Money Market Fund Reforms, 7248-7356 [2021-27532]

Download as PDF 7248 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Electronic Comments SECURITIES AND EXCHANGE COMMISSION • Use the Commission’s internet comment form (https://www.sec.gov/ rules/submitcomments.htm). 17 CFR Parts 270 and 274 [Release No. IC–34441; File No. S7–22–21] RIN 3235–AM80 Money Market Fund Reforms Securities and Exchange Commission. AGENCY: ACTION: Proposed rule. The Securities and Exchange Commission (‘‘Commission’’) is proposing amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The proposed amendments are designed to improve the resilience and transparency of money market funds. The proposal would remove the liquidity fee and redemption gate provisions in the existing rule, which would eliminate an incentive for preemptive redemptions from certain money market funds and could encourage funds to more effectively use their existing liquidity buffers in times of stress. The proposal would also require institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures to require redeeming investors to bear the liquidity costs of their decisions to redeem. The Commission is also proposing to increase the daily liquid asset and weekly liquid asset minimum liquidity requirements, to 25% and 50% respectively, to provide a more substantial buffer in the event of rapid redemptions. The proposal would amend certain reporting requirements on Forms N–MFP and N–CR to improve the availability of information about money market funds, as well as make certain conforming changes to Form N– 1A to reflect our proposed changes to the regulatory framework for these funds. In addition, the Commission is proposing rule amendments to address how money market funds with stable net asset values should handle a negative interest rate environment. Finally, the Commission is proposing rule amendments to specify how funds must calculate weighted average maturity and weighted average life. khammond on DSKJM1Z7X2PROD with PROPOSALS2 SUMMARY: Comments should be received on or before April 11, 2022. DATES: Comments may be submitted by any of the following methods: ADDRESSES: VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 Paper Comments • Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–22–21. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s website (https:// www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission’s public reference room. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission’s website. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Blair Burnett, David Driscoll, Adam Lovell, or James Maclean, Senior Counsels; Angela Mokodean, Branch Chief; or Brian Johnson, Assistant Director at (202) 551–6792, Investment Company Regulation Office; Keri Riemer, Senior Counsel; Penelope Saltzman, Senior Special Counsel; or Thoreau Bartmann, Assistant Director, Chief Counsel’s Office, (202) 551–6825; Viktoria Baklanova, Analytics Office, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–8549. SUPPLEMENTARY INFORMATION: The Commission is proposing for public comment amendments to 17 CFR 270.2a–7 (rule 2a–7) and 17 CFR 270.31a–2 (rule 31a–2) under the PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 Investment Company Act of 1940,1 Form N–1A under the Investment Company Act and the Securities Act,2 and Forms N–MFP and N–CR under the Investment Company Act. Table of Contents I. Introduction A. Types of Money Market Funds and Existing Regulatory Framework B. March 2020 Market Events II. Discussion A. Amendments To Remove Liquidity Fee and Redemption Gate Provisions 1. Unintended Effects of the Tie Between the Weekly Liquid Asset Threshold and Liquidity Fees and Redemption Gates 2. Removal of Redemption Gates From Rule 2a–7 3. Removal of Liquidity Fees From Rule 2a–7 B. Proposed Swing Pricing Requirement 1. Purpose and Terms of the Proposed Requirement 2. Operational Considerations 3. Tax and Accounting Implications 4. Disclosure C. Amendments to Portfolio Liquidity Requirements 1. Increase of the Minimum Daily and Weekly Liquidity Requirements 2. Consequences for Falling Below Minimum Daily and Weekly Liquidity Requirements 3. Proposed Amendments to Liquidity Metrics in Stress Testing D. Amendments Related to Potential Negative Interest Rates E. Amendments To Specify the Calculation of Weighted Average Maturity and Weighted Average Life F. Amendments to Reporting Requirements 1. Amendments to Form N–CR 2. Amendments to Form N–MFP G. Compliance Date III. Economic Analysis A. Introduction B. Economic Baseline 1. Affected Entities 2. Certain Economic Features of Money Market Funds 3. Money Market Fund Activities and Price Volatility C. Costs and Benefits of the Proposed Amendments 1. Removal of the Tie Between the Weekly Liquid Asset Threshold and Liquidity Fees and Redemption Gates 2. Raised Liquidity Requirements 3. Stress Testing Requirements 4. Swing Pricing 5. Amendments Related to Potential Negative Interest Rates 6. Amendments to Disclosures on Form N– CR, Form N–MFP, and Form N–1A 7. Amendments Related to the Calculation of Weighted Average Maturity and Weighted Average Life D. Alternatives 1. Alternatives to the Removal of the Tie Between the Weekly Liquid Asset Threshold and Liquidity Fees and Redemption Gates 1 15 2 15 E:\FR\FM\08FEP2.SGM U.S.C. 80a et seq. U.S.C. 77a et seq. 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 2. Alternatives to the Proposed Increases in Liquidity Requirements 3. Alternative Stress Testing Requirements 4. Alternative Implementations of Swing Pricing 5. Liquidity Fees 6. Expanding the Scope of the Floating NAV Requirements 7. Countercyclical Weekly Liquid Asset Requirement 8. Alternatives to the Amendments Related to Potential Negative Interest Rates 9. Alternatives to the Amendments Related to Processing Orders Under Floating NAV Conditions for All Intermediaries 10. Alternatives to the Amendments Related to WAL/WAM Calculation 11. Sponsor Support 12. Disclosures 13. Capital Buffers 14. Minimum Balance at Risk 15. Liquidity Exchange Bank Membership E. Effects on Efficiency, Competition, and Capital Formation F. Request for Comment IV. Paperwork Reduction Act A. Introduction B. Rule 2a–7 C. Rule 31a–2 D. Form N–MFP E. Form N–CR F. Form N–1A V. Initial Regulatory Flexibility Analysis VI. Consideration of Impact on the Economy VII. Statutory Authority I. Introduction Money market funds are a type of mutual fund registered under the Investment Company Act of 1940 (‘‘Act’’) and regulated pursuant to rule 2a–7 under the Act.3 Money market funds are managed with the goal of providing principal stability by investing in high-quality, short-term debt securities, such as Treasury bills, repurchase agreements, or commercial paper, and whose value does not fluctuate significantly in normal market conditions. Money market fund investors receive dividends that reflect prevailing short-term interest rates and have access to daily liquidity, as money market fund shares are redeemable on demand. The combination of limited principal volatility, diversification of portfolio securities, payment of shortterm yields, and liquidity has made money market funds popular cash management vehicles for both retail and institutional investors. Money market funds also provide an important source of short-term financing for businesses, banks, and Federal, state, municipal, and Tribal governments. In March 2020, in connection with an economic shock from the onset of the COVID–19 pandemic, certain types of money market funds had significant outflows as investors sought to preserve 3 Money market funds are also sometimes called ‘‘money market mutual funds’’ or ‘‘money funds.’’ VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 liquidity.4 We are proposing to amend rule 2a–7 to remove provisions in the rule that appear to have contributed to investors’ incentives to redeem from certain funds during this period. For the category of funds that experienced the heaviest outflows in March 2020 and in prior periods of market stress, we are proposing a new swing pricing requirement that is designed to mitigate the dilution and investor harm that can occur today when other investors redeem—and remove liquidity—from these funds, particularly when certain markets in which the funds invest are under stress and effectively illiquid. We are also proposing to increase liquidity requirements to better equip money market funds to manage significant and rapid investor redemptions. In addition to these reforms, we are proposing changes to improve transparency and facilitate Commission monitoring of money market funds. We also propose to clarify how certain money market funds would operate if interest rates became negative. Finally, we propose to specify how funds must calculate weighted average maturity and weighted average life.5 A. Types of Money Market Funds and Existing Regulatory Framework Different types of money market funds exist to meet differing investor needs. ‘‘Prime money market funds’’ hold a variety of taxable short-term obligations issued by corporations and banks, as well as repurchase agreements and asset-backed commercial paper.6 ‘‘Government money market funds,’’ which are currently the largest category of money market fund, almost exclusively hold obligations of the U.S. Government, including obligations of the U.S. Treasury and Federal agencies and instrumentalities, as well as repurchase agreements collateralized by government securities.7 Compared to prime funds, government money market funds generally offer greater safety of principal but historically have paid 4 See infra Section I.B (discussing these events in more detail). 5 We have consulted and coordinated with the Consumer Financial Protection Bureau regarding this proposed rulemaking in accordance with section 1027(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 6 Commission staff regularly publish comprehensive data regarding money market funds on the Commission’s website, available at https:// www.sec.gov/divisions/investment/mmfstatistics.shtml. This data includes information about the monthly holdings of prime money market funds by type of security. 7 Some government money market funds generally invest at least 80% of their assets in U.S. Treasury obligations or repurchase agreements collateralized by U.S. Treasury securities and are called ‘‘Treasury money market funds.’’ PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 7249 lower yields. ‘‘Tax-exempt money market funds’’ (or ‘‘municipal money market funds’’) primarily hold obligations of state and local governments and their instrumentalities, and pay interest that is generally exempt from Federal income tax for individual taxpayers.8 Within the prime and tax-exempt money market fund categories, some funds are ‘‘retail’’ funds and others are ‘‘institutional’’ funds. Retail money market funds are held only by natural persons, and institutional funds can be held by a wider range of investors, such as corporations, small businesses, and retirement plans.9 To some extent, different types of money market funds are subject to different requirements under rule 2a–7. One primary example is a fund’s approach to valuation and pricing. Government and retail money market funds can rely on valuation and pricing techniques that generally allow them to sell and redeem shares at a stable share price, typically $1.00, without regard to small variations in the value of the securities in their portfolios.10 If the fund’s stable share price and marketbased value per share deviate by more than one-half of 1%, the fund’s board may determine to adjust the fund’s share price below $1.00, which is also colloquially referred to as ‘‘breaking the buck.’’ 11 Institutional prime and institutional tax-exempt money market funds, however, are required to use a 8 In this release, we also use the term ‘‘nongovernment money market fund’’ to refer to prime and tax-exempt money market funds. 9 A retail money market fund is defined as a money market fund that has policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons. See 17 CFR 270.2a–7(a)(21) (rule 2a–7(a)(21)). 10 Under the amortized cost method, a government or retail money market fund’s portfolio securities generally are valued at cost plus any amortization of premium or accumulation of discount, rather than at their value based on current market factors. The penny rounding method of pricing permits such a money market fund when pricing its shares to round the fund’s NAV to the nearest 1% (i.e., the nearest penny). Together, these valuation and pricing techniques create a ‘‘rounding convention’’ that permits these money market funds to sell and redeem shares at a stable share price without regard to small variations in the value of portfolio securities. See 17 CFR 270.2a–7(c)(i), (g)(1), and (g)(2). See generally Valuation of Debt Instruments and Computation of Current Price Per Share by Certain Open-End Investment Companies (Money Market Funds), Investment Company Act Release No. 13380 (July 11, 1983) [48 FR 32555 (July 18, 1983)] (‘‘1983 Adopting Release’’). Throughout this release, we generally use the term ‘‘stable share price’’ or ‘‘stable NAV’’ to refer to the stable share price that these money market funds seek to maintain and compute for purposes of distribution, redemption, and repurchases of fund shares. 11 These funds must compare their stable share price to the market-based value per share of their portfolios at least daily. E:\FR\FM\08FEP2.SGM 08FEP2 7250 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules ‘‘floating’’ net asset value per share (‘‘NAV’’) to sell and redeem their shares, based on the current market-based value of the securities in their underlying portfolios rounded to the fourth decimal place (e.g., $1.0000). These institutional funds are required to use a floating NAV because their investors have historically made the heaviest redemptions in times of market stress and are more likely to act on the incentive to redeem if a fund’s stable price per share is higher than its market-based value.12 As of July 2021, there were approximately 318 money market funds registered with the Commission, and these funds collectively held over $5.0 trillion of assets.13 The vast majority of these assets are held by government money market funds ($4.0 trillion), followed by prime money market funds ($875 billion) and tax-exempt money market funds ($101 billion).14 Slightly less than half of prime money market funds’ assets are held by publicly offered institutional funds, with the remaining assets almost evenly split between retail prime money market funds and institutional prime money market funds that are not offered to the public.15 The vast majority of taxexempt money market fund assets are held by retail funds. khammond on DSKJM1Z7X2PROD with PROPOSALS2 The Commission adopted rule 2a–7 in 1983 and has amended the rule several times over the years, including in response to market events that have highlighted money market fund vulnerabilities.16 For example, during 2007–2008, some prime money market funds were exposed to substantial losses from certain of their holdings.17 At that time, one money market fund ‘‘broke the buck’’ and suspended redemptions, and many fund sponsors provided financial 12 See Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 31166 (July 23, 2014) [79 FR 47735 (Aug. 14, 2014)] (‘‘2014 Adopting Release’’). As stated in the 2014 Adopting Release, this incentive exists largely in prime money market funds because these funds exhibit higher credit risk that makes declines in value more likely (compared to government money market funds). 13 Money Market Fund Statistics, Form N–MFP Data, period ending July 2021, available at: https:// www.sec.gov/files/mmf-statistics-2021-07.pdf. This data excludes ‘‘feeder’’ funds to avoid double counting assets. 14 Id. 15 Some asset managers establish privately offered money market funds to manage cash balances of other affiliated funds and accounts. 16 See 1983 Adopting Release, supra footnote 10; see also infra footnote 20. 17 For a more detailed account of these events, see Money Market Fund Reform, Investment Company Act Release No. 28807 (June 30, 2009) [74 FR 32688 (July 8, 2009)], at section I.D. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 support to their funds.18 These events, along with general turbulence in the financial markets, led to a run primarily on institutional prime money market funds and contributed to severe dislocations in short-term credit markets. The U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System subsequently announced intervention in the short-term markets that was effective in containing the run on prime money market funds and providing additional liquidity to money market funds.19 After the events of the 2008 financial crisis, the SEC adopted a number of amendments to its money market fund regulations in 2010 and 2014.20 In 2010, the Commission adopted amendments to rule 2a–7 that, among other things, for the first time required that money market funds maintain liquidity buffers in the form of specified levels of daily and weekly liquid assets.21 The amendments required that taxable money market funds have at least 10% of their assets in cash, U.S. Treasury securities, or securities that convert into cash (e.g., mature) within one day (‘‘daily liquid assets’’), and that all money market funds have at least 30% of assets in cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, or securities that convert into cash within one week (‘‘weekly liquid assets’’).22 These liquidity buffers provide a source of internal liquidity and are intended to help funds withstand high redemptions during 18 See id. at paragraphs accompanying nn.41 and 44. At this time, all money market funds generally were permitted to maintain stable prices per share. 19 The Treasury Department’s Temporary Guarantee Program for Money Market Funds temporarily guaranteed certain investments in money market funds that participated in the program. The Federal Reserve Board’s Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility extended credit to U.S. banks and bank holding companies to finance their purchases of high-quality asset-backed commercial paper from money market funds. See Press Release, Treasury Department, Treasury Announces Guaranty Program for Money Market Funds (Sept. 19, 2008), available at https://www.treasury.gov/press-center/ press-releases/Pages/hp1161.aspx; Press Release, Federal Reserve Board, Federal Reserve Board Announces Two Enhancements to its Programs to Provide Liquidity to Markets (Sept. 19, 2008), available at https://www.federalreserve.gov/ newsevents/pressreleases/monetary20080919a.htm. 20 Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (‘‘2010 Adopting Release’’); 2014 Adopting Release, supra footnote 12. 21 2010 Adopting Release, supra footnote 20. See rule 17 CFR 270.2a–7(c)(5)(ii) and (iii). 22 See 17 CFR 270.2a–7(a)(8) (rule 2a–7(a)(8)) (defining ‘‘daily liquid assets’’) and 17 CFR 270.2a– 7(a)(28) (rule 2a–7(a)(28)) (defining ‘‘weekly liquid assets’’). PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 times of market illiquidity. The 2010 amendments also increased transparency about a money market fund’s holdings by introducing monthly Form N–MFP reporting requirements and website posting requirements. In addition, the Commission further limited the maturity of a fund’s portfolio, including by shortening the permitted weighted average portfolio maturity and introducing a separate weighted average life to limit the portion of a fund’s portfolio held in longer-term adjustable rate securities. In 2014, the Commission further amended the rules that govern money market funds. In these amendments the Commission provided the boards of directors of non-government money market funds with new tools to stem heavy redemptions by giving them discretion to impose a liquidity fee or temporary suspension of redemptions (i.e., a gate) if a fund’s weekly liquid assets fall below 30%. These amendments also require all nongovernment money market funds to impose a liquidity fee if the fund’s weekly liquid assets fall below 10%, unless the fund’s board determines that imposing such a fee is not in the best interests of the fund. Additionally, in 2014 the Commission removed the valuation exemption that permitted institutional non-government money market funds to maintain a stable NAV, and required those funds to transact at a floating NAV. The amendments provided guidance related to amortized cost valuation, as well as introduced requirements for strengthened diversification of money market funds’ portfolios and enhanced stress testing. The Commission also introduced a requirement that money market funds report certain significant events on Form N–CR and made other amendments to improve transparency, including additional website posting requirements and amendments to Form N–MFP. Following the 2014 amendments, government money market funds grew substantially, while prime money market funds diminished in size, as shown in the chart below.23 BILLING CODE 8011–01–P 23 While the Commission adopted the amendments in 2014, the compliance date for the floating NAV requirement for institutional prime and institutional tax-exempt funds and for the fee and gate provisions for all prime and tax-exempt funds was October 14, 2016. E:\FR\FM\08FEP2.SGM 08FEP2 7251 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules ··CJw1:l:llistoriadNetAsselsuaderMuageme11to:l'MoneyMarketFmuls,byType ;.;;. ____ Prime moneymamt funds - ·---Tu-exemptmoneymarketfimds·. -~mmoneymarketfimm i 0 -.;;;,,;..-----·----·-----·---..;...::..,.;, __ :..,.;,·.....;.;;.....;...'.....;.;:_;;;.;;.,.....;.;.....;.;.;..__ Nov~lO sep::n Jul:12 May-l3<Mar-14 Ja.15 Nov--15 Sep-16 Jlll-i'i :Mily-18 Mar.:u1 Jm-20 N,ov.;20 ~FomiNc-MFP and tax-exempt funds beginning in October 2016.24 The chart below depicts the distribution between retail and institutional net assets in both prime Cbrt2: 11istorica1Net.AssetsuderM1iugelllelltoiPrinl:e ad Tax-Exem,tM•eiMmmt ·. ·FUJlds.by·btV~or.Type·•·. 1,000 t.ooo ~ Pritililf~l - - - - •Prime: telail - ; -Tu;«emptmsiifuliooat -- -Tu:-eitempretait iOO 200 .· .. ·. . . 0 ·-·-··-· -·•-·-···--··~--,_;;_.-..... .. -.·.... ·.- .. ·:-;·..,..._...........~~~ .. .---......... . Od:16 Fef>.:17 IUO:.n Oct-17 Feb48. Jm:.18 OcM8 F~fo 1•19 Oct-19 F~20 Jm-20 ()ct.;2.Q Feb;.2L s.21 1~ ! ·:O· FmmN~MFP VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 institutional and retail prime and tax-exempt money market funds prior to this time may not be PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 fully comparable with current data and, thus, Chart 2 covers a period beginning in October 2016. E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.003</GPH> 24 The 2014 amendments introduced a regulatory definition of a retail money market fund and implemented it in October 2016. Data on EP08FE22.002</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Finally, Table 1 below depicts the key requirements currently applicable to each type of money market fund. 7252 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Table I: Current Requirements for Money Market Funds* Government Prime money market funds Tax-exempt money market money market 1-------------1-------fu_n~d_s_ _ _ ____, funds maintain a stable NAV I>aily liquid asset uirement Weekly liquid asset limitatio Forms N-MFP X X X X X andN-CR reporting re uirements *Table 1 covers the requirements highlighted in this discussion but is not a comprehensive overview of all requirements that apply to money market funds. B. March 2020 Market Events khammond on DSKJM1Z7X2PROD with PROPOSALS2 In March 2020, growing economic concerns about the impact of the COVID–19 pandemic led investors to reallocate their assets into cash and short-term government securities.25 These heavy asset flows placed stress on short-term funding markets.26 For instance, commercial paper and certificates of deposit markets in which prime money market funds and other participants invest became ‘‘frozen’’ in March 2020, making it more difficult to sell these instruments, which have limited secondary trading even in normal times.27 Institutional investors, in particular, sought highly liquid investments, including government money market funds.28 In contrast, institutional prime and tax-exempt money market funds experienced outflows beginning the week of March 9, 2020, which accelerated the following 25 See SEC Staff Report on U.S. Credit Markets Interconnectedness and the Effects of the COVID– 19 Economic Shock (Oct. 2020) (‘‘SEC Staff Interconnectedness Report’’) at 2, available at https://www.sec.gov/files/US-Credit-Markets_ COVID-19_Report.pdf. 26 Notably, this market stress in March 2020, including its impact on money market funds, was more of a liquidity event than in 2008. In 2008 there were heightened concerns regarding the credit quality of some money market funds’ underlying holdings. 27 See SEC Staff Interconnectedness Report, supra footnote 25, at 23. 28 More specifically, government money market funds had record inflows of $838 billion in March 2020 and an additional $347 billion of inflows in April 2020. See id. at 25. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 week.29 Outflows from retail prime and tax-exempt funds began the week of March 16, a week after outflows in institutional funds began. Outflows from some publicly offered institutional prime funds as a percentage of fund size exceeded those in the September 2008 crisis, although the outflows in dollar amounts were much smaller in March 2020, due in part to the significant reductions in the size of prime money market funds that occurred between September 2008 and March 2020. During the two-week period of March 11 to 24, publicly offered institutional prime funds had a 30% redemption rate (about $100 billion), which included outflows of approximately 20% of assets during the week of March 20 alone.30 The largest weekly redemption rate from a single publicly offered institutional prime fund during this period was around 55%, and the largest daily outflow was about 26%. In contrast, privately offered institutional prime funds had redemptions of 3% of assets during the week of March 20, and lost approximately 6% of their total assets ($17 billion) from March 9 through 20. Retail money market funds had lower levels of outflows than publicly offered institutional funds. Retail prime funds had outflows of approximately 11% of their total assets ($48 billion) in the last 29 Id. 30 This discussion of the size of outflows in March 2020 is based on the Report of the President’s Working Group on Financial Markets, Overview of Recent Events and Potential Reform Options for Money Market Funds, infra footnote 39, and our additional analysis. PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 three weeks of March 2020. Outflows from tax-exempt money market funds, which are mostly retail funds, were approximately 8% of their total assets ($12 billion) from March 12 through 25. As prime money market funds experienced heavy redemptions, their holdings of weekly liquid assets generally declined. However, these declines were not commensurate with the level of redemptions. Available data suggests that managers were actively managing their portfolios to avoid having weekly liquid assets below 30% of their total assets by, in some cases, selling other portfolio securities to meet redemptions. Available evidence, supported by many comment letters in response to the Commission’s request for comment discussed below, suggested that funds’ incentives to maintain weekly liquid assets above the 30% threshold were directly tied to investors’ concerns about the possibility of redemption gates and liquidity fees under our rules if a fund drops below that threshold.31 Based on Form N–MFP 31 See, e.g., Comment Letter of State Street Global Advisors (Apr. 12, 2021) (‘‘State Street Comment Letter’’); Comment Letter of Schwab Asset Management Solutions (Apr. 12, 2021) (‘‘Schwab Comment Letter’’); Comment Letter of the Investment Company Institute (Apr. 12, 2021) (‘‘ICI Comment Letter I’’); Comment Letter of Wells Fargo Funds Management, LLC (Apr. 12, 2021) (‘‘Wells Fargo Comment Letter’’); Comment Letter of J.P. Morgan Asset Management (Apr. 12, 2021) (‘‘JP Morgan Comment Letter’’). See also, e.g., Li, Lei, Yi Li, Marco Machiavelli, and Alex Xing Zhou, ‘‘Runs and Interventions in the Time of COVID–19: Evidence from Money Funds,’’ working paper (2020), available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3607593 (‘‘Li et al.’’). E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.004</GPH> BILLING CODE 8011–01–C Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 data providing the size of each fund’s weekly liquid assets as of the end of each week, between March 13 and March 20, the weekly liquid assets of most money market funds changed by less than 5%. In particular, institutional prime money market funds that were closer to the 30% weekly liquid asset threshold tended to increase their weekly liquid assets, while those with higher weekly liquid assets tended to decrease their weekly liquid assets.32 One institutional prime fund’s weekly liquid assets fell below the 30% minimum threshold set forth in rule 2a– 7.33 To support liquidity of fund portfolios, two fund sponsors provided support to three institutional prime funds by purchasing commercial paper and certificates of deposit the funds held.34 On March 18, 2020, the Federal Reserve, with the approval of the Department of the Treasury, broadened its program of support for the flow of credit to households and businesses by taking steps to enhance the liquidity and functioning of money markets with the establishment of the Money Market Mutual Fund Liquidity Facility (‘‘MMLF’’). The MMLF provided loans to financial institutions on advantageous terms to purchase securities from money market funds that were raising liquidity, thereby helping enhance overall market functioning and credit provisions to the broader economy.35 MMLF utilization reached a peak of just over $50 billion in early April 2020, or about 5% of net assets in prime and tax-exempt money market funds at the time.36 Along with other Federal Reserve actions and programs to support the short-term funding markets, the MMLF had the effect of significantly 32 Based on our analysis, two-thirds of retail prime money market funds and about half of institutional prime money market funds increased their weekly liquid assets slightly during this period. 33 The one money market fund that fell below the 30% threshold did not impose a gate or fees. 34 As reported by these money market funds in their filings on Form N–CR. 35 Information about the MMLF is available on the Federal Reserve’s website at https://www.federal reserve.gov/monetarypolicy/mmlf.htm. The Federal Reserve Bank of Boston operated the MMLF. 36 See PWG Report, infra footnote 39, at 17. Institutional and retail prime and tax-exempt money market funds were eligible to participate in the MMLF. See also Federal Reserve Bank of New York Staff Reports, no. 980, The Money Market Mutual Fund Liquidity Facility (Sept. 2021) at text accompanying nn. 19 and 22, available at https:// www.newyorkfed.org/medialibrary/media/research/ staff_reports/sr980.pdf (providing an analysis of prime funds’ participation in the MMLF and stating that through its life, the MMLF extended loans to nine banks, which purchased securities from 30 institutional prime funds and 17 retail prime funds). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 slowing outflows from prime and taxexempt money market funds.37 The MMLF ceased providing loans in March 2021.38 Report of the President’s Working Group on Financial Markets and the Commission’s Request for Comment The President’s Working Group on Financial Markets (‘‘PWG’’) issued a report discussing these events and several potential money market fund reform options in December 2020 (the ‘‘PWG Report’’).39 The Commission issued a request for comment (the ‘‘Request for Comment’’) on the various reform options discussed in the PWG Report, and the comment period closed in April 2021.40 We received numerous comments in response to the Request for Comment, which are discussed throughout this release. Several of the reforms we are proposing in this release were included as potential reform options in the PWG Report.41 37 See, e.g., ‘‘Federal Reserve Issues FOMC Statement’’ (Mar. 15, 2020), available at https:// www.federalreserve.gov/newsevents/pressreleases/ monetary20200315a.htm; ‘‘Federal Reserve Actions to Support the Flow of Credit to Households and Businesses’’ (Mar. 15, 2020), available at https:// www.federalreserve.gov/newsevents/pressreleases/ monetary20200315b.htm; ‘‘Federal Reserve Board Announces Establishment of a Commercial Paper Funding Facility (CPFF) to Support the Flow of Credit to Households and Businesses’’ (Mar. 17, 2020), available at https://www.federalreserve.gov/ newsevents/pressreleases/monetary20200317a.htm; ‘‘Federal Reserve Board Announces Establishment of a Primary Dealer Credit Facility (PDCF) to Support the Credit Needs of Households and Businesses’’ (Mar. 17, 2020), available at https:// www.federalreserve.gov/newsevents/pressreleases/ monetary20200317b.htm; ‘‘Federal Reserve Board Broadens Program of Support for the Flow of Credit to Households and Businesses by Establishing a Money Market Mutual Fund Liquidity Facility (MMLF)’’ (Mar. 18, 2020), available at https:// www.federalreserve.gov/newsevents/pressreleases/ monetary20200318a.htm. 38 See supra footnote 35. 39 See Report of the President’s Working Group on Financial Markets, Overview of Recent Events and Potential Reform Options for Money Market Funds (Dec. 2020), available at https://home.treasury.gov/ system/files/136/PWG-MMF-report-final-Dec2020.pdf. 40 Request for Comment on Potential Money Market Fund Reform Measures in President’s Working Group Report, Investment Company Act Release No. 34188 (Feb. 4, 2021) [86 FR 8938 (Feb. 10, 2021)]. Comment letters received in response to the Request for Comment are available at: https:// www.sec.gov/comments/s7-01-21/s70121.htm. 41 After considering comments on the Commission’s request for comment, we are not proposing other reform options discussed in the PWG Report. These other reform options included: (i) Reform of the conditions for imposing redemption gates; (ii) minimum balance at risk; (iii) countercyclical weekly liquid asset requirements; (iv) floating NAVs for all prime and tax-exempt money market funds; (v) capital buffer requirements; (vi) requiring liquidity exchange bank (‘‘LEB’’) membership; and (vii) new requirements governing sponsor support. The Commission has PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 7253 Reasons for Investors’ Redemption Behavior We considered several factors that may have driven investors’ redemptions during this period of market stress, including the potential for the imposition of fees and gates as funds neared the 30% weekly liquid asset threshold, declining NAVs, risk reduction, and general concerns about the economic impact of the COVID–19 pandemic. Evidence suggests that concerns about the potential for fees or gates contributed to some investors’ redemption decisions. For example, one research paper indicated that institutional prime money market fund outflows accelerated as funds’ weekly liquid assets went closer to the 30% threshold.42 Another paper found that smaller institutional investors redeemed more intensely from prime money market funds with lower liquidity levels, whereas large institutional investors redeemed heavily from prime money market funds regardless of fund liquidity level.43 Weekly Form N–MFP data analyzed in Table 2 shows that most of the largest asset outflows from institutional prime funds in the third week of March 2020 were from those funds with weekly liquid assets below 41%. The five institutional prime money market funds with the lowest weekly liquid assets accounted for roughly 40% of the dollar change in assets among all such money market funds. Although Table 2 shows that money market funds with weekly liquid assets closer to the 30% threshold had a higher percent of outflows during the week ending March 20, 2020, some prime funds with higher levels of weekly liquid assets also experienced large outflows.44 While Table 2 is based on weekly data provided on Form N– MFP, a research report found that considered several of these reform options in the past, including minimum balance at risk, floating NAVs for a broader range of funds, capital buffers, and LEB membership. See 2014 Adopting Release, supra footnote 12, at section III.L. After considering comments, we believe the package of reforms we are proposing is appropriately tailored to achieve our regulatory goals. See infra Section III.D (discussing the reform alternatives in the PWG Report that we are not proposing). 42 See Li et al., supra footnote 31. 