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Today, the Commission is considering adopting final rules to enhance money market funds’ liquidity and investor protection. I support this adoption because it will enhance these funds’ resiliency and ability to protect against dilution.
Money market funds—nearly $6 trillion in size today—provide millions of Americans with a deposit alternative to traditional bank accounts. Using these funds, shareholders can get market-based returns, fully backed dollar-for-dollar by readily marketable securities.
Money market funds, though, have a potential structural liquidity mismatch. Investors can redeem their money market fund holdings on a daily basis, even if those funds keep some of their holdings in securities with less liquidity.
As a result, when markets enter times of stress, some investors—fearing dilution or illiquidity—may try to escape the bear. This can lead to large amounts of rapid redemptions. We have observed this play out in times of stress, including during the 2008 financial crisis and the “dash for cash” in March 2020. Left unchecked, such stress can undermine these critical funds.
In enacting the 1940 Investment Company and Investment Advisers Acts, Congress understood how important it is for open-end funds to manage effectively liquidity and dilution.[1] In that light, the Commission over the years has adopted rules to address such risks for money market funds. We did so through reforms in 2010 and 2014, in response to the 2008 financial crisis.
Given the market events of March 2020, I think it is important that to take further action to manage these risks. President’s Working Group and Financial Stability Oversight Council reports under different Treasury secretaries and presidents have highlighted these issues as well.
Today’s adoption will enhance money market funds’ liquidity, anti-dilution practices, and transparency in a number of ways.
First, the rules will increase money-market funds’ minimum liquidity requirements. Specifically, the rules will require money market funds to hold greater proportions of their total assets in securities that can be liquidated within one business day as well as within five business days. This will provide a more substantial buffer in the event of rapid redemptions.
Second, the rules will prevent money market funds from temporarily halting redemptions (so-called gates).[2] These gates may have encouraged runs in March 2020 and may be procyclical in times of stress. Removing these gates may remove incentives for preemptive redemptions.
Third, the rules will require institutional prime and institutional tax-exempt money market funds—funds that serve institutional rather than everyday investors—to impose liquidity fees on redeeming investors during times of stress. Such fees will help ensure that during stress times, redeeming investors rather than remaining investors bear the cost of redemptions. These funds, which have faced the largest redemptions in past stress periods, represent currently 11 percent of the broader money market funds space.[3] Under existing rules, these funds are those that use a floating net asset value, whereby their institutional investors at times may redeem at a value other than $1.00 per share.
Based upon public feedback, today’s final rules will require liquidity fees instead of the originally proposed swing pricing requirement. I believe that liquidity fees, compared with swing pricing, offer many of the same benefits and fewer of the operational burdens.
Fourth, the rules will amend certain reporting requirements to improve the transparency of money market funds.
In addition to these reforms, today’s rules will amend Form PF for large liquidity fund advisers to align their reporting requirements with those of money market funds.
Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress. That benefits investors.
I’d like to thank the members of the SEC staff who worked on these final rules, including:
- William Birdthistle, Sarah ten Siethoff, Brian M. Johnson, Angela Mokodean, Blair Burnett, Christian Corkery, David Driscoll, Jon Hertzke, Hae-Sung Lee, Isaac Kuznits, Michelle Trillhaase, Susan Zhang, Viktoria Baklanova, Heather Fernandez, and Gregg Jaffray in the Division of Investment Management;
- Megan Barbero, Meridith Mitchell, Malou Huth, Natalie Shioji, Cathy Ahn, and Joseph Guerra in the Office of the General Counsel;
- Jessica Wachter, Alex Schiller, Diana Knyazeva, Joe Simmons, Dan Hiltgen, and Robert Girouard in the Division of Economic and Risk Analysis; and
- Thu Bao Ta, Song Brandon, and Elizabeth Blase in the Division of Examinations.
[1] As SEC Commissioner Robert E. Healy put it in his testimony on behalf of the ’40 Acts: “Due to the right of the stockholder to come in and demand a redemption, the [open-end fund] has to keep itself in a very liquid position. That is, it has to be able to turn its securities into money on very short notice.” See Investment Trusts and Investment Companies: Hearings on H.R. 10065 before a Subcommittee of the House Committee on Interstate and Foreign Commerce, 76th Cong., 3d Sess. 112 (1940), at 57 (Statement of Robert E. Healy). The SEC said in a report in 1942: “Open-end investment companies, because of their security holders’ right to compel redemption of their shares by the company at any time, are compelled to invest their funds predominantly in readily marketable securities.” See Investment Trusts and Investment Companies: Report of the Securities and Exchange Commission (1942), at 76.
[2] Rule 22e-3 would still permit gates in the event of a liquidation.
[3] Based on Form N-MFP data for June 2023. The release reflects money market fund data through March 2023, at which point affected institutional funds represented about 12 percent of total money market fund assets.
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