2020 than the possibility of
liquidity fees).
\90\ See, e.g., JP Morgan Comment Letter.
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Some commenters recommended that we allow a fund's board to impose
liquidity fees whenever the board determines that doing so is in the
best interests of shareholders, without reference to a specific
liquidity threshold.\91\ A few other commenters suggested allowing fund
boards to impose liquidity fees when the fund's weekly liquid assets
reach a set level that is lower than the existing 30% threshold.\92\
Some commenters suggested that we require money market funds to have
policies and procedures that provide a fund's board with direction on
when to impose fees and how to calculate them.\93\ Another commenter
recommended that the rule identify certain types of information that
the board could request from the fund's adviser to inform its decision
of whether to impose liquidity fees and require the board to summarize
the basis of its decision to impose liquidity fees in a report to the
Commission.\94\ We are not proposing any of these approaches because we
do not believe they would result in timely decisions to impose
liquidity fees on days when the fund has net outflows that, due to
associated costs to meet those redemptions, will dilute the value of
the fund for remaining shareholders.\95\ Moreover, while one commenter
suggested removing the ability to impose fees from rule 2a-7, the
commenter did not support any alternative tools for imposing liquidity
costs on redeeming investors.\96\
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\91\ See, e.g., Federated Hermes Comment Letter I; Comment
Letter of Federated Hermes, Inc. (June 1, 2021); Wells Fargo Comment
Letter.
\92\ See, e.g., BlackRock Comment Letter (suggesting 10%);
Dreyfus Comment Letter (suggesting 15%).
\93\ JP Morgan Comment Letter; ICI Comment Letter I; Western
Asset Comment Letter.
\94\ Federated Hermes Comment Letter III.
\95\ In contrast, the proposed swing pricing requirement
discussed below would not require board action to impose costs on
redeeming investors on a particular day and instead would connect
the liquidity costs to the amount of net redemptions for that
period, thus reducing the potential for a first-mover advantage or
other timing misalignment between an investor's redemption activity
and the imposition of liquidity costs.
\96\ Vanguard Comment Letter.
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For institutional prime and tax-exempt money market funds, we are
concerned that the current rule--and the alternatives commenters
suggested--would not protect remaining investors in a fund from
dilution resulting from sizeable outflows in future periods of stress.
While we are proposing to remove liquidity fee provisions from the
rule, we believe it is important for these funds to have an effective
tool to address shareholder dilution and potential institutional
investor incentives to redeem quickly in times of liquidity stress to
avoid further losses. As a result, we are proposing to require
institutional prime and tax-exempt money market funds to implement
swing pricing, as discussed in more detail below.
For retail prime and tax-exempt funds, these funds historically
have experienced lower, more gradual levels of redemptions in stress
periods than institutional funds. This was also true in March 2020,
when retail prime funds had outflows of approximately 11% over a three-
week period in comparison to institutional prime fund outflows of
approximately 30% over a two-week period. As discussed below, we are
proposing to increase liquidity requirements for all money market
funds, including retail funds. When the Commission originally
determined to apply the fee and gate provisions to retail funds, it
expressed concern that retail investors may be motivated to redeem
heavily in flights to quality, liquidity, and transparency (even if
they may do so somewhat more slowly than institutional investors) and
stated that it could not rule out the potential for heavy redemptions
in retail funds in the future.\97\ Although retail funds did not have
particularly heavy redemptions during the liquidity stress of March
2020, some retail prime funds participated in the MMLF, and it is
impossible to know whether outflows would have continued absent
official sector intervention that helped stabilize short-term funding
markets.\98\ We believe, however, that the significant increases to
daily and weekly liquid asset thresholds we are proposing--which would
have the largest effect on retail prime funds based on their average
historical liquidity levels--should result in these funds being able to
manage much heavier redemptions than they have experienced during any
previous stress period.\99\ As a result of the expected effect of the
liquidity requirement changes, we do not believe that retail prime and
tax-exempt money market funds need special provisions allowing them to
impose liquidity fees or other analogous tools under rule 2a-7.
---------------------------------------------------------------------------
\97\ See 2014 Adopting Release, supra footnote 13, at section
III.C.2.a.
\98\ See supra footnote 36 (noting that 17 retail prime funds
participated in the MMLF).
\99\ See infra paragraph accompanying footnote 209 (explaining
that while the proposal would require retail prime funds to maintain
higher levels of liquidity than they have historically maintained on
average, the resulting larger liquidity buffers would increase the
likelihood that these funds can meet redemptions without significant
dilution).
---------------------------------------------------------------------------
While the proposal would remove the liquidity fee provision in rule
2a-7, a money market fund's board of directors may nonetheless approve
the fund's use of redemption fees (up to but not exceeding 2% of the
value of shares redeemed) to eliminate or reduce as practicable
dilution of the value of the fund's outstanding securities under rule
22c-2 under the Act.\100\ As the Commission has previously recognized,
rule 22c-2 is not limited to recouping costs associated with short-term
trading strategies, such as market timing, and can be used to mitigate
dilution arising from shareholder transaction activity generally,
including indirect costs such as liquidity costs.\101\ Although rule
22c-2 generally classifies money market funds as excepted funds that
are not subject to the rule's requirements, the rule does not treat
money market funds as excepted funds if they elect to impose redemption
fees under the rule.\102\ Thus, to the extent a money market fund's
board determines that the ability to impose fees may be necessary to
protect its investors, the board could establish a redemption fee
approach to meet the needs of the fund, provided the fund otherwise
complies with rule 22c-2 (e.g., by entering into shareholder
information agreements with intermediaries) and discloses information
about the redemption fee in its prospectus in compliance with Form N-
1A. If a money market fund elects to impose redemption fees under rule
22c-2, its process for determining when to
[[Page 7260]]
apply a fee and in what amount generally should be designed to result
in timely application of a fee to address dilution.
---------------------------------------------------------------------------
\100\ See 17 CFR 270.22c-2 (rule 22c-2 under the Investment
Company Act) (providing that an open-end fund may impose a
redemption fee, not to exceed 2% of the value of the shares
redeemed, upon the determination by the fund's board of directors
that such fee is ``necessary or appropriate to recoup for the fund
the costs it may incur as a result of those redemptions or to
otherwise eliminate or reduce so far as practicable any dilution of
the value of the outstanding securities issued by the fund''). We
anticipate that retail prime and tax-exempt money market funds would
be more likely to rely on rule 22c-2 to impose redemption fees than
institutional prime and tax-exempt funds, as the institutional funds
would be subject to a proposed swing pricing requirement to address
dilution.
\101\ See Mutual Fund Redemption Fees, Investment Company Act
Release No. 26782 (Mar. 11, 2005) [70 FR 13328 (Mar. 18, 2005)];
Investment Company Swing Pricing, Investment Company Release No.
32316 (Oct. 13, 2016) [81 FR 82084 (Nov. 18, 2016)] (``Swing Pricing
Adopting Release''), at paragraph accompanying n.26.
\102\ See 17 CFR 270.22c-2(b).
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We request comment on our proposal to no longer permit or require
money market funds to impose liquidity fees under rule 2a-7, including
on the following:
6. Should we remove the liquidity fee provisions from rule 2a-7, as
proposed? To what extent did the possibility of liquidity fees motivate
investors' redemption decisions in March 2020? If liquidity fees are
less of a concern for investors than redemption gates, would liquidity
fee provisions, on their own, be less likely to contribute to
preemptive redemptions in future stress periods? If so, are there
advantages to retaining the current liquidity fee provisions and their
connection to weekly liquid asset thresholds? If we retain the
connection between liquidity fees and liquidity thresholds, what
liquidity threshold should we use to permit a board to impose a
liquidity fee (e.g., the current 30% weekly liquid asset threshold or
10% daily liquid asset threshold, the 50% weekly liquid asset threshold
or 25% daily liquid asset threshold we propose to use for purposes of
funds' minimum liquidity requirements, or a lower threshold, such as
10% or 15% weekly liquid assets or 5% daily liquid assets)? How would
changes to the liquidity threshold that allows a fund board to consider
liquidity fees affect investor and fund behavior?
7. Rather than remove the current liquidity fee provisions, should
we modify the circumstances in which a money market fund may impose
liquidity fees? Should we permit a fund's board to impose liquidity
fees when it determines that fees are in the best interests of the
fund? Would a board use this tool in practice? What would be the
impediments (if any) of the board making this determination? Would the
board be able to act quickly enough to impose a fee so that redeeming
investors bear the costs associated with their redemptions and do not
have a first-mover advantage? Are there other ways we could achieve
these goals through a liquidity fee framework? For example, would it be
effective to require a fund to adopt board-approved policies and
procedures that identify the circumstances in which the fund would
impose a liquidity fee and how the fund would calculate the amount of
the fee, without requiring in-the-moment board decisions or action? If
so, what factors should those policies and procedures consider for
purposes of when to impose a liquidity fee (e.g., size of redemptions,
liquidity of the fund's portfolio, market conditions, and transaction
costs)? As another alternative, should we require a fund to adopt
board-approved policies and procedures that result in a fund
determining its liquidity costs each day it has net redemptions and
applying those costs through a fee? Under either of these approaches,
how should funds calculate the amount of a liquidity fee? Should this
calculation method be the same as or similar to the calculation of a
swing factor for purposes of our proposed swing pricing requirement or
the Commission's current swing pricing rule applicable to other mutual
funds? \103\ Should the calculation account for factors that boards may
consider in determining the level of a liquidity fee under the current
rule, such as changes in spreads for portfolio securities (whether
based on actual sales, dealer quotes, pricing vendor mark-to-model or
matrix pricing, or otherwise); the maturity of the fund's portfolio
securities; or changes in the liquidity profile of the fund in response
to redemptions and expectations regarding that profile in the immediate
future? \104\ Should the liquidity fee take into account the market
impact of selling the fund's securities to meet redemptions? \105\
Should the liquidity fee be based on an assumption that the fund meets
redemptions with its most liquid securities, a pro rata amount of each
security in its portfolio, or only the securities the fund intends to
use to meet redemptions? Should the liquidity fee be a set amount, such
as 0.5%, 1%, or 2% of the value of the shares redeemed? Instead of a
uniform fee amount, should the rule establish a default fee that funds
could adjust upward or downward, as appropriate?
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\103\ See infra Section II.B.1 (discussing calculation of a
swing factor under our proposal); 17 CFR 270.22c-1(a)(3)(i)(C)
(describing calculation of a swing factor under the Commission's
current swing pricing rule applicable to non-money market funds).
\104\ See 2014 Adopting Release, supra footnote 12, at paragraph
accompanying n.303.
\105\ Market impact costs are costs incurred when the price of a
security changes as a result of the effort to purchase or sell the
security. Market impact costs reflect price concessions (amounts
added to the purchase price or subtracted from the selling price)
that are required to find the opposite side of the trade and
complete the transaction.
---------------------------------------------------------------------------
8. If we maintain a liquidity fee provision in the rule, should it
apply only to institutional prime and tax-exempt funds, or should
retail or government funds also be subject to the provision? What are
the key distinguishing characteristics of the funds that would lead to
differing approaches?