43 See BIS Quarterly Review: International banking and financial market developments, Bank for International Settlements (Mar. 2021), available at https://www.bis.org/publ/qtrpdf/r_qt2103.pdf. 44 For example, two institutional prime money market funds with outflows greater than 40% had weekly liquid assets of 46% and 48%. E:\FR\FM\08FEP2.SGM 08FEP2 7254 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules weekly liquid assets dropped during the third week of March 2020, but started to recover by the end of the week.45 Beyond concerns about the potential imposition of fees or gates, general declines in liquidity levels may have been a concern for investors because the declines can signify that a fund may be less equipped to handle redemptions in the near-term. While declining liquidity on its own likely contributed to some investors’ redemption decisions, a few commenters provided information from investor surveys suggesting that the potential for gates, and to a somewhat lesser extent the potential of liquidity fees, was a more common concern among investors.46 Table 2: Aggregate Asset Changes as a Function of Weekly Liquid Assets and Maturity for the Week Ending March 20, 2020 Number of Funds WLA AUM ($ Billions2 Asset Change($ Billions) 1-Day 2-7 Days Asset Change (%) >?Days Net 1-Day 2-7Days >?Days Net -33.4 -7.6% -3.1% -12.5% -23.2% All Prime Funds :::;36% 7 110.5 -11.0 -4.4 -17.9 (36%-41%] 14 274.7 7.6 -28.6 -20.7 -41.6 2.4% -9.0% -6.5% -13.2% (41%-46%] 30 346.9 3.0 -17.5 -14.3 -28.8 0.8% -4.7% -3.8% -7.7% >46% 28 270.0 -7.4 -0.4 -5.3 -13.1 -2.6% -0.1% -1.9% -4.6% 1002.0 -7.8 -51 -58.2 -116.9 -0.7% -4.6% -5.2% -10.5% Total 79 Retail Prime Funds :::;36% 3 30.1 0.2 -2.3 -0.7 -2.9 0.5% -7.0% -2.2% -8.8% (36%-41%] 7 199.8 11.8 -23.0 -8.2 -19.3 5.4% -10.5% -3.7% -8.8% (41%-46%] 13 206.7 12.1 -9.4 -3.3 -0.5 5.9% -4.5% -1.6% -0.2% >46% 7 12.3 0.9 -0.3 -0.7 0.0 7.4% -2.5% -5.3% -0.4% Total 30 448.8 25.1 -35.0 -12.8 -22.8 5.3% -7.4% -2.7% -4.8% Institutional Prime Funds (public) :::;36% 4 80.4 -11.1 -2.1 -17.2 -30.5 -10.0% -1.9% -15.5% -27.5% (36%-41%] 7 74.9 -4.2 -5.6 -12.5 -22.3 -4.3% -5.8% -12.8% -22.9% (41%-46%] 16 140.2 -9.5 -7.9 -10.9 -28.3 -5.6% -4.7% -6.5% -16.8% >46% 16 53.9 -1.5 -1.4 -4.2 -7.0 -2.4% -2.3% -6.9% -11.5% Total 43 349.4 -26.2 -17.0 -44.8 -88.1 -6.0% -3.9% -10.2% -20.1% Institutional Prime Funds (non-public) (41%-46%] 1 1.7 0.3 -0.2 -0.1 0.0 17.9% -13.7% -4.7% -0.4% >46% 5 203.8 -6.8 1.3 -0.5 -6.0 -3.3% 0.6% -0.2% -2.9% Total 6 205.5 -6.5 1.1 -0.6 -6.0 -3.1% 0.5% -0.3% -2.9% >46% 80 127.4 0.2 -12.9 0.2% -7.6% -1.7% -9.2% -10.7 -2.4 We also considered the possibility that declining market-based prices for retail and institutional non-government funds contributed to investors’ redemptions in March 2020. For retail funds that maintain a stable NAV, declining market-based prices can contribute to investor concerns that these funds may ‘‘break the buck’’ (i.e., have market-based prices below $0.9950) and re-price their shares below $1.00. Most retail prime and tax-exempt money market funds experienced declining market-based prices in March 2020. However, only one retail taxexempt fund reported a market-based price below $0.9975, and that fund subsequently received sponsor support in the form of a capital contribution to reduce the deviation between the fund’s market-based price and its stable price per share.47 Moreover, retail prime and tax-exempt money market funds with lower market-based prices did not experience larger outflows than other retail prime and tax-exempt money market funds, so these funds’ flows in March 2020 appear to have been unrelated to market-based prices. Like retail funds, most institutional prime and tax-exempt money market funds experienced declines in their marketbased prices in March 2020. However, none of the market-based prices dropped below $0.9975. Staff analysis and an external study did not find a 45 For example, on March 16 there were two institutional prime money market funds with weekly liquid assets less than 35%, six on March 18, and three on March 20. See ICI Report, Experiences of US Money Market Funds During the Covid–19 Crisis (Nov. 2020) (‘‘ICI MMF Report’’), available at https://www.ici.org/pdf/20_rpt_ covid3.pdf. 46 See infra footnote 73 (discussing these surveys). 47 PWG Report, supra footnote 39, at 15. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.005</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 All Municipal Funds Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 correlation between market prices and institutional prime fund redemptions during this time.48 We also considered the potential relationship between a money market fund’s portfolio holdings and investors’ redemption behavior. Investor redemption behavior differed based on the overall nature of a money market fund’s portfolio, given that government money market funds had significant inflows and prime money market funds had large outflows. However, unlike the events of 2008, redemptions from prime money market funds did not appear to be correlated to a fund’s particular holdings. For instance, prime money market funds with the largest holdings of commercial paper and certificates of deposit did not experience greater redemptions than other prime funds, even though the commercial paper and certificates of deposit markets were experiencing greater strains in March 2020 than other markets in which money market funds invest.49 Beyond factors that relate to the regulatory framework for money market funds, there are other factors that may have had a relationship to investors’ redemption incentives in March 2020. As some commenters suggested, general uncertainty of a global health crisis and fears of possible business disruptions and economic downturns in the real economy as people stayed at home resulted in investors becoming increasingly risk averse and seeking to preserve or increase liquidity.50 Some 48 See Baklanova, Kuznits, and Tatum, ‘‘Prime MMFs at the Onset of the Pandemic: Asset Flows, Liquidity Buffers, and NAVs,’’ SEC Staff Analysis (Apr. 15, 2021) (‘‘Prime MMFs at the Onset of the Pandemic Report’’) at 5, available at https:// www.sec.gov/files/prime-mmfs-at-onset-ofpandemic.pdf. Any statements therein represent the views of the staff of the Division of Investment Management. These statements are not a rule, regulation, or statement of the U.S. Securities and Exchange Commission. The Commission has neither approved nor disapproved their content. Such statements, like all staff statements, have no legal force or effect: They do not alter or amend applicable law, and they create no new or additional obligations for any person. See also Li et al., supra footnote 31. 49 The five institutional prime money market funds with the highest concentration of commercial paper and certificates of deposit accounted for roughly 3% of the dollar change in assets among all institutional prime money market funds. These five funds each held between 71% and 83% of their assets in commercial paper and certificates of deposit. In aggregate, these five funds held $31 billion in assets on March 13, 2020, and experienced a combined outflow of $3 billion, or roughly 10% of their total assets, during the week of March 20, 2020. 50 See, e.g., ICI Comment Letter I; JP Morgan Comment Letter; Comment Letter of the Vanguard Group, Inc. (Apr. 12, 2021) (‘‘Vanguard Comment Letter’’); Comment Letter of Federated Hermes, Inc. (Apr. 12, 2021) (‘‘Federated Hermes Comment Letter I’’). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 commenters also asserted that some institutional investor redemptions were ordinary course redemptions that otherwise would have occurred, irrespective of the pandemic and market stress, to meet near-term cash needs, including for operating cash, to make quarterly corporate tax payments, or to meet payroll expenses.51 In addition, our staff identified some relationships between the size of outflows and the type of adviser to the fund or the size of the fund. This revealed that publicly offered prime institutional money market funds managed by bank-affiliated advisers had the most outflows in March 2020.52 Money market funds complexes with lower assets under management in publicly offered prime institutional money market funds also generally had larger outflows during this time.53 Connection Between Money Market Fund Outflows and Stress in ShortTerm Funding Markets In markets for private short-term debt instruments, such as commercial paper and certificates of deposit, conditions significantly deteriorated in the second week of March 2020. Spreads for commercial paper and certificates of deposits began widening sharply, and new issuances declined and shifted to shorter tenors.54 While there is limited secondary activity in these markets even in normal times, several industry commenters discussed particular difficulties selling commercial paper in March 2020.55 Moreover, where money market funds were able to sell 51 See, e.g., Comment Letter of Invesco (Apr. 12, 2021) (‘‘Invesco Comment Letter’’) (stating that prime money market funds experienced increased redemptions leading up to the quarterly corporate tax deadline); Federated Hermes Comment Letter I (citing a Carfang Group survey in which 50% of surveyed corporate treasurers who redeemed from institutional prime funds in March 2020 stated that they were doing so to meet operating cash needs); Comment Letter of the Securities Industry and Financial Markets Association Asset Management Group (Apr. 12, 2021) (‘‘SIFMA AMG Comment Letter’’) (stating that tax return filings for partnerships and S-corporations were due on March 16, 2020, and many businesses had biweekly or semimonthly payroll expenses around the same time). 52 See Prime MMFs at the Onset of the Pandemic Report, supra footnote 48, at 3. The analysis in this report concluded that the largest outflows in midMarch 2020 were from the publicly offered prime institutional money market funds with advisers owned by banking firms. The funds with advisers owned by the largest U.S. banks designated as global systemically important banks (‘‘G–SIBs’’) accounted for 56% of the outflows in the third week of March, even though these funds managed only around 28% of net assets in publicly offered prime institutional money market funds. 53 Id at 3. 54 PWG Report, supra footnote 39, at 11. 55 See infra footnote 202 and accompanying paragraph. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 7255 commercial paper during this period, increased selling activity from institutional prime funds may have contributed to stress in these markets as discussed below. Using Form N–MFP data, we observed that retail prime and privately offered institutional prime funds did not sell significantly more long-term portfolio securities (i.e., securities that mature in more than a month) in March 2020 relative to their typical averages. Publicly offered institutional prime funds, however, increased their sales of long-term securities in March 2020 to 15% of total assets during this time period, which includes assets sold to the MMLF and sponsors, compared to a 4% monthly average during the period from October 2016 through February 2020. In March 2020, these funds sold around $52 billion in certificates of deposit and commercial paper with maturities greater than one month.56 Of this amount, approximately $4 billion was sold to fund sponsors, as reported on Form N–CR. Combining this data with data provided by an industry group’s member survey and Federal Reserve data on the balance of the MMLF, prime money market funds sold an estimated $80 billion in commercial paper and certificates of deposit in March 2020, with approximately 5% ($4 billion) of that total sold to sponsors, 66% ($53 billion) pledged to the MMLF, and 29% ($23 billion) sold in the secondary market.57 Thus, we find that prime money market funds, particularly institutional funds, were engaging in greater than normal selling activity in these markets which, when combined with similar selling from other market participants such as hedge funds and bond mutual funds, both contributed to, and were impacted by, stress in shortterm funding markets.58 56 This analysis is based on longer-term holdings that these funds reported on Form N–MFP in February 2020 but that they did not report holding in March 2020. The estimate includes $24.3 billion in certificates of deposit and $28.1 billion in commercial paper. 57 Our analysis of available data suggests that of the $80 billion in commercial paper and certificates of deposit sold in March 2020, about $70 billion had maturities greater than a month and about $10 billion had maturities less than a month. As of April 1, 2020, the MMLF balance was close to $53 billion according to the Federal Reserve’s weekly data, available at https://www.federalreserve.gov/ releases/h41/20200402/. See ICI Comment Letter I (providing information about money market fund selling activity in March 2020 based on a member survey). 58 See, e.g., SEC Staff Interconnectedness Report, supra footnote 25, at 4. At the end of February 2020, prime money market funds offered to the public owned about 19% of commercial paper outstanding. See PWG Report, supra footnote 39, at 11. E:\FR\FM\08FEP2.SGM 08FEP2 7256 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Conditions in short-term municipal debt markets also worsened rapidly in March 2020. Stresses in short-term municipal markets contributed to pricing pressures and outflows for taxexempt money market funds which, in turn, contributed to increased stress in municipal markets.59 Table 2 shows that as tax-exempt money market funds experienced heightened redemptions in the third week of March 2020 of 9.2%, they reduced their holdings (e.g., tender option bonds and variable rate demand notes) by $12.9 billion that week. One commenter suggested that the overall issue in the municipal securities market in March 2020 was selling pressure from many market participants, and not selling pressure from taxexempt money market funds, which make up only a small portion of the overall market.60 This commenter suggested that other market participants were raising cash by selling short-term municipal securities, which caused meaningful discounts on the market value of those securities and consequently placed downward pressure on market-based NAVs of taxexempt money market funds. The commenter also stated that longer-term municipal money market securities, and not variable rate demand notes, bore the brunt of the market stress in March 2020. Another commenter suggested that tax-exempt money market funds sold longer-term holdings in March 2020 to maintain an average weighted maturity of not more than 60 days, rather than to maintain weekly liquid assets above 30% (given that these funds typically hold much higher levels of weekly liquid assets).61 Our analysis found that tax-exempt money market funds sold a larger amount of portfolio securities with maturities of more than a month in March 2020 than they typically do. Retail tax-exempt money market funds sold 16% of total assets of such holdings during this period, compared to a monthly average of 3% during the period from October 2016 through February 2020. Institutional tax-exempt money market funds increased their sales of longer-term 59 See PWG Report, supra footnote 39, at 12. See also SEC Staff Interconnectedness Report, supra footnote 25, at 27. 60 Vanguard Comment Letter. 61 Comment Letter of Stephen Keen (Apr. 28, 2021). This commenter also disagreed with a statement in the PWG Report that a spike in the SIFMA index yield caused a drop in market-based NAVs of tax-exempt money market funds. The commenter suggested that it is more likely that the fund reporting a market-based NAV below $0.9775 had already realized losses from earlier portfolio sales and sold longer-term holdings in response to redemptions in March, with the March redemptions increasing the significance of the realized losses. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 securities from 5% of total assets during the period from October 2016 through February 2020 to 24% in March 2020. Similar to what we observed with prime money market funds, tax-exempt funds engaged in greater than normal selling activity.62 II. Discussion A. Amendments To Remove Liquidity Fee and Redemption Gate Provisions 1. Unintended Effects of the Tie Between the Weekly Liquid Asset Threshold and Liquidity Fees and Redemption Gates Under current rule 2a–7, a money market fund has the ability to impose liquidity fees or redemption gates (generally referred to as ‘‘fees and gates’’) after crossing a specified liquidity threshold.63 A money market fund may impose a liquidity fee of up to 2%, or temporarily suspend redemptions for up to 10 business days in a 90-day period, if the fund’s weekly liquid assets fall below 30% of its total assets and the fund’s board of directors determines that imposing a fee or gate is in the fund’s best interests.64 Additionally, a non-government money market fund is required to impose a liquidity fee of 1% on all redemptions if its weekly liquid assets fall below 10% of its total assets, unless the board of directors of the fund determines that imposing such a fee would not be in the best interests of the fund.65 Separately, a money market fund is required to provide daily disclosure of the percentage of its total assets invested in weekly liquid assets (as well as daily liquid assets) on its website to provide transparency to investors and increase market discipline.66 Fees and gates were intended to serve as redemption restrictions that would provide a ‘‘cooling off’’ period to temper the effects of a short-term investor panic and preserve liquidity levels in times of market stress, as well as better allocate 62 Although the tax-exempt money market funds held only $127 billion in assets in the third week of March 2020, they, like other larger market participants, found it difficult to sell assets during this period of market stress. 63 Government funds are permitted, but not required, to impose fees and gates, as discussed below. 64 If, at the end of a business day, a fund has invested 30% or more of its total assets in weekly liquid assets, the fund must cease charging the liquidity fee (up to 2%) or imposing the redemption gate, effective as of the beginning of the next business day. See 17 CFR 270.2a–7(c)(2)(i)(A) and (B), and (ii)(B). 65 The board also may determine that a lower or higher fee would be in the best interests of the fund. See 17 CFR 270.2a–7(c)(2)(ii)(A). 66 17 CFR 270.2a–7(h)(10)(ii); 2014 Adopting Release, supra footnote 12, at section III.E.9.a. PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 the costs of providing liquidity to redeeming investors.67 However, these provisions did not achieve these objectives during the period of market stress in March 2020. Based on available evidence, even though no money market fund imposed a fee or gate, the possibility of the imposition of a fee or gate appears to have contributed to incentives for investors to redeem and for money market fund managers to maintain weekly liquid asset levels above the threshold, rather than use those assets to meet redemptions.68 These tools therefore appear to have potentially increased the risks of investor runs without providing benefits to money market funds as intended. As a result, and after considering comments, we are proposing to remove the tie between liquidity thresholds and fee and gate provisions and, moreover, to remove fee and gate provisions from rule 2a–7 entirely.69 Commenters broadly supported removal of the tie between weekly liquid asset thresholds and the potential imposition of fees and gates.70 Many commenters stated that this tie contributed to investors’ incentives to redeem in March 2020 as funds’ weekly liquid assets declined.71 Commenters suggested that, although the rule allows but does not require a fund’s board to impose redemption gates or liquidity fees when the fund drops below the 30% weekly liquid asset threshold, investors viewed the 30% threshold as a bright line prompting redemptions.72 67 See 2014 Adopting Release, supra footnote 12, at section III.L.1.a. 68 See supra Section I.B. 69 We also propose to remove related disclosure and reporting provisions that require funds to disclose certain information about the possibility of fees and gates in their prospectuses and to report any imposition of fees or gates on Form N–CR, on the fund’s website, and in its statement of additional information. See Items 4(b)(1)(ii) and 16(g)(1) of current Form N–1A; Parts E, F, and G of current Form N–CR; 17 CFR 270.2a–7(h)(10)(v). 70 See e.g., ICI Comment Letter I; SIFMA AMG Comment Letter; Comment Letter of Fidelity Management & Research Company LLC (Apr. 12, 2021) (‘‘Fidelity Comment Letter’’); Comment Letter of Northern Trust Asset Management (Apr. 12, 2021) (‘‘Northern Trust Comment Letter’’); Schwab Comment Letter; Comment Letter of Professors of Finance, Stanford Graduate School of Business, and The University of Chicago Booth School of Business (Apr. 9, 2021) (‘‘Prof. Admati et al. Comment Letter’’); Comment Letter of Healthy Markets Association (Apr. 19, 2021) (‘‘Healthy Markets Comment Letter’’). 71 See, e.g., ICI Comment Letter I; Vanguard Comment Letter; Fidelity Comment Letter; Prof. Admati et al. Comment Letter; Comment Letter of U.S. Chamber of Commerce Center for Capital Markets Competitiveness (Apr. 12, 2021) (‘‘CCMC Comment Letter’’). 72 See Schwab Letter; ICI Comment Letter I; Comment Letter of the Investment Company Institute (May 12, 2021) (‘‘ICI Comment Letter II’’); JP Morgan Comment Letter; Wells Fargo Comment Letter. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Some commenters also provided information suggesting that concerns about the potential imposition of fees or gates contributed to institutional investors’ decisions to redeem.73 One commenter stated that these concerns, combined with investors’ ability to track weekly liquid asset levels on a daily basis, drove investors’ redemption behavior.74 A few commenters suggested that investors were more concerned about the potential for temporary suspensions of redemptions than the potential for liquidity fees.75 In addition, a few commenters stated that retail investors were less sensitive to concerns about potential fees or gates than institutional investors.76 Several commenters also discussed the effect of the connection between liquidity thresholds and fees and gates on money market fund managers’ behavior in March 2020. These commenters stated that, rather than use weekly liquid assets, some managers sold longer-dated securities to meet redemptions to avoid falling below the 30% threshold.77 Commenters asserted that these sales led to losses for funds and their remaining investors, and contributed to downward pricing pressure on the underlying securities.78 A few commenters also suggested that the pressure for money market funds to maintain liquidity buffers well above the 30% threshold exacerbated market stress in March 2020 as most money market funds were seeking liquidity at the same time to maintain or build their khammond on DSKJM1Z7X2PROD with PROPOSALS2 73 See, e.g., JP Morgan Comment Letter (discussing an informal survey of institutional investor clients in which respondents, on average, identified the potential for gates as the most important factor affecting their decisions to redeem among several possible factors the survey identified); Federated Hermes Comment Letter I (citing a survey of 39 treasury managers in which 49% of the treasurers decreased their holdings of prime money market funds in March 2020 and, of those treasurers, 87% mentioned the potential of ‘‘redemption hurdles’’ as a factor in their decision to redeem). 74 ICI Comment Letter I. 75 See Invesco Comment Letter (stating that investors were less concerned about the price of their shares and more concerned about not having access to their shares, particularly for investors who were bolstering their liquidity positions ahead of what was an unknown situation in March 2020); ICI Comment Letter I (stating that investors view access to their money as paramount in stress periods and are less concerned with ‘‘losing a few pennies’’ through, for example, a fee); ICI Comment Letter II. 76 See, e.g., ICI Comment Letter I (stating that retail prime money market funds did not exhibit the same pattern of increasing redemptions as a fund neared the 30% threshold, despite the fact that retail prime funds are subject to the same fee and gate provisions as institutional prime funds); Fidelity Comment Letter. 77 See, e.g., State Street Comment Letter; ICI Comment Letter I; JP Morgan Comment Letter. 78 See, e.g., JP Morgan Comment Letter. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 buffers in the face of redemptions.79 Commenters also recognized that, in a few instances, fund sponsors provided financial support by purchasing securities from affiliated institutional prime money market funds to prevent these funds from dropping below the 30% weekly liquid asset threshold.80 One commenter stated that, prior to the 2014 reforms that created the connection between liquidity thresholds and fees and gates, money market funds regularly used their liquidity buffers and had weekly liquid assets below the 30% threshold without adverse consequences.81 We recognize that the current fee and gate provisions did not have their intended effect in March 2020 and, instead, appear to have contributed to some of the stress that some money market funds and short-term funding markets faced during that period. Some investors may have feared that if they were not the first to exit their fund, there was a risk that they could be subject to gates or fees, and this anticipatory, risk-mitigating perspective potentially further accelerated redemptions. As discussed above, our analysis and external research are consistent with commenters’ views on investor behavior and found that prime and tax-exempt money market funds whose weekly liquid assets approached the 30% threshold had, on average, larger outflows in percentage terms than other prime and tax-exempt money market funds.82 2. Removal of Redemption Gates From Rule 2a–7 We are proposing to remove the ability of a money market fund to impose redemption gates under rule 2a– 7, as suggested by some commenters.83 For example, a few commenters suggested that gates be eliminated from rule 2a–7 entirely, or that funds be permitted to suspend redemptions only 79 See Schwab Comment Letter; State Street Comment Letter (stating that the commenter observed that institutional prime money market funds held, on average, weekly liquid assets of approximately 45% during March 2020). 80 See, e.g., ICI Comment Letter I; Wells Fargo Comment Letter. 81 ICI Comment Letter I (stating that for the more than 6 years the 30% weekly liquid asset threshold was in effect but not connected to fee and gate provisions, 68% of prime money market funds and 10% of tax-exempt money market funds dropped below the 30% threshold at least once, and at least one prime money market fund was below this threshold in nearly each week during this period). 82 See supra Section I.B (discussing our analysis and external papers). 83 See Vanguard Comment Letter; Comment Letter of Western Asset Management Company, LLC (Apr. 12, 2021) (‘‘Western Asset Comment Letter’’); see also JP Morgan Comment Letter; ICI Comment Letter I. PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 7257 under extraordinary circumstances, such as in anticipation of a fund liquidation in accordance with rule 22e–3.84 One of these commenters suggested that, given the strong investor aversion to gates and the likelihood that liquidation would be a consequence of any board determination to impose a gate, the current gate provisions contemplated for fund liquidations in existing rule 22e–3 may be sufficient.85 Based on the experience in March 2020, we are concerned that redemption gates may not be an effective tool for money market funds to stem heavy redemptions in times of stress due to money market fund investors’—who typically invest in money market funds for cash management purposes—general sensitivity to being unable to access their investments for a period of time and tendency to redeem from such funds preemptively if they fear a gate may be imposed. Under the proposal, a money market fund would continue to be able to suspend redemptions to facilitate an orderly liquidation of the fund under rule 22e–3. Rule 22e–3 generally allows a money market fund to suspend redemptions if, among other conditions, (1) the fund, at the end of a business day, has invested less than 10% of its total assets in weekly liquid assets or, in the case of a government or retail money market fund, the fund’s price per share has deviated from its stable price (i.e., it has ‘‘broken the buck’’) or the fund’s board determines that such a deviation is likely to occur, and (2) the fund’s board has approved the fund’s liquidation. We continue to believe that the ability to suspend redemptions in these circumstances can help address the significant run risk and potential harm to shareholders. Some commenters suggested other ways of removing the tie between the weekly liquid asset threshold and a fund’s ability to impose a gate. For example, some suggested that fund boards should have discretion to impose gates at any time they determine doing so is in the best interests of the fund.86 84 See Vanguard Comment Letter (noting the negative potential consequences if gates remain in the rule text); Western Asset Comment Letter (recommending that gates be permitted only under extraordinary circumstances, such as when a fund is in severe difficulties or in anticipation of liquidation); JP Morgan Comment Letter (suggesting either that the gate provision be removed from the rule or that rule 2a–7 grant boards the discretion to impose gates at any time if they deem it to be in the best interest of the fund). 85 See JP Morgan Comment Letter. 86 See e.g., Wells Fargo Comment Letter; Federated Hermes Comment Letter I; Comment Letter of the Institute of International Finance (Apr. 12, 2021) (‘‘Institute of International Finance Comment Letter’’); Comment Letter of the American E:\FR\FM\08FEP2.SGM Continued 08FEP2 7258 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 One commenter stated that some institutional investors may still redeem preemptively when a fund’s weekly liquid assets approach the 30% threshold out of fear of a gate, but asserted that granting the board discretion without a liquidity threshold tie would reduce the incentive for a large percentage of shareholders to preemptively redeem. The commenter also suggested this approach could materially improve the functioning of money market funds in any future liquidity events and could be easily implemented within the existing regulatory framework.87 A few other commenters recommended that any reform should maintain a regulatory link between the weekly liquid asset threshold and the imposition of gates, but that the weekly liquid asset threshold should be lowered to 10% or 15%.88 These commenters expressed concern that without clear regulatory protocol on when money market funds could implement gates, boards might face too much pressure in making this decision and investors may have additional uncertainty, which could negatively affect investor redemption decisions. We are not proposing a gate provision, either with or without an associated liquidity threshold, to limit the potential for investor uncertainty and de-stabilizing preemptive investor redemption behavior regarding the potential use of gates during stress events. Based on investor behavior in March 2020, we are concerned that voluntary gates may not be imposed, and if imposed, could lead to the closure of the fund in question. Rule 22e–3 under the Act provides a mechanism for a fund to suspend redemptions to facilitate an orderly liquidation, so we believe that this provision provides adequate flexibility for liquidating funds without incentivizing de-stabilizing investor redemption behavior during stress events. In addition, without a specific regulatory threshold or other specific guidelines to govern the imposition of gates, it may be difficult for a fund’s Bankers Association (Apr. 12, 2021) (‘‘ABA Comment Letter’’); JP Morgan Comment Letter; ICI Comment Letter I; Comment Letter of Federated Hermes, Inc. (Sept. 13, 2021) (‘‘Federated Hermes Comment Letter III’’) (suggesting the rule identify certain types of information that a fund’s board could consider requesting from the adviser to inform this decision). 87 Wells Fargo Comment Letter. 88 Comment Letter of Dreyfus Cash Investment Strategies (Apr. 12, 2021) (‘‘Dreyfus Comment Letter’’); Comment Letter of T. Rowe Price (Apr. 12, 2021) (‘‘T. Rowe Price Comment Letter’’); Comment Letter of BlackRock, Inc. (Apr. 12, 2021) (‘‘BlackRock Comment Letter’’). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 board to determine whether it is in the fund’s best interests to impose a voluntary gate. We are concerned that the discretionary ability of the board to impose gates could add uncertainty in times of market stress, and investors may decide to redeem at this time simply to avoid the potential imposition of a gate. Such preemptive redemptions could increase pressure on fund liquidity during periods of market stress. We request comment on our proposal to remove from rule 2a–7 the ability of money market funds to impose redemption gates and to retain the availability of a suspension under the terms set forth in rule 22e–3, including the following: 1. Should we, as proposed, no longer allow money market funds to impose redemption gates under rule 2a–7? Are there circumstances, beyond those covered by rule 22e–3, in which the ability of a money market fund to impose a gate or suspend redemptions would provide benefits to money market funds and short-term funding markets? 2. Instead of removing the ability to impose gates from rule 2a–7, should we retain gates as an available tool for money market funds? If so, should we modify the current provision to remove the tie between gate determinations and liquidity thresholds? Should a fund board be able to impose a gate any time it determines that doing so is in the best interests of the fund? If so, should a fund have to opt in ex ante to having gates as a potential tool? In what circumstances would it likely be in the fund’s best interests to impose a gate? Would a board impose a gate in practice and, if so, what are the practical consequences of any such decision? Would it be effective to require a fund to adopt board-approved policies and procedures that identify the circumstances in which the fund would impose a gate? If so, what factors should those policies and procedures consider for purposes of when to impose a gate? How would this approach affect investor and fund behavior? For example, would investors be likely to redeem preemptively in times of stress out of concern that a fund may impose a gate, or would investors view a redemption gate as unlikely under this approach? 3. If we retain the connection between redemption gates and liquidity thresholds, what liquidity threshold should we use to permit a board to impose a redemption gate? For example, should the liquidity threshold remain at 30% weekly liquid assets, increase to 50% weekly liquid asset in connection with our proposal to increase liquidity PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 requirements, or be lower than the current 30% threshold (e.g., 10% or 15% weekly liquid assets)? Should the board’s ability to impose a redemption gate instead be tied to a daily liquid asset threshold, such as the current 10% threshold, the proposed 25% threshold discussed below, or a lower threshold, such as 5%? How would these changes affect investor and fund behavior? Are there other ways we should modify provisions related to redemption gates to make them less likely to incentivize preemptive redemptions in times of stress? 4. Should we allow certain types of money market funds to impose redemption gates, but not others? For example, are retail investors less sensitive to the potential imposition of gates, such that allowing retail funds to impose gates is less likely to contribute to incentives to redeem preemptively? Alternatively, should we only allow institutional funds to impose gates given that these funds historically have experienced higher levels of redemptions in times of stress? 5. If we retain a redemption gate provision in rule 2a–7, would the board’s ability to impose a redemption gate reduce the need for, or otherwise affect, other regulatory provisions we are proposing (e.g., the swing pricing requirement for institutional prime and institutional tax-exempt money market funds, increased liquidity requirements for all money market funds)? 3. Removal of Liquidity Fees From Rule 2a–7 We also are proposing to remove from rule 2a–7 the provisions allowing or requiring money market funds to impose liquidity fees once the fund crosses certain liquidity thresholds. As a general matter, we believe investors are less sensitive to the possibility of bearing liquidity costs than they are to the possibility of redemption gates.89 We also continue to believe it is important for institutional prime and institutional tax-exempt money market funds to have a tool to cause redeeming investors to bear the costs of liquidity if they redeem during a period of stress. However, we do not believe the current liquidity fee provisions in rule 2a–7 achieve this goal. In March 2020, no money market funds imposed liquidity fees, despite the fact that many institutional prime and tax-exempt funds were experiencing significant outflows and some were selling 89 See supra footnote 75 (discussing comment letters that expressed the view that the possibility of redemption gates was a greater concern for investors in March 2020 than the possibility of liquidity fees). E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules portfolio holdings to meet redemptions, sometimes at a significant loss due to wider spreads given liquidity conditions in the market at that time.90 In part, this is due to the design of the current rule, given that only one institutional prime fund had weekly liquid assets below the 30% threshold and could have therefore imposed a liquidity fee. Some commenters recommended that we allow a fund’s board to impose liquidity fees whenever the board determines that doing so is in the best interests of shareholders, without reference to a specific liquidity threshold.91 A few other commenters suggested allowing fund boards to impose liquidity fees when the fund’s weekly liquid assets reach a set level that is lower than the existing 30% threshold.92 Some commenters suggested that we require money market funds to have policies and procedures that provide a fund’s board with direction on when to impose fees and how to calculate them.93 Another commenter recommended that the rule identify certain types of information that the board could request from the fund’s adviser to inform its decision of whether to impose liquidity fees and require the board to summarize the basis of its decision to impose liquidity fees in a report to the Commission.94 We are not proposing any of these approaches because we do not believe they would result in timely decisions to impose liquidity fees on days when the fund has net outflows that, due to associated costs to meet those redemptions, will dilute the value of the fund for remaining shareholders.95 Moreover, while one commenter suggested removing the ability to impose fees from rule 2a–7, the commenter did not support any alternative tools for imposing liquidity costs on redeeming investors.96 For institutional prime and taxexempt money market funds, we are concerned that the current rule—and 90 See, e.g., JP Morgan Comment Letter. e.g., Federated Hermes Comment Letter I; Comment Letter of Federated Hermes, Inc. (June 1, 2021); Wells Fargo Comment Letter. 92 See, e.g., BlackRock Comment Letter (suggesting 10%); Dreyfus Comment Letter (suggesting 15%). 93 JP Morgan Comment Letter; ICI Comment Letter I; Western Asset Comment Letter. 94 Federated Hermes Comment Letter III. 95 In contrast, the proposed swing pricing requirement discussed below would not require board action to impose costs on redeeming investors on a particular day and instead would connect the liquidity costs to the amount of net redemptions for that period, thus reducing the potential for a first-mover advantage or other timing misalignment between an investor’s redemption activity and the imposition of liquidity costs. 