The U.S. Securities and Exchange Commission is expected to vote on new rules for money-market funds Wednesday. In March 2020, during the early stages of the Covid-19 pandemic, liquidity began drying up in the commercial paper space, including money market funds that invest in cash, U.S. Treasurys and commercial paper. The Federal Reserve stepped in to backstop the market and provide liquidity. Now the SEC is seeking to raise liquidity requirements for money market funds and implement “swing pricing” rules that would pass on some of the costs associated with investors redeeming the funds. The financial services industry is opposed to “swing pricing” and lobbying hard to have it scrapped. Bloomberg is reporting that the “swing pricing” part of the SEC proposal will be scrapped . The SEC did not respond to CNBC requests for comment. Increase in liquidity requirements Most money market funds invest exclusively in cash or government securities. Some, known as “prime” money market funds, also invest in commercial paper. All are subject to liquidity requirements — some assets have to be readily convertible to cash — including levels of daily and weekly liquidity requirements. The SEC is proposing to increase the daily and weekly liquidity requirements from 10% on a daily basis and 30% on a weekly basis to 25% and 50%, respectively. The effect would be to increase the assets a fund has on hand to meet potential redemption needs. “The SEC is seeking to reduce concerns about liquidity by increasing the threshold for daily and weekly liquid assets to provide a greater buffer to meet larger and more frequent redemptions,” Jon-Luc Dupuy, a partners in K & L Gates’ Asset Management and Investment Funds, told me. The Securities Industry and Financial Markets Association, an industry trade group, wrote to the SEC, expressing “substantial concerns” about the liquidity requirements. “The aggregate impact of the Proposal would result in reduced returns, constraints on portfolio decision-making and limited availability of strategies,” SIFMA said. Remove fee and gate provisions There are fees that can be imposed by the board of a prime (commercial paper) money market fund if liquidity starts to drop below certain levels. The SEC is looking to remove these requirements. Some investors in prime funds shifted their assets to government money market funds, which are not required to maintain fee and gate policies, when it appeared the prime funds they were in were about to impose fees. That caused concerns about redemption in prime funds. Swing pricing The most controversial of the proposals involve so-called “swing pricing.” When investors redeem money market funds, the fund may incur costs associated with those redemptions, i.e., selling of securities. Those costs are born by the fund rather than redeeming shareholders, which in theory dilutes the remaining shareholder interest in the fund. The SEC is proposing that funds will have to calculate a “swing factor,” an amount that would be an estimate of the transaction costs imposed on current shareholders. In theory, investors may not receive the net asset value for the transaction, but could receive a price below the NAV depending on whether there was a “swing factor” applied to the transaction. The financial industry is opposed to this proposal, too. SIFMA has written to the SEC saying, “the benefits the Commission seeks to provide are speculative and unbalanced in relation to the costs that the proposal would force on funds and investors.” Kenneth Bentsen, president of SIFMA, said, “In light of our concerns, we strongly urge the Commission to withdraw or formally stay this proposal, pending more thorough and thoughtful engagement with the industry to assess the costs, benefits and potential downstream consequences to other industry participants.” Some lawmakers have also weighed in against the proposal. At a recent Congressional hearing, Rep. Brad Sherman, D-CA, argued it was unfair to impose additional costs on those selling their funds . “There are those that say that if we just, at certain times, tell mutual fund investors, that ‘The markets are unsteady, we may have a disaster, therefore please don’t sell your mutual fund shares, and if you do, you’re going to be subject to an additional charge.’ That is like telling people on the Titanic [there will] be an extra couple of hundred-dollar fees for getting in the lifeboat. That is not the way to get people calmly into the lifeboats,” Sherman said. In summarizing industry opposition to the proposal, Dupuy said the SEC had not proven the need for swing pricing and said he wasn’t surprised by reports that the proposal may be scrapped. “The SEC is looking to solve for a problem, but they have not proven that costs are incurred by redeeming shareholders,” Dupuy told me. “Funds are not selling to meet redemptions in most cases. They have cash on hand to meet redemptions. They haven’t demonstrated transaction costs are being born by remaining shareholders.”
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