Thank you, Chair Gensler. This is the third round of money market reforms since 2010. This round is primarily designed to address vulnerabilities exposed during the market volatility of March 2020. Notably, the Adopting Release acknowledges that one of the 2014 reforms – the ability of a money market fund to impose liquidity fees or redemption gates after crossing a specified liquidity threshold – contributed to investors’ incentives to redeem from institutional prime money market funds in March 2020. In other words, the 2014 reforms exacerbated the very problems that they were supposed to address.
This result should not come as a surprise. Indeed, concerns were widely expressed at the time that this specific reform “could do harm by potentially triggering destructive ‘pre-emptive’ runs.” Ultimately, the Commission in 2014 pushed forward with this reform and postulated that it had taken measures to mitigate the pre-emptive run risk and dampen any effects if they were to occur. Viewed in hindsight, this confidence was misplaced.
Today’s reforms have four primary elements: (1) the removal of the redemption gate provision, (2) an increase in the minimum daily and weekly liquid asset requirements to 25% and 50%, respectively, (3) the removal of a regulatory tie between a specified liquidity threshold and the ability to impose a discretionary liquidity fee with respect to any non-government money market fund, and (4) a new mandatory liquidity fee requirement for institutional prime and tax-exempt money market funds.
Unfortunately, it appears the Commission is poised to repeat the errors of the past. This time it may even be worse, as the final rule amendments add a previously undisclosed mandatory liquidity fee that is triggered when net redemptions exceed 5% of net assets. This mandatory liquidity fee replaces the proposed swing pricing requirement, but was not described in detail to the public and, thus, unlike in 2014, the Commission does not have the benefit of extensive public comment.
The Adopting Release states that “institutional fund investors may monitor economic developments more closely than retail investors and may be more prone to running in times of market stress.” However, many commenters opined that these concerns could be addressed by amendments to the existing fees and gates mechanism and increasing liquidity minimums. The Commission could have taken an incremental approach by evaluating the impact of these widely-supported elements of the final amendments.
Instead, the Commission chooses to go further and engages in speculation and assumption to support its policy determination on mandatory liquidity fees. The Adopting Release assumes that a fund board may be reluctant to impose fees “out of fear that a fee would signal trouble for the fund or fund complex.” Even if a fund board were willing, the Adopting Release assumes that “institutional funds (or their boards) may require additional time or information to decide whether to impose fees.” The additional time required could “result in a delay” that might allow some investors to redeem without bearing the associated liquidity costs and contributing to dilution and a first-mover advantage.
Key questions, such as whether remaining shareholders of money market funds were disadvantaged as a result of redemption activity in March 2020 and, if so, whether and to what extent a mandatory liquidity fee would solve that problem, remain unanswered. For example, the Adopting Release expressly states that “it is difficult to disentangle” declines in the net asset values of certain money market funds during the peak March 2020 market stress from “the dilution that results from forced sales to meet redemptions.” Thus, the Adopting Release assumes – even if a money market fund has not fully exhausted its available liquidity —the mere depletion of a fund’s available liquidity constitutes a dilution cost imposed on remaining shareholders. This cost is never quantified or concretely illustrated.
Most tellingly, the Adopting Release admits that the Commission “[does] not have granular data about daily money market fund holdings and quotation data that would enable us to estimate the amount of dilution that could have been recaptured in March 2020 or the prevalence of other sources of dilution.” In other words, the Commission is unable to quantify the problem that it claims exists and is therefore unable to quantify the potential benefits of its experimental solution.
It is an open question as to what, if any, marginal benefits are provided by the mandatory liquidity fee. The Adopting Release acknowledges that the problem that the mandatory liquidity fee is intended to address may very well be resolved by other aspects of the rule. For example, the de-linking of discretionary liquidity fees from a specified liquidity threshold and the removal of the redemption gate provision “may benefit money market fund investors by reducing liquidity costs borne by investors remaining in the fund, and money market funds and their investors by reducing the risk of runs, especially during times of liquidity stress.” Additionally, “[h]igher levels of daily and weekly liquid assets in a fund may reduce trading costs and the first-mover advantage during a wave of redemptions, potentially dis-incentivizing runs.” Even when a fund experiences runs, “funds with higher daily and weekly liquid assets may experience lower liquidity costs as they may be more likely to be able to use their liquid assets to meet redemptions rather than be forced to sell assets during liquidity stress.”
Perhaps that is why the Commission admits in the Adopting Release that “each element of the final rule may have lower incremental benefits.” In contrast to the question of whether the mandatory liquidity fee mechanism provides any marginal benefit, it is clear that the potential costs of this mechanism are high.
The Commission should have reproposed this portion of the amendments, especially because the proposing release did not include a mandatory liquidity fee mechanism, the details of which are now being disclosed to the public for the first time. It is not hard to identify potential pitfalls that warrant the benefit of public feedback. To name a few:
- The imposition of a mandatory liquidity fee is premised on the Commission’s ability to predict the future behavior of sophisticated institutional investors in stressed market environments, but that analysis is inherently speculative. Contrary to the Commission’s hypothesis, the existence of the liquidity fee could exacerbate runs during times of stress. An institutional investor might reason that a redemption today will result in a lower fee than a redemption tomorrow when markets might be even more stressed. Is the Commission’s hypothesis accurate?