96 Vanguard Comment Letter. khammond on DSKJM1Z7X2PROD with PROPOSALS2 91 See, VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 the alternatives commenters suggested— would not protect remaining investors in a fund from dilution resulting from sizeable outflows in future periods of stress. While we are proposing to remove liquidity fee provisions from the rule, we believe it is important for these 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. As a result, we are proposing to require institutional prime and tax-exempt money market funds to implement swing pricing, as discussed in more detail below. For retail prime and tax-exempt funds, these funds historically have experienced lower, more gradual levels of redemptions in stress periods than institutional funds. This was also true in March 2020, when retail prime funds had outflows of approximately 11% over a three-week period in comparison to institutional prime fund outflows of approximately 30% over a two-week period. As discussed below, we are proposing to increase liquidity requirements for all money market funds, including retail funds. When the Commission originally determined to apply the fee and gate provisions to retail funds, it expressed concern that retail investors may be motivated to redeem heavily in flights to quality, liquidity, and transparency (even if they may do so somewhat more slowly than institutional investors) and stated that it could not rule out the potential for heavy redemptions in retail funds in the future.97 Although retail funds did not have particularly heavy redemptions during the liquidity stress of March 2020, some retail prime funds participated in the MMLF, and it is impossible to know whether outflows would have continued absent official sector intervention that helped stabilize short-term funding markets.98 We believe, however, that the significant increases to daily and weekly liquid asset thresholds we are proposing— which would have the largest effect on retail prime funds based on their average historical liquidity levels— should result in these funds being able to manage much heavier redemptions than they have experienced during any previous stress period.99 As a result of 97 See 2014 Adopting Release, supra footnote 13, at section III.C.2.a. 98 See supra footnote 36 (noting that 17 retail prime funds participated in the MMLF). 99 See infra paragraph accompanying footnote 209 (explaining that while the proposal would require retail prime funds to maintain higher levels of liquidity than they have historically maintained on average, the resulting larger liquidity buffers would PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 7259 the expected effect of the liquidity requirement changes, we do not believe that retail prime and tax-exempt money market funds need special provisions allowing them to impose liquidity fees or other analogous tools under rule 2a– 7. While the proposal would remove the liquidity fee provision in rule 2a–7, a money market fund’s board of directors may nonetheless approve the fund’s use of redemption fees (up to but not exceeding 2% of the value of shares redeemed) to eliminate or reduce as practicable dilution of the value of the fund’s outstanding securities under rule 22c–2 under the Act.100 As the Commission has previously recognized, rule 22c–2 is not limited to recouping costs associated with short-term trading strategies, such as market timing, and can be used to mitigate dilution arising from shareholder transaction activity generally, including indirect costs such as liquidity costs.101 Although rule 22c– 2 generally classifies money market funds as excepted funds that are not subject to the rule’s requirements, the rule does not treat money market funds as excepted funds if they elect to impose redemption fees under the rule.102 Thus, to the extent a money market fund’s board determines that the ability to impose fees may be necessary to protect its investors, the board could establish a redemption fee approach to meet the needs of the fund, provided the fund otherwise complies with rule 22c–2 (e.g., by entering into shareholder information agreements with intermediaries) and discloses information about the redemption fee in its prospectus in compliance with Form N–1A. If a money market fund elects to impose redemption fees under rule 22c– 2, its process for determining when to increase the likelihood that these funds can meet redemptions without significant dilution). 100 See 17 CFR 270.22c–2 (rule 22c–2 under the Investment Company Act) (providing that an openend fund may impose a redemption fee, not to exceed 2% of the value of the shares redeemed, upon the determination by the fund’s board of directors that such fee is ‘‘necessary or appropriate to recoup for the fund the costs it may incur as a result of those redemptions or to otherwise eliminate or reduce so far as practicable any dilution of the value of the outstanding securities issued by the fund’’). We anticipate that retail prime and tax-exempt money market funds would be more likely to rely on rule 22c–2 to impose redemption fees than institutional prime and tax-exempt funds, as the institutional funds would be subject to a proposed swing pricing requirement to address dilution. 101 See Mutual Fund Redemption Fees, Investment Company Act Release No. 26782 (Mar. 11, 2005) [70 FR 13328 (Mar. 18, 2005)]; Investment Company Swing Pricing, Investment Company Release No. 32316 (Oct. 13, 2016) [81 FR 82084 (Nov. 18, 2016)] (‘‘Swing Pricing Adopting Release’’), at paragraph accompanying n.26. 102 See 17 CFR 270.22c–2(b). E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7260 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules apply a fee and in what amount generally should be designed to result in timely application of a fee to address dilution. We request comment on our proposal to no longer permit or require money market funds to impose liquidity fees under rule 2a–7, including on the following: 6. Should we remove the liquidity fee provisions from rule 2a–7, as proposed? To what extent did the possibility of liquidity fees motivate investors’ redemption decisions in March 2020? If liquidity fees are less of a concern for investors than redemption gates, would liquidity fee provisions, on their own, be less likely to contribute to preemptive redemptions in future stress periods? If so, are there advantages to retaining the current liquidity fee provisions and their connection to weekly liquid asset thresholds? If we retain the connection between liquidity fees and liquidity thresholds, what liquidity threshold should we use to permit a board to impose a liquidity fee (e.g., the current 30% weekly liquid asset threshold or 10% daily liquid asset threshold, the 50% weekly liquid asset threshold or 25% daily liquid asset threshold we propose to use for purposes of funds’ minimum liquidity requirements, or a lower threshold, such as 10% or 15% weekly liquid assets or 5% daily liquid assets)? How would changes to the liquidity threshold that allows a fund board to consider liquidity fees affect investor and fund behavior? 7. Rather than remove the current liquidity fee provisions, should we modify the circumstances in which a money market fund may impose liquidity fees? Should we permit a fund’s board to impose liquidity fees when it determines that fees are in the best interests of the fund? Would a board use this tool in practice? What would be the impediments (if any) of the board making this determination? Would the board be able to act quickly enough to impose a fee so that redeeming investors bear the costs associated with their redemptions and do not have a first-mover advantage? Are there other ways we could achieve these goals through a liquidity fee framework? For example, would it be effective to require a fund to adopt board-approved policies and procedures that identify the circumstances in which the fund would impose a liquidity fee and how the fund would calculate the amount of the fee, without requiring inthe-moment board decisions or action? If so, what factors should those policies and procedures consider for purposes of when to impose a liquidity fee (e.g., size VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 of redemptions, liquidity of the fund’s portfolio, market conditions, and transaction costs)? As another alternative, should we require a fund to adopt board-approved policies and procedures that result in a fund determining its liquidity costs each day it has net redemptions and applying those costs through a fee? Under either of these approaches, how should funds calculate the amount of a liquidity fee? Should this calculation method be the same as or similar to the calculation of a swing factor for purposes of our proposed swing pricing requirement or the Commission’s current swing pricing rule applicable to other mutual funds? 103 Should the calculation account for factors that boards may consider in determining the level of a liquidity fee under the current rule, such as changes in spreads for portfolio securities (whether based on actual sales, dealer quotes, pricing vendor mark-to-model or matrix pricing, or otherwise); the maturity of the fund’s portfolio securities; or changes in the liquidity profile of the fund in response to redemptions and expectations regarding that profile in the immediate future? 104 Should the liquidity fee take into account the market impact of selling the fund’s securities to meet redemptions? 105 Should the liquidity fee be based on an assumption that the fund meets redemptions with its most liquid securities, a pro rata amount of each security in its portfolio, or only the securities the fund intends to use to meet redemptions? Should the liquidity fee be a set amount, such as 0.5%, 1%, or 2% of the value of the shares redeemed? Instead of a uniform fee amount, should the rule establish a default fee that funds could adjust upward or downward, as appropriate? 8. If we maintain a liquidity fee provision in the rule, should it apply only to institutional prime and taxexempt funds, or should retail or government funds also be subject to the provision? What are the key distinguishing characteristics of the funds that would lead to differing approaches? 103 See infra Section II.B.1 (discussing calculation of a swing factor under our proposal); 17 CFR 270.22c–1(a)(3)(i)(C) (describing calculation of a swing factor under the Commission’s current swing pricing rule applicable to non-money market funds). 104 See 2014 Adopting Release, supra footnote 12, at paragraph accompanying n.303. 105 Market impact costs are costs incurred when the price of a security changes as a result of the effort to purchase or sell the security. Market impact costs reflect price concessions (amounts added to the purchase price or subtracted from the selling price) that are required to find the opposite side of the trade and complete the transaction. PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 9. If we allowed or required funds to impose liquidity fees, are there other changes we should make to the current framework? For example, should we continue to limit the size of the liquidity fee to no more than 2% of the value of the shares redeemed? Are there circumstances in which the liquidity costs associated with meeting redemptions may exceed 2% of the value of the shares redeemed, such that increasing or removing the limit would better mitigate dilution? 10. If we adopted a modified liquidity fee framework that required funds to apply liquidity fees more frequently than is contemplated by the current rule, are there operational issues we would need to consider? For example, are intermediaries able to apply liquidity fees on a dynamic basis (e.g., where liquidity fees vary in size and may apply more frequently than during periods of stress)? 11. Should we require money market funds to implement practices to mitigate investor dilution but permit money market funds to choose between imposing liquidity fees or imposing the proposed swing pricing approach as the method for doing so? Should we allow money market funds to choose other unspecified options for mitigating investor dilution? What are the advantages and disadvantages of these approaches? What factors would influence a fund’s decision of whether to implement swing pricing, a liquidity fee framework, or another method of mitigating dilution? 12. Do money market funds view rule 22c–2 as a viable way to implement liquidity fees, if the board approves the use of such fees? Should we modify any of the requirements of rule 22c–2 or Form N–1A that relate to redemption fees for these funds? For example, should we specify that, like a liquidity fee under rule 2a–7, a money market fund redemption fee under rule 22c–2 does not need to be disclosed in the prospectus fee table? Would retail prime or retail tax-exempt funds opt to rely on rule 22c–2? Would institutional prime or institutional tax-exempt funds ever use rule 22c–2 in addition to the proposed swing pricing requirement and, if so, why? B. Proposed Swing Pricing Requirement 1. Purpose and Terms of the Proposed Requirement We are proposing a swing pricing requirement specifically for institutional prime and institutional tax-exempt money market funds that would apply when the fund experiences net E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 redemptions.106 This requirement is designed to ensure that the costs stemming from net redemptions are fairly allocated and do not give rise to a first-mover advantage or dilution under either normal or stressed market conditions.107 The swing pricing requirement would complement our proposal to require funds to hold additional liquidity by requiring redeeming investors to pay the cost of depleting a fund’s liquidity. Requiring swing pricing also would address a fund’s potential reluctance to impose a voluntary liquidity fee even when doing so might be beneficial to the fund. Swing pricing is a process of adjusting a fund’s current NAV such that the transaction price effectively passes on costs stemming from shareholder transaction flows out of the fund to shareholders associated with that activity.108 Trading activity and other changes in portfolio holdings associated with meeting redemptions may impose costs, including trading costs and costs of depleting a fund’s daily or weekly liquid assets. These costs, which currently are borne by the remaining investors in the fund, can dilute the interests of non-redeeming shareholders. This can create incentives for shareholders to redeem quickly to avoid losses, particularly in times of market stress. If shareholder redemptions are motivated by this firstmover advantage, they can lead to increasing outflows, and as the level of outflows from a fund increases, the incentive for remaining shareholders to redeem may also increase. Regardless of whether investor redemptions are motivated by a first-mover advantage or other factors, there can be significant, unfair adverse consequences to remaining investors in a fund in these circumstances, including material 106 We refer to money market funds that are not government money market funds or retail money market funds collectively as ‘‘institutional funds’’ when discussing the proposed swing pricing requirement. 107 The proposed swing pricing requirement differs in certain respects from the swing pricing provision in rule 22c–1, which does not apply to money market funds. We are proposing a swing pricing requirement specifically for institutional funds in rule 2a–7, rather than proposing amendments to rule 22c–1, because we are focused on money market fund reform in this release. The Fall 2021 Unified Agenda notes that the Division of Investment Management is considering recommending changes to regulatory requirements relating to open-end funds’ liquidity and dilution management. See Securities and Exchange Commission, Fall 2021 Unified Agenda, available at www.reginfo.gov. 108 While the term swing pricing typically refers to a process of adjusting a fund’s NAV for either net redemptions or net subscriptions, the proposed swing pricing framework for money market funds would only apply when a fund has net redemptions. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 dilution of remaining investors’ interests in the fund. Swing pricing can reduce the potential for dilution of investors who choose to remain in the fund. The proposed swing pricing requirement is designed to address these concerns. Under the proposal, an institutional fund would be required to adjust its current NAV per share by a swing factor reflecting spread and transaction costs, as applicable, if the fund has net redemptions for the pricing period.109 If the institutional fund has net redemptions for a pricing period that exceed the ‘‘market impact threshold,’’ which would be defined as 4% of the fund’s net asset value 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, the swing factor would also include market impacts, as described below.110 The ‘‘pricing period’’ would be defined, in substance, to mean the period of time in which an order to purchase or sell securities issued by the fund must be received to be priced at the next computed NAV. This is designed to address money market funds that compute their NAVs multiple times per day. For example, if a fund computes a NAV as of 12:00 p.m. and 4:00 p.m., the fund would determine if it had net redemptions for each pricing period and, if so, apply swing pricing for the corresponding NAV calculation.111 Consistent with the approach taken by the Commission with respect to the swing pricing provision in rule 22c–1, an institutional fund with multiple share classes must determine whether it experienced net redemption activity across all share classes in the 109 See proposed rule 2a–7(c)(2)(ii)(A). The proposal would implement the swing pricing requirement by requiring an affected money market fund to adopt swing pricing policies and procedures, approved by the fund’s board and administered by a ‘‘swing pricing administrator,’’ as discussed in more detail below. In addition, and consistent with the Commission’s current swing pricing rule (rule 22c–1), with respect to masterfeeder funds, only the master fund can apply swing pricing under our proposed rule. See proposed rule 2a–7(c)(2)(v). 110 See proposed rule 2a–7(c)(2)(iii)(B) and proposed rule 2a–7(c)(2)(vi)(B). See infra Section III.D.4 for a more detailed analysis of the proposed market impact threshold and potential alternative approaches. 111 Under the proposal a fund may estimate shareholder flow information to determine whether the fund has net redemptions for a pricing period and to determine the amount of net redemptions, provided the swing pricing administrator receives sufficient investor flow information to make a reasonable estimate. Although institutional funds generally have more timely flow information than other kinds of open-end funds, we believe reasonable estimates are appropriate in the absence of complete flow information. PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 7261 aggregate, rather than determining net redemption activity on a class by class basis.112 A mandatory swing pricing regime for net redemptions is intended to address funds’ (or fund boards’) likely reluctance to impose a voluntary swing pricing regime or voluntary liquidity fee. For example, while money market funds were permitted to impose liquidity fees on redeeming investors under rule 2a–7 if a fund had less than 30% of its assets invested in weekly liquid assets no money market fund imposed such fees during the March 2020 market turmoil. Moreover, even if all institutional money market funds recognized the benefits of charging redeeming investors for liquidity costs, we believe there is a collective action problem in which no fund would want to be the first to adopt such an approach. We believe past experience with the existing liquidity fee regime supports a mandatory approach to dilution mitigation for institutional funds. The proposed swing pricing requirement would not apply to net subscriptions because, for money market funds, we believe net redemptions are more likely to contribute to dilution and other liquidity costs than net subscriptions. Institutional funds have come under significant stress twice in the last 13 years in the face of high levels of redemptions—significant subscriptions into these funds have not had similar effects. Beyond these considerations, we also recognize that applying our proposed swing pricing requirements to institutional fund subscriptions would require these funds to make certain assumptions about how they invest cash from new subscriptions that would be inconsistent with the requirements in rule 2a–7.113 Our proposed money market fund swing pricing framework specifies how an institutional fund would determine its swing factor, which would differ based on the amount of net redemptions (see Figure 1, below). The swing factor 112 See Swing Pricing Adopting Release, supra footnote 102, at paragraph accompanying n.175. If a fund were to only include the transaction activity of a single share class, and were to swing one share class and not another, one share class would pay expenses incurred in the management of the fund’s portfolio as a whole, which would generally be inconsistent with rule 18f–3. 113 For example, an institutional fund with weekly liquid assets below the regulatory threshold must invest only in weekly liquid assets and could not purchase a pro rata amount of each security in its portfolio, but our proposed swing pricing framework would require such a fund to assume the purchase of a pro rata amount of each portfolio holding if the framework extended to net subscriptions. E:\FR\FM\08FEP2.SGM 08FEP2 7262 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 would be determined by calculating identified types of costs the fund would incur, as applicable, by selling a pro rata amount of each security in its portfolio to satisfy the amount of net redemptions for the pricing period.114 The requirement that a money market fund calculate costs to sell a pro rata amount of each security in its portfolio—a ‘‘vertical slice’’ of the portfolio—is designed to ensure that a fund’s adjusted NAV incorporate the costs of selling its less liquid holdings, which may protect remaining shareholders from dilution and may discourage investors from redeeming quickly during periods of market stress to seek to avoid potential costs from a fund’s future sale of less liquid securities.115 For example, when investors redeem, if those redemptions are met through daily or weekly liquid assets, the redemptions leave the fund with less liquidity. This increases the likelihood that further redemptions could require the fund to sell less liquid assets or incur costs in rebalancing the portfolio. Although further redemptions may be more likely to require the fund to sell less liquid assets in times of market stress when redemptions may be elevated, redeeming investors depleting a fund’s daily and weekly liquid assets can impose liquidity costs on the remaining shareholders as well as the fund generally, even during nonstressed periods. This depletion of a money market fund’s liquidity can dilute the interests of remaining investors and also can create a firstmover advantage for investors who redeem in an attempt to avoid bearing the costs created by other investors’ redemptions. The factors a fund must take into account when calculating the swing factor vary depending on the size of net redemptions for the pricing period (see Figure 1, below). If the fund has net redemptions that do not exceed the 114 See proposed rule 2a–7(c)(2)(iii). The swing factor is the amount, expressed as a percentage of the fund’s net asset value, by which the fund adjusts its net asset value per share. 115 As described in more detail below, a fund’s swing pricing administrator may estimate costs and market impact factors for each type of security with the same or substantially similar characteristics and apply those estimates to all securities of that type rather than analyze each security separately. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 market impact threshold, the swing factor reflects the spread costs and other transaction costs (i.e., brokerage commissions, custody fees, and any other charges, fees, and taxes associated with portfolio security sales), as applicable, from selling a vertical slice of the portfolio to meet those net redemptions.116 Including the spread cost in the swing factor calculation effectively requires a fund to value a security in its portfolio at the bid price when the fund has net redemptions. We understand that money market funds may already price portfolio securities at the bid price when striking their NAVs.117 As a result, the requirement to adjust the fund’s current NAV by a swing factor when it has net redemptions that do not exceed the market impact threshold would generally affect institutional funds that use mid-market pricing to compute their current NAVs.118 Spread costs and other transaction costs associated with portfolio security sales also are included in the Commission’s current swing pricing rule for non-money market funds. Those transaction-related costs can create dilution for money market funds just as they can for other kinds of funds, and we are including them in this proposal for the same reasons the Commission included them in the current swing pricing rule.119 116 See proposed rule 2a–7(c)(2)(iii)(A). Put another way, the fund must take into account these factors if it has net redemptions in any amount. If a fund has net redemptions that exceed its market impact threshold, it must also apply a market impact factor. 117 See FASB ASC 820–10–35–36C. Generally accepted accounting principles (‘‘GAAP’’) provide that if an asset measured at fair value has a bid price and an ask price (for example, an input from a dealer market), the price within the bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair value, and that the use of bid prices for asset positions is permitted but not required for these purposes. 118 See FASB ASC 820–10–35–36D (stating that use of mid-market pricing as a practical expedient for fair value measurements within a bid-ask spread is not precluded). Very generally, mid-market pricing values a security at the average of its bid price and ask price. Since a seller generally asks for a higher price for a security than a buyer bids for that security, the mid-market price is incrementally higher than the bid price for a security, but lower than its ask price. 119 Our proposed rule requires a money market fund to estimate the costs that would result from selling a vertical slice of its portfolio on a given day. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 If net redemptions exceed the market impact threshold, a fund’s swing factor would also be required to include good faith estimates of the market impact of selling a vertical slice of a fund’s portfolio to satisfy the amount of net redemptions for the pricing period. The fund would estimate market impacts for each security in its portfolio by first estimating the market impact factor. This factor is 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. Then, the fund would multiply the market impact factor by the dollar amount of the security that would be sold if the fund sold a pro rata amount of each security in its portfolio to meet the net redemptions for the pricing period.120 We understand that it may be difficult to produce timely, good faith estimates of the market impact of selling a pro rata portion of each instrument the fund holds. Recognizing these difficulties, and because many securities held by institutional funds have similar characteristics and would likely incur similar costs if sold, the proposed rule would permit a fund to estimate costs and the market impact factor for each type of security with the same or substantially similar characteristics and apply those estimates to all securities of that type in the fund’s portfolio, rather than analyze each security separately.121 As part of this process, we believe it would be reasonable to apply a market impact factor of zero to the fund’s daily and weekly liquid assets, since a fund could reasonably expect such assets to convert to cash without a market impact to fulfill redemptions (e.g., because the assets are maturing shortly). Accordingly, our proposed rule does not incorporate the separate reference to near-term costs that is included in the general swing pricing rule. See 17 CFR 270.22c–1(a)(3)(i)(C). 120 See proposed rule 2a–7(c)(2)(iii)(B). 121 See proposed rule 2a–7(c)(2)(iii)(C). A fund could, for example, determine the liquidity, trading, and pricing characteristics of a subset of securities justifies the application of the same costs and market impact factor to all securities of that type within its portfolio. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7263 Figure 1: Swing Pricing Process Result 1. Did the fund have net redemptions? No: Do not apply a swing factor Yes: Proceed to next step 2. Did the net redemptions exceed the market impact threshold? No: Apply swing factor that includes spread costs (if the fund uses midmarket pricing) and other transaction costs of selling a vertical slice of the fund's portfolio Yes: Apply swing factor that includes spread costs (if the fund uses midmarket pricing), other transaction costs, and market impact factor of selling a vertical slice of the fund's portfolio khammond on DSKJM1Z7X2PROD with PROPOSALS2 We recognize that the market impact of selling a vertical slice of the fund’s portfolio is likely to be negligible when net redemptions are small, and estimating the market impact of selling a security can be challenging. As a result, we are proposing to require funds to include market impact in their swing factors only when net redemptions exceed the market impact threshold. To establish the amount of net redemptions that should trigger application of the market impact factor, we reviewed historical flow information for institutional money market funds over a nearly five-year period.122 During this time, institutional funds had daily outflows greater than 4% on approximately 5% of trading days.123 At these heightened levels of outflows, market impacts are designed to estimate the full liquidity costs of selling a vertical slice of a money market fund’s portfolio because, for a money market fund’s less liquid investments, market impacts may impose significant costs on a fund, particularly when net 122 See infra Section III.D.4 for a more detailed analysis of the proposed market impact threshold and potential alternative approaches. The analysis is based on daily flows of institutional prime and institutional tax-exempt funds reported in CraneData on 1,228 days between December 2016 and October 2021. As of September 2021, CraneData covered 87% of the funds and 96% of total assets under management, resulting in a count of 37 institutional prime funds and 10 institutional taxexempt funds. 123 The proposed definition of market impact threshold would require a fund to divide 4% of the fund’s net asset value by the number of pricing periods to arrive at the amount of net redemptions that would trigger the threshold. In recognition that some institutional funds have multiple pricing periods per day, and the number of pricing periods may vary among funds, this aspect of the definition is designed to provide a threshold that would apply more consistently to funds with different numbers of pricing periods, as opposed to a static figure applicable to all funds. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 redemptions are large or in times of stress. We also propose to allow the swing pricing administrator to apply a market impact factor at a lower amount of net redemptions. This flexibility is designed to recognize that there may be circumstances in which a smaller market impact threshold would be appropriate to mitigate dilution of fund shareholders, such as when a fund holds a larger amount of less liquid investments or in times of stress.124 We believe a fund’s swing pricing administrator, responsible for the dayto-day administration of the fund’s swing pricing program and therefore familiar with the fund’s redemption patterns and the operational requirements of the swing pricing program, would be well positioned to determine whether a smaller market impact threshold could be beneficial for the fund’s investors to help mitigate dilution. To address the concerns the Commission expressed in 2016 that subjective estimates of market impact costs could grant excessive discretion in the determination of a swing factor, we also are providing additional parameters for estimating market impact to make the calculation more objective as discussed above.125 These requirements should help to limit subjectivity that 124 For example, investors that invest in funds with less liquid portfolios may accept the risk of larger swings because they believe that the fund’s less liquid portfolio could generate higher returns. 125 See Swing Pricing Adopting Release, supra footnote 101, at paragraphs accompanying nn. 143 and 148. Specifically, a fund’s market impact factor calculation for a security would reflect 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, multiplied by the dollar amount of the security that would be sold if the fund sold a pro rata amount of each security in its portfolio to meet the net redemptions for the pricing period. PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 could be abused, and proposed recordkeeping rules would require funds to document their market impact factors, facilitating our staff’s review and oversight of money market fund swing pricing.126 With respect to application of a swing factor, a fund with multiple share classes must use the same swing factor for each share class. Because the economic activity causing dilution occurs at the fund level, it would not be appropriate to employ swing pricing at the share class level to target such dilution.127 In addition, when an institutional fund applies the swing factor to its net asset value, it must round the adjusted current net asset value per share to a minimum of the fourth decimal place in the case of a fund with a $1.0000 share price or an equivalent or more precise level of accuracy for money market funds with a different share price (e.g., $10.000 per share, or $100.00 per share).128 We are not proposing an upper limit on a fund’s swing factor. The Commission included a 2% upper limit in the current swing pricing rule in light of concerns that, without an upper limit, a fund’s application of swing pricing could operate as a ‘‘de facto gate’’ or place an undue restriction on investors’ ability to redeem.129 We believe the more specific parameters in this proposal for determining a fund’s swing factor sufficiently mitigate these concerns. Further, if a fund were to 126 See proposed rule 31a–2(a)(2). Swing Pricing Adopting Release, supra footnote 101, at paragraph accompanying n.178. 128 See proposed rule 2a–7(c)(1)(ii). This provision is designed to provide the same level of pricing precision that an institutional fund must calculate with respect to its floating NAV. 129 Swing Pricing Adopting Release, supra footnote 102, at paragraph accompanying n.254. 127 See E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.000</GPH> Step 7264 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 experience such high costs, we believe it would be appropriate for redeeming investors to bear the costs their redemptions create for the benefit of remaining investors. Given our experience with investor behavior in March 2020, we also believe that requiring redeeming investors to internalize the liquidity costs of their redemptions would make investors consider potential redemption requests more carefully, particularly during periods of market stress, and would prevent remaining investors from bearing costs imposed on the fund by redeeming investors. Finally, we are proposing several requirements related to the administration of the proposed swing pricing requirement. Specifically, a money market fund’s swing pricing policies and procedures must be implemented by a board-designated administrator (the ‘‘swing pricing administrator’’), and the administration of the swing pricing program must be reasonably segregated from portfolio management of the fund and may not include portfolio managers.130 The Commission’s current swing pricing rule also requires the board to designate a swing pricing administrator and the administration of a swing pricing program that is reasonably segregated from portfolio management of the fund and may not include portfolio managers. We are proposing the requirement here for the same reasons the Commission adopted it in that rule: Requiring segregation of functions with respect to the administration of swing pricing will provide better clarity of roles and reduce the possibility of conflicts of interest in the administration of swing pricing.131 We also are proposing requirements to facilitate board oversight of swing pricing. A fund’s board, including a majority of directors who are not interested persons of the fund, would be required to (1) approve the fund’s swing pricing policies and procedures; (2) designate the swing pricing administrator; and (3) review, no less frequently than annually, a written report prepared by the swing pricing administrator describing the adequacy 130 See proposed rule 2a–7(c)(2)(iv)(B) and proposed rule 2a–7(c)(2)(vi)(E). Consistent with the Swing Pricing Adopting Release, we believe that portfolio managers may have conflicts of interest with respect to setting the swing factor, and therefore we do not believe that they should be involved in setting the swing factor. See Swing Pricing Adopting Release, supra footnote 102, at paragraph accompanying n.293. 131 Swing Pricing Adopting Release, supra footnote 102, at paragraph accompanying n.293. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 and effectiveness of the program.132 We propose to amend rule 2a–7 to provide that a money market fund’s board may not delegate its responsibilities to make the determinations that the proposed swing pricing provisions would require of the board.133 The swing pricing administrator’s report to the board would be required to describe (1) the administrator’s review of the adequacy of the fund’s swing pricing policies and procedures and the effectiveness of their implementation; (2) any material changes to the fund’s swing pricing policies and procedures since the date of the last report; and (3) the administrator’s review and assessment of the fund’s swing factors and market impact threshold, including the information and data supporting the determination of the swing factors and the swing pricing administrator’s determination to use a smaller market impact threshold, if applicable.134 The proposal, like the Commission’s current swing pricing rule, generally contemplates a board role in compliance oversight, rather than board involvement in the day-to-day administration of a fund’s swing pricing program. Moreover, money market fund boards in particular have significant responsibilities regarding valuation- and pricing-related matters and should be well-positioned to provide effective oversight of the proposed swing pricing program. Accordingly, board approval of the swing pricing policies and procedures, and targeted review of the implementation of the fund’s swing pricing program, will help ensure that swing pricing operates in the best interests of the fund’s shareholders. We are proposing recordkeeping requirements that are consistent with the requirements in our existing swing pricing rule. Specifically, a fund must maintain a written copy of the reports provided by the swing pricing administrator to the board for six years, the first two in an easily accessible place.135 Similarly, existing 132 See proposed rule 2a–7(c)(2)(iv)(A) through (C). 