9. If we allowed or required funds to impose liquidity fees, are
there other changes we should make to the current framework? For
example, should we continue to limit the size of the liquidity fee to
no more than 2% of the value of the shares redeemed? Are there
circumstances in which the liquidity costs associated with meeting
redemptions may exceed 2% of the value of the shares redeemed, such
that increasing or removing the limit would better mitigate dilution?
10. If we adopted a modified liquidity fee framework that required
funds to apply liquidity fees more frequently than is contemplated by
the current rule, are there operational issues we would need to
consider? For example, are intermediaries able to apply liquidity fees
on a dynamic basis (e.g., where liquidity fees vary in size and may
apply more frequently than during periods of stress)?
11. Should we require money market funds to implement practices to
mitigate investor dilution but permit money market funds to choose
between imposing liquidity fees or imposing the proposed swing pricing
approach as the method for doing so? Should we allow money market funds
to choose other unspecified options for mitigating investor dilution?
What are the advantages and disadvantages of these approaches? What
factors would influence a fund's decision of whether to implement swing
pricing, a liquidity fee framework, or another method of mitigating
dilution?
12. Do money market funds view rule 22c-2 as a viable way to
implement liquidity fees, if the board approves the use of such fees?
Should we modify any of the requirements of rule 22c-2 or Form N-1A
that relate to redemption fees for these funds? For example, should we
specify that, like a liquidity fee under rule 2a-7, a money market fund
redemption fee under rule 22c-2 does not need to be disclosed in the
prospectus fee table? Would retail prime or retail tax-exempt funds opt
to rely on rule 22c-2? Would institutional prime or institutional tax-
exempt funds ever use rule 22c-2 in addition to the proposed swing
pricing requirement and, if so, why?
B. Proposed Swing Pricing Requirement
1. Purpose and Terms of the Proposed Requirement
We are proposing a swing pricing requirement specifically for
institutional prime and institutional tax-exempt money market funds
that would apply when the fund experiences net
[[Page 7261]]
redemptions.\106\ This requirement is designed to ensure that the costs
stemming from net redemptions are fairly allocated and do not give rise
to a first-mover advantage or dilution under either normal or stressed
market conditions.\107\ The swing pricing requirement would complement
our proposal to require funds to hold additional liquidity by requiring
redeeming investors to pay the cost of depleting a fund's liquidity.
Requiring swing pricing also would address a fund's potential
reluctance to impose a voluntary liquidity fee even when doing so might
be beneficial to the fund.
---------------------------------------------------------------------------
\106\ We refer to money market funds that are not government
money market funds or retail money market funds collectively as
``institutional funds'' when discussing the proposed swing pricing
requirement.
\107\ The proposed swing pricing requirement differs in certain
respects from the swing pricing provision in rule 22c-1, which does
not apply to money market funds. We are proposing a swing pricing
requirement specifically for institutional funds in rule 2a-7,
rather than proposing amendments to rule 22c-1, because we are
focused on money market fund reform in this release. The Fall 2021
Unified Agenda notes that the Division of Investment Management is
considering recommending changes to regulatory requirements relating
to open-end funds' liquidity and dilution management. See Securities
and Exchange Commission, Fall 2021 Unified Agenda, available at
<a href="http://www.reginfo.gov">www.reginfo.gov</a>.
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Swing pricing is a process of adjusting a fund's current NAV such
that the transaction price effectively passes on costs stemming from
shareholder transaction flows out of the fund to shareholders
associated with that activity.\108\ Trading activity and other changes
in portfolio holdings associated with meeting redemptions may impose
costs, including trading costs and costs of depleting a fund's daily or
weekly liquid assets. These costs, which currently are borne by the
remaining investors in the fund, can dilute the interests of non-
redeeming shareholders. This can create incentives for shareholders to
redeem quickly to avoid losses, particularly in times of market stress.
If shareholder redemptions are motivated by this first-mover advantage,
they can lead to increasing outflows, and as the level of outflows from
a fund increases, the incentive for remaining shareholders to redeem
may also increase. Regardless of whether investor redemptions are
motivated by a first-mover advantage or other factors, there can be
significant, unfair adverse consequences to remaining investors in a
fund in these circumstances, including material dilution of remaining
investors' interests in the fund. Swing pricing can reduce the
potential for dilution of investors who choose to remain in the fund.
---------------------------------------------------------------------------
\108\ While the term swing pricing typically refers to a process
of adjusting a fund's NAV for either net redemptions or net
subscriptions, the proposed swing pricing framework for money market
funds would only apply when a fund has net redemptions.
---------------------------------------------------------------------------
The proposed swing pricing requirement is designed to address these
concerns. Under the proposal, an institutional fund would be required
to adjust its current NAV per share by a swing factor reflecting spread
and transaction costs, as applicable, if the fund has net redemptions
for the pricing period.\109\ If the institutional fund has net
redemptions for a pricing period that exceed the ``market impact
threshold,'' which would be defined as 4% of the fund's net asset value
divided by the number of pricing periods the fund has in a business
day, or such smaller amount of net redemptions as the swing pricing
administrator determines, the swing factor would also include market
impacts, as described below.\110\ The ``pricing period'' would be
defined, in substance, to mean the period of time in which an order to
purchase or sell securities issued by the fund must be received to be
priced at the next computed NAV. This is designed to address money
market funds that compute their NAVs multiple times per day. For
example, if a fund computes a NAV as of 12:00 p.m. and 4:00 p.m., the
fund would determine if it had net redemptions for each pricing period
and, if so, apply swing pricing for the corresponding NAV
calculation.\111\ Consistent with the approach taken by the Commission
with respect to the swing pricing provision in rule 22c-1, an
institutional fund with multiple share classes must determine whether
it experienced net redemption activity across all share classes in the
aggregate, rather than determining net redemption activity on a class
by class basis.\112\
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\109\ See proposed rule 2a-7(c)(2)(ii)(A). The proposal would
implement the swing pricing requirement by requiring an affected
money market fund to adopt swing pricing policies and procedures,
approved by the fund's board and administered by a ``swing pricing
administrator,'' as discussed in more detail below. In addition, and
consistent with the Commission's current swing pricing rule (rule
22c-1), with respect to master-feeder funds, only the master fund
can apply swing pricing under our proposed rule. See proposed rule
2a-7(c)(2)(v).
\110\ See proposed rule 2a-7(c)(2)(iii)(B) and proposed rule 2a-
7(c)(2)(vi)(B). See infra Section III.D.4 for a more detailed
analysis of the proposed market impact threshold and potential
alternative approaches.
\111\ Under the proposal a fund may estimate shareholder flow
information to determine whether the fund has net redemptions for a
pricing period and to determine the amount of net redemptions,
provided the swing pricing administrator receives sufficient
investor flow information to make a reasonable estimate. Although
institutional funds generally have more timely flow information than
other kinds of open-end funds, we believe reasonable estimates are
appropriate in the absence of complete flow information.
\112\ See Swing Pricing Adopting Release, supra footnote 102, at
paragraph accompanying n.175. If a fund were to only include the
transaction activity of a single share class, and were to swing one
share class and not another, one share class would pay expenses
incurred in the management of the fund's portfolio as a whole, which
would generally be inconsistent with rule 18f-3.
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A mandatory swing pricing regime for net redemptions is intended to
address funds' (or fund boards') likely reluctance to impose a
voluntary swing pricing regime or voluntary liquidity fee. For example,
while money market funds were permitted to impose liquidity fees on
redeeming investors under rule 2a-7 if a fund had less than 30% of its
assets invested in weekly liquid assets no money market fund imposed
such fees during the March 2020 market turmoil. Moreover, even if all
institutional money market funds recognized the benefits of charging
redeeming investors for liquidity costs, we believe there is a
collective action problem in which no fund would want to be the first
to adopt such an approach. We believe past experience with the existing
liquidity fee regime supports a mandatory approach to dilution
mitigation for institutional funds.
The proposed swing pricing requirement would not apply to net
subscriptions because, for money market funds, we believe net
redemptions are more likely to contribute to dilution and other
liquidity costs than net subscriptions. Institutional funds have come
under significant stress twice in the last 13 years in the face of high
levels of redemptions--significant subscriptions into these funds have
not had similar effects. Beyond these considerations, we also recognize
that applying our proposed swing pricing requirements to institutional
fund subscriptions would require these funds to make certain
assumptions about how they invest cash from new subscriptions that
would be inconsistent with the requirements in rule 2a-7.\113\
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\113\ For example, an institutional fund with weekly liquid
assets below the regulatory threshold must invest only in weekly
liquid assets and could not purchase a pro rata amount of each
security in its portfolio, but our proposed swing pricing framework
would require such a fund to assume the purchase of a pro rata
amount of each portfolio holding if the framework extended to net
subscriptions.
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Our proposed money market fund swing pricing framework specifies
how an institutional fund would determine its swing factor, which would
differ based on the amount of net redemptions (see Figure 1, below).
The swing factor
[[Page 7262]]
would be determined by calculating identified types of costs the fund
would incur, as applicable, by selling a pro rata amount of each
security in its portfolio to satisfy the amount of net redemptions for
the pricing period.\114\
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\114\ See proposed rule 2a-7(c)(2)(iii). The swing factor is the
amount, expressed as a percentage of the fund's net asset value, by
which the fund adjusts its net asset value per share.
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The requirement that a money market fund calculate costs to sell a
pro rata amount of each security in its portfolio--a ``vertical slice''
of the portfolio--is designed to ensure that a fund's adjusted NAV
incorporate the costs of selling its less liquid holdings, which may
protect remaining shareholders from dilution and may discourage
investors from redeeming quickly during periods of market stress to
seek to avoid potential costs from a fund's future sale of less liquid
securities.\115\ For example, when investors redeem, if those
redemptions are met through daily or weekly liquid assets, the
redemptions leave the fund with less liquidity. This increases the
likelihood that further redemptions could require the fund to sell less
liquid assets or incur costs in rebalancing the portfolio. Although
further redemptions may be more likely to require the fund to sell less
liquid assets in times of market stress when redemptions may be
elevated, redeeming investors depleting a fund's daily and weekly
liquid assets can impose liquidity costs on the remaining shareholders
as well as the fund generally, even during non-stressed periods. This
depletion of a money market fund's liquidity can dilute the interests
of remaining investors and also can create a first-mover advantage for
investors who redeem in an attempt to avoid bearing the costs created
by other investors' redemptions.
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\115\ As described in more detail below, a fund's swing pricing
administrator may estimate costs and market impact factors for each
type of security with the same or substantially similar
characteristics and apply those estimates to all securities of that
type rather than analyze each security separately.
