Sec Speeches Cryptocurrency Air Dancers and Flies: Statement on Adoption of the Latest Round of Money Market Fund Reforms

Thank you, Chair Gensler.  I am pleased that we are removing the tie between liquid asset thresholds and fees and gates and that we are not moving forward with swing pricing.  I could have supported the final money market fund rule if we had been equally prudent with respect to other elements of the rule.  But today’s adoption contains the same flaw that tanked the 2014 money market fund rulemaking—an insistence that our own judgment is superior to that of money market funds, their sponsors, their boards, and their shareholders.  Accordingly, I will be voting no today.

The final rule, drawing on the experience from March 2020, eliminates the link between liquidity fees and gates and weekly liquid assets dropping below 30 percent of fund assets.  As one commenter explained, “the general consensus” is “that the possibility of liquidity fees and gates increased uncertainty, created confusion in the market, and may have made it more difficult for a money market fund to manage redemptions.”[i]  The evidence of how poorly our rule functioned in a time of stress forms the basis for today’s elimination of the link between a particular liquidity threshold and fees and gates.  That change is good.

Having seen in 2020 that one regulatory mandate for money market funds did not work, we now grasp for another—mandatory fees for institutional prime and institutional tax-exempt funds.  Much like an air dancer—the inflatable tubular figure dancing to drum up business for a tire or furniture store near you—the Commission has the habit of lurching from one side to the other when regulating money market funds, and so it is with today’s amendments.  Just as we were in 2014 with fees and gates tied to liquidity thresholds, and again in December 2021 with swing pricing, we are once more convinced that we have found the solution to first-movers and share dilution.  We wobble from codifying consideration of redemption gates to forbidding it and mandating redemption fees instead.  We will not even allow fund boards the freedom to opt out of implementing them.[ii] 

Even as we lurch our way through different solutions, we have yet to identify precisely the problem we are trying to solve.  The release speaks generally of the potential for early redeemers to dilute the fund at the expense of remaining fund investors, but we absolve ourselves of having to “conduct a data analysis on the extent to which money market fund shareholders have experienced dilution in the past” by saying we lack sufficient information.[iii]  How then can we know if the benefits to investors of the rule outweigh the costs to investors?  The dilution problem may not be material in money market funds, which are flush with short-term liquidity that (absent a regulatory incentive to sell longer-term assets first)[iv] can be used to meet redemptions without diluting remaining shareholders.[v] 

We do not need a new solution to a problem that we have not shown to exist.  You might be saying, “Well, we can live with mandatory redemption fees; they are better than mandatory swing pricing.”  To the Commission’s credit, we listened to what commenters said; mandatory swing pricing is out.  But we are not making a serious effort to hear from commenters on mandatory liquidity fees.  The proposing release discussed the use of liquidity fees as an alternative to fight dilution costs in the proposal, but it also rejected that option, in part, because liquidity fees “could introduce additional operational complexity and cost,” and could “require more coordination with a fund’s service providers than swing pricing.”[vi]  Some commenters suggested that the burdens associated with liquidity fees would likely be less oppressive than those of swing pricing.[vii] 

That many commenters found a liquidity fee preferable to swing pricing is hardly a full-throated endorsement of a liquidity fee.  Those same commenters also likely would prefer one fly in their soup to four, but I suspect that most would check none of the above if given that choice.  One commenter that addressed the rejected liquidity fee alternative said, “if properly constructed, such a fee potentially could serve as a more effective alternative than swing pricing.”[viii]  Put another way: show us your plan Commission, and we will tell you what we think.  Commenters spoke broadly about different approaches that could be taken—discretionary fees versus mandatory fees, and whether to employ multiple threshold triggers, for instance[ix]—but did not provide the particularized feedback that we need to guide the design of liquidity fees, which were one of fifteen rejected alternatives sketched out in the proposing release. 

If we are determined to move forward with a liquidity fee mandate, we should go back out for comment to get the wisdom of commenters.  Among other information, we need to know:

• whether the introduction of mandatory fees, contrary to their intended effect, will induce early redemptions;
• the appropriateness of the 5% of net assets redemption trigger;
• whether we should be mandating the use of a vertical slice of portfolio holdings to determine how much to charge redeeming investors;
• whether a default liquidity fee of 1% makes sense;
• what operational difficulties funds will encounter, including how feasible it will be to attain the cooperation of service providers in imposing the fees; and
• whether institutional prime funds will survive this latest Commission silver bullet.

The mandatory element of the liquidity fees is symptomatic of a broader theme in our approach to money market funds—regulatory, one-size-fits-all mandates.  A better approach would be to permit funds to choose approaches that work for them.  As one commenter put it, “Given regulators’ track record, it makes sense that fund managers and shareholders––not federal officials––should shoulder the responsibility of figuring out what investment structures provide the right incentives and options.”[x]

Despite my concerns, the final rule has some good features.  In addition to eliminating swing pricing, another positive change is the allowance of share cancellation in negative interest rate environments.  The best feature of the rule, of course, is its authors.  Thank you to the hardworking staff in the Divisions of Investment Management and Economic and Risk Analysis, and the Office of the General Counsel.  Working against aggressive deadlines, they are all under tremendous pressure, but they have been nothing but generous in their willingness to address my questions and concerns.  I do have several questions to ask you this morning:

1. We are raising the daily and weekly liquid assets requirements to 25% and 50% respectively.  We could simply have removed the tie between weekly liquid assets and gates and fees and then observed whether this or some additional measure was necessary.  Why didn’t we take an iterative approach?
2. While many commenters supported increasing the liquidity requirements, the increases we are adopting exceed what many commenters thought necessary or prudent.  Why are we raising the thresholds so dramatically?  A number of commenters suggested, for example, 20% and 40%.  Why not start there and raise them more later if evidence suggests that such increases are needed?  Is one of our goals to kill prime funds?
3. Do you anticipate that most money market funds will be managed to stay above the required thresholds even after the gate link is removed?
4. One commenter suggested a 40% requirement for retail prime funds “due to their stable investor base and less volatile redemptions.”[xi]  Why not have a lower requirement for retail funds?
5. We did not propose mandating liquidity fees for prime and tax-exempt funds.  In fact, we rejected them as likely being more costly than swing pricing.  How have we have met our notice and comment obligations under the Administrative Procedure Act?
6. How do the costs associated with the mandated liquidity fees compare to the dilution costs they are aimed at preventing?
7. Commenters asked us to exempt non-publicly offered central cash management funds from swing pricing.  Commenters highlighted the fact that redemption activity varied dramatically from publicly offered funds.  These same characteristics would justify an exemption from mandatory redemption fees, so why are we imposing mandatory liquidity fees on these types of funds?
8. Please walk me through the compliance periods, what commenters had to say about how much time they would need, and explain why we think they are sufficient.