We learned from Dechert's Stephen Cohen that the U.S. Securities & Exchange Commission's Director of the Division of Investment Management, Dalia Blass, briefly discussed money market funds at the ICI's 2020 Virtual Securities Law Developments Conference Thursday. During her theme of "Regulating with our Eyes on the Future," she comments, "Last month, the Investment Company Act turned 80 years old. At the time of the Act's adoption, the registered fund industry consisted of only 105 funds with $1 billion in assets. Now over 14,000 SEC-registered funds hold nearly $25 trillion in assets, including through two important fund structures that did not exist in 1940 -- money market funds and exchange-traded funds (ETFs). In terms of assets, that is an annualized growth rate of 13%."
Blass says, "Let's start with money market funds. The Commission granted orders that permitted the first money market funds starting in 1978. As additional funds requested and received similar relief, the Commission codified the money market fund structure in 1983 by adopting rule 2a-7. Over the next 30 years, the Commission amended the rule many times. The latest amendments in 2010 and 2014 sought to primarily address issues that arose during the 2008 financial crisis."
She continues, "A perennial area of concern has been whether the structure of money market funds is able to withstand periods of market stress without some form of external support and without runs. The 2010 and 2014 amendments were designed to address this issue by reducing the risks of money market fund portfolios, addressing their susceptibility to heavy redemptions in times of stress, improving their ability to manage potential contagion from redemptions, and increasing the transparency of their risks. For example, the rule now permits non-government funds to impose a liquidity fee or gate to address certain liquidity conditions. The rule also now requires institutional prime and tax-exempt funds, whose investors historically have made the heaviest redemptions in times of stress, to transact at a 'floating' NAV rather than a 'stable' NAV, which all money market funds were permitted to use prior to 2016."
Blass explains, "The COVID-19 market disruption tested these reforms. As the markets reacted to the impact of the pandemic, prime and tax-exempt money market funds experienced significantly heightened redemptions. In fact, the percentage of redemptions from certain funds during the height of the market turmoil was higher than what we saw in a similar time period in September 2008. Despite the significant reforms to rule 2a-7, once again, financial regulators stepped in with emergency measures to assist these funds."
She tells us, "I believe that it is critical for us to analyze the events in March and how the framework of rule 2a-7 may have either alleviated or contributed to any of the events that unfolded. For example, did the possibility of gates when a fund's liquidity approached or passed certain limits drive market behavior? On the other hand, did the risk limitations imposed by the rule provide funds with the necessary liquidity to meet the heightened redemptions?"
Blass adds, "However, analyzing past dislocations should not be the only drivers of regulatory review and changes. Instead we also need to be forward-looking with a fresh eye, focusing on how to create a flexible framework that will interact smoothly with future market innovations, different market conditions, and investor reactions that we may not have already experienced. Most importantly, we should seek to construct a framework that provides structural resiliency and appropriate incentives during market stress while preserving the important role of money market funds in the short-term funding markets. I think this speech highlights that the push for additional reforms is occurring and we'll continue to monitor statements and actions from regulators."
In other news, a Prospectus Supplement for the $1.8 billion Vanguard Pennsylvania Municipal Money Market Fund and the $1.2 billion Vanguard New Jersey Municipal Money Market Fund tells us, "On September 24, 2020, the board of trustees for each of the Vanguard Pennsylvania Municipal Money Market Fund and the Vanguard New Jersey Municipal Money Market Fund (the Funds) approved a proposal to liquidate and dissolve the Funds on or about November 24, 2020 (the liquidation date). In anticipation of the liquidation and dissolution, the Funds will be closed to new investors at the start of business on September 25, 2020, and will be closed to new investments at the start of business on November 5, 2020."
Vanguard writes, "On the liquidation date, each Fund will redeem all of its outstanding shares at the net asset value of such shares. On this same date, all outstanding shares of each Fund will be canceled and each Fund will cease operations as a mutual fund. In order to provide for an orderly liquidation and satisfy redemptions in anticipation of the liquidation, each Fund may deviate from its investment objective and strategies as the liquidation date approaches. Prior to the liquidation date, the Fund will declare and pay its shareholders of record one or more dividends, other distributions of its investment company taxable income, if any, and/or net realized capital gains."
Finally, the filing states, "The liquidation and dissolution is not expected to result in income tax liability for either Fund. Each Fund may pay more than one liquidating distribution in more than one installment. Distribution of liquidation proceeds, if any, to Fund shareholders may result in a taxable event for shareholders, depending on their individual circumstances. Shareholders should consult their own tax advisors about any tax liability resulting from the receipt of liquidation proceeds."
Vanguard CIO Greg Davis comments in a posting, "We are focused on providing a viable and thoughtful lineup of money market products, and we are confident that our streamlined suite of tax-exempt money market funds is well suited to meet investors' cash management and tax-free income preferences. Due to the short supply of certain types of municipal securities available in Pennsylvania and New Jersey, we believe these specific municipal money markets no longer offer the market depth needed to prudently provide these state-specific products in all market conditions."
We learned about the news from Independent Advisor for Vanguard Investors Editor Dan Wiener, who writes in a note, "As yields have hit the near-lower bound of 0.01%, Vanguard has taken the unprecedented step of closing more of its money funds with plans to liquidate them as supplies of securities in the New Jersey and Pennsylvania markets are squeezed. The closures are happening even as assets have declined with more investors taking money from the funds than putting money in." Fidelity will be the sole provider offering NJ and PA Muni MMFs after Vanguard and Federated exit the space. (See Crane Data's Links of the Day, "Federated to Liquidate State Muni MFs" (9/4/20) and "Dreyfus Liquidating General NJ MMF" (8/3/20).)