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The factors a fund must take into account when calculating the
swing factor vary depending on the size of net redemptions for the
pricing period (see Figure 1, below). If the fund has net redemptions
that do not exceed the market impact threshold, the swing factor
reflects the spread costs and other transaction costs (i.e., brokerage
commissions, custody fees, and any other charges, fees, and taxes
associated with portfolio security sales), as applicable, from selling
a vertical slice of the portfolio to meet those net redemptions.\116\
Including the spread cost in the swing factor calculation effectively
requires a fund to value a security in its portfolio at the bid price
when the fund has net redemptions. We understand that money market
funds may already price portfolio securities at the bid price when
striking their NAVs.\117\ As a result, the requirement to adjust the
fund's current NAV by a swing factor when it has net redemptions that
do not exceed the market impact threshold would generally affect
institutional funds that use mid-market pricing to compute their
current NAVs.\118\ Spread costs and other transaction costs associated
with portfolio security sales also are included in the Commission's
current swing pricing rule for non-money market funds. Those
transaction-related costs can create dilution for money market funds
just as they can for other kinds of funds, and we are including them in
this proposal for the same reasons the Commission included them in the
current swing pricing rule.\119\
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\116\ See proposed rule 2a-7(c)(2)(iii)(A). Put another way, the
fund must take into account these factors if it has net redemptions
in any amount. If a fund has net redemptions that exceed its market
impact threshold, it must also apply a market impact factor.
\117\ See FASB ASC 820-10-35-36C. Generally accepted accounting
principles (``GAAP'') provide that if an asset measured at fair
value has a bid price and an ask price (for example, an input from a
dealer market), the price within the bid-ask spread that is most
representative of fair value in the circumstances shall be used to
measure fair value, and that the use of bid prices for asset
positions is permitted but not required for these purposes.
\118\ See FASB ASC 820-10-35-36D (stating that use of mid-market
pricing as a practical expedient for fair value measurements within
a bid-ask spread is not precluded). Very generally, mid-market
pricing values a security at the average of its bid price and ask
price. Since a seller generally asks for a higher price for a
security than a buyer bids for that security, the mid-market price
is incrementally higher than the bid price for a security, but lower
than its ask price.
\119\ Our proposed rule requires a money market fund to estimate
the costs that would result from selling a vertical slice of its
portfolio on a given day. Accordingly, our proposed rule does not
incorporate the separate reference to near-term costs that is
included in the general swing pricing rule. See 17 CFR 270.22c-
1(a)(3)(i)(C).
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If net redemptions exceed the market impact threshold, a fund's
swing factor would also be required to include good faith estimates of
the market impact of selling a vertical slice of a fund's portfolio to
satisfy the amount of net redemptions for the pricing period. The fund
would estimate market impacts for each security in its portfolio by
first estimating the market impact factor. This factor is the
percentage decline in the value of the security if it were sold, per
dollar of the amount of the security that would be sold, under current
market conditions. Then, the fund would multiply the market impact
factor by the dollar amount of the security that would be sold if the
fund sold a pro rata amount of each security in its portfolio to meet
the net redemptions for the pricing period.\120\
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\120\ See proposed rule 2a-7(c)(2)(iii)(B).
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We understand that it may be difficult to produce timely, good
faith estimates of the market impact of selling a pro rata portion of
each instrument the fund holds. Recognizing these difficulties, and
because many securities held by institutional funds have similar
characteristics and would likely incur similar costs if sold, the
proposed rule would permit a fund to estimate costs and the market
impact factor for each type of security with the same or substantially
similar characteristics and apply those estimates to all securities of
that type in the fund's portfolio, rather than analyze each security
separately.\121\ As part of this process, we believe it would be
reasonable to apply a market impact factor of zero to the fund's daily
and weekly liquid assets, since a fund could reasonably expect such
assets to convert to cash without a market impact to fulfill
redemptions (e.g., because the assets are maturing shortly).
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\121\ See proposed rule 2a-7(c)(2)(iii)(C). A fund could, for
example, determine the liquidity, trading, and pricing
characteristics of a subset of securities justifies the application
of the same costs and market impact factor to all securities of that
type within its portfolio.
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[[Page 7263]]
[GRAPHIC] [TIFF OMITTED] TP08FE22.000
We recognize that the market impact of selling a vertical slice of
the fund's portfolio is likely to be negligible when net redemptions
are small, and estimating the market impact of selling a security can
be challenging. As a result, we are proposing to require funds to
include market impact in their swing factors only when net redemptions
exceed the market impact threshold. To establish the amount of net
redemptions that should trigger application of the market impact
factor, we reviewed historical flow information for institutional money
market funds over a nearly five-year period.\122\ During this time,
institutional funds had daily outflows greater than 4% on approximately
5% of trading days.\123\ At these heightened levels of outflows, market
impacts are designed to estimate the full liquidity costs of selling a
vertical slice of a money market fund's portfolio because, for a money
market fund's less liquid investments, market impacts may impose
significant costs on a fund, particularly when net redemptions are
large or in times of stress. We also propose to allow the swing pricing
administrator to apply a market impact factor at a lower amount of net
redemptions. This flexibility is designed to recognize that there may
be circumstances in which a smaller market impact threshold would be
appropriate to mitigate dilution of fund shareholders, such as when a
fund holds a larger amount of less liquid investments or in times of
stress.\124\ We believe a fund's swing pricing administrator,
responsible for the day-to-day administration of the fund's swing
pricing program and therefore familiar with the fund's redemption
patterns and the operational requirements of the swing pricing program,
would be well positioned to determine whether a smaller market impact
threshold could be beneficial for the fund's investors to help mitigate
dilution. To address the concerns the Commission expressed in 2016 that
subjective estimates of market impact costs could grant excessive
discretion in the determination of a swing factor, we also are
providing additional parameters for estimating market impact to make
the calculation more objective as discussed above.\125\ These
requirements should help to limit subjectivity that could be abused,
and proposed recordkeeping rules would require funds to document their
market impact factors, facilitating our staff's review and oversight of
money market fund swing pricing.\126\
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\122\ See infra Section III.D.4 for a more detailed analysis of
the proposed market impact threshold and potential alternative
approaches. The analysis is based on daily flows of institutional
prime and institutional tax-exempt funds reported in CraneData on
1,228 days between December 2016 and October 2021. As of September
2021, CraneData covered 87% of the funds and 96% of total assets
under management, resulting in a count of 37 institutional prime
funds and 10 institutional tax-exempt funds.
\123\ The proposed definition of market impact threshold would
require a fund to divide 4% of the fund's net asset value by the
number of pricing periods to arrive at the amount of net redemptions
that would trigger the threshold. In recognition that some
institutional funds have multiple pricing periods per day, and the
number of pricing periods may vary among funds, this aspect of the
definition is designed to provide a threshold that would apply more
consistently to funds with different numbers of pricing periods, as
opposed to a static figure applicable to all funds.
\124\ For example, investors that invest in funds with less
liquid portfolios may accept the risk of larger swings because they
believe that the fund's less liquid portfolio could generate higher
returns.
\125\ See Swing Pricing Adopting Release, supra footnote 101, at
paragraphs accompanying nn. 143 and 148. Specifically, a fund's
market impact factor calculation for a security would reflect the
percentage decline in the value of the security if it were sold, per
dollar of the amount of the security that would be sold, under
current market conditions, multiplied by the dollar amount of the
security that would be sold if the fund sold a pro rata amount of
each security in its portfolio to meet the net redemptions for the
pricing period.
\126\ See proposed rule 31a-2(a)(2).
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With respect to application of a swing factor, a fund with multiple
share classes must use the same swing factor for each share class.
Because the economic activity causing dilution occurs at the fund
level, it would not be appropriate to employ swing pricing at the share
class level to target such dilution.\127\ In addition, when an
institutional fund applies the swing factor to its net asset value, it
must round the adjusted current net asset value per share to a minimum
of the fourth decimal place in the case of a fund with a $1.0000 share
price or an equivalent or more precise level of accuracy for money
market funds with a different share price (e.g., $10.000 per share, or
$100.00 per share).\128\
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\127\ See Swing Pricing Adopting Release, supra footnote 101, at
paragraph accompanying n.178.
\128\ See proposed rule 2a-7(c)(1)(ii). This provision is
designed to provide the same level of pricing precision that an
institutional fund must calculate with respect to its floating NAV.
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We are not proposing an upper limit on a fund's swing factor. The
Commission included a 2% upper limit in the current swing pricing rule
in light of concerns that, without an upper limit, a fund's application
of swing pricing could operate as a ``de facto gate'' or place an undue
restriction on investors' ability to redeem.\129\ We believe the more
specific parameters in this proposal for determining a fund's swing
factor sufficiently mitigate these concerns. Further, if a fund were to
[[Page 7264]]
experience such high costs, we believe it would be appropriate for
redeeming investors to bear the costs their redemptions create for the
benefit of remaining investors. Given our experience with investor
behavior in March 2020, we also believe that requiring redeeming
investors to internalize the liquidity costs of their redemptions would
make investors consider potential redemption requests more carefully,
particularly during periods of market stress, and would prevent
remaining investors from bearing costs imposed on the fund by redeeming
investors.
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\129\ Swing Pricing Adopting Release, supra footnote 102, at
paragraph accompanying n.254.
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Finally, we are proposing several requirements related to the
administration of the proposed swing pricing requirement. Specifically,
a money market fund's swing pricing policies and procedures must be
implemented by a board-designated administrator (the ``swing pricing
administrator''), and the administration of the swing pricing program
must be reasonably segregated from portfolio management of the fund and
may not include portfolio managers.\130\ The Commission's current swing
pricing rule also requires the board to designate a swing pricing
administrator and the administration of a swing pricing program that is
reasonably segregated from portfolio management of the fund and may not
include portfolio managers. We are proposing the requirement here for
the same reasons the Commission adopted it in that rule: Requiring
segregation of functions with respect to the administration of swing
pricing will provide better clarity of roles and reduce the possibility
of conflicts of interest in the administration of swing pricing.\131\
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\130\ See proposed rule 2a-7(c)(2)(iv)(B) and proposed rule 2a-
7(c)(2)(vi)(E). Consistent with the Swing Pricing Adopting Release,
we believe that portfolio managers may have conflicts of interest
with respect to setting the swing factor, and therefore we do not
believe that they should be involved in setting the swing factor.
See Swing Pricing Adopting Release, supra footnote 102, at paragraph
accompanying n.293.
\131\ Swing Pricing Adopting Release, supra footnote 102, at
paragraph accompanying n.293.
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We also are proposing requirements to facilitate board oversight of
swing pricing. A fund's board, including a majority of directors who
are not interested persons of the fund, would be required to (1)
approve the fund's swing pricing policies and procedures; (2) designate
the swing pricing administrator; and (3) review, no less frequently
than annually, a written report prepared by the swing pricing
administrator describing the adequacy and effectiveness of the
program.\132\ We propose to amend rule 2a-7 to provide that a money
market fund's board may not delegate its responsibilities to make the
determinations that the proposed swing pricing provisions would require
of the board.\133\ The swing pricing administrator's report to the
board would be required to describe (1) the administrator's review of
the adequacy of the fund's swing pricing policies and procedures and
the effectiveness of their implementation; (2) any material changes to
the fund's swing pricing policies and procedures since the date of the
last report; and (3) the administrator's review and assessment of the
fund's swing factors and market impact threshold, including the
information and data supporting the determination of the swing factors
and the swing pricing administrator's determination to use a smaller
market impact threshold, if applicable.\134\ The proposal, like the
Commission's current swing pricing rule, generally contemplates a board
role in compliance oversight, rather than board involvement in the day-
to-day administration of a fund's swing pricing program. Moreover,
money market fund boards in particular have significant
responsibilities regarding valuation- and pricing-related matters and
should be well-positioned to provide effective oversight of the
proposed swing pricing program. Accordingly, board approval of the
swing pricing policies and procedures, and targeted review of the
implementation of the fund's swing pricing program, will help ensure
that swing pricing operates in the best interests of the fund's
shareholders.
