Money Market Funds Proposal Highlights
The SEC has proposed amendments to the money funds rules that, if adopted, will impact board oversight of money funds. Lawyers from Dechert will present an MFDF webinar on the proposals on March 10, 2022. Registration is available here.
Following is a summary of the highlights of the SEC’s proposed amendments and key points from law firm memos on the topic.
Removal of Liquidity Fee and Redemption Gate Provisions. The amendments would remove provisions that permit (or under certain circumstances require) money funds to impose liquidity fees.
Swing Pricing Requirement. The proposal requires an institutional prime or institutional tax-exempt money fund to implement board-approved policies and procedures that require the fund to adjust its NAV per share downward by a “swing factor” when it experiences net redemptions during a “pricing period.”
Increase in Daily and Weekly Liquid Asset Requirements. The proposal would increase minimum daily liquid asset requirements from 10% to 25% and weekly liquid asset requirements from 30% to 50% for all money funds. It would also require board notification and certain filings if a fund has less than 25% of total assets invested in weekly liquid assets or 12.5% of total assets invested in daily liquid assets.Other proposed amendments relate to how stable NAV money funds might respond to negative interest rates; how money funds may make certain calculations; stress testing; and related board reporting and filing requirements.
Stradley Ronon’s memo summarizes each of the major features of the proposal with additional commentary, particularly as relates to the board. Stradley noted that the proposal imposes new, additional notifications to the board upon the occurrence of specific liquidity (daily, weekly) threshold events. However, the proposal does not contemplate any specific action to be taken by the board upon receipt of such notification. “Board notification requirements are intended to facilitate appropriate and timely board monitoring, engagement, and understanding when a fund’s liquidity levels decrease significantly below the minimum liquidity requirements.”Seward & Kissel’s memo provides a short explanation for each section of the proposal. The memo explains that the changes proposed would be significant if adopted, but they are by no means certain since the proposal was approved by a 3-2 vote. “Some aspects of the proposal reflect the nuances of operating under the 2010 and 2014 amendments; others, like the removal of liquidity fees and gates, show that the SEC is able to pull back when its solutions are not effective to address a crisis; and others, like the prohibition of using reverse distributions, seek to address issues that have arisen in money markets since the 2014 amendments.” On swing pricing, Seward & Kissel writes that swing pricing has never been popular in U.S. funds, and the earlier proposal generated significant industry opposition. “The potential operational challenges of swing pricing and costs of implementing these changes in a competitive environment could result in reducing further the number of money market fund providers.”
The Swing Pricing Requirement
K&L Gates Memo focuses on the proposal’s swing pricing requirements. Swing pricing is a process of adjusting a fund's current net asset value such that the transaction price effectively passes on costs stemming from shareholder redemptions to redeeming shareholders. The memo explains the proposal’s key requirements for swing factor implementation as follows:
- Swing pricing policies and procedures would have to be approved by a majority of the fund's independent directors and reviewed annually.
- The swing factor would be implemented by a board-designated “swing pricing administrator” who must be reasonably segregated from the portfolio management of the institutional MMF and make annual reports to the board.
- The swing pricing administrator’s annual report to the board would be required to include:
(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.
- The swing pricing administrator would also be responsible for the proposed rule’s record keeping requirements. Specifically, the swing pricing administrator must maintain a written copy of both the swing pricing policy and the reports provided by the swing pricing administrator to the board for six years, the first two being in an easily accessible place.
- Each institutional MMF would be required to report, in its Form N-MFP filing, the number of times the fund applied a swing factor over the course of the reporting period, and each swing factor applied.
Sidley Austin points to potential hurdles in the proposed swing pricing requirement. Sidley lawyers point out that the swing pricing requirement as proposed could make it more difficult or impossible for institutional funds to offer intraday liquidity and/or same day settlement and the systems required to accommodate swing pricing could carry significant costs and burdens. The memo also notes that because intermediaries typically report flows with a delay, institutional funds would not be able to determine net shareholder flows in time to apply a swing factor to the fund’s NAV as needed. Sidley’s memo contends that this portion of the proposal will be the most controversial of the proposed changes. “Swing pricing would be a significant change in investor experience and operationally complex to implement.” Sidley also discusses in depth the board’s role in the proposed money funds regime and emphasizes the SEC’s point that the proposed amendments contemplate a board role in compliance oversight rather than board involvement in the day-to-day administration of a fund’s swing pricing program. Read Sidley’s memo here.