Law firm Stradley Ronon published a "Fund Alert" recently, entitled, "SEC Proposes Money Market Fund Reforms: Key Facts." It tells us, "At an open meeting on Dec. 15, 2021, the U.S. Securities and Exchange Commission (SEC), in a 3-2 vote, proposed amendments to Rule 2a-7 under the Investment Company Act of 1940 (1940 Act) that, if adopted, will impact the manner in which all money market funds operate. The key provisions of the proposed amendments would: Completely eliminate liquidity fee and redemption gate provisions in Rule 2a-7 for all money market funds; Require swing pricing for institutional prime and institutional tax-exempt money market funds; Increase daily and weekly liquid asset requirements to 25% and 50%, respectively (from 10% and 30%, respectively); Require board notification and filing on Form N-CR if a fund has less than 25% of total assets invested in weekly liquid assets or 12.5% of total assets invested in daily liquid assets; and, Prohibit certain mechanisms for maintaining a stable net asset value (NAV) per share in negative interest rate environments, such as by reducing the number of fund shares outstanding (including through reverse distribution mechanisms)." (Note: Stradley Ronon Partner Jamie Gershkow, will discuss "Money Fund Regulations: 2a-7 Basics & History" at our upcoming Money Fund University conference in Boston, January 20-21.)
Stradley Ronon writes, "Additionally, the SEC has proposed amendments to reporting requirements on Forms N-MFP and N-CR that, if adopted, will require increased SEC reporting to improve the availability of information about all money market funds. This alert summarizes the major features of the proposal. We will issue a series of alerts in the coming weeks to discuss in detail key aspects of the rulemaking package.... In addition, Stradley will host a webinar on Jan. 13, 2022 at 2:00 pm (Eastern time) on the proposal. Click here to register for the webcast.
Discussing the "Swing Pricing" proposal, they explain, "Under the proposed rule, an institutional prime or institutional tax-exempt money market fund must adjust its current NAV per share by a 'swing factor' if the fund has net redemptions for the pricing period. A swing factor is essentially a premium over NAV that an investor would be required to pay the fund to make it whole for the costs incurred in selling portfolio securities to meet the investor's redemption request during periods of net redemptions. The proposed swing pricing requirements would not apply to net subscriptions during a pricing period."
The piece continues, "The 'pricing period' is the period of time an order to purchase or sell securities issued by the fund must be received to otherwise be priced at a given current NAV under Rule 22c-1 (also known as the fund's cut off time). The definition is intended to permit money market funds that strike their NAV multiple times a day to continue to have multiple NAV strike times, but would require such funds to determine whether the fund has net redemptions for each pricing period during the day and apply swing pricing for each corresponding NAV calculation. Consistent with Rule 22c-1, net redemption activity would be determined based on all share classes in the aggregate rather than on a class-by-class basis."
It says, "Under the proposed rule, a swing pricing administrator would be responsible for determining the swing factor through good faith estimates, supported by data, of the costs the fund would incur if it sold a prorata amount of each security in its portfolio (a 'vertical slice' of its portfolio) to satisfy the amount of net redemptions for the pricing period. Determination of the swing factor, including the factors a swing pricing administer is required to consider, would differ depending upon whether net redemptions exceed a 'market impact threshold.' In determining whether a fund has net redemptions and the amount of net redemptions, the swing pricing administrator may make such determination based on receipt of sufficient investor flow information for the pricing period, which may consist of individual, aggregated, or netted orders, and may include reasonable estimates where necessary."
Stradley Ronon explains, "For institutional money market funds with net redemptions for the pricing period, the good faith estimates used in determining the swing factor would include, for each security, spread costs (such that the fund is valuing each security at its bid price) and transaction costs. Under specific circumstances, the swing factor would increase. Specifically, if the institutional money market fund has net redemptions for a pricing period that exceed a 'market impact threshold,' the good faith estimates used in determining the swing factor would also include market impacts. The 'market impact threshold' is defined as 4% of the fund's NAV divided by the number of pricing periods the fund has in a business day, or such smaller amount of net redemptions as the swing pricing administrator determines."
They add, "The swing pricing administrator would estimate market impacts for each security in the fund's portfolio by first establishing a market impact factor for each security (or each type of security with the same or substantially similar characteristics). The market impact factor would be an estimate of the percentage decline in the value of the security if it were sold, per dollar of the amount of the security that would be sold, under current market conditions. Next, the market impact factor would be multiplied by the dollar amount of the security that would be sold if a pro-rata amount of each security in the fund's portfolio were sold to meet the net redemptions for the pricing period."
The Alert also says, "The proposed rule includes specific responsibilities for the board related to swing pricing, including the independent trustees. Specifically, the board, including a majority of independent trustees, would be required to (i) approve the fund's swing pricing policies and procedures, (ii) designate the swing pricing administrator; and (iii) review, no less frequently than annually, a written report prepared by the swing pricing administrator. The proposal generally contemplates a board role in oversight, rather than board involvement in the day-to-day administration of swing pricing. The swing pricing proposal also includes related amendments to registration statement disclosure, Form N-MFP reporting, and website disclosure."
It continues, "The intent of swing pricing is to effectively pass transaction costs stemming from shareholder redemptions to the redeeming shareholders in order to reduce the potential for the dilution in the value of the remaining shareholders' shares. It is expected to reduce first-mover advantage and help prevent a run on a fund. As explained below, the SEC is proposing to remove liquidity fees from Rule 2a-7, but the SEC believes it is important for institutional prime and institutional tax-exempt money market funds to have an effective tool to address shareholder dilution and potential institutional investor incentives to redeem quickly in times of liquidity stress to avoid further losses. A mandatory swing pricing regime for net redemptions is also intended to address any reluctance of imposing a voluntary swing pricing regime or voluntary liquidity fee. Swing pricing was included in the proposed rule despite a general lack of industry support in the comments submitted on the PWG Report."
Discussing "Form N-CR and Form N-MFP Reporting," the article comments, "Form N-CR is a publicly available form used by money market funds to report certain material events to the SEC. Proposed changes to Form N-CR would require money market funds to report when a fund has invested less than 25% of its total assets in weekly liquid assets or less than 12.5% of its total assets in daily liquid assets.... Form N-MFP is a publicly available form used by money market funds to report their portfolio holdings and certain other information to the SEC each month. Proposed changes to Form N-MFP would require new information to be reported, including (i) disclosure of the name and percentage ownership of each person who owns of record or is known by the fund to own beneficially 5% or more of the class of shares; (ii) for money market funds that are not government or retail money market funds, identification of the percentage of investors in specified categories.... Proposed changes to Form N-MFP also include changes to standardize how filers report certain information, require additional information about repurchase agreement transactions, and include more frequent data points for information reported in Form N-MFP."
Finally, they write, "The SEC proposes the following compliance periods following the effective date of any amendments: 12-month compliance period for (i) swing pricing requirements, including disclosures related to swing pricing on Forms N-MFP and N-1A; and (ii) the requirement that financial intermediaries have the capacity to redeem and sell at a price based on the current NAV per share or be prohibited from purchasing securities issued by the fund in nominee name on behalf of other persons; Six-month compliance period for all other provisions of the proposal; Removal of the liquidity fee and redemption gate provisions, including related disclosure requirements in Form N-1A and N-CR, would be effective when a final rule is effective. Comments on the proposal are due 60 days from publication in the Federal Register. As of the date of this alert, the proposal had not yet been published in the Federal Register."