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\132\ See proposed rule 2a-7(c)(2)(iv)(A) through (C).
\133\ See proposed rule 2a-7(j). Rule 2a-7(j) permits a money
market fund's board of directors to delegate to the fund's
investment adviser or officers the responsibility to make the
determinations required to be made by the board of directors under
the rule, except for certain specified provisions.
\134\ See proposed rule 2a-7(c)(2)(iv)(C)(1) through (3). The
report to the board, which must be delivered no less frequently than
annually, must include a description of the impact of the swing
pricing program on eliminating or reducing liquidity costs
associated with satisfying shareholder redemptions. The report must
include the information and data that support the administrator's
determination of the fund's swing factor each day.
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We are proposing recordkeeping requirements that are consistent
with the requirements in our existing swing pricing rule. Specifically,
a fund must maintain a written copy of the reports provided by the
swing pricing administrator to the board for six years, the first two
in an easily accessible place.\135\ Similarly, existing recordkeeping
requirements applicable to all money market fund procedures would
require a fund to maintain its swing pricing policies and procedures
for six years, the first two in an easily accessible place.\136\
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\135\ See proposed rule 2a-7(h)(8).
\136\ See 17 CFR 270.2a-7(h)(1).
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Our proposed money market fund swing pricing framework considers
and addresses the comments we received on the swing pricing option
included in the PWG Report. Two of those comments supported a swing
pricing requirement for money market funds.\137\ One of these
commenters suggested that swing pricing would directly address investor
incentives for rapid redemptions from money market funds by ensuring
that all investors who redeem are at risk for any losses created by a
run, reducing or eliminating the incentive for early redemptions.\138\
However, most commenters opposed a swing pricing requirement.\139\
Several commenters suggested that swing pricing may not slow investor
redemptions and would not have addressed the issues that occurred in
March 2020.\140\ One of these commenters suggested that imposing an
additional cost through swing pricing would not materially affect
investor behavior, particularly because an investor does not know at
the time of placing its order whether the fund will adjust its
NAV.\141\ One commenter suggested that swing pricing may encourage
investors to accelerate redemptions and seek a first-mover
advantage.\142\ Certain commenters also expressed concern that swing
pricing would reduce investor interest in money market funds.\143\
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\137\ Comment Letter of Robert Rutkowski (Apr. 13, 2021);
Comment Letter of the Americans for Financial Reform Education Fund
(Apr. 12, 2021) (``Americans for Financial Reform Comment Letter'').
\138\ Americans for Financial Reform Comment Letter.
\139\ See, e.g., Fidelity Comment Letter; Western Asset Comment
Letter; Comment Letter of the GARP Risk Institute (Mar. 16, 2021)
(``GARP Risk Institute Comment Letter''); Healthy Markets Comment
Letter; Comment Letter of PIMCO (Apr. 19, 2021) (``PIMCO Comment
Letter''); SIFMA AMG Comment Letter; ICI Comment Letter I; Federated
Hermes Comment Letter I; JP Morgan Comment Letter; BlackRock Comment
Letter; Institute of International Finance Comment Letter; State
Street Comment Letter; CCMC Comment Letter; T Rowe Price Comment
Letter; Comment Letter of the Investment Company Institute (June 3,
2021) (``ICI Comment Letter III'').
\140\ See, e.g., Fidelity Comment Letter; Western Asset Comment
Letter; GARP Risk Institute Comment Letter.
\141\ Fidelity Comment Letter.
\142\ Western Asset Comment Letter.
\143\ BlackRock Comment Letter; GARP Risk Institute Comment
Letter; Comment Letter of mCD IP Corporation (Apr. 12, 2021) (``mCD
IP Comment Letter'').
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[[Page 7265]]
We recognize that investors would not know at the time of order
submission whether a fund would have net redemptions for that pricing
period and swing the fund's price accordingly. However, we believe the
implementation of a swing pricing regime for institutional funds may
cause some investors in those funds to choose not to redeem, including
in times of market stress, because those investors view the potential
swing factor and price adjustment as more tangible than the uncertain
possibility of potential future losses during times of reduced
liquidity. We do not agree that, as some commenters suggested, a swing
pricing requirement would encourage investors to preemptively redeem
and seek a first-mover advantage.\144\ Investors do not necessarily
know whether the fund's flows during any given pricing period will
trigger swing pricing or, if so, the size of the swing factor for that
period. In addition, redeeming investors would bear the cost of
liquidity under the proposed rule even when net redemptions are small,
meaning that there would not be a clear advantage to redeeming earlier
versus later. Rather than encourage preemptive redemptions, we believe
the proposed swing pricing requirement would discourage excessive
redemptions, particularly in times of stress, by requiring redeeming
investors to bear liquidity costs. For example, investors may determine
not to redeem during stress periods, or to redeem smaller amounts over
a longer period of time, which could help reduce concentrated
redemptions and associated liquidity pressures that institutional funds
can face in times of stress. The swing pricing requirement also could
cause some investors to move their assets to government money market
funds, as certain commenters stated, to avoid the possibility of paying
liquidity costs. Government money market funds may be a better match
for investors unwilling to bear liquidity costs, however, in that
government money market funds face lower liquidity costs. Even if for
some investors the prospect of swing pricing does not alter redemption
behavior on a particular day, we believe swing pricing results in
fairer, non-dilutive pricing, particularly when there are heavy
redemptions (even if the prospect of swing pricing does not materially
change the level of those redemptions).
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\144\ We are not aware of any evidence that the use of swing
pricing in other jurisdictions has encouraged preemptive redemptions
by investors.
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We recognize the Commission previously declined to extend swing
pricing to money market funds.\145\ In part, the Commission at that
time believed that swing pricing was not necessary due to the extensive
liquidity requirements applicable to such funds and the existing
liquidity fee regime that is permitted under rule 2a-7.\146\ However,
our proposed reforms would remove the ability of money market funds to
impose liquidity fees. In addition, although we are proposing to
increase money market funds' liquidity requirements, based on our
monitoring of the market stress in March 2020, we believe institutional
money market funds may continue to have incentives to sell illiquid
assets to meet redemptions in order to maintain a substantial buffer of
liquid assets or may otherwise be required to sell illiquid assets in a
stressed period. These incentives increase in times of stress but, as
discussed above, a fund's sale of less liquid assets or depletion of
daily and weekly liquid assets can create liquidity costs for the fund
in both normal and stressed circumstances. We understand institutional
investors frequently scrutinize liquidity levels in money market funds,
and some portals through which they invest even have alerts to identify
when a fund's reported liquidity levels decline, facilitating rapid
redemptions when a fund's liquidity begins to decline. Thus, we believe
that swing pricing would help institutional money market funds
equitably allocate costs that may result from these redemptions and
reduce other market externalities that increased liquidity requirements
in our rules may not fully counter and that would no longer be
countered by liquidity fees and redemption gates.
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\145\ Swing Pricing Adopting Release, supra footnote 102, at
section II.A.3.a.
\146\ Id. See also 17 CFR 270.2a-7(c)(2) ``Liquidity fees and
temporary suspensions of redemptions.''
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In addition to existing liquidity requirements and fee provisions,
the Commission stated in 2016 that swing pricing may be less
appropriate than a liquidity fee regime for money market funds because
their investors, and particularly investors in stable NAV money market
funds, are sensitive to price volatility.\147\ We continue to believe
that certain money market fund investors are sensitive to price
volatility. Institutional money market funds are currently subject to a
floating NAV requirement, however, and we do not believe that a swing
pricing requirement would impose significant additional price
volatility under normal market conditions.\148\
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\147\ Swing Pricing Adopting Release, supra footnote 101, at
n.77 and accompanying text.
\148\ For example, as discussed above, we understand many
institutional funds already use bid prices when valuing their
portfolio investments and, thus, would not need to make additional
price adjustments to reflect spread costs. In addition, based on
historical flow data, we do not anticipate that funds would
regularly experience net redemption amounts that trigger the market
impact threshold.
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We considered a framework that would apply the swing factor in the
form of a liquidity fee rather than an adjustment to the fund's
price.\149\ A liquidity fee could be used to impose liquidity costs on
redeeming investors and address dilution, much like a swing pricing-
related price adjustment. We recognize that a liquidity fee framework
could have certain advantages over a swing pricing requirement. For
example, liquidity fees provide greater transparency for redeeming
investors of the liquidity costs they are incurring. Liquidity fees
also provide a mechanism for imposing liquidity costs directly on
redeeming investors, without providing a discount to subscribing
investors through a downward adjustment of the fund's transaction price
that also must be taken into account to fully address dilution.
However, we believe that a swing pricing requirement also has several
advantages over liquidity fees. With swing pricing, a fund can pass
liquidity costs on to redeeming investors in a fair and equal manner,
without any reliance on intermediaries to achieve fair and equal
application of costs. While money market funds and their intermediaries
should be able to apply liquidity fees under the current rule, we also
believe applying dynamic liquidity fees that can change in size from
pricing period-to-pricing period may involve greater operational
complexity and cost than swing pricing. For instance, liquidity fees
may require more coordination with a fund's service providers because
these fees need to be imposed on an investor-by-investor basis by each
intermediary involved--which may be particularly difficult with respect
to omnibus accounts.\150\ On balance, we believe a swing pricing
requirement has operational advantages over liquidity fees, but we
request comment on using a liquidity fee
[[Page 7266]]
framework to impose liquidity costs and whether a liquidity fee
alternative may have fewer operational or other burdens than the
proposed swing pricing requirement while still achieving the same
overall goals.\151\ We also believe it is important for institutional
funds to use a uniform approach to impose liquidity costs on redeeming
investors, as we are concerned it would be confusing for investors if
some funds applied swing pricing and other funds applied liquidity
fees. In addition, we believe there are operational efficiencies with
funds using a uniform approach under these circumstances.
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\149\ See infra Section III.D.5 (discussing our consideration of
a liquidity fee alternative in more detail).
\150\ Swing pricing, on the other hand, would require some funds
and intermediaries to create new systems and operational procedures
(discussed below), but once those are in place, swing pricing would
be incorporated in the process by which a fund strikes its NAV.
Intermediaries would then effect customer transactions at NAV, as
they do today, without further operational changes or coordination
with the fund. See infra Section III.D.5.
\151\ See infra Section II.B.2 for a discussion of the
operational considerations related to swing pricing.
