We wrote last week on the Keynote session from our recent Money Fund Symposium conference in Atlanta. (See our June 29 News, "`Highlights of Money Fund Symposium: Invesco's Brignac, Wong Keynote.") In today's news, we summarize the session, "Regulations: Money Fund Reforms Round III," which featured Brenden Carroll of Dechert LLP, Jon-Luc Dupuy of K&L Gates LLP and Jamie Gershkow of Stradley Ronon. Carroll comments, "I am shocked that the first word on this slide is 'proposed'. If you were to have asked us last year, ... we all gave predictions and we were all incredibly wrong.... We are going to talk a little bit about some of the ongoing policy debate that I think is leading to some of the delays here. Sometimes I feel that money market funds are caught between the SEC and bank regulators, and they have a different outlook on how best to regulate things, including investment products." (Note: Conference materials are available in our "Money Fund Symposium 2023 Download Center." Watch for more highlights in coming days and in our next Money Fund Intelligence newsletter, and have a great Fourth of July!)
He continues, "We're also going to talk about the final rulemaking and what our expected timeline is; I think it's still unclear. But I will say it is a short-term priority for the SEC. It was recently added to the SEC's rulemaking agenda. It's listed for this fall. You shouldn't pay too much attention to the dates on those regulatory agendas. It's either October or April, and that doesn't really mean anything other than it is a short-term priority or long-term priority. The fact that it's on the October [agenda] suggests it is a short-term priority."
Carroll says, "But I also think the delay can be attributable in part to what I think is sort of the incredible engagement of a number of the money market fund sponsors in this room. Typically, when the SEC proposes this rulemaking, there's a lot of thought at the front end that goes into what the rulemaking should look like and why they're proposing it and the cost benefit analysis. I think during this comment process, there is an incredible scholarship in what was posted on the SEC's comment file, and the SEC has to consider that. And I think that that has caused them to at least reassess some assumptions in part."
He adds, "The other thing that I think is leading to some of this delay is … the SEC has a lot of other things going on right now. Chairman Gensler has a very aggressive regulatory agenda. One of the other items is swing pricing for mutual funds, or I should say non-money market mutual funds. Obviously, these investment products are completely different animals. But what the SEC does in one of these rulemakings will probably influence what it does in another. Not necessarily with a common approach. But at least with how it describes the remedy for what it sees as the problem."
Gershkow then tells MFS, "There isn't really one set reason why we don't have the rulemaking [yet] -- there are a handful of different factors at play. You'll see on this first slide, we have a list of some of the key U.S. regulatory players. So the SEC is the primary regulator for money market funds. They have a 3-part mission that they're seeking to achieve: protecting investors, maintaining fair and efficient markets and facilitating capital formation. But they're not the only regulatory player when it comes to money market funds. `There's a lot of cooks in the kitchen here, and all of them have an interest in money market fund reform and regulation. They also have different missions than the SEC does."
She continues, "I'll highlight one of them on here. FSOC, they were established under Dodd-Frank in 2010, and their mission, different from the SEC, [is] really centered on financial stability. If you recall from the last round of reforms, FSOC actually kind of stepped more into the fray here and had put forth some proposed recommendations to the SEC. As Brenden had referenced earlier, there's kind of this push pull between bank-like regulations for money market funds and some of the more market driven reforms. In those proposed recommendations back in 2012, FSOC had a lot of those bank-like policies…. This go-around, they haven't put forth those proposed recommendations. They've said that they're supportive of the SEC's ongoing efforts in this area, but they'll continue to monitor what comes in this area."
Gershkow states, "This slide really kind of highlights some of the views that we've seen from the different regulatory players in the industry…. [We have] Yellen talking about these clear-cut vulnerabilities in money market funds and highlighting that unlike the banking sector, money funds aren't subject to a lot of the additional requirements that banks are subject to. Therefore, there's financial stability risks that are presented by money market funds that just have not been addressed and need to be addressed."
She also says, "Then we also have Gensler continuing with his 'bear' analogy. For those of you that haven't read any of his recent speeches, he's been explaining 'first mover advantage' as if you are a camper in the wilderness with a bear chasing you. You don't have to outrun the bear, you just have to outrun your fellow campers. So the takeaway is not to go camping with Chair Gensler.... But he has been highlighting this first mover advantage is still real. There's liquidity risk in money market funds and we need an anti-delusion mechanism in order to address that. So out of the SEC, we got the policy proposals last December 2021, but there is still this ongoing debate among the different regulatory players, as to where this will take a final landing point."
Gershkow continues, "There's a handful of events that happened since December of 2021 that are also likely to have an impact on the pace of rulemaking for money market funds. Brenden highlighted before, after we got some pricing proposal for money market funds, we then got a pricing proposal for other types of mutual funds, and the comment file on that is even more robust than the comment file on money market reform. There were nearly 3,000 letters submitted on the open-end funds swing pricing proposal, the very, very large majority of which were in opposition…. So as the SEC is considering that very large comment file, there’s an interest to see what impact that has on swing pricing for money market funds."
She adds, "Then we of course also saw the regional bank failures in March 2023. We think that the regulatory players here are also taking that into consideration in a lot of the speeches that we've seen [since March]. We've really seen a focus on this financial stability aspect of reforms and having to improve the overall stability of the system, even though these were bank failures, not money market failures…. And if you look at that comment file on money market fund reform, you'll see the comments continue coming in."
Finally, Dupuy comments, "As for timing, … the SEC October agenda [posting] is merely a sort of suggestion.... There's really no certainty. With respect to that, it could be before or after, but there certainly is a considerable backlog of rules that have been proposed that need to be the final implementation. So I guess to pick a date, I'm thinking that something will happen this year. I can't say that it's going to be August, October or December. But I do think or I’m pretty sure [it will happen]." Gershkow adds, "I also think sometime this year, but I've given that same answer last year and a half, so take that with grain of salt. But I do still think this is a priority of this commission and they are working to get this done in short order."
