In a move that marks a significant shift in the financial landscape, the U.S. Securities and Exchange Commission (SEC) has finalized a comprehensive set of reforms aimed at bolstering the resilience of money-market funds. The new regulations, which are the most extensive overhaul in years, are designed to prevent rapid outflows during periods of financial stress.
The SEC's decision to impose these reforms comes in the wake of the March 2020 financial crisis when the Federal Reserve was compelled to intervene to salvage money-market funds. This marked the second such rescue operation in 12 years, prompting calls for the SEC to implement more stringent regulations.
The new rules, approved by three out of five commission members, will introduce mandatory liquidity fees for some funds. These will be implemented after a one-year period for institutional prime and institutional tax-exempt funds when daily redemptions exceed 5% of net assets.
SEC Chair Gary Gensler stated, "I believe that liquidity fees, compared with swing pricing, offer many of the same benefits and fewer of the operational burdens." He added that these changes would enhance the resilience of money-market funds.
The liquidity-fee approach requires fund managers to charge redeeming investors, thereby discouraging a rush to exit the fund during times of market volatility. This strategy is designed to prevent mass redemptions, which can increase costs to a fund and dilute the assets of remaining shareholders.
However, the SEC decided to abandon the "swing pricing" proposal, which the industry had opposed. Swing pricing would have adjusted the price above or below a fund's net asset value per share if flows in or out of a fund were deemed too large.
This decision marks a significant victory for major players like JPMorgan Chase & Co.'s asset management unit, State Street Corp., and Federated Hermes Inc., who had opposed the measure. They argued that swing pricing would increase investor costs and lead to a significant decrease in institutional money-market funds' assets.
Despite the SEC's decision to back off from swing pricing, the shift to a liquidity fee as an alternative has not been fully endorsed by money-market funds. Republican Commissioner Hester Peirce expressed this sentiment during a meeting to consider the plan, stating that the new approach is unlikely to receive a "full-throated endorsement."
The industry will have a transition period to comply with the new rules, which also include an increase in the minimum daily and weekly liquid asset requirements for some funds to 25% and 50%, respectively, up from the current levels of 10% and 30%.
These reforms represent a significant step towards enhancing the stability of the financial sector and preventing future crises. However, their implementation and the industry's response will be closely watched in the coming months.
