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"Liquidity Fee" for Money Market Funds Gaining Support

In comment letters to the U.S. Financial Stability Oversight Council (FSOC), Vanguard and the Securities Industry and Financial Markets Association (SIFMA) said they could support “liquidity fees” on money market funds.  Blackrock has previously floated similar fees as a way to mitigate run risk.  The fee is intended to encourage investors to stay in the fund, because those leaving the fund will be adding value to the remaining shareholders.

In Vanguard’s comment letter, they suggest requiring the board to impose a 1-3% liquidity fee on all withdrawals if a prime money market fund’s weekly liquidity dips below 15%. Vanguard also stated that any additional reform measures imposed should be limited to institutional prime money market fund accounts.

SIFMA said the SEC should explore imposing a redemption gate, accompanied by a redemption fee or “liquidity fee.” The gate, when triggered, would prohibit investors from redeeming and provide a period of time for a fund to restore its liquidity. The gate would operate for a brief period. The purpose of the gate would be to allow time for the fund to implement the liquidity fee and make any other necessary determinations regarding the fund’s next steps.  SIFMA supports having the fund board decide when the liquidity fee is no longer in the best interests of long-term shareholders in the fund and should be lifted.

The FSOC deadline for comments on the money market fund proposal has been extended until February 15, 2013 at the request of SEC Chairman Elisse Walter.