The SEC held an open meeting today to propose new money market reform rules. We provide highlights of the main speeches including details on the proposals.
From Chairman Mary Jo White’s speech:
Today’s proposal contains two alternative reforms that could be adopted separately or combined into a single reform package to address run risk in money market funds.
Floating NAV
The first proposed alternative would require that all institutional prime money market funds operate with a floating net asset value (NAV). That is, they could no longer value their entire portfolio at amortized cost and they could not round their share prices to the nearest penny. The set “dollar” would be replaced by a share price that actually fluctuates, reflecting the changing values in these money market funds.
Fees & Gates
Under this alternative, non-government money market funds would be required to impose a 2 percent liquidity fee if the fund’s level of weekly liquid assets fell below 15 percent of its total assets, unless the fund’s board determined that it was not in the best interest of the fund. That determination would be subject to the board’s fiduciary duty, and we believe it would be a high hurdle. After falling below the 15 percent weekly liquid assets threshold, the fund’s board would also be able to temporarily suspend redemptions in the fund for up to 30 days – or “gate” the fund.
Reporting and Disclosure
Importantly, the staff’s recommendations also contain a number of other significant reform proposals – tightening diversification requirements, enhancing disclosure requirements, strengthening stress testing and improving reporting on both money market funds and unregistered liquidity funds that could serve as alternatives to money market funds for some investors. These proposed reforms should further enhance the resiliency and transparency of this important product and are significant complements to the other proposals.
From Commissioner Troy Paredes speech:
I support the staff’s recommendation. That said, to be clear, at present, I remain unconvinced that floating the NAV is justified on a cost-benefit basis. But floating the NAV is just one of the proposed alternatives. It is particularly important to me that liquidity fees and gates are being proposed as a separate, standalone alternative so that, if appropriate, this alternative can be adopted by itself without requiring money market funds to float their NAVs.
From Commissioner Daniel M. Gallagher’s speech:
Today’s proposal is a very good one. There are other aspects of MMF regulation that I would have liked to tackle today, such as the removal of references to credit ratings in the Commission’s MMF rules – a critical piece of unfinished business that would be directly responsive to the financial crisis. But I think today’s proposal is both sound and of appropriate scope.
Our view: so long, 2a-7 funds. In a May 21 2013 article, “How can institutional 2a-7 money market funds survive?,” we said we didn’t see a way forward for institutional investors to stay in 2a-7 funds given these reforms. Today’s official proposal supports our position.