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Finally, we are not proposing to require retail money market funds
to implement swing pricing because these funds historically have had
smaller outflows than institutional funds during times of market
stress, including during March 2020. As a result, based on historical
experience, retail funds are less likely to have redemptions of a size
that would deplete the increased liquidity buffers we are proposing to
require. Retail investors also appear to focus less on a fund's
reported liquidity levels.\152\ Thus, retail fund managers may feel
more comfortable drawing down available liquidity from the fund's daily
liquid assets and weekly liquid assets to meet redemptions in times of
stress, without engaging in secondary market sales that could result in
significant liquidity costs. Investors typically view government money
market funds, in contrast to prime money market funds, as a relatively
safe investment during times of market turmoil, and government money
market funds have seen inflows during periods of market instability.
Government money market funds are also less likely to incur significant
liquidity costs when they purchase or sell portfolio securities due to
the generally higher levels of liquidity in the markets in which they
invest. Due to these differences in investor behavior and liquidity
costs among the various fund types, we are not proposing to require
retail money market funds or government money market funds to implement
swing pricing. Additionally, retail money market funds and government
money market funds typically maintain a stable NAV. Investors in these
funds, therefore, are accustomed to a stable NAV and may be more
sensitive to price volatility. Requiring a retail or government money
fund to adjust its NAV on any day it has net redemptions effectively
would require these funds to operate with a floating NAV. We do not
believe this is warranted in light of the differences in investor
behavior and liquidity costs discussed above and the increased
liquidity requirements we are proposing to apply to these funds.
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\152\ See supra footnote 76 (discussing comments suggesting that
retail investors were less sensitive to declines in weekly liquid
assets in March 2020).
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We request comment on our proposal to require any money market fund
that is not a government money market fund or a retail money market
fund to implement swing pricing.
13. As proposed, should we require any money market fund that is
not a government money market fund or a retail money market fund to
implement swing pricing? Should we permit, but not require, these funds
to implement swing pricing? If swing pricing were an optional tool,
would money market funds use it? Would they be more likely to use
optional swing pricing or optional liquidity fees, such as those which
rule 2a-7 currently contemplates?
14. Should we adopt a framework that requires a fund to adjust its
NAV for spread, other transaction costs, or market impacts only when
net redemptions exceed a certain percentage of a money market fund's
net assets? If so, should swing pricing apply only when a fund's net
redemptions exceed the market impact threshold under the proposed rule?
Should funds be able to set their own threshold?
15. Should we permit a money market fund to reasonably estimate
whether it has net redemptions and the amount of net redemptions, as
proposed, or should we require a fund to determine the actual amount of
net redemptions during a pricing period? Are there operational
complexities to this approach?
16. As proposed, should money market funds that strike NAV multiple
times per day be required to determine whether the fund has net
redemptions and, if so, the swing factor to apply for each NAV strike
(i.e., for each pricing period)? Are there alternative approaches we
should consider? If so, how could such an approach ensure that
investors are treated fairly?
17. Should we require swing pricing for both net redemptions and
net subscriptions, or only for net redemptions, as proposed? If we
require swing pricing for both net redemptions and net subscriptions,
what additional operational complexities or other considerations might
arise? If we required swing pricing for net subscriptions, should we
require funds to assume the purchase of a vertical slice of the fund's
portfolio and to value portfolio holdings at ask prices to reflect
spread costs?
18. As proposed, should we require the swing factor to account for
spread costs and other transaction costs if a fund's net redemptions
are at or below the market impact threshold? What effect would this
proposed requirement have on institutional funds that already use bid
prices when striking their NAVs? Should we instead require an
institutional fund to apply swing pricing when net redemptions are at
or below the market impact threshold only if the fund does not price at
the bid? What are the reasons a money market fund may not price at the
bid currently? Do pricing services that money market funds use
currently provide the option for funds to receive either mid or bid
prices (or both)? Are there any impediments to a fund's ability to
determine a bid price for each portfolio security? Should we remove or
revise any of the cost categories that would apply when net redemptions
are at or below the market impact threshold?
19. Should we require the swing factor to account for spread costs,
other transaction costs, and market impacts if the amount of net
redemptions exceeds the market impact threshold, as proposed? Should we
remove or revise any of these cost categories? Do funds need additional
guidance on any of these categories, such as application of the market
impact factor? Would it be sufficient for funds experiencing net
redemptions to apply a swing factor that accounts for spread costs and
other transaction costs, but not market impacts? How effective would
this approach be in achieving the objectives of swing pricing discussed
throughout this release, including the goal of fairly allocating the
costs stemming from net redemptions and preventing those costs from
giving rise to a first-mover advantage or dilution?
20. Do some or all institutional funds already estimate market
impact factors, or perform similar analyses, to inform trading
decisions? If so, would these funds' prior experience smooth the
transition to making a good faith estimate of the market impact factor
under the proposal? What difficulties might funds experience in
developing a framework to analyze market impact factors and in
producing good faith estimates of market impact factors for purposes of
the proposed swing pricing requirement? Are there ways we could reduce
those difficulties, while still requiring redeeming investors to bear
costs that reasonably represent the costs they would otherwise impose
on the fund and its remaining shareholders?
[[Page 7267]]
21. Should we define the market impact threshold as an amount of
net redemptions for a pricing period that is the value of 4% of the
fund's net asset value divided by the number of pricing periods, as
proposed? Should the threshold at which a fund must include market
impacts in its swing factor be higher or lower than proposed? In
establishing the threshold amount, should we consider factors other
than historical flows? Should the Commission periodically reexamine and
adjust the market impact threshold to account for possible changes to
redemption patterns and market behavior over time? If so, how often?
Does identification of a specific threshold in rule 2a-7 raise gaming
or other concerns?
22. Rather than a set percentage of net redemptions, as proposed,
should we define the market impact threshold on a fund-by-fund basis,
with reference to a fund's historical flows (i.e., should each fund be
required to determine the trading days for which it had its highest
flows over a set time period, and set its market impact threshold based
on the 5% of trading days with the highest flows)? Should we define the
market impact threshold on a fund-by-fund basis with reference to
another metric other than net redemptions?
23. Should we permit the swing pricing administrator to use
discretion to establish a smaller market impact threshold, as proposed?
Should we prescribe the circumstances in which a smaller market impact
threshold would be permitted, the timing of such a determination by the
swing pricing administrator (e.g., if a swing pricing administrator
must formally establish a smaller market impact threshold that will
remain in place for a period of time), disclosure of such a
determination to the fund's investors, and recordkeeping requirements
in support of the determination? Should we require the fund's board,
instead of the swing pricing administrator, to approve use of a smaller
market impact threshold? Should the swing pricing administrator or the
board have flexibility to establish a larger market impact threshold
than proposed? If so, what are the circumstances in which a fund should
have flexibility to use a market impact threshold that is larger than
4% of the fund's net asset value divided by the number of pricing
periods?
24. Should money market funds be required to take into account
other costs in determining their swing factors, beyond those proposed?
For example, should we require consideration of borrowing costs that a
fund may incur to facilitate shareholder redemptions?
25. Does our proposed requirement that a fund calculate the swing
factor by assuming it would sell a pro rata amount of each security in
its portfolio properly account for liquidity costs? Are there other
considerations related to liquidity costs that the swing pricing
framework should take into account, such as shifts in the fund's
liquidity management or other repositioning of the fund's portfolio?
26. Should money market funds calculate the swing factor by
estimating the costs of selling only the securities the fund plans to
sell to satisfy shareholder redemptions during the pricing period,
rather than calculating the swing factor based on the costs the fund
would incur if it sold a pro rata amount of each security in its
portfolio? If so, what would the operational consequences be?
27. Should the rule permit, rather than require, funds to follow
the market impact threshold and swing factor calculations set forth in
the rule? If so, what considerations or factors should the rule require
a fund to consider when determining market impact thresholds and swing
factors if the fund determines not to follow the threshold or
calculations set forth in the rule? For example, should the rule
identify for these purposes the size, frequency, and volatility of
historical net redemptions; the liquidity of the fund's portfolio; or
the costs associated with transactions in the markets in which the fund
invests?
28. Should money market funds be subject to a numerical limit on
the size of swing factors? Should the limit instead be bound only by
liquidity costs associated with net redemptions for a given pricing
period, as proposed? Should we allow a fund to use a set swing factor,
such as 2% or 3%, in times of market stress when estimating a swing
factor with high confidence may not be possible? How would we define
market stress for this purpose? Should a fund's adviser, or a majority
of the fund's independent directors, be permitted to determine market
conditions were sufficiently stressed such that the fund would apply
the set swing factor? Are there other circumstances in which we should
permit a fund to use a default swing factor?
29. Should we permit a fund to estimate costs and market impact
factors for each type of security with the same or substantially
similar characteristics and apply those estimates to all securities of
that type in the fund's portfolio, as proposed? Should we define types
of securities with the same or substantially similar characteristics?
Should we provide additional guidance to support funds' determinations
as to whether securities have the same or substantially similar
characteristics?
30. Is it reasonable to apply a market impact factor of zero to the
fund's daily and weekly liquid assets? If not, should funds estimate
the market impact factor of such assets in the same way as other assets
under the rule, or should we prescribe a different methodology for such
assets? Are there particular circumstances in which it would not be
reasonable for a fund to use a market impact factor of zero for daily
and weekly liquid assets, such as in stressed market conditions?
31. Instead of specifying swing factor calculations and thresholds
in the rule, should we require a fund to adopt policies and procedures
that specify how the fund would determine swing pricing thresholds and
swing factors based on principles set forth in the rule? If so, should
the policies and procedures include the methodologies from the market
impact threshold calculation we proposed (i.e., net redemptions that
are at or above the 95th percentile of likely fund redemptions,
determined based on relevant historical data)? Should the policies and
procedures include the swing factor calculation (i.e., the percentage
decline in the value of the security, per dollar of the amount of the
security that would be sold, multiplied by the dollar amount of the
security that would be sold if the fund sold a pro rata amount of each
security in its portfolio to meet the net redemptions for the pricing
period)? Should the policies and procedures define the market impact
threshold with reference to a metric other than net redemptions? If we
require policies and procedures, should we specify the market impacts
and dilution costs that a fund's swing pricing program must address,
rather than specifying specific principles and calculation
methodologies?
32. Should we require boards to appoint a swing pricing
administrator? What individuals or entities are likely to fulfill the
role of swing pricing administrator? Should we require board
involvement in the day-to-day administration of a fund's swing pricing
program in addition to its compliance oversight role? How might funds
maintain segregation between portfolio management and swing pricing
administration? Should a fund's chief compliance officer have a
designated role in overseeing how the fund applies the proposed swing
pricing requirement?
33. Should we require board review of a swing pricing report more
or less
[[Page 7268]]
frequently than annually? Should we require an evolving level of board
review over time (e.g., every quarter for the first year after
implementation and then less frequently in following years as the fund
gains experience implementing the swing pricing program under various
market conditions)? Should we require the fund to disclose any material
inaccuracies in the swing pricing calculation to the board (e.g., as
they arise, no less frequently than quarterly, or at some other
frequency)?