133 See proposed rule 2a–7(j). Rule 2a–7(j) permits a money market fund’s board of directors to delegate to the fund’s investment adviser or officers the responsibility to make the determinations required to be made by the board of directors under the rule, except for certain specified provisions. 134 See proposed rule 2a–7(c)(2)(iv)(C)(1) through (3). The report to the board, which must be delivered no less frequently than annually, must include a description of the impact of the swing pricing program on eliminating or reducing liquidity costs associated with satisfying shareholder redemptions. The report must include the information and data that support the administrator’s determination of the fund’s swing factor each day. 135 See proposed rule 2a–7(h)(8). PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 recordkeeping requirements applicable to all money market fund procedures would require a fund to maintain its swing pricing policies and procedures for six years, the first two in an easily accessible place.136 Our proposed money market fund swing pricing framework considers and addresses the comments we received on the swing pricing option included in the PWG Report. Two of those comments supported a swing pricing requirement for money market funds.137 One of these commenters suggested that swing pricing would directly address investor incentives for rapid redemptions from money market funds by ensuring that all investors who redeem are at risk for any losses created by a run, reducing or eliminating the incentive for early redemptions.138 However, most commenters opposed a swing pricing requirement.139 Several commenters suggested that swing pricing may not slow investor redemptions and would not have addressed the issues that occurred in March 2020.140 One of these commenters suggested that imposing an additional cost through swing pricing would not materially affect investor behavior, particularly because an investor does not know at the time of placing its order whether the fund will adjust its NAV.141 One commenter suggested that swing pricing may encourage investors to accelerate redemptions and seek a first-mover advantage.142 Certain commenters also expressed concern that swing pricing would reduce investor interest in money market funds.143 136 See 17 CFR 270.2a–7(h)(1). Letter of Robert Rutkowski (Apr. 13, 2021); Comment Letter of the Americans for Financial Reform Education Fund (Apr. 12, 2021) (‘‘Americans for Financial Reform Comment Letter’’). 138 Americans for Financial Reform Comment Letter. 139 See, e.g., Fidelity Comment Letter; Western Asset Comment Letter; Comment Letter of the GARP Risk Institute (Mar. 16, 2021) (‘‘GARP Risk Institute Comment Letter’’); Healthy Markets Comment Letter; Comment Letter of PIMCO (Apr. 19, 2021) (‘‘PIMCO Comment Letter’’); SIFMA AMG Comment Letter; ICI Comment Letter I; Federated Hermes Comment Letter I; JP Morgan Comment Letter; BlackRock Comment Letter; Institute of International Finance Comment Letter; State Street Comment Letter; CCMC Comment Letter; T Rowe Price Comment Letter; Comment Letter of the Investment Company Institute (June 3, 2021) (‘‘ICI Comment Letter III’’). 140 See, e.g., Fidelity Comment Letter; Western Asset Comment Letter; GARP Risk Institute Comment Letter. 141 Fidelity Comment Letter. 142 Western Asset Comment Letter. 143 BlackRock Comment Letter; GARP Risk Institute Comment Letter; Comment Letter of mCD IP Corporation (Apr. 12, 2021) (‘‘mCD IP Comment Letter’’). 137 Comment E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules We recognize that investors would not know at the time of order submission whether a fund would have net redemptions for that pricing period and swing the fund’s price accordingly. However, we believe the implementation of a swing pricing regime for institutional funds may cause some investors in those funds to choose not to redeem, including in times of market stress, because those investors view the potential swing factor and price adjustment as more tangible than the uncertain possibility of potential future losses during times of reduced liquidity. We do not agree that, as some commenters suggested, a swing pricing requirement would encourage investors to preemptively redeem and seek a firstmover advantage.144 Investors do not necessarily know whether the fund’s flows during any given pricing period will trigger swing pricing or, if so, the size of the swing factor for that period. In addition, redeeming investors would bear the cost of liquidity under the proposed rule even when net redemptions are small, meaning that there would not be a clear advantage to redeeming earlier versus later. Rather than encourage preemptive redemptions, we believe the proposed swing pricing requirement would discourage excessive redemptions, particularly in times of stress, by requiring redeeming investors to bear liquidity costs. For example, investors may determine not to redeem during stress periods, or to redeem smaller amounts over a longer period of time, which could help reduce concentrated redemptions and associated liquidity pressures that institutional funds can face in times of stress. The swing pricing requirement also could cause some investors to move their assets to government money market funds, as certain commenters stated, to avoid the possibility of paying liquidity costs. Government money market funds may be a better match for investors unwilling to bear liquidity costs, however, in that government money market funds face lower liquidity costs. Even if for some investors the prospect of swing pricing does not alter redemption behavior on a particular day, we believe swing pricing results in fairer, non-dilutive pricing, particularly when there are heavy redemptions (even if the prospect of swing pricing does not materially change the level of those redemptions). We recognize the Commission previously declined to extend swing 144 We are not aware of any evidence that the use of swing pricing in other jurisdictions has encouraged preemptive redemptions by investors. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 pricing to money market funds.145 In part, the Commission at that time believed that swing pricing was not necessary due to the extensive liquidity requirements applicable to such funds and the existing liquidity fee regime that is permitted under rule 2a–7.146 However, our proposed reforms would remove the ability of money market funds to impose liquidity fees. In addition, although we are proposing to increase money market funds’ liquidity requirements, based on our monitoring of the market stress in March 2020, we believe institutional money market funds may continue to have incentives to sell illiquid assets to meet redemptions in order to maintain a substantial buffer of liquid assets or may otherwise be required to sell illiquid assets in a stressed period. These incentives increase in times of stress but, as discussed above, a fund’s sale of less liquid assets or depletion of daily and weekly liquid assets can create liquidity costs for the fund in both normal and stressed circumstances. We understand institutional investors frequently scrutinize liquidity levels in money market funds, and some portals through which they invest even have alerts to identify when a fund’s reported liquidity levels decline, facilitating rapid redemptions when a fund’s liquidity begins to decline. Thus, we believe that swing pricing would help institutional money market funds equitably allocate costs that may result from these redemptions and reduce other market externalities that increased liquidity requirements in our rules may not fully counter and that would no longer be countered by liquidity fees and redemption gates. In addition to existing liquidity requirements and fee provisions, the Commission stated in 2016 that swing pricing may be less appropriate than a liquidity fee regime for money market funds because their investors, and particularly investors in stable NAV money market funds, are sensitive to price volatility.147 We continue to believe that certain money market fund investors are sensitive to price volatility. Institutional money market funds are currently subject to a floating NAV requirement, however, and we do not believe that a swing pricing requirement would impose significant additional 145 Swing Pricing Adopting Release, supra footnote 102, at section II.A.3.a. 146 Id. See also 17 CFR 270.2a–7(c)(2) ‘‘Liquidity fees and temporary suspensions of redemptions.’’ 147 Swing Pricing Adopting Release, supra footnote 101, at n.77 and accompanying text. PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 7265 price volatility under normal market conditions.148 We considered a framework that would apply the swing factor in the form of a liquidity fee rather than an adjustment to the fund’s price.149 A liquidity fee could be used to impose liquidity costs on redeeming investors and address dilution, much like a swing pricing-related price adjustment. We recognize that a liquidity fee framework could have certain advantages over a swing pricing requirement. For example, liquidity fees provide greater transparency for redeeming investors of the liquidity costs they are incurring. Liquidity fees also provide a mechanism for imposing liquidity costs directly on redeeming investors, without providing a discount to subscribing investors through a downward adjustment of the fund’s transaction price that also must be taken into account to fully address dilution. However, we believe that a swing pricing requirement also has several advantages over liquidity fees. With swing pricing, a fund can pass liquidity costs on to redeeming investors in a fair and equal manner, without any reliance on intermediaries to achieve fair and equal application of costs. While money market funds and their intermediaries should be able to apply liquidity fees under the current rule, we also believe applying dynamic liquidity fees that can change in size from pricing period-to-pricing period may involve greater operational complexity and cost than swing pricing. For instance, liquidity fees may require more coordination with a fund’s service providers because these fees need to be imposed on an investor-by-investor basis by each intermediary involved— which may be particularly difficult with respect to omnibus accounts.150 On balance, we believe a swing pricing requirement has operational advantages over liquidity fees, but we request comment on using a liquidity fee 148 For example, as discussed above, we understand many institutional funds already use bid prices when valuing their portfolio investments and, thus, would not need to make additional price adjustments to reflect spread costs. In addition, based on historical flow data, we do not anticipate that funds would regularly experience net redemption amounts that trigger the market impact threshold. 149 See infra Section III.D.5 (discussing our consideration of a liquidity fee alternative in more detail). 150 Swing pricing, on the other hand, would require some funds and intermediaries to create new systems and operational procedures (discussed below), but once those are in place, swing pricing would be incorporated in the process by which a fund strikes its NAV. Intermediaries would then effect customer transactions at NAV, as they do today, without further operational changes or coordination with the fund. See infra Section III.D.5. E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7266 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules framework to impose liquidity costs and whether a liquidity fee alternative may have fewer operational or other burdens than the proposed swing pricing requirement while still achieving the same overall goals.151 We also believe it is important for institutional funds to use a uniform approach to impose liquidity costs on redeeming investors, as we are concerned it would be confusing for investors if some funds applied swing pricing and other funds applied liquidity fees. In addition, we believe there are operational efficiencies with funds using a uniform approach under these circumstances. Finally, we are not proposing to require retail money market funds to implement swing pricing because these funds historically have had smaller outflows than institutional funds during times of market stress, including during March 2020. As a result, based on historical experience, retail funds are less likely to have redemptions of a size that would deplete the increased liquidity buffers we are proposing to require. Retail investors also appear to focus less on a fund’s reported liquidity levels.152 Thus, retail fund managers may feel more comfortable drawing down available liquidity from the fund’s daily liquid assets and weekly liquid assets to meet redemptions in times of stress, without engaging in secondary market sales that could result in significant liquidity costs. Investors typically view government money market funds, in contrast to prime money market funds, as a relatively safe investment during times of market turmoil, and government money market funds have seen inflows during periods of market instability. Government money market funds are also less likely to incur significant liquidity costs when they purchase or sell portfolio securities due to the generally higher levels of liquidity in the markets in which they invest. Due to these differences in investor behavior and liquidity costs among the various fund types, we are not proposing to require retail money market funds or government money market funds to implement swing pricing. Additionally, retail money market funds and government money market funds typically maintain a stable NAV. Investors in these funds, therefore, are accustomed to a stable NAV and may be more sensitive to price volatility. Requiring a retail or government money fund to adjust its 151 See infra Section II.B.2 for a discussion of the operational considerations related to swing pricing. 152 See supra footnote 76 (discussing comments suggesting that retail investors were less sensitive to declines in weekly liquid assets in March 2020). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 NAV on any day it has net redemptions effectively would require these funds to operate with a floating NAV. We do not believe this is warranted in light of the differences in investor behavior and liquidity costs discussed above and the increased liquidity requirements we are proposing to apply to these funds. We request comment on our proposal to require any money market fund that is not a government money market fund or a retail money market fund to implement swing pricing. 13. As proposed, should we require any money market fund that is not a government money market fund or a retail money market fund to implement swing pricing? Should we permit, but not require, these funds to implement swing pricing? If swing pricing were an optional tool, would money market funds use it? Would they be more likely to use optional swing pricing or optional liquidity fees, such as those which rule 2a–7 currently contemplates? 14. Should we adopt a framework that requires a fund to adjust its NAV for spread, other transaction costs, or market impacts only when net redemptions exceed a certain percentage of a money market fund’s net assets? If so, should swing pricing apply only when a fund’s net redemptions exceed the market impact threshold under the proposed rule? Should funds be able to set their own threshold? 15. Should we permit a money market fund to reasonably estimate whether it has net redemptions and the amount of net redemptions, as proposed, or should we require a fund to determine the actual amount of net redemptions during a pricing period? Are there operational complexities to this approach? 16. As proposed, should money market funds that strike NAV multiple times per day be required to determine whether the fund has net redemptions and, if so, the swing factor to apply for each NAV strike (i.e., for each pricing period)? Are there alternative approaches we should consider? If so, how could such an approach ensure that investors are treated fairly? 17. Should we require swing pricing for both net redemptions and net subscriptions, or only for net redemptions, as proposed? If we require swing pricing for both net redemptions and net subscriptions, what additional operational complexities or other considerations might arise? If we required swing pricing for net subscriptions, should we require funds to assume the purchase of a vertical slice of the fund’s portfolio and to value PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 portfolio holdings at ask prices to reflect spread costs? 18. As proposed, should we require the swing factor to account for spread costs and other transaction costs if a fund’s net redemptions are at or below the market impact threshold? What effect would this proposed requirement have on institutional funds that already use bid prices when striking their NAVs? Should we instead require an institutional fund to apply swing pricing when net redemptions are at or below the market impact threshold only if the fund does not price at the bid? What are the reasons a money market fund may not price at the bid currently? Do pricing services that money market funds use currently provide the option for funds to receive either mid or bid prices (or both)? Are there any impediments to a fund’s ability to determine a bid price for each portfolio security? Should we remove or revise any of the cost categories that would apply when net redemptions are at or below the market impact threshold? 19. Should we require the swing factor to account for spread costs, other transaction costs, and market impacts if the amount of net redemptions exceeds the market impact threshold, as proposed? Should we remove or revise any of these cost categories? Do funds need additional guidance on any of these categories, such as application of the market impact factor? Would it be sufficient for funds experiencing net redemptions to apply a swing factor that accounts for spread costs and other transaction costs, but not market impacts? How effective would this approach be in achieving the objectives of swing pricing discussed throughout this release, including the goal of fairly allocating the costs stemming from net redemptions and preventing those costs from giving rise to a first-mover advantage or dilution? 20. Do some or all institutional funds already estimate market impact factors, or perform similar analyses, to inform trading decisions? If so, would these funds’ prior experience smooth the transition to making a good faith estimate of the market impact factor under the proposal? What difficulties might funds experience in developing a framework to analyze market impact factors and in producing good faith estimates of market impact factors for purposes of the proposed swing pricing requirement? Are there ways we could reduce those difficulties, while still requiring redeeming investors to bear costs that reasonably represent the costs they would otherwise impose on the fund and its remaining shareholders? E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 21. Should we define the market impact threshold as an amount of net redemptions for a pricing period that is the value of 4% of the fund’s net asset value divided by the number of pricing periods, as proposed? Should the threshold at which a fund must include market impacts in its swing factor be higher or lower than proposed? In establishing the threshold amount, should we consider factors other than historical flows? Should the Commission periodically reexamine and adjust the market impact threshold to account for possible changes to redemption patterns and market behavior over time? If so, how often? Does identification of a specific threshold in rule 2a–7 raise gaming or other concerns? 22. Rather than a set percentage of net redemptions, as proposed, should we define the market impact threshold on a fund-by-fund basis, with reference to a fund’s historical flows (i.e., should each fund be required to determine the trading days for which it had its highest flows over a set time period, and set its market impact threshold based on the 5% of trading days with the highest flows)? Should we define the market impact threshold on a fund-by-fund basis with reference to another metric other than net redemptions? 23. Should we permit the swing pricing administrator to use discretion to establish a smaller market impact threshold, as proposed? Should we prescribe the circumstances in which a smaller market impact threshold would be permitted, the timing of such a determination by the swing pricing administrator (e.g., if a swing pricing administrator must formally establish a smaller market impact threshold that will remain in place for a period of time), disclosure of such a determination to the fund’s investors, and recordkeeping requirements in support of the determination? Should we require the fund’s board, instead of the swing pricing administrator, to approve use of a smaller market impact threshold? Should the swing pricing administrator or the board have flexibility to establish a larger market impact threshold than proposed? If so, what are the circumstances in which a fund should have flexibility to use a market impact threshold that is larger than 4% of the fund’s net asset value divided by the number of pricing periods? 24. Should money market funds be required to take into account other costs in determining their swing factors, beyond those proposed? For example, should we require consideration of VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 borrowing costs that a fund may incur to facilitate shareholder redemptions? 25. Does our proposed requirement that a fund calculate the swing factor by assuming it would sell a pro rata amount of each security in its portfolio properly account for liquidity costs? Are there other considerations related to liquidity costs that the swing pricing framework should take into account, such as shifts in the fund’s liquidity management or other repositioning of the fund’s portfolio? 26. Should money market funds calculate the swing factor by estimating the costs of selling only the securities the fund plans to sell to satisfy shareholder redemptions during the pricing period, rather than calculating the swing factor based on the costs the fund would incur if it sold a pro rata amount of each security in its portfolio? If so, what would the operational consequences be? 27. Should the rule permit, rather than require, funds to follow the market impact threshold and swing factor calculations set forth in the rule? If so, what considerations or factors should the rule require a fund to consider when determining market impact thresholds and swing factors if the fund determines not to follow the threshold or calculations set forth in the rule? For example, should the rule identify for these purposes the size, frequency, and volatility of historical net redemptions; the liquidity of the fund’s portfolio; or the costs associated with transactions in the markets in which the fund invests? 28. Should money market funds be subject to a numerical limit on the size of swing factors? Should the limit instead be bound only by liquidity costs associated with net redemptions for a given pricing period, as proposed? Should we allow a fund to use a set swing factor, such as 2% or 3%, in times of market stress when estimating a swing factor with high confidence may not be possible? How would we define market stress for this purpose? Should a fund’s adviser, or a majority of the fund’s independent directors, be permitted to determine market conditions were sufficiently stressed such that the fund would apply the set swing factor? Are there other circumstances in which we should permit a fund to use a default swing factor? 29. Should we permit a fund to estimate costs and market impact factors for each type of security with the same or substantially similar characteristics and apply those estimates to all securities of that type in the fund’s portfolio, as proposed? Should we define types of securities with the same PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 7267 or substantially similar characteristics? Should we provide additional guidance to support funds’ determinations as to whether securities have the same or substantially similar characteristics? 30. Is it reasonable to apply a market impact factor of zero to the fund’s daily and weekly liquid assets? If not, should funds estimate the market impact factor of such assets in the same way as other assets under the rule, or should we prescribe a different methodology for such assets? Are there particular circumstances in which it would not be reasonable for a fund to use a market impact factor of zero for daily and weekly liquid assets, such as in stressed market conditions? 31. Instead of specifying swing factor calculations and thresholds in the rule, should we require a fund to adopt policies and procedures that specify how the fund would determine swing pricing thresholds and swing factors based on principles set forth in the rule? If so, should the policies and procedures include the methodologies from the market impact threshold calculation we proposed (i.e., net redemptions that are at or above the 95th percentile of likely fund redemptions, determined based on relevant historical data)? Should the policies and procedures include the swing factor calculation (i.e., the percentage decline in the value of the security, per dollar of the amount of the security that would be sold, multiplied by the dollar amount of the security that would be sold if the fund sold a pro rata amount of each security in its portfolio to meet the net redemptions for the pricing period)? Should the policies and procedures define the market impact threshold with reference to a metric other than net redemptions? If we require policies and procedures, should we specify the market impacts and dilution costs that a fund’s swing pricing program must address, rather than specifying specific principles and calculation methodologies? 32. Should we require boards to appoint a swing pricing administrator? What individuals or entities are likely to fulfill the role of swing pricing administrator? Should we require board involvement in the day-to-day administration of a fund’s swing pricing program in addition to its compliance oversight role? How might funds maintain segregation between portfolio management and swing pricing administration? Should a fund’s chief compliance officer have a designated role in overseeing how the fund applies the proposed swing pricing requirement? 33. Should we require board review of a swing pricing report more or less E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7268 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules frequently than annually? Should we require an evolving level of board review over time (e.g., every quarter for the first year after implementation and then less frequently in following years as the fund gains experience implementing the swing pricing program under various market conditions)? Should we require the fund to disclose any material inaccuracies in the swing pricing calculation to the board (e.g., as they arise, no less frequently than quarterly, or at some other frequency)? 34. Are there circumstances in which it would not be possible to estimate the market impact factor with a high degree of accuracy? If so, what modifications should we make to the proposal? For example, should we instead adopt a liquidity fee framework that is consistent with the current liquidity fee provision in rule 2a–7, but without the link to weekly liquid asset thresholds? 35. How do the operational implications of swing pricing, as proposed, differ from the operational implications of an economically equivalent dynamic liquidity fee framework? What are the operational implications of a requirement for institutional money market funds to impose a liquidity fee that can change in size and that may need to be applied with some frequency? Are fund intermediaries equipped to apply dynamic fees on a regular basis? Would funds have insight into whether and how intermediaries apply these fees to redeeming investors? 36. If we adopt a liquidity fee framework instead of a swing pricing framework, should a fund be required to apply a liquidity fee under the same circumstances in which a fund would be required to adjust its net asset value under the proposed swing pricing requirement? Should a fund be required to use the same approach to calculating a liquidity fee as the proposed approach to calculating a swing factor? Alternatively, should different trigger events or calculation methods determine when a liquidity fee applies and the amount of such fee? 153 37. If we adopt a liquidity fee framework instead of a swing pricing framework, should we adopt a simplified fee calculation methodology? If so, should the simplified liquidity fee framework be tied to the level of the fund’s net redemptions, the liquidity of its portfolio holdings, or some other input? Should the simplified liquidity fee be a set percentage (i.e., a 1% fee), or should the fee increase as 153 We also request comment on such liquidity fee alternatives in Section II.A.3. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 redemptions, illiquidity, or other variables increase? 38. Should we permit or require retail or government money market funds to implement swing pricing? Would retail or government money market funds have access to sufficient flow information to apply swing pricing, or would changes to current order processing methods be needed to facilitate access to sufficient flow information? 39. Will our proposed swing pricing requirement cause investors to move their assets out of the funds that must implement a swing pricing program to funds that do not, such as government money market funds or short term bond funds? What are the potential costs and benefits associated with these decisions? 40. Should we provide any exclusions from the proposed swing pricing requirement for institutional funds? For example, should we provide an exclusion from the swing pricing requirement for affiliated money market funds created by an adviser for the purpose of efficiently managing cash across accounts within its advisory complex and not available to other investors? 41. Will swing pricing reduce the threshold effects that stem from investors seeking to redeem in advance of a liquidity fee or gate? Will swing pricing cause some investors to choose not to redeem because the potential swing factor and price adjustment may be more tangible than the uncertain possibility of potential future losses during periods of market stress? 42. Will swing pricing protect money market fund investors that remain in the fund from dilution when the fund fulfills net shareholder redemptions? Would the increased liquidity requirements that we are proposing provide adequate protection from dilution without swing pricing? Should we impose additional liquidity requirements for institutional prime and institutional tax-exempt as an alternative to swing pricing? 43. How might swing pricing affect investor behavior in a period of liquidity stress? Will swing pricing increase money market fund resilience by reducing the first mover advantage that some investors may seek during periods of market stress? Will swing pricing encourage investors to redeem smaller amounts over a longer period of time because investors will not know whether the fund’s flows during any given pricing period will trigger swing pricing and, if so, the size of the swing factor for that period? PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 44. Based on historical data, how would our swing pricing framework affect money market funds’ NAVs under normal market conditions? 45. Rather than requiring institutional funds to adopt a swing pricing requirement, should we provide more than one approach to mitigate dilution in rule 2a–7 and require each institutional fund to determine its own preferred approach? If so, what approaches should the rule provide? Should we, for example, allow a fund either to adopt swing pricing or a liquidity fee? Are there other options that would be appropriate under this approach? Should non-institutional funds be permitted or required to adopt an anti-dilution approach? Would funds’ use of different approaches benefit investors by increasing investor choice or, conversely, would these differences confuse investors or make it more difficult for them to compare money market funds with each other? 2. Operational Considerations Many investors use institutional money market funds as a cash management vehicle, and money market funds provide operational efficiencies to serve those investors. Institutional money market fund transactions often settle on the same day that an investor places a purchase or sell order, which has made these funds an important component of systems for processing and settling various types of transactions. Some institutional money market funds also provide shareholders with intraday liquidity and same-day settlement by pricing fund shares periodically during the day (e.g., at 11 a.m. and 4 p.m.). Many commenters opposed swing pricing due to operational issues, some of which are unique to money market funds.154 For example, several commenters stated swing pricing is currently impractical because intermediaries typically report flows with a delay, so funds would not be able to determine net shareholder flows in time to apply a swing factor to the fund’s net asset value, as needed.155 One commenter suggested that a move from T+0 to T+1 settlement for money market fund subscriptions and redemptions could make it difficult for 154 See, e.g., Healthy Markets Comment Letter; PIMCO Comment Letter; SIFMA AMG Comment Letter; ICI Comment Letter I; ICI Comment Letter III; Western Asset Comment Letter; Fidelity Comment Letter; State Street Comment Letter (expressing the view that swing pricing can be a valuable liquidity management tool, but it is not easily applicable to money market funds due to operational issues). 155 See, e.g., ICI Comment Letter I; PIMCO Comment Letter; Fidelity Comment Letter; Federated Hermes Comment Letter I. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules money market funds to act as sweep vehicles and could affect their status as cash equivalents.156 Some commenters asserted that swing pricing works better in Europe due to fundamental differences between fund operations in the U.S. and Europe (i.e., earlier trading cut-off times, greater use of currencybased orders versus share- or percentage-based transactions, and more direct-sold funds).157 Several commenters expressed concern that intraday liquidity and/or same-day settlement would not be available to investors if money market funds were required to implement swing pricing.158 In addition, many commenters also asserted that there would be significant costs and burdens from implementing systems to accommodate swing pricing.159 We acknowledge that swing pricing will introduce new operational complexity to institutional money market funds. A fund must determine whether it has net redemptions, and the size of those net redemptions, for the pricing period prior to striking its NAV, and this determination would need to be completed multiple times per day for funds that strike their NAV multiple times per day. However, institutional money market funds often impose order cut-off times that ensure that they receive flow data prior to striking their NAV.160 Therefore, we believe many of them would have the necessary flow information to determine if there are net redemptions and the amount of those net redemptions.161 This is in contrast to other open-end mutual funds, which may receive purchase and redemption requests from fund intermediaries even after the fund has struck its NAV. Due to the cut-off times that many institutional money market funds impose, we believe these money market funds would not be subject to significant operational impediments 156 JP Morgan Comment Letter. Comment Letter; Fidelity Comment Letter; BlackRock Comment Letter. 158 See, e.g., ICI Comment Letter I; SIFMA AMG Comment Letter; Western Asset Comment Letter; Federated Hermes Comment Letter I; JP Morgan Comment Letter; Institute of International Finance Comment Letter; Comment Letter of the Committee on Capital Markets Regulation (May 24, 2021) (‘‘CCMR Comment Letter’’). 159 See, e.g., SIFMA AMG Comment Letter; JP Morgan Comment Letter; GARP Risk Institute Comment Letter. 160 Based on a 2021 staff analysis of information from CraneData, a majority of the prime institutional money market funds that impose an order cut-off time impose a 3:00 p.m. deadline for same-day processing of shareholder transaction requests. 