SEC Commissioner Peirce on "No" Vote
As we've mentioned, the SEC released its 424-page "Money Market Fund Reforms" last week, and we continue to excerpt and analyze the rules and commentary surrounding them. (See the MMF Reforms press release here and the Fact Sheet here.) Today, we quote from SEC Commissioner Hester Peirce "No" Vote "Air Dancers and Flies: Statement on Adoption of the Latest Round of Money Market Fund Reforms." (See all the other Commissioner's Statements here.) She says, "Thank you, Chair Gensler. I am pleased that we are removing the tie between liquid asset thresholds and fees and gates and that we are not moving forward with swing pricing. I could have supported the final money market fund rule if we had been equally prudent with respect to other elements of the rule. But today's adoption contains the same flaw that tanked the 2014 money market fund rulemaking -- an insistence that our own judgment is superior to that of money market funds, their sponsors, their boards, and their shareholders. Accordingly, I will be voting no today." Peirce explains, "The final rule, drawing on the experience from March 2020, eliminates the link between liquidity fees and gates and weekly liquid assets dropping below 30 percent of fund assets. As one commenter explained, 'the general consensus' is 'that the possibility of liquidity fees and gates increased uncertainty, created confusion in the market, and may have made it more difficult for a money market fund to manage redemptions.' The evidence of how poorly our rule functioned in a time of stress forms the basis for today's elimination of the link between a particular liquidity threshold and fees and gates. That change is good. `Having seen in 2020 that one regulatory mandate for money market funds did not work, we now grasp for another -- mandatory fees for institutional prime and institutional tax-exempt funds. Much like an air dancer -- the inflatable tubular figure dancing to drum up business for a tire or furniture store near you -- the Commission has the habit of lurching from one side to the other when regulating money market funds, and so it is with today's amendments. Just as we were in 2014 with fees and gates tied to liquidity thresholds, and again in December 2021 with swing pricing, we are once more convinced that we have found the solution to first-movers and share dilution. We wobble from codifying consideration of redemption gates to forbidding it and mandating redemption fees instead. We will not even allow fund boards the freedom to opt out of implementing them." She adds, "Even as we lurch our way through different solutions, we have yet to identify precisely the problem we are trying to solve. The release speaks generally of the potential for early redeemers to dilute the fund at the expense of remaining fund investors, but we absolve ourselves of having to 'conduct a data analysis on the extent to which money market fund shareholders have experienced dilution in the past' by saying we lack sufficient information. How then can we know if the benefits to investors of the rule outweigh the costs to investors? The dilution problem may not be material in money market funds, which are flush with short-term liquidity that (absent a regulatory incentive to sell longer-term assets first) can be used to meet redemptions without diluting remaining shareholders. We do not need a new solution to a problem that we have not shown to exist. You might be saying, 'Well, we can live with mandatory redemption fees; they are better than mandatory swing pricing.' To the Commission's credit, we listened to what commenters said; mandatory swing pricing is out. But we are not making a serious effort to hear from commenters on mandatory liquidity fees. The proposing release discussed the use of liquidity fees as an alternative to fight dilution costs in the proposal, but it also rejected that option, in part, because liquidity fees 'could introduce additional operational complexity and cost,' and could 'require more coordination with a fund's service providers than swing pricing.' Some commenters suggested that the burdens associated with liquidity fees would likely be less oppressive than those of swing pricing." Finally, Peirce states, "That many commenters found a liquidity fee preferable to swing pricing is hardly a full-throated endorsement of a liquidity fee. Those same commenters also likely would prefer one fly in their soup to four, but I suspect that most would check none of the above if given that choice."