- Since the mandatory liquidity fee is to be determined at the end of the day and retroactively applied to any redemptions that occurred during the day, how will a fund impose the fee from an operational perspective?
- Since any liquidity fee will not be based on actual liquidity costs – but instead will be based on the cost of liquidating a vertical slice of the fund’s portfolio on the date the fee is imposed – what is the likelihood that redeeming shareholders could be assessed a fee that exceeds any actual costs?
- Uncertainty regarding whether and to what extent a liquidity fee will be imposed on fund redemptions might cause institutional investors to allocate assets away from institutional prime funds. To what extent could this negatively impact short-term funding markets, such as commercial paper?
Since the other aspects of today’s amendments were generally supported by commenters, it is confounding that the Commission would choose to wander into potentially problematic new territory at this time rather than simply fix the known problems and give further thought to additional measures. To the extent that there is a significant pivot from the proposal, there should have been a re-proposal. Engagement with the public is at the heart of a quality rulemaking process.
The procedural shortcomings surrounding the adoption of the mandatory fee mechanism are compounded by the fact that the public often has inaccurate information on the timing of Commission action. Thus, they are unable to identify when to engage with the Commission and its staff on a particular rulemaking initiative. The Commission’s Spring 2023 Regulatory Agenda lists 37 rules in the final rule stage, of which 27 rules—including money market fund reforms – have a final action date of October 2023. Yet, the Commission is adopting the final rule today in July. And this is not the only final rule that was adopted far in advance of the publicly disclosed action date. The removal of references to credit ratings from Regulation M, the prohibition against fraud, manipulation, and deception in connection with security-based swaps, and the Form PF amendments for large hedge fund and private equity fund advisers all had final action dates of October 2023, but were adopted in either May or June 2023.
If the Commission’s regulatory agenda cannot be relied upon to provide a reasonable estimate of when a rule might be acted upon, interested parties are left at a disadvantage in determining how to allocate their time and efforts when it comes to providing thoughtful feedback to the Commission and its staff.
Had today’s reforms been limited to implementing widely-agreed upon fixes to known problems, I could have supported the recommendation for money market funds and the technical amendments. I could have supported a companion re-proposal on the imposition of mandatory liquidity fees. Unfortunately, those are not the actions that the Commission is taking today. I thank the staff in the Divisions of Investment Management and Economic and Risk Analysis, as well as the Office of the General Counsel, for their efforts.
 See Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)], available at https://www.sec.gov/rules/final/2010/ic-29132.pdf; Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 31166 (July 23, 2014) [79 FR 47735 (Aug. 14, 2014)], available at https://www.sec.gov/rules/final/2014/33-9616.pdf; Money Market Fund Reforms; Form PF Reporting Requirements for Large Liquidity Fund Advisers; Technical Amendments to Form N-CSR and Form N-1A, Investment Company Act Release No.34959 (July 12, 2023) (the “Adopting Release”), available at https://www.sec.gov/rules/final/2023/33-11211.pdf.
 See Adopting Release, supra note 1, at 20.
 Adopting Release, supra note 1, at 181.
 Id. at 49. (Emphasis added.)
 The economic analysis in the proposing release sketched out the skeleton of a liquidity fee alternative to swing pricing, but did not provide the details of this mechanism and the attendant economic analysis. Commenters who opposed the proposed swing pricing requirement largely stated that a liquidity fee alternative would be preferable to swing pricing only if the Commission demonstrated with facts and analysis that additional anti-dilution tools were necessary based on actual data and analysis.
 For example, in 2015, the Commission proposed new Rule 18f-4 under the Investment Company Act of 1940, which would have governed an investment company’s use of derivatives. See Use of Derivatives by Registered Investment Companies and Business Development Companies, Investment Company Act Release No. 31933 (Dec. 11, 2015) [80 FR 80883 (Dec. 28, 2015)], available at https://www.sec.gov/rules/proposed/2015/ic-31933.pdf. The Commission pivoted in its approach after reviewing approximately 200 comment letters and engaging with fund complexes and investor groups. Rather than simply moving to the adoption stage after determining to alter its approach, the Commission wisely re-proposed Rule 18f-4 in 2020. See Use of Derivatives by Registered Investment Companies and Business Development Companies; Required Due Diligence by Broker-Dealers and Registered Investment Advisers Regarding Retail Customers’ Transactions in Certain Leveraged/Inverse Investment Vehicles (Nov. 25, 2019) [85 FR 4446 (Jan. 24, 2020)], available at https://www.sec.gov/rules/proposed/2019/34-87607.pdf.
 For reasons similar to those described in May 2023, I am unable to support the amendments to Form PF. See Statement on Final Amendments to Form PF to Require Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers and to Amend Reporting Requirements for Large Private Equity Fund Advisers (May 3, 2023), available at https://www.sec.gov/news/statement/uyeda-statement-form-pf-050323.