161 See proposed rule 2a–7(c)(2)(ii)(A) (permitting reasonable high confidence estimates of investor flows to determine whether a fund has net redemptions). khammond on DSKJM1Z7X2PROD with PROPOSALS2 157 PIMCO VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 with respect to having timely flow information to inform swing pricing decisions. However, if an institutional money market fund does not impose order cut-off times, such a fund may face additional operational complexity and costs to implement a cut-off time or otherwise gather the necessary information to determine whether it has net redemptions. In addition, if a fund has net redemptions, it would be required to calculate and apply the swing factor to the NAV prior to processing any shareholder transactions. Funds that strike their NAV multiple times per day may also need to calculate and apply a swing factor multiple times per day. We acknowledge that the proposed swing pricing requirement would impose additional administrative burdens and costs that money market funds do not face under current regulation, particularly if net redemptions exceed the market impact threshold or if the fund currently values its securities at the midpoint when striking its NAV. In addition, while we recognize that the need to calculate and apply a swing factor could delay a fund’s ability to determine the transaction price, we believe it is unlikely that these delays would result in funds having to settle transactions on T+1, instead of T+0. We do not believe T+1 settlement is a likely result of the proposed swing pricing requirement because funds could take steps to maintain their ability to offer same-day settlement if they believe this type of settlement is important to institutional investors. For example, if necessary, relevant funds could choose to move their last NAV strike to an earlier point in the day.162 Similarly, we understand that the proposed swing pricing requirement could cause relevant funds to reduce the number of NAV strikes they offer each day. For example, a fund may determine that instead of offering three or four separate NAV strikes each day, it may only offer one or two NAV strikes to ease implementation of the proposed swing pricing requirement. As a general matter, to the extent these operational changes are necessary, we believe they are warranted to address investor harm and dilution that occurs when redeeming investors reduce the fund’s 162 We understand that, to offer same-day settlement, funds must be able to complete Fedwire instructions before the Federal Reserve’s 6:45 p.m. ET Fedwire cut-off time. See, e.g., ICI Comment Letter I. Moving the last NAV strike to a somewhat earlier point in the day would provide the fund with additional time to calculate and apply its swing factor and take other necessary steps prior to the Fedwire cut-off time. PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 7269 liquidity and impose other costs on remaining investors. Prior money market fund reforms required institutional money market funds to adopt a floating NAV. This requirement can introduce some variability to a fund’s NAV, particularly during times of market stress. In the years since the implementation of the floating NAV requirement, most institutional money market funds have typically been able to maintain a floating NAV that remains close to $1.0000 or another value chosen by the fund.163 The addition of a swing pricing requirement could introduce greater variability to a fund’s NAV, particularly during volatile periods. For example, a fund’s NAV could float downward if the markets for its portfolio securities becomes more illiquid and it has sizeable net redemptions, and the application of a swing factor at such a time would cause additional variation in the fund’s NAV for shareholders that transact on that day. This variability may reduce the appeal of institutional money market funds as cash management tools if investors seek alternative investment options that are not subject to fluctuation in value at times of market stress. Further, while one commenter expressed concern that a swing pricing requirement would affect money market funds’ use in sweep arrangements, it is our understanding that institutional prime and tax-exempt money market funds currently are not used in sweep arrangements.164 We request comment on the operational impact of our proposed swing pricing requirement, including: 46. Are there key operational impediments with the proposed swing pricing approach? Are there key inputs for the swing factor calculation, including the market impact factor, that are operationally and prohibitively difficult to ascertain within the time period needed to calculate the swing factor? Are there key inputs that are not operationally complex to obtain? 47. Are there instances in which an institutional money market fund permits intermediaries to submit subscription or redemption requests after the fund’s cut-off time and to receive the NAV calculated for that cutoff time, as long as the intermediary received the order prior to the fund’s 163 For example, some funds maintain a floating NAV that remains close to some other amount, such as $100.00. 164 Based on analysis of information from CraneData. See JP Morgan Comment Letter (discussing the operational complexities of swing pricing for money market funds that are used in sweep platforms). E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7270 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules cut-off time? If so, when do such instances occur, and how frequently? 48. If institutional money market funds do not receive information about subscription or redemption requests early enough to make swing pricing decisions prior to striking NAV, are there rule-based solutions that could improve the timing considerations regarding shareholder flows and swing pricing (e.g., by requiring intermediaries to provide earlier flow information to funds or by requiring specific cut-off times for transaction requests)? 49. What proportion of institutional prime and institutional tax-exempt money market funds use mid-market pricing? Would such funds incur greater operational costs than a fund that uses bid pricing to estimate the spread costs the fund would incur to sell a vertical slice of its portfolio? 50. Do commenters agree with our assessment that institutional prime and institutional tax-exempt money market funds could still offer same-day settlement if they are required to implement swing pricing? If not, how would swing pricing affect the ability of institutional money market funds to settle transactions on a T+0 basis? If these funds instead settle transactions on a T+1 basis, how might this affect investors? 51. How might swing pricing affect the ability of institutional money market funds to offer multiple NAV strikes per day? How many institutional money market funds will reduce the number of times they strike their NAV if we adopt swing pricing as proposed? How might investors be affected if these funds are no longer able to offer multiple NAV strikes, or as many NAV strikes, per day? 52. Should we require all money market funds, including stable NAV money market funds, to adopt a floating NAV and to implement swing pricing? 53. Will investors seek alternative cash management investment options that are not subject to fluctuation in value at times of market stress to avoid the additional NAV variability that results from swing pricing? If so, which alternatives are investors most likely to use? 54. Are institutional prime and taxexempt money market funds used in cash sweep arrangements? 55. What other operational changes would be required for funds to implement our swing pricing requirement as proposed? 3. Tax and Accounting Implications When the Commission adopted the floating NAV requirement for all prime and tax-exempt money market funds VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 sold to institutional investors in 2014, the Treasury Department amended its regulations to clarify money market funds’ reporting obligations.165 The Commission, the Treasury Department, and the IRS recognized the difficulties and costs associated with requiring floating NAV money market funds to comply with then-existing tax reporting requirements, and the amended Treasury regulations permit shareholders of floating NAV money market funds to use the ‘‘NAV method’’ to report gains and losses.166 This method allows investors to aggregate gains and losses for the calendar year on their tax returns, rather than reporting individual transactions. The Treasury Department and the IRS also clarified that the ‘‘wash sale’’ rule does not apply to redemptions in floating NAV money market funds.167 The Commission staff will continue discussions with the staff of the Treasury Department and IRS regarding the tax consequences of the proposed swing pricing requirement, including any implications for an investor’s use of the NAV method of accounting for gain or loss on shares in a floating NAV money market fund or the exemption from the wash sale rules for redemptions of shares in these funds. We recognize that if the proposed swing pricing requirement modifies the method of accounting for gains or losses in relevant money market fund shares, or has other tax implications, the tax reporting effects of the proposed swing pricing requirement could increase burdens for investors. From an accounting perspective, when institutional money market funds were required to adopt a floating NAV, the Commission stated its belief that an investment in a money market fund with a floating NAV would meet the definition of a ‘‘cash equivalent’’ for accounting purposes.168 One commenter expressed concern that a swing pricing requirement could result in money market funds no longer qualifying as cash equivalents.169 For the same reasons discussed in connection with the 2014 reforms, we 165 Treas. Reg. § 1.446–7. Reg. § 1.446–7. 167 See Rev. Proc. 2014–45 (2014–34 IRB 388) and Method of Accounting for Gains and Losses on Shares in Money Market Funds; Broker Returns With Respect to Sales of Shares in Money Market Funds, RIN 1545–BM04 (June 15, 2016) [81 FR 44508 (July 8, 2016)] at 44511. Very generally, the wash sale rule prevents taxpayers from taking an immediate loss from the sale of securities if substantially identical securities are purchased within six months of the sale. 168 2014 Adopting Release, supra footnote 12, at section VI (amending the ‘‘Codification of Financial Reporting Policies’’ announced in Financial Reporting Release No. 1 (Apr. 15, 1982)). 169 JP Morgan Comment Letter. 166 Treas. PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 believe the adoption of swing pricing would not preclude shareholders from classifying their investments in money market funds as cash equivalents. Under normal circumstances, we believe an investment in a money market fund that applies swing pricing under our proposed rule would qualify as a ‘‘cash equivalent’’ for purposes of U.S. GAAP.170 Under normal circumstances, we anticipate that fluctuations in the amount of cash received upon redemption from a fund that applies swing pricing would likely be small and would be consistent with the concept of a ‘‘known’’ amount of cash. However, as already exists today and, as noted by the Commission in 2014, events may occur that give rise to credit and liquidity issues for money market funds. If such events occur, shareholders would need to reassess if their investments in that money market fund continue to meet the definition of a cash equivalent.171 This is already the case absent swing pricing, but we recognize that swing pricing may result in larger fluctuations in a fund’s share price during such periods of stress. Consistent with the approach the Commission established for mutual fund swing pricing, the proposed swing pricing requirement for institutional money market funds would affect certain aspects of financial reporting, as these funds would need to distinguish between the GAAP NAV per share and the transactional price adjustment to the NAV per share resulting from swing pricing (‘‘swung price’’).172 The GAAP NAV per share is the amount of net assets attributable to each share of capital stock outstanding at the close of the period, and the swung price (if the NAV per share is adjusted due to swing pricing at period end) would represent the transactional price on the last day of the period, which is the NAV per share on the day with an adjustment by the swing factor.173 Money market funds would disclose the GAAP NAV per share (which will reflect the effects of swing pricing throughout the reporting period, if applicable) on the statement of assets and liabilities. This allows users of the financial statements to understand the actual amount of net assets attributable to the fund’s 170 See FASB Accounting Standards Codification Master Glossary, available at https://asc.fasb.org/ glossary. 171 See 2014 Adopting Release, supra footnote 12, at paragraph accompanying n.428. 172 See Swing Pricing Adopting Release, supra footnote 102, at section II.A.3.g. 173 See 17 CFR 210.6–04.19 and FASB ASC 946– 10–20 (discussing the concept of the GAAP NAV); Swing Pricing Adopting Release, supra footnote 102, at section II.A.3.g. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 remaining shareholders at period end.174 A money market fund using swing pricing would, however, include the impact of swing pricing in its financial highlights, and the per share impact of amounts retained by the fund due to swing pricing should be included in the fund’s disclosures of per share operating performance.175 Swing pricing also affects disclosure of capital share transactions included in a fund’s statement of changes in net assets.176 Finally, a money market fund using swing pricing would be required to disclose in a footnote to its financial statements: (1) The general methods used in determining whether the fund’s NAV per share will be adjusted due to swing pricing; (2) whether the fund’s NAV per share has been adjusted by swing pricing during the period; and (3) a general description of the effects of swing pricing on the fund’s financial statements.177 We request comment on the tax and accounting implications of our proposed swing pricing requirement, including: 56. Would swing pricing impose additional complications with respect to the tax treatment of floating NAV money market fund investments? If so, how could we address such complications? 57. Would the implementation of swing pricing for institutional money market funds affect the treatment of shares of such funds as ‘‘cash equivalents’’ for accounting purposes? Would a cap on the swing factor, such as a 2% cap, reduce uncertainty about the treatment of institutional money market fund shares as ‘‘cash equivalents’’? 58. Should the financial reporting effects of swing pricing differ for money market funds, as opposed to other types of mutual funds? 59. Are there other tax or accounting implications of institutional money market funds using swing pricing that we should address? 174 See Swing Pricing Adopting Release, supra footnote 102, at section II.A.3.g. 175 See Item 13 of Form N–1A (requiring disclosure of the swung price per share, if applicable, as a separate line item below the ending GAAP NAV per share on the financial highlights); FASB ASC 946–205–50–7 (requiring specific per share information to be presented in the financial highlights for registered investment companies, including disclosure of the per share amount of purchase premiums, redemption fees, or other capital items). 176 See 17 CFR 210.6–09.4(b). This rule requires funds to disclose the number of shares and dollar amounts received for shares sold and paid for shares redeemed. For funds that implement swing pricing, Regulation S–X would require the dollar amount disclosed to be based on the NAVs used to process investor subscriptions and redemptions, including those processed using swung prices during the reporting period. 177 See rule 6–03(n) of Regulation S–X. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 4. Disclosure Form N–1A is used by open-end funds, including money market funds and ETFs, to register under the Investment Company Act and to register offerings of their securities under the Securities Act. Form N–1A currently requires a fund to describe its procedures for pricing fund shares, including an explanation that the price of fund shares is based on the fund’s NAV and a description of the method used to value fund shares.178 In 2016, when the Commission adopted the swing pricing rule for open-end funds that are not money market funds or ETFs, it adopted amendments to Item 6 of Form N–1A to enhance disclosure of an open-end fund’s swing pricing procedures.179 Under our proposal, institutional money market funds would be required to implement swing pricing policies and procedures and therefore would be required to comply with the swing pricing-related requirements of Form N–1A, described in greater detail below. Money market funds subject to a swing pricing requirement under our proposal also would be required to respond to the existing swing pricingrelated items on Form N–1A that were not historically applicable to these funds. Specifically, the form requires a fund to include a general description of the effects of swing pricing on the fund’s annual total returns as a footnote to its risk/return bar chart and table.180 Form N–1A also requires a fund that uses swing pricing to explain the fund’s use of swing pricing, including its meaning, the circumstances under which the fund will use it, and the effects of swing pricing on the fund and investors.181 While Form N–1A requires other funds that use swing pricing to disclose a fund’s swing factor upper limit, we are proposing to exclude money market funds from this requirement because our proposal does not require these funds to establish a swing factor upper limit.182 Money market funds use Form N– MFP to report key information to the Commission each month. As part of our swing pricing framework for money market funds, we propose to amend Form N–MFP to require money market funds that are not government funds or retail funds to use their adjusted NAV, as applicable, for purposes of reporting the series- and class-level NAV per 178 See Item 11(a)(1) of Form N–1A. Swing Pricing Adopting Release, supra footnote 102, at section II.B.1. 180 Items 4(b)(2)(ii) and (iv) of Form N–1A. 181 Item 6(d) of current Form N–1A. 182 Item 6(d) of proposed Form N–1A. 179 See PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 7271 share.183 We also propose to require these funds to report the number of times the fund applied a swing factor over the course of the reporting period, and each swing factor applied.184 Together, these reporting requirements would help the Commission monitor the size of the adjustments funds are making during normal and stressed market conditions, as well as the frequency at which funds apply swing factor adjustments. Under current rule 2a–7, money market funds are required to provide on their websites the money market fund’s net asset value per share as of the end of each business day during the preceding six months. This disclosure must be updated each business day as of the end of the preceding business day.185 We are proposing to amend this provision to require money market funds that are not government funds or retail funds to depict their adjusted NAV, taking into account the application of a swing factor.186 We believe that, when a fund applies swing pricing, the adjusted NAV is more useful for investors because it represents the price at which transactions in the fund’s shares occurred. We request comment on swing pricing disclosure requirements as applicable to money market funds, including: 60. Are the existing swing pricingrelated disclosure obligations on Form N–1A appropriate for money market funds? In addition to the question regarding the swing factor’s upper limit, are there other existing obligations that should not be applied to money market funds? 61. Would more information be useful to shareholders or other market participants? If so, what additional information should we require to be disclosed on Form N–1A, Form N–MFP, or elsewhere (e.g., fund websites or other marketing materials)? When should we require such disclosure? 62. Should we require institutional funds to report the number of times the fund applied a swing factor and each swing factor applied, as proposed? Should we require the median, highest, and lowest (non-zero) swing factor applied for each reporting period on Form N–MFP, rather than requiring 183 See Items A.20 and B.5 of current Form N– MFP; Items A.20 and B.6 of proposed Form N–MFP. As discussed below, we are also proposing to amend these current reporting requirements to require funds to provide series- and class-level NAVs per share as of the close of each business day, rather than as of the close of business on each Friday during the month reported. See infra Section II.F.2.c. 184 See Item A.22 of proposed Form N–MFP. 185 17 CFR 270.2a–7(h)(10)(iii). 186 See proposed rule 2a–7(h)(10)(iii). E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7272 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules disclosure of each swing factor applied? Should we require these funds to provide additional information about swing pricing in their monthly reports on Form N–MFP, such as the swing pricing administrator’s determination to use a lower market impact threshold (if applicable)? Should we separately require funds to disclose information about market impact factors, such as how many times a market impact factor was included in the swing factor each month and the size of those market impact factors (e.g., either the size of any market impact factor applied, or the median, highest, and lowest (non-zero) amount)? 63. As proposed, should we require an institutional fund to use its adjusted NAV, as applicable, for purposes of current requirements to disclose a fund’s NAV on its website and the series- and class-level NAV disclosure requirements on Form N–MFP? Should we require an institutional fund to indicate, for each NAV reported, whether a swing factor was applied (i.e., whether the NAV was ‘‘adjusted’’)? As an alternative to reporting the adjusted NAV, should we provide that the website and Form N–MFP NAV disclosures should not include a swing factor adjustment? If so, why would the unadjusted NAV be more useful for these purposes? Alternatively, should we require an institutional fund to disclose both its adjusted NAV and its unadjusted NAV on the fund’s website or on Form N–MFP? What are the advantages and disadvantages of requiring funds to disclose both figures? 64. Requirements to disclose NAVs per share on fund websites and on Form N–MFP require NAVs per share as of the close of business on a given day, while some funds may have multiple pricing periods and multiple NAVs each day. Should we require a fund to disclose its NAV per share for each pricing period, instead of the end-of-day NAV per share only? Would this additional transparency be helpful for investors, or would it make NAV disclosure less useful for investors by increasing the number of data points without significantly improving the value of the data? 65. Will daily website disclosure of fund flows and the adjusted NAV facilitate gaming of swing pricing or preemptive runs by investors that wish to redeem in advance of a fund imposing a swing factor on a particular day? If so, how? Are there changes we should make to reduce the potential for gaming? VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 C. Amendments to Portfolio Liquidity Requirements 1. Increase of the Minimum Daily and Weekly Liquidity Requirements Currently, rule 2a–7 requires that a money market fund, immediately after acquisition of an asset, hold at least 10% of its total assets in daily liquid assets and at least 30% of its total assets in weekly liquid assets.187 Assets that make up daily liquid assets and weekly liquid assets are cash or securities that can readily be converted to cash within one business day or five business days, respectively.188 These requirements are designed to support funds’ ability to meet redemptions from cash or securities convertible to cash even in market conditions in which money market funds cannot rely on a secondary or dealer market to provide liquidity.189 In March 2020, significant outflows from prime funds caused general reductions in these funds’ daily liquid assets and weekly liquid assets. Although only one institutional prime fund reported weekly liquid assets below the 30% threshold, it is likely that other funds would have breached daily liquid asset or weekly liquid asset thresholds at the time if they had used daily liquid assets or weekly liquid assets to meet redemptions. As previously discussed, because the fee and gate provisions in rule 2a–7 incentivized funds to maintain weekly liquid assets above 30%, many funds took other actions (e.g., selling longerterm assets or receiving financial support) to meet redemptions and remain above the minimum liquidity threshold. Some funds experienced redemption levels that would have depleted required levels of daily liquid assets or weekly liquid assets, if they had been used. For example, the largest 187 See 17 CFR 270.2a–7(d)(4)(ii) and (iii) (rule 2a–7(d)(4)(ii) and (iii)); see also supra footnote 22 and accompanying paragraph. Tax-exempt money market funds are not subject to the daily liquid asset requirements due to the nature of the markets for tax-exempt securities and the limited supply of securities with daily demand features. See 2010 Adopting Release, supra footnote 20, at n.243 and accompanying text. 188 Daily liquid assets are: Cash; direct obligations of the U.S. Government; certain securities that will mature (or be payable through a demand feature) within one business day; or amounts unconditionally due within one business day from pending portfolio security sales. See rule 2a–7(a)(8). Weekly liquid assets are: Cash; direct obligations of the U.S. Government; agency discount notes with remaining maturities of 60 days or less; certain securities that will mature (or be payable through a demand feature) within five business days; or amounts unconditionally due within five business days from pending security sales. See rule 2a– 7(a)(28). 189 See 2010 Adopting Release, supra footnote 20, at n.213 and accompanying and following text. PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 weekly outflow in March 2020 was around 55%, and the largest daily outflow was about 26% (both well above the respective weekly liquid asset and daily liquid asset thresholds of 30% and 10%).190 Further, since the fee and gate provisions in rule 2a–7 incentivized funds to maintain weekly liquid assets above the current threshold, the proposed removal of the fee and gate provisions from rule 2a–7 could have the effect of reducing fund liquidity levels by eliminating such incentives. Accordingly, we are proposing to increase daily and weekly liquid asset requirements to 25% and 50%, respectively.191 We believe that these increased thresholds will provide a more substantial buffer that would better equip money market funds to manage significant and rapid investor redemptions, like those experienced in March 2020, while maintaining funds’ flexibility to invest in diverse assets during normal market conditions. Several commenters supported increasing the minimum liquidity requirements, believing that such increases could make money market funds more resilient during times of market stress.192 Several commenters acknowledged that historically, most prime money market funds have maintained liquidity levels well above the regulatory minimums in normal market conditions.193 Some commenters asserted that raising the thresholds to the levels that most funds already maintain would provide a more sufficient liquidity buffer.194 One commenter suggested that requiring sufficiently higher weekly liquid asset levels would provide investors with confidence that funds hold adequate liquidity during periods of market uncertainty, thereby reducing the 190 See supra section I.B; see also Prime MMFs at the Onset of the Pandemic Report, supra footnote 41, at 2–3. According to Form N–MFP filings, no prime money market fund reported daily liquid assets declining below the 10% threshold in March 2020. 191 See proposed rule 2a–7(d)(4)(ii) and (iii). 192 See e.g., ICI Comment Letter I; Comment letter of Samuel G. Hanson, David S. Scharfstein, Adi Sunderam, Harvard Business School (Apr. 12, 2021) (‘‘Prof. Hanson et al. Comment Letter’’); Dreyfus Comment Letter (suggesting increasing the weekly liquid asset minimum to 35%); Fidelity Comment Letter (supporting higher liquidity requirements for institutional prime money market funds specifically). 193 Dreyfus Comment Letter; SIFMA AMG Comment Letter; Western Asset Comment Letter; ICI Comment Letter I (stating that ‘‘institutional prime money market funds on average held 44 percent of their assets in weekly liquid assets, and retail prime money market funds held on average 41 percent of their assets in weekly liquid assets’’). 194 Dreyfus Comment Letter; ICI Comment Letter I. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules likelihood of a run.195 This commenter stated that an increased weekly liquid assets requirement, along with the removal of the tie to fees and gates, would most effectively address the structural vulnerabilities in money market funds that were exposed in March 2020. Some commenters suggested that the Commission analyze and monitor market data to ensure that any new thresholds promote the goal of improving the resilience of money market funds during times of market stress while preserving the benefits that investors have come to expect from money market funds.196 Other commenters opposed any increase in the minimum liquidity management requirements.197 These commenters argued that such a change would likely decrease the yield of prime money market funds. They asserted that such a decrease in yield might reduce the spread between prime and government money market funds, which could ultimately decrease investor demand for prime money market funds. Further, some commenters stated that most fund managers have shown discipline in maintaining liquidity in excess of the existing thresholds.198 Some of these commenters asserted that this practice will continue such that increasing the minimum regulatory requirements would result in funds holding even greater amounts of daily and weekly liquid assets at levels that may be higher than is necessary or appropriate.199 One commenter asserted that such an increase could have the unintended effect of encouraging ‘‘barbelling,’’ in which fund managers compensate for the impact on expected yield by increasing the maturity risk of their remaining assets, potentially making the fund’s portfolio more susceptible to volatility overall.200 Lastly, one commenter stated that an increase in the minimum liquidity management requirements is likely to have marginal impact because the 195 Fidelity khammond on DSKJM1Z7X2PROD with PROPOSALS2 196 ICI Comment Letter. Comment Letter I; Fidelity Comment Letter. 197 See e.g., Western Asset Comment Letter; Wells Fargo Comment Letter; JP Morgan Comment Letter; SIFMA AMG Comment Letter (recommending that, if the Commission does increase the weekly liquid asset threshold, it do so incrementally to observe the effects of an increased threshold on portfolio management and investor demand for money market funds). 198 Wells Fargo Comment Letter; JP Morgan Comment Letter; Western Asset Comment Letter (noting that reporting and transparency requirements encourage managers to maintain liquid assets in excess of the existing weekly liquid asset threshold). 199 SIFMA AMG Comment Letter; Western Asset Comment Letter. 200 Western Asset Comment Letter. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 redemption behavior in March 2020 was motivated by a concern that money market funds would implement fees and gates. This commenter asserted that if fees and gates are no longer tied to weekly liquid asset thresholds, increasing the liquidity requirements is unlikely to have a material impact on investor behavior.201 We believe it is important for money market funds to have a strong source of available liquidity to meet daily redemption requests, particularly in times of stress, when liquidity in the secondary market can be less reliable for many instruments in which they invest. For example, many industry commenters discussed difficulties selling commercial paper in March 2020.202 One commenter explained that, in the commercial paper market, market participants who want to sell commercial paper frequently must ask the bank from whom they purchased the paper to bid it back in the secondary markets, and banks typically are unwilling to bid commercial paper from issuers if they are not a named dealer on the issuer’s program.203 The commenter asserted that in March 2020, banks declined to bid for commercial paper even where the bank sold the commercial paper or was a named dealer in the issuer’s program. The proposed increased liquidity requirements are designed to provide a stronger liquidity buffer for funds to meet redemptions even during periods of market stress when secondary markets may be illiquid. Moreover, we disagree with the assertion from some commenters that higher liquidity thresholds would likely decrease the demand for prime money market funds or encourage riskier portfolio construction and ‘‘barbelling.’’ As discussed below, for the past several years, prime money market funds have maintained levels of liquidity that are close to or that exceed the proposed thresholds, without generally barbelling.204 This demonstrates that funds have the ability to operate with the proposed minimum liquidity levels while continuing to serve as an efficient and diversified cash management tool for investors. In addition, while we acknowledge that requirements to 201 SIFMA AMG Comment Letter. e.g., Western Asset Comment Letter; Invesco Comment Letter; BlackRock Comment Letter; ICI Comment Letter I; State Street Comment Letter. 203 See BlackRock Comment Letter. 204 See BlackRock Comment Letter (stating that it has not seen evidence that barbelling was a problem in March 2020, or that money market fund portfolios were generally structured with a barbell). We similarly have not found significant use of barbelling strategies among money market funds. 202 See, PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 7273 provide daily liquid asset and weekly liquid asset levels on funds websites and on Form N–MFP may encourage funds to hold liquidity buffers above the regulatory minimums, as some commenters suggested, this would not be required by our rules nor would it be necessarily an expected outcome. For example, funds may be more likely to operate as they did prior to the adoption of fee and gates provision in rule 2a–7, where they generally maintained liquidity levels slightly above the regulatory thresholds and dropped below those thresholds as needed.205 To aid in the determination of new daily liquid asset and weekly liquid asset thresholds, we created hypothetical portfolios and stress tested them using the redemption patterns of institutional prime funds from March 16 to 20, 2020, when prime money market funds experienced their heaviest outflows.206 Our analysis calculated the probability that a fund would have breached its liquid asset limits under various daily liquid asset and weekly liquid asset combinations during this period. The analysis estimates that if a fund held only the required minimum liquidity thresholds of 10% daily liquid assets and 30% weekly liquid assets, the fund would have a 32% chance of exhausting its available liquidity and needing to sell less liquid assets on at least one day during the five-day period. The analysis further reflects that a fund that held 25% daily liquid assets and 50% weekly liquid assets during the same period would have a 9% chance of running out of liquid assets to meet redemptions on at least one day. At these liquidity thresholds, a fund would have a near 2% chance of running out of available liquidity on days 1, 2, and 5, and about a 5% chance of exhausting available liquidity on days 3 and 4. The analysis also assessed higher liquidity 205 See infra Section II.C.2 (proposing to maintain the existing regulatory requirement that if a money market fund’s portfolio does not meet the minimum daily liquid asset or weekly liquid asset threshold, the fund may not acquire any assets other than daily liquid assets or weekly liquid assets, respectively, until it meets these minimum thresholds). 206 Each hypothetical portfolio was created using a specific daily liquid asset and weekly liquid asset value (and, for the weekly liquid asset value, the hypothetical portfolio used one of 20 separate distribution bins of assets maturing within 2 to 5 business days, which were created to match the actual distribution observed on Form N–MFP). The analysis yielded 840 possible outcomes for each daily liquid asset and weekly liquid asset combination that were used to calculate the probability that a fund would run out of available liquidity on days 1, 2, 3, 4, and/or 5, representing March 16 to 20, 2020. Because a fund could run out on one or multiple days, our analysis also calculated the probability available liquidity would run out on at least one of the days. E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7274 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules levels, such as 50% daily liquid assets and 60% weekly liquid assets. At these levels, a fund would not have exhausted its available liquid assets on any day during the five-day period. Based on this analysis and other considerations discussed in this section, we are proposing to increase the minimum liquidity requirements to 25% daily liquid assets and 50% weekly liquid assets.207 While these proposed liquidity levels do not reduce a fund’s liquidity risk to zero, we believe that, based on the analysis above, the proposed thresholds would be sufficiently high to allow most money market funds to manage their liquidity risk in a market crisis. Moreover, the proposed increase in funds’ required daily and weekly liquid assets would be paired with the proposed removal of liquidity fees and redemption gates from rule 2a–7. These two proposed changes, together, should reduce incentives for managers to avoid using liquidity buffers and therefore allow them to use the increased amounts of required daily and weekly liquid assets to meet redemptions without the concern that using the assets could lead to runs to avoid a fee or gate. We also believe that the proposed liquidity buffers are sufficiently high to allow funds to use their available liquidity as needed, without raising investor concerns that the fund will rapidly run out of weekly liquid assets or daily liquid assets merely because its liquidity has dropped below the proposed 25% or 50% thresholds. The proposed liquidity buffers of 25% daily liquid assets and 50% weekly liquid assets are generally consistent with the average liquidity levels prime money market funds have maintained over the past several years. According to analysis of Form N–MFP data from October 2016 to February 2020, the average amount of daily liquid assets and weekly liquid assets for prime money market funds was 31% and 49%, respectively. The same analysis also showed that approximately 20% of prime money market funds had daily liquid assets above 40% and weekly liquid assets above 60% over the same period. We recognize that at the higher levels of liquidity that funds typically have maintained, if money market funds had used their liquidity buffers in March 2020, many would have been able to fulfill redemptions requests without selling longer-term portfolio securities or receiving sponsor support. However, we understand that rule 2a– 7’s fee and gate provisions have been a significant motivating factor for funds to 207 See proposed rule 2a–7(d)(4). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 maintain liquidity buffers well above the current regulatory minimums. If we adopt the proposed removal of the tie between the potential imposition of fees and gates and a fund’s liquidity, we are concerned that funds may subsequently reduce their liquidity levels and not be equipped to handle future stress. As we saw in March 2020, markets can become illiquid very rapidly in response to events that fund managers may not anticipate. The failure of a single fund to anticipate such conditions may lead to a run affecting all or many funds. We think it would be ill-advised to rely solely on the ability of managers to anticipate liquidity needs, which may arise from events the money market fund manager cannot anticipate or control. Thus, we are proposing modified liquidity requirements that are more in line with the typical levels of liquidity that funds have held over the past several years. If adopted, these increased liquidity requirements should limit the potential effect on fund liquidity that may otherwise arise from removing the fee and gate provisions from rule 2a–7. With the exception of tax-exempt money market funds, which will continue to be exempt from the daily liquid asset requirements, our proposal does not establish different liquidity thresholds by type of fund.208 Although outflows in March 2020 were more acute in institutional prime money market funds than in retail prime money market funds, we do not know that redemption patterns would be the same in future periods of market turmoil, particularly without official sector intervention to support short-term funding markets.209 In addition, while the proposal would require retail prime funds to maintain higher levels of liquidity than they have historically maintained on average, the resulting larger liquidity buffers would increase the likelihood that these funds can meet redemptions without significant dilution.210 Moreover, retail prime money market funds invest in markets that are prone to illiquidity in stress periods, and increased liquidity requirements would provide protections 208 See supra footnote 187 (discussing the current exception tax-exempt funds have from the required daily liquid asset investment minimum). 209 As an example, if retail investors are merely slower to act initially in periods of market stress, retail prime and tax-exempt funds may need higher liquidity levels to meet ongoing redemptions if a stress period is not relatively brief. 210 Based on analysis of Form N–MFP data, retail prime money market funds maintained average daily liquid assets of 24% and average weekly liquid assets of 42% during the period of October 2016 through February 2020. In contrast, institutional prime fund averages during this period were 37% and 54%, respectively. PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 so that these funds can meet redemptions in times of stress without additional tools such as liquidity fees, redemption gates, or swing pricing. We believe that a uniform approach encourages sufficient liquidity levels across all money market funds, thereby reducing the potential incentive for investors to flee from funds that might otherwise be perceived as holding insufficient liquidity during market stress events. The PWG Report and the Commission’s associated Request for Comment considered the creation of a new liquidity requirement category, such as a biweekly liquid asset requirement.211 Commenters expressed general opposition to a new liquidity category for money market funds.212 Commenters suggested that such a category would increase regulatory complexity and overcomplicate the regulatory framework without additional benefit.213 Commenters also expressed skepticism that issuers would underwrite assets with a two-week maturity, as there is a very limited issuance market for assets in the biweekly maturity category.214 After considering these comments, we are not proposing to introduce a new category of liquidity requirements. We believe that a new category, such as a requirement for biweekly assets, would be an extension of the weekly liquid asset threshold without significant benefits. This is because we expect that money market funds would likely meet a biweekly requirement in the same way that they meet the weekly liquid asset thresholds, by letting longer-dated securities roll down in maturity.215 We believe it would be more efficient to increase the weekly liquid asset requirement directly, as proposed, than to increase it indirectly by adopting a new biweekly liquid asset requirement. Another commenter recommended more substantial asset restrictions for prime money market funds, such as a requirement that prime money market funds hold 25–50% of their weekly liquid assets in short-term U.S. 211 See PWG Report at 26. e.g., ICI Comment Letter I; SIFMA AMG Comment Letter; Federated Hermes Comment Letter I; Wells Fargo Comment Letter; BlackRock Comment Letter. 213 ICI Comment Letter I; SIFMA AMG Comment Letter; Wells Fargo Comment Letter; JP Morgan Comment Letter (asserting that ‘‘[money market funds] typically already hold assets with a well distributed range of maturities, with longer-dated positions constantly rolling down towards maturity’’). 214 SIFMA AMG Comment Letter; JP Morgan Comment Letter; ICI Comment Letter I (noting that commercial paper, for example, is not currently issued with 14-day maturities). 215 ICI Comment Letter I. 212 See, E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Government securities, including U.S. Government agency securities.216 This commenter suggested that enhancing the quality, not only the quantity, of a prime money market fund’s liquid assets would enhance investor confidence that such funds can withstand market stress. We do not believe that this type of requirement would have a significant effect, as most prime money market funds already hold a significant percentage of their weekly liquid assets in Treasuries and government agency securities.217 We continue to believe that grounding our definitions of liquid assets in terms of maturity, rather than type of security, is the best framework to determine a fund’s available liquidity for purposes of rule 2a–7. Instead of requiring funds to hold a separate threshold of particular securities within the daily and weekly liquid asset basket, as the commenter suggested, we believe that increasing the minimum liquidity threshold, paired with removing fees and gates from rule 2a–7, would be a more efficient manner of enhancing funds’ access to liquidity and thus their ability to withstand market stress. We request comment on our proposal to increase the minimum liquidity requirements to 25% daily liquid assets and 50% weekly liquid assets, including the following: 66. Would our proposal to increase the minimum liquidity requirements make money market funds more resilient during times of market stress? Would a lower or higher threshold of daily or weekly liquid assets better allow most money market funds’ to meet potential redemptions without selling less liquid asset in periods of market stress? Should we instead propose to raise the minimum daily liquid asset threshold to 20%, 30%, or 35% and/or the minimum weekly liquid asset threshold to 40%, 55%, or 60%, for example? Why or why not? 67. Would our proposal to remove fee and gate provisions from rule 2a–7 encourage funds to maintain lower levels of liquidity during normal market conditions? If so, do our proposed increased minimum liquidity requirements limit the potential effect on fund liquidity that may otherwise arise from our proposal to remove fee and gate provisions from rule 2a–7? 216 CCMR Comment Letter. Baklanova, Kuznits, and Tatum, How Do Prime MMFs Manage Their Liquidity Buffers (July 21, 2021), available at https://www.sec.gov/files/ how-do-prime-mmfs-manage-liquidity-buffers.pdf (finding that investments in Treasuries and government agency securities account, on average, for approximately 35% of prime funds’ weekly liquid assets). 217 See VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 Should the proposed minimum liquidity thresholds be higher or lower to accommodate such effect? Why or why not? 68. To what extent would our proposed amendments reduce money market fund liquidity risk? 69. What, if any, impacts would our proposed amendments have on yields of prime money market funds? What would be the effect on yields of lower or higher minimum liquidity requirements? Would increased or decreased yields effect the desirability of prime money market funds for retail and/or institutional investors? Would the proposed amendments decrease the availability of prime money market funds? 70. How would the proposal affect funds’ current incentives to maintain liquidity buffers well above the regulatory minimums? Would funds be more likely to hold daily liquid asset and weekly liquid asset amounts that are closer to the regulatory minimums? Absent our proposed increase to the minimum liquidity requirements, would the existing requirement for funds to disclose liquidity information on a daily basis on their websites provide sufficient incentive for funds to maintain liquidity buffers well above the current regulatory minimums? 71. Would our proposal increase the propensity for prime money market funds to ‘‘barbell’’ or invest in potentially risker and longer-term assets outside of the portion of the fund’s portfolio that qualifies as daily liquid assets or weekly liquid assets? Why or why not? 72. Should the proposal alter the current framework for which type of money market funds are subject to the minimum liquidity requirements? For example, should the requirements distinguish between prime money market funds and government money market funds? Should institutional money market funds and retail money market funds be subject to the same minimum liquidity requirements, as proposed? Does the fact that institutional money market funds experienced more significant outflows than retail money market funds during recent stress events reflect that institutional money market funds should be subject to a different minimum liquidity requirement than retail money market funds? Why or why not? 73. Should the proposed minimum liquidity requirements vary based on external market factors? For example, would a countercyclical minimum liquidity threshold, in which the minimum liquidity thresholds decline PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 7275 when net redemptions are large or when the Commission provides temporary relief from the higher liquidity threshold, better incentivize money market funds to use liquidity during times of significant outflows? 218 If so, what specific factors should trigger or inform a countercyclical minimum liquidity threshold? 74. Would the increased liquidity thresholds, along with other changes we are proposing, affect investors’ interest in monitoring funds’ liquidity levels or potential sensitivity to declines below the liquidity thresholds? Are there any changes we should make to reduce potential investor sensitivity to a fund dropping below a liquidity threshold? For example, should we remove, or reduce the frequency of, website liquidity disclosure? 75. Should the Commission consider revising the definition of daily liquid assets and/or weekly liquid assets in any way? For instance, should we amend the definition of weekly liquid assets to limit the amount of nongovernment securities that can qualify as weekly liquid assets? Alternatively, would explicitly limiting the amount of investment in commercial paper and certificates of deposit for prime money market funds alleviate stresses in the short-term funding market during market downturns? Why or why not? 76. Should the Commission propose a new category of liquidity requirements to rule 2a–7? Would a new category of liquidity requirements with slightly longer maturities than the current requirements (e.g., biweekly liquid assets) significantly enhance funds’ near-term portfolio liquidity during periods of stress in the short-term funding markets? What would be the positive and negative effects of a new category of liquidity requirements with slightly longer maturities? 2. Consequences for Falling Below Minimum Daily and Weekly Liquidity Requirements Currently, rule 2a–7 requires that a money market fund comply with the daily liquid asset and weekly liquid asset standards at the time each security is acquired.219 A money market fund’s 218 The PWG Report discussed a countercyclical liquidity buffer as a potential reform option. Most commenters opposed this option and expressed concern that it may create a new trigger event that could accelerate redemptions. See SIFMA AMG Comment Letter; Western Asset Comment Letter; JP Morgan Comment Letter; Fidelity Comment letter; Dreyfus Comment Letter. A few commenters supported this option. See ABA Comment Letter; mCD IP Comment Letter. 219 Rule 2a–7(d)(4)(ii) and (iii). Compliance with the minimum liquidity requirement is determined E:\FR\FM\08FEP2.SGM Continued 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7276 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules portfolio that does not meet the minimum liquidity standards has not failed to satisfy the daily liquid asset and weekly liquid asset conditions of rule 2a–7; the fund simply may not acquire any assets other than daily liquid assets or weekly liquid assets, respectively, until it meets these minimum thresholds. We are proposing to maintain this approach with respect to the increased minimum liquidity thresholds. Commenters generally supported maintaining the current rule’s regulatory requirements when a fund’s liquidity drops below the daily or weekly liquidity threshold instead of including some type of automatic penalty that would apply either to the fund or to the fund sponsor under these circumstances, which was an option the PWG Report discussed.220 Some commenters noted that the Investment Company Act and the rules thereunder do not otherwise impose automatic penalties on funds or fund sponsors.221 A commenter also noted that imposing a penalty on the fund sponsor might further disincentivize managers from using their existing liquidity in times of market stress.222 Several commenters suggested that the reforms could require a money market fund to overcorrect (e.g., invest only in liquid assets until its weekly liquid assets exceed a specified percentage above the regulatory minimum) if it fell below the minimum liquidity threshold.223 One of these commenters further suggested that a fund be prohibited from purchasing any non-overnight instruments until it reaches the required liquidity minimum threshold.224 As we saw in March 2020, markets can become illiquid very rapidly in response to events that money market fund managers may not anticipate. This demonstrates that it is important that fund managers have the ability to sell their most liquid assets to meet investor redemptions to avoid selling less liquid assets into a declining market, which would likely have negative effects on the fund and its remaining shareholders. Accordingly, we believe that any regulatory amendments should allow funds to deploy their excess liquidity during times of market stress, when such liquidity is typically needed most. Imposing a new regulatory penalty when a fund drops below a minimum liquidity threshold, or requiring the fund to ‘‘overcorrect’’ in that case, could have the unintended effect of incentivizing some fund managers to sell less liquid assets into a declining market rather than use their excess liquidity during market stress events out of fear of approaching or falling below the regulatory threshold.225 We therefore are proposing to maintain the existing regulatory requirement that if a money market fund’s portfolio does not meet the minimum daily liquid asset or weekly liquid asset threshold, the fund may not acquire any assets other than daily liquid assets or weekly liquid assets, respectively, until it meets these minimum thresholds. Moreover, the proposed rule would require a fund to notify its board of directors when the 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 (a ‘‘liquidity threshold event’’).226 The proposal would require a fund to notify the board within one business day of the liquidity threshold event.227 The proposed rule would also require the fund to provide the board with a brief description of the facts and circumstances that led to the liquidity threshold event within four business days after its occurrence.228 Some commenters supported requiring a fund to notify its board following the fund falling below a liquidity threshold.229 The liquidity levels that trigger a liquidity threshold event reflect that a fund’s liquidity has decreased by more than 50% below at least one of the proposed minimum daily and weekly liquid asset requirements. This provision is designed to facilitate appropriate board notification, monitoring, and engagement when a fund’s liquidity levels decrease significantly below the minimum liquidity requirements.230 We at security acquisition, because we believe that a money market fund should not have to dispose of less liquid securities (and potentially realize an immediate loss) if the fund fell below the minimum liquidity requirements as a result of investor redemptions. 220 ICI Comment Letter I; SIFMA AMG Comment Letter; Fidelity Comment Letter. 221 SIFMA AMG Comment Letter; Fidelity Comment Letter. 222 Fidelity Comment Letter. 223 SIFMA AMG Comment Letter; Fidelity Comment Letter; JP Morgan Comment Letter; Dreyfus Comment Letter. 224 SIFMA AMG Comment Letter. 225 To some extent, this could be similar to the effect we observed in March 2020 of the tie between the weekly liquid asset threshold and the potential imposition of liquidity fees or redemption gates, when some fund managers sold less liquid assets to avoid dropping below the regulatory threshold. 226 See proposed rule 2a–7(f)(4)(i). 227 Id. 228 See proposed rule 2a–7(f)(4)(ii). 229 JP Morgan Comment Letter; SIFMA AMG Comment Letter. 230 Similar to these proposed board notification requirements, we are proposing that funds file reports on Form N–CR upon a liquidity threshold event. See infra Section II.F.1.a. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 understand that many funds today provide regular reports to fund boards regarding fund liquidity, often in connection with quarterly board meetings. We believe that the proposed board notification requirement would provide the board with timely information in a context that would better facilitate the board’s understanding and monitoring of significant declines in the fund’s liquidity levels. We request comment on the proposed regulatory requirements for falling below the minimum liquidity thresholds, including the following: 77. Should the Commission impose penalties on funds or fund sponsors when a fund falls below a required minimum liquidity requirement? For example, should we require funds to ‘‘over-correct’’ to a higher liquidity level after dropping below a minimum requirement? If so, how long should a fund be required to maintain a higher level of liquidity after the overcorrection? 78. Should rule 2a–7 impose a minimum liquidity maintenance requirement, i.e., require that a money market fund maintain the minimum daily liquid asset and weekly liquid asset thresholds at all times? What are the advantages and disadvantages of this approach? 79. Are the proposed requirements for the fund to notify its board upon a liquidity threshold event appropriate? Would the proposed requirement help boards monitor significant declines in fund liquidity levels? Do funds currently notify the board when they fall below a certain liquidity level? 80. Should the liquidity levels that trigger a liquidity threshold event be 50% of the minimum liquidity requirements, as proposed? Would a lower or higher percentage be more appropriate (e.g., 10%, 25%, or 75% below the minimum liquidity requirements)? Alternatively, should the rule require funds to notify the board if the fund falls below the minimum liquidity requirements (i.e., below 25% daily liquid assets or 50% weekly liquid assets)? 81. Should the rule also require the fund to provide a subsequent notification to its board when the fund’s liquidity returns above an identified threshold (e.g., the fund’s liquidity is at or above the 25% daily liquid asset requirement and 50% weekly liquid asset requirement)? 82. Is one business day sufficient time to allow a fund to notify its board following a liquidity threshold event? Is four business days sufficient time to allow a fund to provide its board with E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 a brief description of the facts and circumstances that led to a liquidity threshold event? Should the rule provide more or less time for either or both of these notifications? Should the rule require either or both of these notifications to the fund’s board to be written? 83. Are the proposed requirements for the fund to notify the board of the facts and circumstances that led to a liquidity threshold event appropriate? Would the fund provide these details without the rule’s requirements (either on its own or after board inquiry)? Should the rule require other specific information in this notification? If so, what information and why? For example, should the rule require a fund to provide a reasonable estimate for when the fund will come back into compliance with the minimum liquidity requirements? 84. Should we instead require board notification if a fund has dropped below a particular liquidity level for a specified period (e.g., if the fund has dropped below the minimum liquidity requirements, or some lower amount, for at least 3, 5, or 10 consecutive business days)? Should a liquidity threshold event for purposes of the board notification requirement align with liquidity threshold events that funds would be required to report on Form N–CR, such that any changes to the scope of the proposed Form N–CR reporting requirement would also apply to the board notification requirement? 3. Proposed Amendments to Liquidity Metrics in Stress Testing Each money market fund is currently required to engage in periodic stress testing under rule 2a–7 and report the results of such testing to its board.231 Currently, one aspect of periodic stress testing involves the fund’s ability to have invested at least 10% of its total net assets in weekly liquid assets under specified hypothetical events described in rule 2a–7. The Commission chose the 10% threshold because dropping below this threshold triggers a default liquidity fee, absent board action, and thus, has consequences for a fund and its shareholders.232 Because our proposal would no longer provide for default liquidity fees if a fund has weekly liquid assets below 10%, and our proposal would increase the weekly liquid asset minimum from 30% to 50%, we no longer believe that the rule should require funds to test their ability to maintain 10% weekly liquid assets under the specified hypothetical events 231 See 17 CFR 270.2a–7(g)(8). 232 See 2014 Adopting Release, supra footnote 12, at Section III.J.2. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 described in rule 2a–7. Instead, we are proposing to require funds to test whether they are able to maintain sufficient minimum liquidity under such specified hypothetical events.233 As a result, each fund would be required to determine the minimum level of liquidity it seeks to maintain during stress periods, identify that liquidity level in its written stress testing procedures, periodically test its ability to maintain such liquidity, and provide the fund’s board with a report on the results of the testing. For purposes of stress testing, we are proposing to permit each fund to determine the level of liquidity that it considers sufficient, instead of continuing to provide a bright-line threshold that all funds must use uniformly. We believe the proposed approach may improve the utility of stress test results because they would reflect whether the fund is able to maintain the level of liquidity it considers sufficient, which may differ among funds for a variety of reasons (e.g., type of money market fund or characteristics of investors, such as investor concentration or composition that may contribute to large redemptions). We request comment on the proposed amendments to stress testing requirements, including the following; 85. As proposed, should we remove the 10% weekly liquid asset metric from current stress testing requirements and instead require funds to determine the sufficient minimum liquidity level to test? 86. Should we instead identify a different liquidity threshold funds must test (e.g., 15%, 20%, or 30% weekly liquid assets)? Under this approach, should we require stress testing to consider both weekly liquid assets and daily liquid assets? If so, what threshold should we use for daily liquid assets (e.g., 5%, 10%, or 15%)? D. Amendments Related to Potential Negative Interest Rates Twice during the past 15 years, the Federal Reserve established the lower bound of the target range for the federal funds rate at 0% to spur borrowing and other economic activity in the face of economic crises. In 2008, a crisis that originated in the financial sector quickly spread to the rest of the U.S. economy, prompting the Federal Reserve to establish a target federal funds rate of 0– 0.25% for the first time.234 The Federal 233 See proposed rule 2a–7(g)(8)(i) and (g)(8)(ii)(A). 234 Statement of the Federal Open Markets Committee, December 16, 2008, available at https:// PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 7277 Reserve raised the target range for the federal funds rate in 2015, but the rise in rates from 2015 to 2018 was relatively short lived.235 In early 2020, another crisis occurred, amid growing economic concerns related to the COVID–19 pandemic and an overall flight by investors to liquidity and quality. Once again, the Federal Reserve lowered the target range for the federal funds rate to 0–0.25%.236 In this pervasive low interest rate environment, it is very difficult for investors to generate substantial returns from investments in U.S. Treasury securities and other high quality government debt securities. This is true for money market funds, and particularly true for government money market funds, which must invest 99.5% or more of their assets in cash, government securities, and/or repurchase agreements that are collateralized fully.237 Government and retail money market funds (or ‘‘stable NAV funds’’) can still maintain a nonnegative stable share price while investing in instruments that yield a low but positive interest rate; however, if interest rates turn negative and the gross yield of a fund’s portfolio turns negative, it would be challenging or impossible for the fund to maintain a non-negative stable share price. The fund would begin to lose money. Despite keeping the lower bound of the federal funds rate target at zero for many years, some policymakers at the Federal Reserve have at times expressed the view that negative interest rates do not appear to be an attractive monetary policy tool in the United States.238 However, other regulators and academics, including prior Federal Reserve leaders, have suggested policymakers could consider negative interest rates as a potential tool to counteract future economic www.federalreserve.gov/newsevents/pressreleases/ monetary20081216b.htm. 235 See Board of Governors of the Federal Reserve System, ‘‘Open Market Operations,’’ available at https://www.federalreserve.gov/monetarypolicy/ openmarket.htm. 236 Statement of the Federal Open Markets Committee, March 15, 2020, available at https:// www.federalreserve.gov/newsevents/pressreleases/ monetary20200315a.htm. 237 17 CFR 270.2a–7(a)(14). The term ‘‘government security,’’ as defined in the Act, means any security issued or guaranteed as to principal or interest by the United States, or by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States; or any certificate of deposit for any of the foregoing. 15 U.S.C. 80a–2(a)(16). 238 See, e.g., Minutes of the Federal Open Market Committee: October 29–30, 2019, available at ‘‘https://www.federalreserve.gov/monetarypolicy/ files/fomcminutes20191030.pdf. E:\FR\FM\08FEP2.SGM 08FEP2 7278 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 slowdowns.239 In addition, even if the Federal Reserve does not lower the target federal funds rate below zero, market interest rates may still move into negative territory if the federal funds rate remains at or near zero for extended periods of time. Given the possibility that negative interest rates may occur during future periods of economic instability, in 2020 several money market fund sponsors issued investor education materials about the effects of negative interest rates.240 Fund sponsors also published analyses of potential actions that government and retail money market funds could take in order to maintain a stable share price if the gross yield on their investments turns negative.241 Rule 2a–7, in its current form, does not explicitly address how money market funds must operate when interest rates are negative. However, rule 2a–7 states that government and retail money market funds may seek to maintain a stable share price by using amortized cost and/or penny-rounding accounting methods. A fund may only take this approach so long as the fund’s board of directors believes that the stable share price fairly reflects the fund’s market-based net asset value per share.242 Accordingly, if negative interest rates turn a stable NAV fund’s gross yield negative, the board may reasonably believe the stable share price does not fairly reflect the market-based price per share, as the fund would be unable to generate sufficient income to support a stable share price. Under these circumstances, the fund would not be permitted to use amortized cost and/ 239 See, e.g., ‘‘What tools does the Fed have left? Part 1: Negative interest rates,’’ Ben S. Bernanke (March 18, 2016), available at https:// www.brookings.edu/blog/ben-bernanke/2016/03/ 18/what-tools-does-the-fed-have-left-part-1negative-interest-rates/ (‘‘Overall, as a tool of monetary policy, negative interest rates appear to have both modest benefits and manageable costs’’). 240 See, e.g., ‘‘Negative interest rates: What you need to know’’ Wells Fargo Letter Asset Management (July 2020), available at https:// www.wellsfargoassetmanagement.com/assets/ public/pdf/insights/investing/negative-interestrates-what-you-need-to-know.pdf; ‘‘Everything You Needed to Know About Negative Rates to Impress Your Boss’’ State Street Letter Global Advisors (June 2020), available at https://www.ssga.com/librarycontent/pdfs/cash/inst-cash-negative-interest-ratepiece.pdf. 241 See, e.g., ‘‘Negative Rates: Could it happen in the US?’’ Invesco (March 31, 2020), available at https://www.Invesco.com/us-rest/ contentdetail?contentId=798d6439a0331710Vgn VCM1000006e36b50aRCRD&audience Type=Institutional; ‘‘Negative interest rates: What you need to know’’ Wells Fargo Asset Management (July 2020), available at https://www.wellsfargo assetmanagement.com/assets/public/pdf/insights/ investing/negative-interest-rates-what-you-need-toknow.pdf. 242 17 CFR 270.2a–7(c)(1)(i). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 or penny-rounding accounting methods to seek to maintain a stable share price. Instead, the fund would need to convert to a floating share price. In addition to the pricing provision described above, rule 2a–7 also includes certain procedural standards for stable NAV funds.243 These standards, overseen by the fund’s board of directors, include a requirement that the fund periodically calculate the marketbased value of the portfolio (‘‘shadow price’’) and compare it to the fund’s stable share price. If the deviation between these two values exceeds 1⁄2 of 1% (50 basis points), the fund’s board of directors must consider what action, if any, should be taken by the board, including whether to re-price the fund’s securities above or below the fund’s $1.00 share price (i.e., ‘‘break the buck’’). Regardless of the extent of the deviation, rule 2a–7 imposes on the board of a money market fund a duty to consider appropriate action whenever the board believes the extent of any deviation may result in material dilution or other unfair results to investors or current shareholders. We believe that, if interest rates turn negative, the board of a stable NAV fund could reasonably require the fund to convert to a floating share price to prevent material dilution or other unfair results to investors or current shareholders. While these pricing provisions of rule 2a–7 apply specifically to government and retail money market funds, the rule also requires these funds and their transfer agents to have the capacity to redeem and sell securities at prices that do not correspond to a stable price per share.244 Accordingly, these funds and their service providers also must understand how the floating share price mechanism would operate when interest rates are negative. Government and retail money market fund transfer agents and other service providers generally should confirm that they have effective procedures to facilitate transactions for the fund if it were to switch to a floating share price. We believe the pricing provisions of rule 2a–7 provide appropriate flexibility for a fund with a stable share price to respond to negative interest rates. While we are not proposing changes to the rule 2a–7 pricing provisions in relation to negative interest rates, we are proposing to expand government and retail money market funds’ obligations to confirm that they can fulfill shareholder transactions if they convert to a floating share price. Specifically, we propose to 243 17 244 17 PO 00000 CFR 270.2a–7(g)(1). CFR 270.2a–7(h)(11). Frm 00032 Fmt 4701 Sfmt 4702 require a government or retail money market fund (or the fund’s principal underwriter or transfer agent on its behalf) to determine that financial intermediaries that submit orders— including through an agent—to purchase or redeem the fund’s shares have the capacity to redeem and sell the fund’s shares at prices that do not correspond to a stable price per share or, if this determination cannot be made, to prohibit the relevant financial intermediaries from purchasing the fund’s shares in nominee name.245 Funds would have flexibility in how they make this determination for each financial intermediary but would be required to maintain records identifying the intermediaries the fund has determined have the capacity to transact at non-stable share prices and the intermediaries for which the fund was unable to make this determination.246 We believe it is necessary that all parties concerned—stable NAV money market funds, their service providers, and their distribution network—are capable of processing transactions in a fund’s shares in the event that the fund converts to a floating NAV. Rule 2a–7 already imposes this obligation on money market funds and their transfer agents. Because many investors purchase shares through financial intermediaries, however, we believe it is important that such intermediaries are able to continue to process shareholder transactions if a stable NAV fund converts to a floating NAV. Absent this capability, a money market fund would not actually be able to process transactions at a floating NAV, as currently required by rule 2a–7. The pricing provisions of rule 2a–7 have now been in place for several years, and we believe fund sponsors are familiar with the operational requirements to operate a money market fund with a floating share price. This is especially true because all money market funds other than government and retail money market funds are currently required to operate with a floating share price. However, some fund industry representatives proposed 245 See proposed rule 2a–7(h)(11)(ii). This proposed requirement would apply to each financial intermediary that submits orders, itself or through its agent, to purchase or redeem shares directly to the money market fund, its principal underwriter or transfer agent, or to a registered clearing agency. The term ‘‘financial intermediary’’ has the same meaning as in 17 CFR 270.22c–2(c)(1). See proposed rule 2a–7(h)(11)(iv). 246 See proposed rule 2a–7(h)(11)(iii). Funds would be required to preserve a written copy of such records for a period of not less than six years following each identification of a financial intermediary, the first two years in an easily accessible place. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 different operational responses to negative interest rates. Specifically, some fund sponsors discussed a reverse distribution mechanism, whereby a government or retail money market fund would maintain a stable share price, despite losing value, by reducing the number of its outstanding shares. We understand that European money market funds used a reverse distribution mechanism for a period of time, before the European Commission determined this approach was not consistent with the 2016 EU money market fund regulations.247 While some have suggested that the reverse distribution mechanism was not confusing to European money market fund investors, nearly all of whom are institutional investors, we believe such a mechanism would not be intuitive for retail investors in government and retail money market funds. Under a reverse distribution mechanism, these investors would observe a stable share price but a declining number of shares for their investment in a fund that is generating a negative gross yield. We believe that investors may be misled by such a mechanism and assume that their investment in a fund with a stable share price is holding its value while, in fact, the investment is losing value over time.248 In contrast, we believe investors would easily understand a decline in share prices in the event that a fund’s gross yield turns negative. Due to the potentially misleading or confusing nature of the reverse distribution mechanism, we are proposing to amend rule 2a–7 to prohibit money market funds from operating a reverse distribution mechanism, routine reverse stock split, or other device that would periodically reduce the number of the fund’s outstanding shares to maintain a stable share price.249 Having described considerations under rule 2a–7 that are relevant to negative interest rates, we seek comment on possible methods that government or retail money market funds could use to operate if interest rates turn negative. We also seek comment on our proposal to prohibit money market funds from operating a 247 See ESMA Press Release, European Commission Letter on Money Market Fund Regulation (Feb. 2, 2018), available at https:// www.esma.europa.eu/press-news/esma-news/ european-commission-letter-money-market-fundregulation. 248 Comment Letter of Jose Joseph (Apr. 13, 2021) (‘‘Jose Joseph Comment Letter’’) (suggesting that if money market funds generate negative yields, ‘‘[u]nilaterally redeeming the shares[ ] by reverse distribution is like cheating’’ and that funds should instead inform shareholder and move to a floating NAV to be fair and transparent). 