34. Are there circumstances in which it would not be possible to
estimate the market impact factor with a high degree of accuracy? If
so, what modifications should we make to the proposal? For example,
should we instead adopt a liquidity fee framework that is consistent
with the current liquidity fee provision in rule 2a-7, but without the
link to weekly liquid asset thresholds?
35. How do the operational implications of swing pricing, as
proposed, differ from the operational implications of an economically
equivalent dynamic liquidity fee framework? What are the operational
implications of a requirement for institutional money market funds to
impose a liquidity fee that can change in size and that may need to be
applied with some frequency? Are fund intermediaries equipped to apply
dynamic fees on a regular basis? Would funds have insight into whether
and how intermediaries apply these fees to redeeming investors?
36. If we adopt a liquidity fee framework instead of a swing
pricing framework, should a fund be required to apply a liquidity fee
under the same circumstances in which a fund would be required to
adjust its net asset value under the proposed swing pricing
requirement? Should a fund be required to use the same approach to
calculating a liquidity fee as the proposed approach to calculating a
swing factor? Alternatively, should different trigger events or
calculation methods determine when a liquidity fee applies and the
amount of such fee? \153\
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\153\ We also request comment on such liquidity fee alternatives
in Section II.A.3.
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37. If we adopt a liquidity fee framework instead of a swing
pricing framework, should we adopt a simplified fee calculation
methodology? If so, should the simplified liquidity fee framework be
tied to the level of the fund's net redemptions, the liquidity of its
portfolio holdings, or some other input? Should the simplified
liquidity fee be a set percentage (i.e., a 1% fee), or should the fee
increase as redemptions, illiquidity, or other variables increase?
38. Should we permit or require retail or government money market
funds to implement swing pricing? Would retail or government money
market funds have access to sufficient flow information to apply swing
pricing, or would changes to current order processing methods be needed
to facilitate access to sufficient flow information?
39. Will our proposed swing pricing requirement cause investors to
move their assets out of the funds that must implement a swing pricing
program to funds that do not, such as government money market funds or
short term bond funds? What are the potential costs and benefits
associated with these decisions?
40. Should we provide any exclusions from the proposed swing
pricing requirement for institutional funds? For example, should we
provide an exclusion from the swing pricing requirement for affiliated
money market funds created by an adviser for the purpose of efficiently
managing cash across accounts within its advisory complex and not
available to other investors?
41. Will swing pricing reduce the threshold effects that stem from
investors seeking to redeem in advance of a liquidity fee or gate? Will
swing pricing cause some investors to choose not to redeem because the
potential swing factor and price adjustment may be more tangible than
the uncertain possibility of potential future losses during periods of
market stress?
42. Will swing pricing protect money market fund investors that
remain in the fund from dilution when the fund fulfills net shareholder
redemptions? Would the increased liquidity requirements that we are
proposing provide adequate protection from dilution without swing
pricing? Should we impose additional liquidity requirements for
institutional prime and institutional tax-exempt as an alternative to
swing pricing?
43. How might swing pricing affect investor behavior in a period of
liquidity stress? Will swing pricing increase money market fund
resilience by reducing the first mover advantage that some investors
may seek during periods of market stress? Will swing pricing encourage
investors to redeem smaller amounts over a longer period of time
because investors will not know whether the fund's flows during any
given pricing period will trigger swing pricing and, if so, the size of
the swing factor for that period?
44. Based on historical data, how would our swing pricing framework
affect money market funds' NAVs under normal market conditions?
45. Rather than requiring institutional funds to adopt a swing
pricing requirement, should we provide more than one approach to
mitigate dilution in rule 2a-7 and require each institutional fund to
determine its own preferred approach? If so, what approaches should the
rule provide? Should we, for example, allow a fund either to adopt
swing pricing or a liquidity fee? Are there other options that would be
appropriate under this approach? Should non-institutional funds be
permitted or required to adopt an anti-dilution approach? Would funds'
use of different approaches benefit investors by increasing investor
choice or, conversely, would these differences confuse investors or
make it more difficult for them to compare money market funds with each
other?
2. Operational Considerations
Many investors use institutional money market funds as a cash
management vehicle, and money market funds provide operational
efficiencies to serve those investors. Institutional money market fund
transactions often settle on the same day that an investor places a
purchase or sell order, which has made these funds an important
component of systems for processing and settling various types of
transactions. Some institutional money market funds also provide
shareholders with intraday liquidity and same-day settlement by pricing
fund shares periodically during the day (e.g., at 11 a.m. and 4 p.m.).
Many commenters opposed swing pricing due to operational issues,
some of which are unique to money market funds.\154\ For example,
several commenters stated swing pricing is currently impractical
because intermediaries typically report flows with a delay, so funds
would not be able to determine net shareholder flows in time to apply a
swing factor to the fund's net asset value, as needed.\155\ One
commenter suggested that a move from T+0 to T+1 settlement for money
market fund subscriptions and redemptions could make it difficult for
[[Page 7269]]
money market funds to act as sweep vehicles and could affect their
status as cash equivalents.\156\ Some commenters asserted that swing
pricing works better in Europe due to fundamental differences between
fund operations in the U.S. and Europe (i.e., earlier trading cut-off
times, greater use of currency-based orders versus share- or
percentage-based transactions, and more direct-sold funds).\157\
Several commenters expressed concern that intraday liquidity and/or
same-day settlement would not be available to investors if money market
funds were required to implement swing pricing.\158\ In addition, many
commenters also asserted that there would be significant costs and
burdens from implementing systems to accommodate swing pricing.\159\
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\154\ See, e.g., Healthy Markets Comment Letter; PIMCO Comment
Letter; SIFMA AMG Comment Letter; ICI Comment Letter I; ICI Comment
Letter III; Western Asset Comment Letter; Fidelity Comment Letter;
State Street Comment Letter (expressing the view that swing pricing
can be a valuable liquidity management tool, but it is not easily
applicable to money market funds due to operational issues).
\155\ See, e.g., ICI Comment Letter I; PIMCO Comment Letter;
Fidelity Comment Letter; Federated Hermes Comment Letter I.
\156\ JP Morgan Comment Letter.
\157\ PIMCO Comment Letter; Fidelity Comment Letter; BlackRock
Comment Letter.
\158\ See, e.g., ICI Comment Letter I; SIFMA AMG Comment Letter;
Western Asset Comment Letter; Federated Hermes Comment Letter I; JP
Morgan Comment Letter; Institute of International Finance Comment
Letter; Comment Letter of the Committee on Capital Markets
Regulation (May 24, 2021) (``CCMR Comment Letter'').
\159\ See, e.g., SIFMA AMG Comment Letter; JP Morgan Comment
Letter; GARP Risk Institute Comment Letter.
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We acknowledge that swing pricing will introduce new operational
complexity to institutional money market funds. A fund must determine
whether it has net redemptions, and the size of those net redemptions,
for the pricing period prior to striking its NAV, and this
determination would need to be completed multiple times per day for
funds that strike their NAV multiple times per day. However,
institutional money market funds often impose order cut-off times that
ensure that they receive flow data prior to striking their NAV.\160\
Therefore, we believe many of them would have the necessary flow
information to determine if there are net redemptions and the amount of
those net redemptions.\161\ This is in contrast to other open-end
mutual funds, which may receive purchase and redemption requests from
fund intermediaries even after the fund has struck its NAV. Due to the
cut-off times that many institutional money market funds impose, we
believe these money market funds would not be subject to significant
operational impediments with respect to having timely flow information
to inform swing pricing decisions. However, if an institutional money
market fund does not impose order cut-off times, such a fund may face
additional operational complexity and costs to implement a cut-off time
or otherwise gather the necessary information to determine whether it
has net redemptions.
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\160\ Based on a 2021 staff analysis of information from
CraneData, a majority of the prime institutional money market funds
that impose an order cut-off time impose a 3:00 p.m. deadline for
same-day processing of shareholder transaction requests.
\161\ See proposed rule 2a-7(c)(2)(ii)(A) (permitting reasonable
high confidence estimates of investor flows to determine whether a
fund has net redemptions).
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In addition, if a fund has net redemptions, it would be required to
calculate and apply the swing factor to the NAV prior to processing any
shareholder transactions. Funds that strike their NAV multiple times
per day may also need to calculate and apply a swing factor multiple
times per day. We acknowledge that the proposed swing pricing
requirement would impose additional administrative burdens and costs
that money market funds do not face under current regulation,
particularly if net redemptions exceed the market impact threshold or
if the fund currently values its securities at the midpoint when
striking its NAV. In addition, while we recognize that the need to
calculate and apply a swing factor could delay a fund's ability to
determine the transaction price, we believe it is unlikely that these
delays would result in funds having to settle transactions on T+1,
instead of T+0. We do not believe T+1 settlement is a likely result of
the proposed swing pricing requirement because funds could take steps
to maintain their ability to offer same-day settlement if they believe
this type of settlement is important to institutional investors. For
example, if necessary, relevant funds could choose to move their last
NAV strike to an earlier point in the day.\162\ Similarly, we
understand that the proposed swing pricing requirement could cause
relevant funds to reduce the number of NAV strikes they offer each day.
For example, a fund may determine that instead of offering three or
four separate NAV strikes each day, it may only offer one or two NAV
strikes to ease implementation of the proposed swing pricing
requirement. As a general matter, to the extent these operational
changes are necessary, we believe they are warranted to address
investor harm and dilution that occurs when redeeming investors reduce
the fund's liquidity and impose other costs on remaining investors.
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\162\ We understand that, to offer same-day settlement, funds
must be able to complete Fedwire instructions before the Federal
Reserve's 6:45 p.m. ET Fedwire cut-off time. See, e.g., ICI Comment
Letter I. Moving the last NAV strike to a somewhat earlier point in
the day would provide the fund with additional time to calculate and
apply its swing factor and take other necessary steps prior to the
Fedwire cut-off time.
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Prior money market fund reforms required institutional money market
funds to adopt a floating NAV. This requirement can introduce some
variability to a fund's NAV, particularly during times of market
stress. In the years since the implementation of the floating NAV
requirement, most institutional money market funds have typically been
able to maintain a floating NAV that remains close to $1.0000 or
another value chosen by the fund.\163\ The addition of a swing pricing
requirement could introduce greater variability to a fund's NAV,
particularly during volatile periods. For example, a fund's NAV could
float downward if the markets for its portfolio securities becomes more
illiquid and it has sizeable net redemptions, and the application of a
swing factor at such a time would cause additional variation in the
fund's NAV for shareholders that transact on that day. This variability
may reduce the appeal of institutional money market funds as cash
management tools if investors seek alternative investment options that
are not subject to fluctuation in value at times of market stress.
Further, while one commenter expressed concern that a swing pricing
requirement would affect money market funds' use in sweep arrangements,
it is our understanding that institutional prime and tax-exempt money
market funds currently are not used in sweep arrangements.\164\
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\163\ For example, some funds maintain a floating NAV that
remains close to some other amount, such as $100.00.
\164\ Based on analysis of information from CraneData. See JP
Morgan Comment Letter (discussing the operational complexities of
swing pricing for money market funds that are used in sweep
platforms).
