On April 11, 2022, the Committee submitted a comment letter to the Securities and Exchange Commission (the “SEC”) regarding its proposed rule on money market fund reforms.
The Proposed Rule would make extensive changes to the rules governing money market funds (“MMFs”) under the Investment Company Act of 1940 (the “Act”), including by: (i) increasing minimum portfolio liquidity requirements; (ii) removing MMFs’ ability to impose liquidity fees and redemption gates when they drop below certain liquidity thresholds; (iii) prohibiting “reverse distributions,” and (iv) requiring swing pricing for institutional prime and municipal MMFs. The Proposed Rule is issued in response to the events of March 2020, when certain MMFs (particularly institutional prime funds) experienced significant outflows at the onset of the COVID-19 pandemic. According to the SEC, the proposed amendments would improve MMFs’ resilience and transparency.
As stated in our May 2021 report, Money Market Funds and the COVID Crisis (the “Committee Report”), the Committee supports reforms that would enhance the resilience of prime MMFs, including enhancing portfolio liquidity requirements and eliminating liquidity fees and redemption gates that are linked to liquidity thresholds. However, we do not support the implementation of a swing pricing requirement for MMFs, as doing so is impracticable and would not enhance MMF resilience.
Our letter proceeds in two parts. First, we describe the Proposed Rule and then we assess the Proposed Rule’s removal of liquidity fees and gates that are linked to liquidity thresholds and proposal for enhanced portfolio liquidity requirements and implementation of a swing pricing regime. In doing so, we focus on the cost-benefit analysis conducted by the SEC. We find that the SEC’s cost-benefit analysis fails to substantiate several purported benefits, and to consider or quantify several principal costs, of the proposal.
The full report is available here.