NEW YORK, July 12 (Reuters) – The U.S. Securities and Exchange Commission on Wednesday finalized rules aimed at increasing the resilience of the $5.5 trillion money market fund industry, but scrapped a proposed new pricing model that had been strongly opposed by asset managers.
The SEC’s decision not to impose “swing pricing” represents a major victory for asset managers including BlackRock (BLK.N), Vanguard and Fidelity, which operate some of the industry’s largest money market funds.
The industry had argued the pricing mechanism, meant to deter hasty investor redemptions in times of market stress, would make money market funds unattractive and be challenging to implement.
Money market funds saw massive outflows in March 2020 at the onset of the COVID-19 pandemic, prompting the U.S. government to intervene to stabilize them. The panic was reminiscent of 2008 when a run on money market funds threatened to freeze up global markets and prompted the government to backstop the sector.
Critics have said money market funds, which are a key source of short-term corporate and municipal funding, now enjoy an implicit government guarantee.
While industry groups commended the SEC for dropping the swing pricing proposal, they said the decision to impose a liquidity fee instead was problematic.
The new liquidity fee requires money market funds to impose mandatory fees when a fund experiences daily net redemptions that exceed 5% of net assets, unless the fund’s liquidity costs are negligible. It also gives a fund’s board the discretion to impose a fee if necessary.
“The SEC has missed the mark by forcing money market funds to adopt an expensive and complex mandatory fee on investors,” said Eric Pan, chief executive of the Investment Company Institute, a trade group for regulated funds.
The mandatory fee sidelines a fund’s fiduciary board of directors and should have been reproposed by the SEC, with greater detail and allowing for public comment, Pan said.
SEC Chair Gary Gensler praised the new rules.
“Based upon public feedback, today’s final rules will require liquidity fees instead of the originally proposed swing pricing requirement,” Gensler said in remarks prepared for an SEC open meeting on Wednesday. “I believe that liquidity fees, compared with swing pricing, offer many of the same benefits and fewer of the operational burdens.”
In December 2021, the SEC proposed new liquidity requirements for money market funds, as well as scrapping redemption fees and restrictions.
It also proposed adjusting funds’ value in line with dealing activity, a process known as swing pricing.
Swing pricing, which under the proposal would have been applied to institutional prime and institutional tax-exempt money market funds, would require that redeeming investors, under certain circumstances, bear the liquidity costs of their redemptions.
In theory, swing pricing reduces the incentive to run to the exit first.
Major asset managers, however, have said it is not appropriate for money market funds, which invest in high-quality short-term debt instruments and are designed to handle large amounts of flows for daily cash management purposes. They said the added cost of redeeming their cash would drive investors away from the funds.
Influential industry groups including the Securities Industry and Financial Markets Association, ICI and the U.S. Chamber of Commerce strongly opposed swing pricing.
Reporting by John McCrank; additional reporting by Douglas Gillison; editing by Michelle Price, Nick Zieminski, Emelia Sithole-Matarise and Leslie Adler
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