Yesterday, the Securities and Exchange Commission unanimously voted to propose structural reforms for money market funds. The Commission’s goal in the proposal is to make money market funds less susceptible to runs while preserving the funds as an investment alternative. The proposal includes two alternatives that could ultimately be combined in the final adopting release. The alternatives are:
• A floating NAV for institutional prime money market funds. SEC Chair Mary Jo White stated that she believes the floating NAV will reduce incentives to redeem shares in prime institutional money market funds during times of stress, increase transparency and highlight investment risk, and address the segment of the money market fund market that experienced issues during the financial crisis.
Government money market funds and retail money market funds would still be able to maintain their current stable $1 share price. The Commission’s proposal defines prime retail funds as those that limit redemptions to $1 million per business day.
Despite the unanimous vote on the entire proposal, Commissioner Paredes expressed reservations that a floating NAV would prevent future runs on money funds. He stated “We do not know for sure why investors left money market funds during the financial crisis. The data we do have, however, is consistent with the view that investors predominantly left in search of safety and that investors would have done so even if NAVs floated. First, European floating value money market funds experienced significant redemptions during the financial crisis. Second, U.S. ultra-short bond funds also saw heavy redemptions. Third, even as institutional investors exited from prime money market funds in 2008, significant sums flowed into institutional government money market funds, further suggesting that investors were reallocating their investments to the highest quality assets they could find."
• The second alternative would combine liquidity fees and redemption gates, while preserving the stable $1 share price. The second alternative places new responsibilities on fund directors. The proposed liquidity fees of 2% would be triggered when a fund’s weekly liquid assets fall below 15% of its total assets. A fund’s board, however, would be able to make a determination that a liquidity fee would not be in the best interests of the fund (or choose to impose a smaller fee). In addition, once a fund’s assets fall below the 15% threshold, directors would be able to suspend redemptions for a period of up to 30 days.
Government money market funds would also be exempt from this second alternative, but could voluntarily choose to comply.
Other proposed reforms include: stronger diversification requirements, additional disclosure, enhancements to stress-testing requirements, and additional reporting to the SEC by money market funds and unregistered liquidity funds.
Finally, the proposal addresses the economic effects of the proposal in a novel way. Rather than including a cost-benefit analysis in a stand-alone section of the proposal, the economic analysis is interspersed throughout the release.
The Commissioners and staff members encouraged robust comments on the proposal, including comments on whether the two alternatives should be combined.
The SEC press release on the proposal can be found here.