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We request comment on the operational impact of our proposed swing
pricing requirement, including:
46. Are there key operational impediments with the proposed swing
pricing approach? Are there key inputs for the swing factor
calculation, including the market impact factor, that are operationally
and prohibitively difficult to ascertain within the time period needed
to calculate the swing factor? Are there key inputs that are not
operationally complex to obtain?
47. Are there instances in which an institutional money market fund
permits intermediaries to submit subscription or redemption requests
after the fund's cut-off time and to receive the NAV calculated for
that cut-off time, as long as the intermediary received the order prior
to the fund's
[[Page 7270]]
cut-off time? If so, when do such instances occur, and how frequently?
48. If institutional money market funds do not receive information
about subscription or redemption requests early enough to make swing
pricing decisions prior to striking NAV, are there rule-based solutions
that could improve the timing considerations regarding shareholder
flows and swing pricing (e.g., by requiring intermediaries to provide
earlier flow information to funds or by requiring specific cut-off
times for transaction requests)?
49. What proportion of institutional prime and institutional tax-
exempt money market funds use mid-market pricing? Would such funds
incur greater operational costs than a fund that uses bid pricing to
estimate the spread costs the fund would incur to sell a vertical slice
of its portfolio?
50. Do commenters agree with our assessment that institutional
prime and institutional tax-exempt money market funds could still offer
same-day settlement if they are required to implement swing pricing? If
not, how would swing pricing affect the ability of institutional money
market funds to settle transactions on a T+0 basis? If these funds
instead settle transactions on a T+1 basis, how might this affect
investors?
51. How might swing pricing affect the ability of institutional
money market funds to offer multiple NAV strikes per day? How many
institutional money market funds will reduce the number of times they
strike their NAV if we adopt swing pricing as proposed? How might
investors be affected if these funds are no longer able to offer
multiple NAV strikes, or as many NAV strikes, per day?
52. Should we require all money market funds, including stable NAV
money market funds, to adopt a floating NAV and to implement swing
pricing?
53. Will investors seek alternative cash management investment
options that are not subject to fluctuation in value at times of market
stress to avoid the additional NAV variability that results from swing
pricing? If so, which alternatives are investors most likely to use?
54. Are institutional prime and tax-exempt money market funds used
in cash sweep arrangements?
55. What other operational changes would be required for funds to
implement our swing pricing requirement as proposed?
3. Tax and Accounting Implications
When the Commission adopted the floating NAV requirement for all
prime and tax-exempt money market funds sold to institutional investors
in 2014, the Treasury Department amended its regulations to clarify
money market funds' reporting obligations.\165\ The Commission, the
Treasury Department, and the IRS recognized the difficulties and costs
associated with requiring floating NAV money market funds to comply
with then-existing tax reporting requirements, and the amended Treasury
regulations permit shareholders of floating NAV money market funds to
use the ``NAV method'' to report gains and losses.\166\ This method
allows investors to aggregate gains and losses for the calendar year on
their tax returns, rather than reporting individual transactions. The
Treasury Department and the IRS also clarified that the ``wash sale''
rule does not apply to redemptions in floating NAV money market
funds.\167\ The Commission staff will continue discussions with the
staff of the Treasury Department and IRS regarding the tax consequences
of the proposed swing pricing requirement, including any implications
for an investor's use of the NAV method of accounting for gain or loss
on shares in a floating NAV money market fund or the exemption from the
wash sale rules for redemptions of shares in these funds. We recognize
that if the proposed swing pricing requirement modifies the method of
accounting for gains or losses in relevant money market fund shares, or
has other tax implications, the tax reporting effects of the proposed
swing pricing requirement could increase burdens for investors.
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\165\ Treas. Reg. Sec. 1.446-7.
\166\ Treas. Reg. Sec. 1.446-7.
\167\ See Rev. Proc. 2014-45 (2014-34 IRB 388) and Method of
Accounting for Gains and Losses on Shares in Money Market Funds;
Broker Returns With Respect to Sales of Shares in Money Market
Funds, RIN 1545-BM04 (June 15, 2016) [81 FR 44508 (July 8, 2016)] at
44511. Very generally, the wash sale rule prevents taxpayers from
taking an immediate loss from the sale of securities if
substantially identical securities are purchased within six months
of the sale.
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From an accounting perspective, when institutional money market
funds were required to adopt a floating NAV, the Commission stated its
belief that an investment in a money market fund with a floating NAV
would meet the definition of a ``cash equivalent'' for accounting
purposes.\168\ One commenter expressed concern that a swing pricing
requirement could result in money market funds no longer qualifying as
cash equivalents.\169\ For the same reasons discussed in connection
with the 2014 reforms, we believe the adoption of swing pricing would
not preclude shareholders from classifying their investments in money
market funds as cash equivalents. Under normal circumstances, we
believe an investment in a money market fund that applies swing pricing
under our proposed rule would qualify as a ``cash equivalent'' for
purposes of U.S. GAAP.\170\ Under normal circumstances, we anticipate
that fluctuations in the amount of cash received upon redemption from a
fund that applies swing pricing would likely be small and would be
consistent with the concept of a ``known'' amount of cash. However, as
already exists today and, as noted by the Commission in 2014, events
may occur that give rise to credit and liquidity issues for money
market funds. If such events occur, shareholders would need to reassess
if their investments in that money market fund continue to meet the
definition of a cash equivalent.\171\ This is already the case absent
swing pricing, but we recognize that swing pricing may result in larger
fluctuations in a fund's share price during such periods of stress.
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\168\ 2014 Adopting Release, supra footnote 12, at section VI
(amending the ``Codification of Financial Reporting Policies''
announced in Financial Reporting Release No. 1 (Apr. 15, 1982)).
\169\ JP Morgan Comment Letter.
\170\ See FASB Accounting Standards Codification Master
Glossary, available at <a href="https://asc.fasb.org/glossary">https://asc.fasb.org/glossary</a>.
\171\ See 2014 Adopting Release, supra footnote 12, at paragraph
accompanying n.428.
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Consistent with the approach the Commission established for mutual
fund swing pricing, the proposed swing pricing requirement for
institutional money market funds would affect certain aspects of
financial reporting, as these funds would need to distinguish between
the GAAP NAV per share and the transactional price adjustment to the
NAV per share resulting from swing pricing (``swung price'').\172\ The
GAAP NAV per share is the amount of net assets attributable to each
share of capital stock outstanding at the close of the period, and the
swung price (if the NAV per share is adjusted due to swing pricing at
period end) would represent the transactional price on the last day of
the period, which is the NAV per share on the day with an adjustment by
the swing factor.\173\ Money market funds would disclose the GAAP NAV
per share (which will reflect the effects of swing pricing throughout
the reporting period, if applicable) on the statement of assets and
liabilities. This allows users of the financial statements to
understand the actual amount of net assets attributable to the fund's
[[Page 7271]]
remaining shareholders at period end.\174\ A money market fund using
swing pricing would, however, include the impact of swing pricing in
its financial highlights, and the per share impact of amounts retained
by the fund due to swing pricing should be included in the fund's
disclosures of per share operating performance.\175\ Swing pricing also
affects disclosure of capital share transactions included in a fund's
statement of changes in net assets.\176\ Finally, a money market fund
using swing pricing would be required to disclose in a footnote to its
financial statements: (1) The general methods used in determining
whether the fund's NAV per share will be adjusted due to swing pricing;
(2) whether the fund's NAV per share has been adjusted by swing pricing
during the period; and (3) a general description of the effects of
swing pricing on the fund's financial statements.\177\
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\172\ See Swing Pricing Adopting Release, supra footnote 102, at
section II.A.3.g.
\173\ See 17 CFR 210.6-04.19 and FASB ASC 946-10-20 (discussing
the concept of the GAAP NAV); Swing Pricing Adopting Release, supra
footnote 102, at section II.A.3.g.
\174\ See Swing Pricing Adopting Release, supra footnote 102, at
section II.A.3.g.
\175\ See Item 13 of Form N-1A (requiring disclosure of the
swung price per share, if applicable, as a separate line item below
the ending GAAP NAV per share on the financial highlights); FASB ASC
946-205-50-7 (requiring specific per share information to be
presented in the financial highlights for registered investment
companies, including disclosure of the per share amount of purchase
premiums, redemption fees, or other capital items).
\176\ See 17 CFR 210.6-09.4(b). This rule requires funds to
disclose the number of shares and dollar amounts received for shares
sold and paid for shares redeemed. For funds that implement swing
pricing, Regulation S-X would require the dollar amount disclosed to
be based on the NAVs used to process investor subscriptions and
redemptions, including those processed using swung prices during the
reporting period.
\177\ See rule 6-03(n) of Regulation S-X.
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We request comment on the tax and accounting implications of our
proposed swing pricing requirement, including:
56. Would swing pricing impose additional complications with
respect to the tax treatment of floating NAV money market fund
investments? If so, how could we address such complications?
57. Would the implementation of swing pricing for institutional
money market funds affect the treatment of shares of such funds as
``cash equivalents'' for accounting purposes? Would a cap on the swing
factor, such as a 2% cap, reduce uncertainty about the treatment of
institutional money market fund shares as ``cash equivalents''?
58. Should the financial reporting effects of swing pricing differ
for money market funds, as opposed to other types of mutual funds?
59. Are there other tax or accounting implications of institutional
money market funds using swing pricing that we should address?
4. Disclosure
Form N-1A is used by open-end funds, including money market funds
and ETFs, to register under the Investment Company Act and to register
offerings of their securities under the Securities Act. Form N-1A
currently requires a fund to describe its procedures for pricing fund
shares, including an explanation that the price of fund shares is based
on the fund's NAV and a description of the method used to value fund
shares.\178\ In 2016, when the Commission adopted the swing pricing
rule for open-end funds that are not money market funds or ETFs, it
adopted amendments to Item 6 of Form N-1A to enhance disclosure of an
open-end fund's swing pricing procedures.\179\ Under our proposal,
institutional money market funds would be required to implement swing
pricing policies and procedures and therefore would be required to
comply with the swing pricing-related requirements of Form N-1A,
described in greater detail below.
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\178\ See Item 11(a)(1) of Form N-1A.
\179\ See Swing Pricing Adopting Release, supra footnote 102, at
section II.B.1.
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Money market funds subject to a swing pricing requirement under our
proposal also would be required to respond to the existing swing
pricing-related items on Form N-1A that were not historically
applicable to these funds. Specifically, the form requires a fund to
include a general description of the effects of swing pricing on the
fund's annual total returns as a footnote to its risk/return bar chart
and table.\180\ Form N-1A also requires a fund that uses swing pricing
to explain the fund's use of swing pricing, including its meaning, the
circumstances under which the fund will use it, and the effects of
swing pricing on the fund and investors.\181\ While Form N-1A requires
other funds that use swing pricing to disclose a fund's swing factor
upper limit, we are proposing to exclude money market funds from this
requirement because our proposal does not require these funds to
establish a swing factor upper limit.\182\
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\180\ Items 4(b)(2)(ii) and (iv) of Form N-1A.
