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The Commission is adopting reforms to strengthen the resiliency of money market funds. These reforms, which I support, should help reduce money market funds’ susceptibility to risk, especially during adverse market events.
The money market fund industry has grown from approximately $2 billion in 1974, around the time of its inception, to nearly $6 trillion in June of this year.
Money market funds play an important role in our financial markets, both to meet the short-term funding needs of institutional investors as well as those of retail investors who opt to include more liquid investments in their portfolio mix.
As with all investment products, money market funds carry their own unique risks and vulnerabilities. In September 2008, in the wake of the collapse of a major Wall Street firm, and in March 2020, at the start of the COVID pandemic lockdown, sudden heavy investor redemptions tested this market’s resiliency. To prevent contagion and the further erosion of financial stability, the federal government intervened with taxpayer-backed liquidity support in both instances.
The Financial Stability Oversight Council has indicated that the money market fund industry is highly interconnected with the financial system and with the broader economy. As a result, instability in this segment of our financial system can carry a higher risk of market contagion.
The reforms being adopted today follow a series of reforms the Commission undertook in 2010 and in 2014. These prior reforms provided for enhanced liquidity risk management, the ability to suspend redemptions, stress testing, and improved disclosures. But the experience of March 2020 revealed that these reforms did not mitigate runs in this market, nor did they reduce the likelihood of massive taxpayer bailouts.
To fulfill the SEC’s mission most effectively on behalf of the public, we must strive to anticipate areas of vulnerability in our capital markets and to act swiftly and effectively to address them.
The Commission’s actions today do just that.
Increases in a fund’s liquidity requirements may reduce the transaction costs of redemptions. Eliminating the ability of a fund to suspend investor redemptions may reduce the likelihood of runs. And improvements to the liquidity fee framework shifts liquidity costs to redeeming investors, thereby protecting remaining investors from dilution.
Overall, these improvements will strengthen the resiliency of money market funds.
As is customary in Commission rulemaking, today’s reforms are the product of a thorough and extensive public comment process. As is also customary, the Commission’s dedicated public servants – particularly in the Division of Investment Management – crafted these thoughtful reforms after evaluating this extensive public input on its merits, as required by law. This input also includes that of the investor advocacy community representing the interests of working families who invest in our capital markets to build a brighter financial future. The Commission staff conducts its work in the best spirit of advancing the public interest and protecting investors, and I commend their commitment to public service.
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