\181\ Item 6(d) of current Form N-1A.
\182\ Item 6(d) of proposed Form N-1A.
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Money market funds use Form N-MFP to report key information to the
Commission each month. As part of our swing pricing framework for money
market funds, we propose to amend Form N-MFP to require money market
funds that are not government funds or retail funds to use their
adjusted NAV, as applicable, for purposes of reporting the series- and
class-level NAV per share.\183\ We also propose to require these funds
to report the number of times the fund applied a swing factor over the
course of the reporting period, and each swing factor applied.\184\
Together, these reporting requirements would help the Commission
monitor the size of the adjustments funds are making during normal and
stressed market conditions, as well as the frequency at which funds
apply swing factor adjustments.
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\183\ See Items A.20 and B.5 of current Form N-MFP; Items A.20
and B.6 of proposed Form N-MFP. As discussed below, we are also
proposing to amend these current reporting requirements to require
funds to provide series- and class-level NAVs per share as of the
close of each business day, rather than as of the close of business
on each Friday during the month reported. See infra Section
II.F.2.c.
\184\ See Item A.22 of proposed Form N-MFP.
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Under current rule 2a-7, money market funds are required to provide
on their websites the money market fund's net asset value per share as
of the end of each business day during the preceding six months. This
disclosure must be updated each business day as of the end of the
preceding business day.\185\ We are proposing to amend this provision
to require money market funds that are not government funds or retail
funds to depict their adjusted NAV, taking into account the application
of a swing factor.\186\ We believe that, when a fund applies swing
pricing, the adjusted NAV is more useful for investors because it
represents the price at which transactions in the fund's shares
occurred.
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\185\ 17 CFR 270.2a-7(h)(10)(iii).
\186\ See proposed rule 2a-7(h)(10)(iii).
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We request comment on swing pricing disclosure requirements as
applicable to money market funds, including:
60. Are the existing swing pricing-related disclosure obligations
on Form N-1A appropriate for money market funds? In addition to the
question regarding the swing factor's upper limit, are there other
existing obligations that should not be applied to money market funds?
61. Would more information be useful to shareholders or other
market participants? If so, what additional information should we
require to be disclosed on Form N-1A, Form N-MFP, or elsewhere (e.g.,
fund websites or other marketing materials)? When should we require
such disclosure?
62. Should we require institutional funds to report the number of
times the fund applied a swing factor and each swing factor applied, as
proposed? Should we require the median, highest, and lowest (non-zero)
swing factor applied for each reporting period on Form N-MFP, rather
than requiring
[[Page 7272]]
disclosure of each swing factor applied? Should we require these funds
to provide additional information about swing pricing in their monthly
reports on Form N-MFP, such as the swing pricing administrator's
determination to use a lower market impact threshold (if applicable)?
Should we separately require funds to disclose information about market
impact factors, such as how many times a market impact factor was
included in the swing factor each month and the size of those market
impact factors (e.g., either the size of any market impact factor
applied, or the median, highest, and lowest (non-zero) amount)?
63. As proposed, should we require an institutional fund to use its
adjusted NAV, as applicable, for purposes of current requirements to
disclose a fund's NAV on its website and the series- and class-level
NAV disclosure requirements on Form N-MFP? Should we require an
institutional fund to indicate, for each NAV reported, whether a swing
factor was applied (i.e., whether the NAV was ``adjusted'')? As an
alternative to reporting the adjusted NAV, should we provide that the
website and Form N-MFP NAV disclosures should not include a swing
factor adjustment? If so, why would the unadjusted NAV be more useful
for these purposes? Alternatively, should we require an institutional
fund to disclose both its adjusted NAV and its unadjusted NAV on the
fund's website or on Form N-MFP? What are the advantages and
disadvantages of requiring funds to disclose both figures?
64. Requirements to disclose NAVs per share on fund websites and on
Form N-MFP require NAVs per share as of the close of business on a
given day, while some funds may have multiple pricing periods and
multiple NAVs each day. Should we require a fund to disclose its NAV
per share for each pricing period, instead of the end-of-day NAV per
share only? Would this additional transparency be helpful for
investors, or would it make NAV disclosure less useful for investors by
increasing the number of data points without significantly improving
the value of the data?
65. Will daily website disclosure of fund flows and the adjusted
NAV facilitate gaming of swing pricing or preemptive runs by investors
that wish to redeem in advance of a fund imposing a swing factor on a
particular day? If so, how? Are there changes we should make to reduce
the potential for gaming?
C. Amendments to Portfolio Liquidity Requirements
1. Increase of the Minimum Daily and Weekly Liquidity Requirements
Currently, rule 2a-7 requires that a money market fund, immediately
after acquisition of an asset, hold at least 10% of its total assets in
daily liquid assets and at least 30% of its total assets in weekly
liquid assets.\187\ Assets that make up daily liquid assets and weekly
liquid assets are cash or securities that can readily be converted to
cash within one business day or five business days, respectively.\188\
These requirements are designed to support funds' ability to meet
redemptions from cash or securities convertible to cash even in market
conditions in which money market funds cannot rely on a secondary or
dealer market to provide liquidity.\189\
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\187\ See 17 CFR 270.2a-7(d)(4)(ii) and (iii) (rule 2a-
7(d)(4)(ii) and (iii)); see also supra footnote 22 and accompanying
paragraph. Tax-exempt money market funds are not subject to the
daily liquid asset requirements due to the nature of the markets for
tax-exempt securities and the limited supply of securities with
daily demand features. See 2010 Adopting Release, supra footnote 20,
at n.243 and accompanying text.
\188\ Daily liquid assets are: Cash; direct obligations of the
U.S. Government; certain securities that will mature (or be payable
through a demand feature) within one business day; or amounts
unconditionally due within one business day from pending portfolio
security sales. See rule 2a-7(a)(8). Weekly liquid assets are: Cash;
direct obligations of the U.S. Government; agency discount notes
with remaining maturities of 60 days or less; certain securities
that will mature (or be payable through a demand feature) within
five business days; or amounts unconditionally due within five
business days from pending security sales. See rule 2a-7(a)(28).
\189\ See 2010 Adopting Release, supra footnote 20, at n.213 and
accompanying and following text.
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In March 2020, significant outflows from prime funds caused general
reductions in these funds' daily liquid assets and weekly liquid
assets. Although only one institutional prime fund reported weekly
liquid assets below the 30% threshold, it is likely that other funds
would have breached daily liquid asset or weekly liquid asset
thresholds at the time if they had used daily liquid assets or weekly
liquid assets to meet redemptions. As previously discussed, because the
fee and gate provisions in rule 2a-7 incentivized funds to maintain
weekly liquid assets above 30%, many funds took other actions (e.g.,
selling longer-term assets or receiving financial support) to meet
redemptions and remain above the minimum liquidity threshold. Some
funds experienced redemption levels that would have depleted required
levels of daily liquid assets or weekly liquid assets, if they had been
used. For example, the largest weekly outflow in March 2020 was around
55%, and the largest daily outflow was about 26% (both well above the
respective weekly liquid asset and daily liquid asset thresholds of 30%
and 10%).\190\ Further, since the fee and gate provisions in rule 2a-7
incentivized funds to maintain weekly liquid assets above the current
threshold, the proposed removal of the fee and gate provisions from
rule 2a-7 could have the effect of reducing fund liquidity levels by
eliminating such incentives. Accordingly, we are proposing to increase
daily and weekly liquid asset requirements to 25% and 50%,
respectively.\191\ We believe that these increased thresholds will
provide a more substantial buffer that would better equip money market
funds to manage significant and rapid investor redemptions, like those
experienced in March 2020, while maintaining funds' flexibility to
invest in diverse assets during normal market conditions.
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\190\ See supra section I.B; see also Prime MMFs at the Onset of
the Pandemic Report, supra footnote 41, at 2-3. According to Form N-
MFP filings, no prime money market fund reported daily liquid assets
declining below the 10% threshold in March 2020.
\191\ See proposed rule 2a-7(d)(4)(ii) and (iii).
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Several commenters supported increasing the minimum liquidity
requirements, believing that such increases could make money market
funds more resilient during times of market stress.\192\ Several
commenters acknowledged that historically, most prime money market
funds have maintained liquidity levels well above the regulatory
minimums in normal market conditions.\193\ Some commenters asserted
that raising the thresholds to the levels that most funds already
maintain would provide a more sufficient liquidity buffer.\194\ One
commenter suggested that requiring sufficiently higher weekly liquid
asset levels would provide investors with confidence that funds hold
adequate liquidity during periods of market uncertainty, thereby
reducing the
[[Page 7273]]
likelihood of a run.\195\ This commenter stated that an increased
weekly liquid assets requirement, along with the removal of the tie to
fees and gates, would most effectively address the structural
vulnerabilities in money market funds that were exposed in March 2020.
Some commenters suggested that the Commission analyze and monitor
market data to ensure that any new thresholds promote the goal of
improving the resilience of money market funds during times of market
stress while preserving the benefits that investors have come to expect
from money market funds.\196\
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\192\ See e.g., ICI Comment Letter I; Comment letter of Samuel
G. Hanson, David S. Scharfstein, Adi Sunderam, Harvard Business
School (Apr. 12, 2021) (``Prof. Hanson et al. Comment Letter'');
Dreyfus Comment Letter (suggesting increasing the weekly liquid
asset minimum to 35%); Fidelity Comment Letter (supporting higher
liquidity requirements for institutional prime money market funds
specifically).
\193\ Dreyfus Comment Letter; SIFMA AMG Comment Letter; Western
Asset Comment Letter; ICI Comment Letter I (stating that
``institutional prime money market funds on average held 44 percent
of their assets in weekly liquid assets, and retail prime money
market funds held on average 41 percent of their assets in weekly
liquid assets'').
\194\ Dreyfus Comment Letter; ICI Comment Letter I.
\195\ Fidelity Comment Letter.
\196\ ICI Comment Letter I; Fidelity Comment Letter.
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Other commenters opposed any increase in the minimum liquidity
management requirements.\197\ These commenters argued that such a
change would likely decrease the yield of prime money market funds.
They asserted that such a decrease in yield might reduce the spread
between prime and government money market funds, which could ultimately
decrease investor demand for prime money market funds. Further, some
commenters stated that most fund managers have shown discipline in
maintaining liquidity in excess of the existing thresholds.\198\ Some
of these commenters asserted that this practice will continue such that
increasing the minimum regulatory requirements would result in funds
holding even greater amounts of daily and weekly liquid assets at
levels that may be higher than is necessary or appropriate.\199\ One
commenter asserted that such an increase could have the unintended
effect of encouraging ``barbelling,'' in which fund managers compensate
for the impact on expected yield by increasing the maturity risk of
their remaining assets, potentially making the fund's portfolio more
susceptible to volatility overall.\200\ Lastly, one commenter stated
that an increase in the minimum liquidity management requirements is
likely to have marginal impact because the redemption behavior in March
2020 was motivated by a concern that money market
[…truncated; see source link]Indexed from Federal Register on February 8, 2022.
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