249 See proposed rule 2a–7(c)(3). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 reverse distribution mechanism and our proposed provisions relating to whether a government or retail fund’s distribution network can sell and redeem the fund’s shares at non-stable prices per share. 87. Should the Commission mandate specific disclosure to investors or to the Commission if a fund’s gross yield turns negative? 88. Would a reverse distribution mechanism or similar mechanism mislead or confuse investors? Would such a mechanism benefit investors? Would investors more easily understand a decline in share prices (i.e., a floating share price), rather than a decline in the number of stable value shares (i.e., a reverse distribution mechanism), in the event that a fund’s gross yield turns negative? 89. Should we permit a stable NAV money market fund to engage in a routine reverse stock split, reverse distribution mechanism, or other mechanism by which the fund maintains a stable share price, despite losing value, by reducing the number of its outstanding shares? Should we permit only institutional government funds to engage in such a mechanism because institutional investors may be more likely to appreciate that the fund is losing value notwithstanding the lack of a change in the share price? If so, how should we define an institutional government fund for this purpose (e.g., a government fund that does not have policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons; or a government fund that has policies and procedures reasonably designed to limit all beneficial owners to non-natural persons)? If we permit the use of such a mechanism, how should a fund be required to communicate its operation to investors? Should the fund be required to take steps to make sure existing investors approve of a reverse distribution mechanism before operating such a mechanism? If so, what should those steps be? 90. Should all stable NAV money market funds be required to respond to negative interest rates in the same manner (i.e., should all these funds be required to switch to a floating share price, or should each fund be permitted to respond to negative interest rates in a different manner)? If the rule permits funds to respond to negative interest rates on an individualized basis, should the rule prescribe specific options that are permissible? Would it be confusing for investors if each money market fund used a different method for absorbing a negative interest rate? PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 7279 91. Would investors prefer a government or retail money market fund with a negative yield to implement a floating share price or a reverse distribution mechanism? Does the response differ depending on the type of investor? Does the response differ depending on the type of money market fund? 92. How likely are investors to remain invested in a money market fund with a negative gross yield? If investors redeem shares in a money market fund with a negative gross yield, where might they choose to invest their money instead? 93. How likely are fund sponsors to continue to operate money market funds in a pervasive negative interest rate environment? Are certain fund sponsors (e.g., bank-affiliated sponsors) more likely than others to continue to operate money market funds in a negative interest rate environment? Are sponsors more likely to continue to operate certain types of money market funds (e.g., prime funds) in a negative interest rate environment? 94. As proposed, should we require a government or retail fund to determine that financial intermediaries in its distribution network can sell and redeem the fund’s shares at non-stable prices per share? Should we, as proposed, require a fund to prohibit a financial intermediary from purchasing the fund’s shares in nominee name on behalf of other persons if the fund cannot make such a determination? Are there alternative approaches we should take to make sure financial intermediaries are able to handle a fund’s potential transition from using a stable NAV to a floating NAV? 95. As proposed, should we require a government or retail fund to maintain and keep current records identifying the intermediaries the fund has determined have the capacity to transact at nonstable share prices and the intermediaries for which the fund was unable to make this determination? Are there alternative ways of documenting this information that we should require? Should we require funds to periodically check against these records to make sure they are not using an intermediary that cannot transact at non-stable share prices? 96. Should we mandate or provide additional guidance around how a fund would determine that a financial intermediary can sell and redeem the fund’s shares at non-stable prices per share? Should we require a fund to maintain records of these determinations? 97. Should we require a fund to report to its board of directors the basis of its E:\FR\FM\08FEP2.SGM 08FEP2 7280 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 determinations that a financial intermediary has the capacity to redeem and sell securities issued by the fund at a price based on the current net asset value, including prices that do not correspond to a stable price per share? Should we require a fund to disclose the basis of such determinations publicly or to the Commission? 98. Should we require government and retail funds and their financial intermediaries to test their ability to redeem and sell securities issued by the fund at prices that do not correspond to a stable price per share? Should we require a fund to report the results of those tests to its board of directors? Should we require a fund to disclose the results of those tests to the Commission or publicly? E. Amendments To Specify the Calculation of Weighted Average Maturity and Weighted Average Life We are proposing to amend rule 2a– 7 to specify the calculations of ‘‘dollarweighted average portfolio maturity’’ (‘‘WAM’’) and ‘‘dollar-weighted average life maturity’’ (‘‘WAL’’).250 WAM and WAL are calculations of the average maturities of all securities in a portfolio, weighted by each security’s percentage of net assets. These calculations are an important determinant of risk in a portfolio, as a longer WAM and WAL may increase a fund’s exposure to interest rate risks. We have found that funds use different approaches when calculating WAM and WAL under the current definitions in the rule. For instance, we understand that a majority of money market funds calculate WAM and WAL based on the percentage of each security’s market value in the portfolio, while other money market funds base calculations on the amortized cost of each portfolio security. This discrepancy can create inconsistency of WAM and WAL calculations across funds, including in data reported to the Commission and provided on fund websites.251 Although these inconsistencies are likely to be small, they could confuse investors that review funds’ WAM and WAL and create inefficiencies for the Commission’s monitoring of money market funds. Accordingly, we are proposing to amend rule 2a–7 to require that money market funds calculate WAM and WAL based on the percentage of each security’s market value in the portfolio. We are proposing to require funds to use market value because all 250 See proposed amendments to rule 2a– 7(d)(1)(ii) and (iii). 251 See Items A.11 and A.12 of Form N–MFP; 17 CFR 270.2a–7(h)(10)(i)(A). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 types of money market funds already determine the market values of their portfolio holdings for other purposes, while only certain money market funds use amortized cost.252 Thus, we believe all money market funds can use this calculation approach with information they already obtain. We believe that these amendments will enhance the consistency of calculations for funds, while allowing the Commission to better monitor and respond to indicators of potential risk and stress in the market. We request comment on the proposed clarification of WAM and WAL calculations, including the following: 99. Should we require all money market funds to calculate WAM and WAL based on the percentage of each security’s market value in the portfolio, as proposed? Should certain types of money market funds be excluded from this requirement or subject to a different requirement? If so, why? For instance, should we require money market funds that maintain a stable NAV to calculate WAM and WAL using the amortized costs of the portfolio? 100. Are there benefits to calculating WAM and WAL based on amortized cost of the portfolio instead of market value? 101. Are there other changes or additions that would improve the accuracy or consistency of the calculations of WAM or WAL? Should we provide additional guidance related to the proposed amendment? F. Amendments to Reporting Requirements 1. Amendments to Form N–CR Money market funds are required to file reports on Form N–CR when certain specified events occur.253 Currently, a money market fund typically is required to file Form N–CR reports if a portfolio security defaults or experiences an event of insolvency, an affiliate provides financial support to the fund, the fund experiences a deviation between current net asset value per share and intended stable price per share, liquidity fees or redemption gates are imposed or lifted, as well as any optional disclosure made at the fund’s discretion. We are proposing to add a new requirement for a money market fund to file a report on Form N–CR when the fund falls below a specified liquidity threshold. We also propose to require funds to file Form N– 252 Money market funds that use a floating NAV use market values when determining a fund’s NAV, while money market funds that maintain a stable NAV are required to use market values to calculate their market-based price at least daily. 253 See 17 CFR 270.30b1–8 (rule 30b1–8 under the Act). PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 CR reports in a structured data language. Further, we are proposing other amendments to improve the utility of reported information and to remove reporting requirements related to the imposition of liquidity fees and redemption gates under rule 2a–7. a. Reporting of Liquidity Threshold Events We propose to amend Form N–CR to require a fund to report when a liquidity threshold event occurs (i.e., the 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).254 Currently, money market funds are required to provide information about the size of their weekly liquid assets and daily liquid assets on a daily basis on their websites.255 We believe it is appropriate to require that a fund report when it falls below half of its 25% daily liquid asset and 50% weekly liquid asset minimum liquidity requirements, as this drop represents a significant decrease in liquidity. We believe this reporting would help investors, the Commission, and its staff monitor significant declines in liquidity, without having to monitor each money market fund’s website.256 The reports also would provide more transparency, as well as facilitate our monitoring efforts, by providing the related facts and circumstances of any liquidity threshold event. Upon falling below either of the liquidity thresholds, the proposed amendments would require a fund to report certain information about the liquidity threshold event. When reporting a liquidity threshold event, the fund’s report on Form N–CR would be required to include: (1) The initial date on which the fund falls below either the 25% weekly liquid asset threshold or the 12.5% daily liquid asset threshold; (2) the percentage of the fund’s total assets invested in both weekly liquid assets and daily liquid assets on the initial date of a liquidity threshold event; and (3) a brief description of the facts and circumstances leading to the liquidity 254 Proposed Part E of Form N–CR. CFR 270.2a–7(h)(10)(ii)(A) and (B). Under these provisions, a money market fund must post prominently on its website a schedule, chart, graph, or other depiction that provides the percentages of the fund’s total assets invested in daily liquid assets and in weekly liquid assets. This website disclosure must be updated each business day, as of the end of the preceding business day, and cover each business day during the preceding six months. 256 See JP Morgan Comment Letter (suggesting that money market funds be required to report to the Commission when they fall below a liquidity threshold). 255 17 E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules threshold event.257 The proposed reporting requirement would apply when a fund falls below either threshold. Although a fund may not necessarily fall below both thresholds, we are proposing to require funds to disclose the percentages of both weekly liquid assets and daily liquid assets as of the initial date that either threshold is crossed.258 We believe that reporting both weekly liquid asset and daily liquid asset levels would provide insight into a fund’s short-term and immediate liquidity profile. The brief description of facts and circumstances would include additional details about the liquidity threshold event, which would better inform investors, the Commission, and our staff of events that lead to significant declines in liquidity.259 Consistent with the timing of current Form N–CR reporting items, the proposal would require a money market fund to file a report within one business day after occurrence of a liquidity threshold event; however, a fund could file an amended report providing the required brief description of the facts and circumstances leading to the liquidity threshold event up to four business days after such event.260 We believe it may take funds up to four business days to write and review a narrative description of the relevant facts and circumstances, particularly where the liquidity threshold event was caused by multiple or complex circumstances. If a fund has daily liquid assets or weekly liquid assets continuously below the relevant threshold for consecutive business days after reporting an initial liquidity threshold event, the proposal would not require additional Form N–CR reports to disclose that the same type of liquidity threshold event continues.261 We request comment on the proposed amendments to Form N–CR to report information related to liquidity threshold events: 257 Proposed Items E.1 through E.4 of Form N–CR. Item E.3 of Form N–CR. 259 Proposed Item E.4 of Form N–CR. 260 Proposed Instruction to Part E of Form N–CR. 261 If a fund initially falls below only one threshold and then subsequently falls below the other threshold, the proposal would require a second Form N–CR report. For example, if a fund dropped below 25% weekly liquid assets on Tuesday and dropped below 12.5% daily liquid assets on Thursday, it would be required to file two separate reports to disclose each liquidity threshold event. Additionally, if a fund fell below either threshold and subsequently resolved the liquidity threshold event before an initial or amended report is filed, the fund would still be required to report the liquidity threshold event and the facts and circumstances leading to the liquidity threshold event. khammond on DSKJM1Z7X2PROD with PROPOSALS2 258 Proposed VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 102. Should we require money market funds to file reports on Form N–CR when they fall more than 50% below a minimum liquidity requirement, as proposed? How might liquidity reporting on Form N–CR affect money market funds’ incentives to maintain weekly liquid assets and daily liquid assets above 25% and 12.5%, respectively, of total assets? How might this reporting affect investor behavior? 103. Should a report on Form N–CR when a fund falls more than 50% below a liquidity threshold be filed confidentially with the Commission (e.g., because investors can already see liquidity levels on funds’ public websites and Form N–CR reporting may increase investor sensitivity to liquidity levels)? Or, in addition to the proposed public reporting when a fund falls more than 50% below a liquidity threshold, should we require funds to file confidential reports at a different level below a minimum liquidity requirement (e.g., 25% below a minimum)? If we require funds to report certain information confidentially on Form N– CR, should that information be publicly available on a delayed basis and, if so, what is an appropriate delay (e.g., 15, 30, or 60 days)? 104. Should we use a different daily liquid asset or weekly liquid asset level for determining when a fund must file a report on Form N–CR? If so, what level(s) should we use? For example, would 10%, 25%, or 75% (rather than 50%) below the minimum liquidity requirements be appropriate? 105. As proposed, should funds be required to report both their current weekly liquid asset and daily liquid asset levels even if only one of those thresholds is crossed? 106. Should funds be required to report each day they remain below either the 12.5% daily liquid asset threshold or the 25% weekly liquid asset threshold, or is just the initial date of liquidity threshold event sufficient? Should funds be required to subsequently report when a fund’s liquidity returns above an identified threshold (e.g., to a level at or above the minimum liquidity requirements) or is the daily website disclosure of fund liquidity levels sufficient for this purpose? 107. As proposed, should we require funds to report liquidity threshold events within one business day of the relevant event? Is four business days sufficient for funds to file an amended report that includes a brief description of the facts and circumstances leading to the fund falling below either threshold? Should these reporting periods be longer or shorter? PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 7281 108. Should any more, less, or other information be required in connection with liquidity threshold events? b. Structured Data Requirement We are proposing to require money market funds to file reports on Form N– CR in a structured data language.262 In particular, we are proposing to require filing of Form N–CR reports in a custom eXtensible Markup Language (‘‘XML’’) -based structured data language created specifically for reports on Form N–CR (‘‘N–CR-specific XML’’). We believe use of an N–CR-specific XML language would make it easier for money market funds to prepare and submit the information required by Form N–CR accurately, and would make the submitted information more useful to investors and the Commission. A structured data language would allow tools to be developed so that users can sort and filter the available data according to specified parameters. Reports on Form N–CR are currently required to be filed in HTML or ASCII.263 We understand that, in order to prepare reports in HTML and ASCII, money market funds generally need to reformat required information from the way the information is stored for normal business uses. In this process, money market funds typically strip out incompatible metadata (i.e., syntax that is not part of the HTML or ASCII specification) that their business systems use to ascribe meaning to the stored data items and to represent the relationships among different data items. The resulting code, when rendered in an end-user’s web browser, is comprehensible to a human reader, but it is not suitable for automated validation or aggregation. In recent years we have gained experience with different reporting data languages, including with reports in an XML-based structured data language. For example, we have used customized XML data languages for reports filed on Form N–CEN and Form N–MFP.264 We 262 See proposed General Instruction D of Form N–CR (specifying that reporting persons must file reports on Form N–CR electronically on EDGAR and consult the EDGAR Filer Manual for EDGAR filing instructions). See also 17 CFR 232.301 (requiring filers to prepare electronic filings in the manner prescribed by the EDGAR Filer Manual). 263 See Regulation S–T, 17 CFR 232.101(a)(1)(iv); 17 CFR 232.301; EDGAR Filer Manual (Volume II) version 59 (September 2021), at 5–1 (requiring EDGAR filers generally to use ASCII or HTML for their document submissions, subject to certain exceptions). 264 See e.g., Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)] (adopting Form N–CEN); 2010 Adopting Release (adopting Form N–MFP). E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7282 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules have found the XML-based structured data languages used for those reports allow investors to aggregate and analyze reported data in a much less laborintensive manner than data filed in ASCII or HTML. Based on our understanding of how funds currently disclose required information in a structured data language, we believe that requiring a Form N–CR-specific XML language would minimize reporting costs while yielding more useful data for investors and the Commission, as applicable. Money market funds would be able, at their option, either to submit XML reports directly or use a web-based reporting application developed by the Commission to generate the reports, as funds are able to do today when submitting holdings reports on Form N– CEN. We recognize that Form N–CR filers could bear some additional reporting costs related to adjusting their systems to a different data language. However, many money market funds have acquired substantial experience with reporting on web-based applications (or directly submitting information in a structured data language). For example, money market funds currently file Form N–MFP on a monthly basis to report their portfolio holdings and other information to the Commission in a custom XML language. We believe that aligning Form N–CR’s reporting data language with the type of data language of other required reports, including Form N–MFP, may reduce costs and introduce additional efficiencies for money market funds already accustomed to reporting using structured data and may reduce overall reporting costs in the longer term. Furthermore, even if there are increased costs, we believe that the benefits to investors and the Commission of making the information more usable would justify these costs. We request comment on the reporting data language we are proposing to require for reports filed on Form N–CR, and, in particular, on the following: 109. Should we require, as we are proposing, Form N–CR reports to be filed in an N–CR-specific XML language? Is an N–CR-specific XML language the appropriate type of data language for Form N–CR reports? Why or why not? If another structured data language (e.g., Inline eXtensible Business Reporting Language), would be more appropriate, which one, and why? 110. Would this proposed requirement yield reported data that is more useful to investors, compared with not requiring Form N–CR to be filed in an N–CR-specific XML language, or VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 requiring Form N–CR to be filed in a structured data language other than an N–CR-specific XML language? 111. Should any subset of funds be exempt from the proposed structured data reporting requirement? If so, what subset and why? 112. What implementation and long term costs, if any, would be associated with the proposed structured data reporting requirement? c. Other Proposed Amendments In addition to the proposed items related to liquidity threshold events and the proposed structured data language requirement, we are proposing a few other amendments to Form N–CR. To improve the identifying information for the registrant and series reporting an event on Form N–CR, we are proposing to require the registrant name, series name, and legal entity identifiers (‘‘LEIs’’) for the registrant and series.265 We also propose to add definitions of LEI, registrant, and series to the form for clarity, and the definitions of these terms would be the same as on Form N– MFP.266 Further, we are proposing to remove the reporting events that relate to liquidity fees and redemption gates, consistent with our proposal to remove the underlying provisions from rule 2a– 7.267 We also propose an amendment to Part C of Form N–CR, which relates to the provision of financial support to the fund. Specifically, when the support involves the purchase of a security from the fund, we propose to require the date the fund acquired the security, which would allow better identification of, and context for, support that occurs within a short period of time. For example, if the fund purchased the security a few days before the affiliate acquired it, this could suggest that the risk profile of the security deteriorated rapidly. We request comment on the other proposed amendments to Form N–CR: 113. Should we require reporting of registrant name, series name, and LEIs for the registrant and series on Form N– CR, as proposed? Is there other identifying information we should require? 114. Should we make any changes to the definitions we propose to include in 265 See Items A.2, A.4, A.5, and A.7 of proposed Form N–CR. An LEI is a unique identifier generally associated with a single corporate entity and is intended to provide a uniform international standard for identifying counterparties to a transaction. Money market funds are already required to report LEIs for a registrant and series on Form N–CEN. See Items B.1 and C.1 of Form N– CEN. 266 See proposed General Instruction F of Form N–CR. 267 See Parts F through G of current Form N–CR. PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 Form N–CR? Are there other terms we should define in the form? 115. For the Form N–CR item requiring reporting of financial support, should we require reporting of the date the fund acquired a security, as proposed, if the support involves the purchase of a security from the fund? 2. Amendments to Form N–MFP Form N–MFP is the form that money market funds use to report their portfolio holdings and other key information each month.268 We use the information on Form N–MFP to monitor money market funds and support our examination and regulatory programs. We are proposing amendments to improve our ability to monitor money market funds. The proposed amendments would provide certain new information about a fund’s shareholders and disposition of non-maturing portfolio investments. We are also proposing changes to enhance the accuracy and consistency of information funds currently report, to increase the frequency of certain data points, and to improve identifying information for the reporting fund. a. New Information Requirements We are proposing to require additional information about the composition and concentration of money market fund shareholders. With respect to shareholder concentration, we are proposing that all money market funds disclose the name and percent of ownership of each person who owns of record or is known by the fund to own beneficially 5% or more of the shares outstanding in the relevant class.269 Money market funds currently provide substantially the same information on an annual basis in their registration statements.270 We believe more frequent information about shareholder concentration would be helpful for monitoring a fund’s potential risk of redemptions by an individual or a small group of investors that could significantly affect the fund’s liquidity. We recognize that as a result of omnibus accounts, there are circumstances in which multiple investors would be 268 See rule 30b1–7 under the Investment Company Act. 269 See proposed Item B.10 of Form N–MFP. If the fund knows that two or more beneficial owners of the class are affiliated with each other, the fund would treat them as a single beneficial owner for purposes of the 5% ownership calculation and would report information about each affiliated beneficial owner. For these purposes, an affiliated beneficial owner would be one that directly or indirectly controls or is controlled by another beneficial owner or is under common control with another beneficial owner. 270 See Item 18 of Form N–1A. E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules represented as a single shareholder of record for purposes of this disclosure.271 The proposal would require information about beneficial owners known by the fund in recognition that funds may not have information about the amount each beneficial owner holds in an omnibus account. The proposed item would distinguish between record owners and beneficial owners to facilitate a more nuanced understanding of potential concentration levels. We are proposing to require funds to use a 5% ownership threshold for this reporting requirement to align with analysis funds already must conduct each year for purposes of updating their registration statements.272 We also propose to require a money market fund that is not a government money market fund or a retail money market fund to provide information about the composition of its shareholders by type.273 The proposed item would require these funds to identify the percentage of investors within the following categories: Nonfinancial corporation; pension plan; non-profit; state or municipal government entity (excluding governmental pension plans); registered investment company; private fund; depository institution and other banking institution; sovereign wealth fund; broker-dealer; insurance company; and other. This information would assist with monitoring the liquidity and redemption risks of institutional money market funds, as different types of investors may pose different redemption risks. We are not proposing to require this information of government money market funds because these funds have lower redemption and liquidity risks than other money market funds. We are not proposing to apply this requirement to retail funds because these funds, by definition, are limited to retail investors. In addition, we propose to add new Part D to Form N–MFP, which would require information about the amount of portfolio securities a prime money market fund sold or disposed of during the reporting period. This information would facilitate monitoring of prime money market funds’ liquidity management, as well as their secondary market activities in normal and stress periods. It also would improve the availability of data about how selling activity by money market funds relates 271 Omnibus accounts are accounts established by intermediaries that typically aggregate all customer activity and holdings in a money market fund, which can result in the fund not having information about individual beneficial owners who hold their shares through the omnibus account. 272 See Item 18 of Form N–1A. 273 See proposed Item B.11 of Form N–MFP. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 to broader trends in short-term funding markets. The proposal would require a prime fund to disclose the aggregate amount it sold or disposed of for each category of investment.274 The categories of investments would mirror the categories funds already use on Form N–MFP for identifying their month-end holdings (e.g., certificate of deposit, non-negotiable time deposit, financial or non-financial company commercial paper, or U.S. Treasury debt).275 To focus the disclosure on secondary market activity, the proposal would exclude portfolio securities the fund held until maturity. We are proposing to require only prime funds to provide information about securities sold or disposed of because we believe that asset liquidation by this type of money market fund contributed to the market stress in March 2020 and during the 2008 financial crisis. In contrast, government funds generally receive inflows during periods of market stress and tend to provide liquidity to the market by investing incoming cash flow in the repurchase agreement market and purchasing securities. Tax-exempt funds are only a small segment of the money market fund industry and are less likely to generate significant liquidity concerns for the broader municipal market. As described above in the proposed swing pricing requirement section, we also propose to amend Form N–MFP to require money market funds that are not government money market funds or retail money market funds to report the number of times the fund applied a swing factor over the course of the reporting period, and each swing factor applied. In that section, we requested comment on these swing pricing-related amendments to Form N–MFP. We request comment on the new items we propose to add to Form N– MFP, including: 116. Should we require all money market funds to disclose information about shareholder concentration on Form N–MFP, as proposed? Should certain types of funds be excluded and, if so, why? Should the reporting threshold be ownership of at least 5% of a class’s shares outstanding, as proposed? Should the threshold be lower or higher, such as 1%, 10%, or 15%? Instead of requiring information about shareholders who hold a certain amount of a class’s outstanding shares, should we use a different method of obtaining information about shareholder concentration? For example, should we require funds to report the amount of 274 See 275 See PO 00000 Item D.1 of proposed Form N–MFP. Item C.6 of current Form N–MFP. Frm 00037 Fmt 4701 Sfmt 4702 7283 net assets held by a specific number of the fund’s largest investors, such as the one, five, or ten largest investors? 117. As proposed, should the shareholder concentration item require the name and percentage of ownership for each shareholder who owns of record or beneficially 5% or more? Should we require different information for some or all types of investors? For example, should we not require name information for retail investors or other types of investors? As another alternative, should we require funds to report only the number of investors who own of record or beneficially 5% or more, distinguishing between record owners and beneficial owners? Additionally, should this information, as proposed, be reported on a nonconfidential basis? Is there any sensitivity to identifying shareholder information such that it should only be reported to the Commission on a confidential basis? 118. Do funds currently gather information about shareholder concentration and composition on at least a monthly basis, or would the proposal require more frequent gathering of information than current practices? If more frequent information gathering would be required, what are the associated advantages and disadvantages of assessing shareholder concentration and composition more frequently? Should we require funds to report this information on Form N–MFP less frequently than proposed, such as annually, semiannually, or quarterly? 119. Should we require institutional prime and tax-exempt money market funds to provide information about the composition of their shareholders by type, as proposed? Are there any changes we should make to the types of shareholders the form would identify? Should certain shareholder categories be added or removed? Should we provide additional guidance or definition for any of the categories of shareholders? Should we also require government money market funds to respond to this item? If so, why? 120. To what extent do money market funds know when an investor beneficially owns 5% or more of a class’s outstanding shares when those shares are held through an omnibus account? To what extent do institutional money market funds know the composition of their shareholders by type? Are there any changes we should make to facilitate money market funds’ abilities to collect this information, including for investors who invest through an omnibus account? For example, should we preclude a money market fund from selling its securities to E:\FR\FM\08FEP2.SGM 08FEP2 7284 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 a financial intermediary in nominee name on behalf of others unless the intermediary provides certain information about investors in the fund (such as size of holding, type of investor, or other investor characteristics)? 121. Should we require prime funds to disclose aggregate information about the amount of portfolio securities they sold or disposed of during the reporting period for each category of investment, as proposed? Should we instead require details about each instrument sold (e.g., date of sale, price, and identifying information for each holding)? Should we instead consider requiring that prime funds report information about the amount of portfolio securities sold or disposed of on Form N–CR if the amount is above a specific threshold? If so, what amount of selling activity should trigger such reporting? 122. Should we require only some money market funds to disclose their selling activity, as proposed? Should we alternatively require all, or a broader subset of, money market funds to disclose this information? 123. Are there other types of information we should require money market funds to report on Form N–MFP to facilitate monitoring of these funds? b. Changes To Improve the Accuracy and Consistency of Currently Reported Information We are proposing several amendments to improve information about money market funds’ portfolio securities. We are proposing to specify that, for purposes of reporting the fund’s schedule of portfolio securities in Part C of Form N–MFP, filers must provide required information separately for the initial acquisition of a security and any subsequent acquisitions of the security (i.e., for each lot).276 Currently, some funds report information separately for each lot, while others do not. Requiring funds to report information separately for each lot would facilitate the Commission’s ability to analyze other information we propose to require. Specifically, we are proposing an additional item that would require funds to provide the trade date on which the security was acquired and the yield of the security as of that trade date.277 These proposed amendments, collectively, would assist the 276 See introductory language to Part C of proposed Form N–MFP. 277 See Item C.6 on proposed Form N–MFP. Because the proposed amendments separately request the yield at the time of acquisition, we are proposing to remove language in Item C.2 requiring filers to include the coupon, if applicable, in response to that item. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 Commission in understanding how long a fund has held a given position and the maturity of the position when it was first acquired. This information is important to understand a money market fund’s portfolio turnover during normal market conditions and to monitor a potentially higher level of asset disposition during periods of market stress. Form N–MFP requires filers to report particular information about funds’ repurchase agreements. We are proposing to amend the form to require additional information about repurchase agreement transactions and to standardize how filers report certain information. Specifically, the amendments would require that filers identify (1) the name of the counterparty in a repurchase agreement; (2) whether a repurchase agreement is centrally cleared and the name of the central clearing counterparty, if applicable; (3) if a repurchase agreement was settled on a triparty platform; and (4) the CUSIP of the securities involved in the repurchase agreement. Currently, Form N–MFP simply asks for the name of the issuer. For repurchase agreements, filers sometimes report the name of the counterparty to the repurchase agreement, the name of the clearing house (in the case of centrally cleared repurchase agreements), or both in response to this item. In addition, the amendments would recognize changes that have occurred in the market for repurchase agreements since the form was last amended, such as the introduction of centrally cleared (or ‘‘sponsored’’) repurchase agreements. These proposed amendments would improve the Commission’s monitoring of money market fund activity in various segments of the market for repurchase agreements, including potentially increased or decreased activity during periods of market stress, which may affect availability of funding for borrowers. We are also proposing to include ‘‘cash’’ as a category of investment that most closely represents the collateral in repurchase agreements.278 This amendment is designed to recognize that cash is sometimes used as collateral for repurchase agreements, and we expect that the addition would reduce inaccurate disclosure suggesting that a 278 See Item C.9.k of Form N–MFP (currently listing as categories of investments that most closely represents the collateral: Asset-backed securities; agency collateralized mortgage obligations; agency debentures and agency strips; agency mortgagebacked securities; private label collateralized mortgage obligations; corporate debt securities; equities; money market; U.S. Treasuries (including strips); and other instruments). PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 repurchase agreement is undercollateralized. Moreover, we are proposing to remove the ability for funds to aggregate certain required information if multiple securities of an issuer are subject to the repurchase agreement.279 Removing this provision would provide more complete information about securities subject to a repurchase agreement. Form N–MFP currently requires filers to indicate the category of money market fund.280 These categories include ‘‘Treasury,’’ ‘‘Government/ Agency,’’ and ‘‘Exempt Government,’’ among others. We understand that these categories for government money market funds have contributed to confusion and inconsistent approaches to categorization. We are proposing to remove these three category designations and to replace them with one ‘‘Government’’ category.281 To differentiate between Treasury funds and other government funds, the proposal includes a new subsection that requires government money market funds to indicate whether they typically invest at least 80% of the value of their assets in U.S. Treasury obligations or repurchase agreements collateralized by U.S. Treasury obligations.282 We believe that these amendments would provide more clarity for filers and supply the Commission with more accurate identification of different types of government money market funds. We are proposing a new item in Form N–MFP that would require filers to indicate whether the fund is established as a cash management vehicle for affiliated funds and accounts.283 This item would make it easier and more efficient to identify privately offered institutional money market funds. Our proposal also includes an amendment to 279 See Item C.8 of Form N–MFP. A.10 of Form N–MFP. 281 See proposed Item A.10 of Form N–MFP. We also propose to add definitions for ‘‘government money market fund’’ and ‘‘retail money market fund’’ in the form, which would be consistent with the definitions of these terms in rule 2a–7. Including these definitions in the form would clarify the meaning of references to these terms in this item and elsewhere in the form. See General Instruction E of proposed Form N–MFP. Because under this approach the definition of ‘‘retail money market fund’’ would be clear for purposes of the form, we also propose to amend Item A.10.a to use this defined term, rather than refer to exempt retail money market funds. See proposed Item A.10.a of Form N–MFP. 282 See proposed Item A.10.b of Form N–MFP. The 80% investment standard is based on 17 CFR 270.35d–1 (rule 35d–1 under the Investment Company Act), which requires a money market fund that includes ‘‘Treasury’’ in its name to adopt a policy to invest, under normal circumstances, at least 80% of its assets in the particular type of investment the fund’s name suggests. 283 See proposed Item A.21 of Form N–MFP. 280 Item E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules enhance consistency of reporting of whether a fund seeks to maintain a stable price per share.284 Currently, the form provides that if a fund seeks to maintain a stable price per share, it must state the price it seeks to maintain. However, if a fund does not respond to this item, it is unclear whether the fund did so in error or simply does not seek to maintain a stable price per share. The proposed amendment would require a fund to respond ‘‘yes’’ or ‘‘no’’ to whether it seeks to maintain a stable price per share so as to avoid any ambiguity. Currently, funds are required to provide the name of any person who paid for or waived all or part of the fund’s operating expenses or management fees during the reporting period and describe the amount and nature of the fee and expense waiver or reimbursement. These disclosures are difficult to use, as they are provided in a format that is not structured.285 Moreover, the identification of the person who paid for or waived the fund’s expenses or fees is not significantly beneficial to the Commission’s monitoring and assessment of fund risks. While we continue to believe that shareholders should have access to this information, we believe that it is unnecessary to include in Form N–MFP since disclosure related to fees and expenses is available in funds’ financial statements. Accordingly, we are proposing to require funds to report only the amount of any fee waiver or expense reimbursement during the reporting period.286 This proposed change would make it easier for the Commission and investors to analyze efficiently the reported data. For each portfolio security, a fund is required to indicate on Form N–MFP the category of instrument, using a list of categories designated in the form.287 We are proposing to include a new category that distinguishes between U.S. Government agency notes that are coupon-paying and those that are nocoupon discount notes.288 We believe that including this distinction would allow us to better understand whether an agency security should be categorized as a weekly liquid asset, as only agency discount notes with less than 60 days to maturity can be 284 See proposed Item A.18 of Form N–MFP (proposing to require a fund to respond ‘‘yes’’ or ‘‘no’’ to whether it seeks to maintain a stable price per share). 285 Item B.8 of Form N–MFP. 286 See proposed Item B.9 of Form N–MFP. 287 Item C.6 of Form N–MFP. 288 See proposed amendments to Item C.7 of Form N–MFP. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 considered weekly liquid assets under the rule. We are also proposing a conforming change to the list of investment categories that a fund must use for purposes of disclosing information about its holdings on its website.289 We request comment on the proposed amendments to improve the accuracy and consistency of currently reported information on Form N–MFP, including the following: 124. Is the proposed requirement that funds provide required information separately for the initial acquisition of a security and any subsequent acquisitions of the security appropriate? Why or why not? Should we require funds to report the acquisition date and yield as of the acquisition date for each lot, as proposed? Are there better ways for us to assess how long a fund has held a position and its portfolio turnover? If so, how? 125. Should we, as proposed, require additional information about the counterparty to the repurchase agreement and information about whether a repurchase agreement is centrally cleared or a triparty agreement? Are there other ways we could acquire this information? 126. As proposed, should we require the CUSIP of the collateral subject to the repurchase agreement and add a category for cash collateral? As proposed, should we remove the provision that allows funds to aggregate information about multiple securities of an issuer that are subject to a repurchase agreement? To what extent do funds currently rely on this provision? What are the potential effects of our proposal to remove this provision? Is there any additional information related to repurchase agreement transactions that we should require? 127. Should Form N–MFP require registrants to provide Financial Instrument Global Identifier for securities, if available? Should Form N– MFP permit registrants to report the Financial Instrument Global Identifier in lieu of a CUSIP number on Form N– MFP? Why or why not? 128. Are our proposed amendments to consolidate how funds would identify different types of government money market funds effective? Is our proposed approach to identifying funds that should be classified as Treasury funds appropriate? 129. Is our proposed item to identify money market funds established as cash management vehicles for affiliates or other related entities sufficiently clear? Are there any changes we should make 289 See PO 00000 proposed rule 2a–7(h)(10)(i)(B)(2). Frm 00039 Fmt 4701 Sfmt 4702 7285 to that item? Is there a more effective way of identifying these funds? Would this question be more appropriate on a different form instead of Form N–MFP, for example, Form N–CEN? 130. Should we simplify disclosure of any fee waiver or expense reimbursement during the reporting period, as proposed? What scope of arrangements do funds currently report as fee waivers or expense reimbursements on Form N–MFP? For example, do they include offsets or credits (e.g., custodian credits)? Do funds need additional clarity or guidance on the types of arrangements to report? Instead of our proposed approach, should we retain information about the person waiving the fee or reimbursing the expense and a description of the fee waiver or expense reimbursement? For example, to better structure the item, should we require filers to identify the type of waiver or reimbursement on Form N–MFP (e.g., management fees, 12b–1 fees)? Why or why not? Should we require filers to provide a reason for the waiver or reimbursement? For instance, should the item require that filers designate whether such actions were taken to maintain a particular expense ratio or a minimum level of yield? Why or why not? 131. As proposed, should we require funds to distinguish between U.S. Government agency notes that are coupon-paying and those that are nocoupon discount notes when categorizing their portfolio securities on Form N–MFP? Would this information be helpful for identifying securities that qualify as weekly liquid assets? Should we also require funds to distinguish between these two categories for purposes of disclosing portfolio securities on their websites, as proposed? 132. Are there other changes or additions that would improve the accuracy and consistency of the required reported information on Form N–MFP? c. More Frequent Data Points Under current rule 2a–7, a money market fund must prominently disclose on its website, as of the end of each business day during the preceding six months, the fund’s percentage of total assets invested in daily liquid assets and in weekly liquid assets, as well as the fund’s net asset value per share (including for each class of shares) and net shareholder flow.290 Currently, in monthly reports on Form N–MFP, a money market fund must provide the 290 17 E:\FR\FM\08FEP2.SGM CFR 270.2a–7(h)(10)(ii). 08FEP2 7286 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules same general information for each Friday during the month reported.291 Based on the Commission’s experience with using current Form N–MFP data to analyze the events of March 2020 and other periods, we are proposing to amend Form N–MFP to require a money market fund to provide in its monthly report this liquidity, net asset value, and flow data for each business day of the month, rather than on a weekly basis. We are proposing to require daily liquidity, net asset value, and flow data in monthly reports to allow Commission staff to better and more precisely monitor risks and trends in these areas in an efficient and more precise manner without requiring frequent visits to the websites of many different funds, and to provide industry-wide daily data in a central repository as a resource for investors and others.292 The weekly data currently reported on Form N–MFP provides only a snapshot of the liquidity, net asset value, and flow data for any given month, and is therefore incomplete and less useful for purposes of analysis and monitoring than data for each business day in that month. In addition, most of the data on Form N– MFP is reported as of the end of the month, making it difficult to analyze the weekly data in a comprehensive manner. This is because the weekly data points generally relate to different days than the monthly data points. Although data vendors provide some daily data based on information gathered from funds’ websites, the staff has found this data could be incomplete at times, and therefore may not be appropriate for purposes of staff monitoring and analyses. As money market funds generally are already required to report on their websites the same data that we propose requiring be reported on Form N–MFP, we believe this change would impose minimal burden on money market funds. Consistent with the website information funds already provide, the reported daily data points 291 Items A.13, A.20, B.5, and B.6 of Form N– khammond on DSKJM1Z7X2PROD with PROPOSALS2 MFP. 292 To enhance consistency in reporting practices, we propose to specify that filers report gross subscriptions and gross redemptions as of the trade date (rather than as of the settlement date). This proposed change is intended to ensure that funds are reporting the information in the same manner. We also propose to clarify that filers that are masterfeeder funds should report the required shareholder flow data at the feeder fund level only. See Item B.7 of proposed Form N–MFP. In addition, as discussed above, we are also proposing to amend the net asset value per share disclosures to require that an institutional prime or institutional tax-exempt fund should provide the net asset value per share as adjusted by a swing factor, if applicable. See supra Section II.B.4. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 would be calculated as of the end of each business day. We are also proposing to increase the frequency with which funds report certain yield information. Currently, funds must report 7-day gross yields (at the series level) and 7-day net yields (at the share class level) as of the end of the reporting period. We propose to require funds to report this information each business day. We believe the higherfrequency reporting would assist in the timely monitoring and assessment of fund risks, particularly during periods of market stress. We request comment on our proposal to require daily liquidity, net asset value, flow, and yield data in monthly Form N–MFP reports, including on the following: 133. Should we, as proposed, require liquidity, net asset value, and flow data to be reported as of the close of business on each business day of each month? Would funds incur significantly higher costs than under the current weekly data reporting requirement? Please describe the associated costs. 134. Would our new proposed requirements help us better identify certain risk characteristics that the form currently does not capture? 135. Are there other ways to monitor risks and trends in fund liquidity, valuation, and shareholder flow in a more efficient and precise manner without requiring frequent visits to the websites of many different funds? 136. When reporting required flow information on Form N–MFP, money market funds must include dividend reinvestments in the gross subscriptions figure.293 After last amending Form N– MFP, the Commission adopted Form N– PORT, which requires other types of registered management investment companies to report shares sold in connection with reinvestments of dividends and distributions separately.294 Should we similarly require money market funds to report dividend reinvestments and distributions separately? Would using an approach that is similar to Form N– PORT benefit fund complexes by allowing them to use consistent systems across different types of mutual funds for purposes of reporting flow information and allow the Commission and investors to better identify whether the fund is receiving new subscriptions? Or would such a change burden fund complexes and require systems changes, without significantly enhancing the current data because dividend reinvestments by money market fund 293 See 294 See PO 00000 Item B.6 of current Form N–MFP. Item B.6 of Form N–PORT. Frm 00040 Fmt 4701 Sfmt 4702 investors are less substantial than for other fund types? 137. Should we, as proposed, require money market funds to report 7-day yield information each business day? What are the advantages and disadvantages of requiring higherfrequency reporting of yield information? Should we instead require funds to report this information for each Friday of the month and for month-end, or on a different time cycle? d. Other Amendments Form N–MFP currently provides that a filer must disclose the registrant’s LEI, if available, and does not require the LEI of the series.295 Filers also provide the name of the registrant and series in metadata associated with the form, but filers do not report these names on the form itself. We are proposing to require funds to identify the name and LEI for both the fund registrant and the series.296 Requiring reporting of registrant and series names on the form is meant to make the form easier for investors to use. The change to require LEIs for the registrant and series aligns Form N–MFP with Forms N–CEN and N–PORT, which require LEI reporting for the registrant and series. Currently, funds must report the LEI that corresponds to a portfolio security, if the LEI is available. We propose to clarify that funds should respond to an item request with ‘‘N/A’’ if the information is not applicable (e.g., a company does not have an LEI).297 We also propose to amend the definition of LEI in the form to remove language providing that, in the case of a financial institution that does not have an assigned LEI, a fund should instead disclose the RSSD ID assigned by the National Information Center of the Board of Governors of the Federal Reserve System, if any.298 Rather than classify an RSSD ID as an LEI under these circumstances, we propose to add RSSD ID as an additional category of ‘‘other identifiers’’ that a fund can use for relevant portfolio securities.299 295 See Item 3 of current Form N–MFP. Items 2, 4, 5, and 6 of proposed Form N– MFP. We also propose that funds disclose the full name of the class of series, as the current form only includes the EDGAR class identifier. 297 See General Instruction A of proposed Form N–MFP. 298 See General Instruction F of proposed Form N–MFP for a revised definition of LEI. 299 See Item C.5 of proposed Form N–MFP; General Instruction F of proposed Form N–MFP (adding a definition of RSSD ID). The revised definition of LEI would differ from the definitions of this term in Forms N–CEN, N–PORT, and PF, which allow an RSSD ID for a financial institution to be treated as an LEI if the institution has not been assigned an LEI. However, we do not believe that the different definitions of LEI among these forms 296 See E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules These changes are designed to improve consistency and comparability of information funds report about the securities they hold. We request comment on our other proposed amendments to Form N–MFP, including the following: 138. Should we require funds to provide both the name and LEI for the registrant and the series and the full name of the class of the series, as proposed? Is there other identifying information about the registrant, series, or class that would be helpful? 139. As proposed, should we amend the definition of LEI in the form and provide a separate item for providing an RSSD ID as a securities identifier, as applicable? 140. Are there other definitions we should amend, include, or exclude from the form? Please explain. G. Compliance Date khammond on DSKJM1Z7X2PROD with PROPOSALS2 We propose to provide a transition period after the effective date of the amendments to give affected funds sufficient time to comply with the proposed changes and associated disclosure and reporting requirements, as described below. Based on our experience, we believe the proposed compliance dates would provide an appropriate amount of time for funds to comply with the proposed rule if adopted. • Twelve-Month Compliance Date. We propose that 12 months after the effective date of the amendments, any money market fund that is not a government money market fund or a retail money market fund must comply with the proposed swing pricing requirement in rule 2a–7, if adopted, as well as the swing pricing disclosures applicable to these money market funds in the proposed amendments, if adopted, to Forms N–MFP and N–1A.300 We also propose to provide 12 months after the effective date for government and retail funds to determine, should the rule be adopted, that financial intermediaries have the capacity to redeem and sell at a price based on the current net asset value per share pursuant to rule 22c–1 or prohibit the financial intermediary from purchasing in nominee name on behalf of other would result in confusion or burdens. Form N–MFP would continue to allow a fund to report an RSSD ID for a financial institution when an LEI is not available, similar to the other forms, but it would make it easier to distinguish between the two types of identifiers. 300 See proposed rule 2a–7(c); proposed amendments to Items 4 and 6 of Form N–1A; proposed amendments to Item A.22 of Form N– MFP. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 persons, securities issued by the fund.301 • Six-Month Compliance Date. The proposed compliance period for all other aspects of the proposal is six months after the effective date of the amendments, if adopted, and includes the following: Æ The proposed increased daily minimum asset and weekly minimum asset requirements; and Æ The amendments to Forms N–CR and N–MFP, except the swing pricingrelated disclosure on Form N–MFP. • Effective Date for Amendments Related to Liquidity Fees and Redemption Gates. Removal of the liquidity fee and redemption gate provisions in rule 2a–7, as well as removal of associated disclosure requirements in Form N–1A and N–CR, would be effective, if adopted, when the final rule is effective. We request comment on the proposed compliance dates, and specifically on the following items: 141. Are the proposed compliance dates appropriate? If not, why not? Is a longer or shorter period necessary to allow affected funds to comply with one or more of these particular amendments? If so, what would be a recommended compliance date? 142. Should removal of the fee and gate provisions be effective when the final rules become effective, as proposed? Alternatively, should these provisions not be effective until the compliance period ends for the increased liquidity requirements or the swing pricing requirement? III. Economic Analysis A. Introduction The Commission is mindful of the economic effects, including the costs and benefits, of the proposed amendments. Section 2(c) of the Act provides that when the Commission is engaging in rulemaking under the Act and is required to consider or determine whether an action is consistent with the public interest, the Commission shall also consider whether the action will promote efficiency, competition, and capital formation, in addition to the protection of investors. The analysis below addresses the likely economic effects of the proposed amendments, including the anticipated and estimated benefits and costs of the amendments and their likely effects on efficiency, competition, and capital formation. The Commission also discusses the potential economic effects of certain alternatives to the approaches taken in this proposal. 301 See PO 00000 proposed rule 2a–7(h)(ii). Frm 00041 Fmt 4701 Sfmt 4702 7287 Money market funds serve as intermediaries between investors seeking to allocate capital and issuers seeking to raise capital. Specifically, money market funds pool a diversified portfolio of short-term debt instruments (such as government and municipal debt, repurchase agreements, commercial paper, certificates of deposit, and other short-term debt instruments), and sell shares to end investors, who use money market funds to manage liquidity needs. Money market funds play an important role in investors’ asset allocation and liquidity management; serve as a source of wholesale funding liquidity in the financial system; and rely on capital subject to daily and intraday redemptions to invest in short-term debt instruments.302 As discussed in detail in the sections that follow, the proposal seeks to address liquidity externalities in money market funds. Specifically, redeeming investors impose negative liquidity externalities on investors remaining in the fund (‘‘fund dilution’’), which may amplify a first mover advantage in redemptions. For example, when early redemptions force a money market fund to draw down on liquid assets, they reduce overall fund liquidity available for future redemptions. The proposed removal of the tie between weekly liquid assets and redemption gates and the proposed elimination of redemption gates under rule 2a–7 are intended to reduce incentives of investors to redeem early to avoid losing liquidity during a potential gating period. The proposed increases in minimum liquidity requirements are designed to support funds’ ability to meet redemptions from cash or securities convertible to cash even in market conditions in which money market funds cannot rely on a secondary or dealer market to provide liquidity, which may reduce transaction costs associated with redemptions and corresponding dilution borne by remaining investors. In addition, the proposed swing pricing requirement for institutional prime and institutional tax exempt money market funds is intended to require redeeming investors to absorb the liquidity costs they impose on the fund and thereby reduce unfairness to and the dilution of shareholders remaining in the fund. By reducing liquidity externalities in money market funds, the proposal may dampen the risk of runs on money market funds. The possibility that funds may impose gates or fees after crossing a threshold may give rise to additional 302 See Section III.B.3 for an analysis of portfolio holdings of different types of money market funds. E:\FR\FM\08FEP2.SGM 08FEP2 7288 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules run risk. As discussed in Section I.B, in March 2020, when some money market funds approached the 30% weekly liquid asset threshold that would permit a fund to impose a gate or a fee, investors became more likely to redeem from those funds. Loss of access to liquidity by investors during the gating period can magnify the incentive to run before the gate is imposed. The proposal may mitigate liquidity externalities and run risk in money market funds in three ways. First, the proposal would remove the tie between weekly liquid asset thresholds and the possibility that gates or fees will be imposed, which incentivized runs on money market funds and altered portfolio management behavior of money market funds in 2020, based on available evidence. Second, increases in minimum liquidity requirements may improve the ability of funds to meet redemptions, reducing the risk of runs on funds with low liquidity. Third, the proposed swing pricing requirement may partly reduce run risk by reducing the first-mover advantage related to dilution costs.303 Money market fund managers’ risktaking incentives may lead them to hold liquidity levels that may be insufficient to meet redemptions in times of stress 304 for at least three reasons. First, some investors may seek to maximize other than dilution costs—such as falling asset prices and potential differences between a fund’s net asset value and execution prices—may also contribute to runs. These and other considerations are discussed in greater detail in Section III.B.2 below. 304 A large finance literature examines the interplay between maturity transformation, systemic risk, and leverage. See, e.g., Fahri, Emmanuel and Jean Tirole. 2012. ‘‘Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts’’. American Economic Review 102(1): 60– 93. See also Acharya, Viral, and S Viswanathan. 2011. ‘‘Leverage, Moral Hazard, and Liquidity.’’ Journal of Finance 66(1): 99–138. Other papers have examined the effects of government backstops on money market funds. See, e.g., Strahan, Philip, and Basak Tanyeri. 2015. ‘‘Once Burned, Twice Shy: Money Market Fund Responses to a Systemic Liquidity Shock.’’ Journal of Financial and Quantitative Analysis 50(1–2): 119–144. See also Kim, Hugh Hoikwang. 2020. ‘‘Information Spillover of Bailouts.’’ Journal of Financial Intermediation 43. khammond on DSKJM1Z7X2PROD with PROPOSALS2 303 Factors VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 returns,305 assets with higher liquidity risks deliver higher returns,306 and fund managers’ compensation may be related to fund size and performance.307 Second, large scale redemptions akin to those experienced by some funds in March 2020 are rare, and estimating the risk of such rare and large scale redemptions is inherently difficult. Third, money market funds do not internalize liquidity externalities that money market fund liquidity management practices may impose on market participants transacting in the same asset classes. While the proposal would not fundamentally change these incentives of money market funds or fund managers, it would require funds to hold a greater share of highly liquid assets. This may reduce the ability of money market funds to invest in less liquid assets in order to reach for yield, reducing the probability that money market funds are unable to meet redemptions with liquid assets and have to sell less liquid holdings at a large haircut. Moreover, future times of stress may involve larger redemptions that would force money market funds to sell less liquid assets to meet redemptions. Thus, the proposal may lower the risk that money market funds do not have enough liquidity to meet redemptions and consequently relying on 305 In a somewhat parallel open end fund context, fund inflows are highly sensitive to fund yields, which can incentivize a reach for yield. See, e.g., Choi, Jaewon, and Mathias Kronlund. 2018. ‘‘Reaching for Yield in Corporate Bond Mutual Funds.’’ The Review of Financial Studies. 31(5): 1930–1965. See also Kacperczyk, Marcin, and Philipp Schnabl. 2013. ‘‘How Safe are Money Market Funds?’’ The Quarterly Journal of Economics, 138(3): 1073–1122. See also Fulkerson, Jon, Bradford Jordan, and Timothy Riley. 2013. ‘‘Return Chasing in Bond Funds.’’ Journal of Fixed Income, 22(4): 90–103. 306 See, e.g., Lee, Kuan-Hui. 2011. ‘‘The World Price of Liquidity Risk.’’ Journal of Financial Economics 99(1): 136–161. See also Acharya, Viral, and Lasse Pedersen. 2005. ‘‘Asset Pricing with Liquidity Risk.’’ Journal of Financial Economics, 77(2): 375–410. See also Pastor, Lubos, and Robert Stambaugh. 2003. ‘‘Liquidity Risk and Expected Stock Returns.’’ Journal of Political Economy 111(3): 642–685. 307 See, e.g., Ma, Linlin, Yuehua Tang, and JuanPedro Gomez. 2019. ‘‘Portfolio Manager Compensation in the U.S. Mutual Fund Industry.’’ Journal of Finance 74(2): 587–638. PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 government backstops or sponsor support. Many of the benefits and costs discussed below are difficult to quantify. For example, we lack data to quantify the number of funds that had to sell less liquid holdings during March 2020; how funds may adjust the liquidity of their portfolios in response to the proposed liquidity thresholds; the extent to which investors may reduce their holdings in money market funds as a result of the proposed swing pricing requirement; the extent to which investors may move capital from institutional prime to government money market funds; and the reductions in dilution costs to investors as a result of the proposed amendments (which will depend on investor redemption activity and the liquidity risk of underlying fund assets). Form N–MFP data is not sufficiently granular to allow such quantification and many of these effects will depend on how affected funds and investors may react to the proposed amendments. While we have attempted to quantify economic effects where possible, much of the discussion of economic effects is qualitative in nature. We seek comment on all aspects of the economic analysis, especially any data or information that would enable a quantification of the proposal’s economic effects. B. Economic Baseline 1. Affected Entities a. Money Market Funds The proposed amendments would directly affect money market funds registered with the Commission. From Form N–MFP data, there are a total of 318 funds with approximately $5 trillion in total net assets that may be affected by various aspects of the proposal. Table 3 and Table 4 below estimate the number and total net assets of funds by fund type as of the end of July 2021. Prime money market funds account for approximately 17% of the total net assets in the industry, whereas municipal money market funds account for approximately 2%. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7289 Table 3: Number ofMoney Market Funds by Fund Type, as ofJuly 2021. Category Fund Type Count Share Institutional Public 32 10% Prime Institutional Nonpublic 9 3% Retail 23 7% Institutional 4% 12 Tax Exempt Retail 17% 53 Government 139 44% Government& Treasury Treasury 50 16% Total Total 318 100% Table 4: Money Market Fund Net Assets by Fund Type ($ Billions), as ofJuly 2021. Category Fund Type Net Assets Share Institutional Public 315.8 6% Prime Institutional Nonpublic 337.5 7% Retail 222.0 4% Institutional 19.8 0% Tax Exempt Retail 80.7 2% -----------------------------------------------------------------------------------------------· Government & Government 2,787.1 56% Treasury Treasury 1,222.7 25% khammond on DSKJM1Z7X2PROD with PROPOSALS2 As discussed above, the swing pricing proposal may disproportionately affect funds that strike their NAV at the midpoint price, rather than at the bid price of the securities. One commenter indicated that it and many other U.S. fund complexes value the securities held in money market and bond funds for purposes of computing fund NAVs at the bid price.308 We lack data to quantify how many institutional prime and institutional tax-exempt funds currently strike their NAV at the midpoint and, to the best of our knowledge, no such data is publicly available. We solicit comment and any data that would enable such quantification. b. Other Affected Entities As discussed above, the proposed swing pricing requirement would indirectly affect a large group of intermediaries. Specifically, swing pricing would require certain money market funds to receive more timely flow information before they can strike the NAV and settle trades. As discussed in greater detail below, this may affect 308 See Fidelity Comment Letter to the Financial Stability Board, available at https://www.fsb.org/ wp-content/uploads/Fidelity.pdf. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 4,985.6 all market participants sending orders to relevant money market funds, including broker-dealers, registered investment advisers, retirement plan recordkeepers and administrators, banks, other registered investment companies, and transfer agents that receive flows directly. In addition, the proposed requirement that stable NAV money market funds determine that intermediaries submitting orders to purchase or redeem the fund’s shares have the ability to process transactions at non-stable prices would also affect intermediaries sending flows to these money market funds. As discussed in section II.D, rule 2a–7 already imposes the obligation on money market funds and their transfer agents to have the capacity to redeem and sell securities at prices that do not correspond to a stable price per share. 2. Certain Economic Features of Money Market Funds Several features of money market funds can create an incentive for their shareholders to redeem shares heavily in periods of market stress. We discuss these factors below, as well as the adverse impacts that can result from PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 100% such heavy redemptions in money market funds. a. Money Market Fund Investors As discussed elsewhere,309 investors in money market funds have varying investment goals and tolerances for risk. Many investors use money market funds for principal preservation and as a cash management tool. Such investors may be loss averse for many reasons, including general risk tolerance, legal or investment policy restrictions, or shortterm cash needs. These overarching considerations may create incentives for money market fund investors to redeem—incentives that may persist regardless of market conditions and even if the other dilution related incentives discussed below are addressed by the proposal. The desire to avoid loss may cause investors to redeem from certain money market funds in times of stress. For example, as discussed elsewhere, heavy redemptions from prime money market funds and subscriptions in government money market funds during the 2008 financial crisis pointed to a flight to quality, given that most of the assets 309 See, e.g., 2014 Adopting Release, supra footnote 12, at 47740. E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.007</GPH> Total EP08FE22.006</GPH> Total 7290 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules held by government money market funds have a lower default risk than the assets of prime money market funds.310 As discussed above, during peak market stress in March 2020, investor redemptions may have been driven by liquidity considerations, among other things. In addition, as long as investors consider their money market investments as relatively liquid and low risk, the possibility that a fund may impose gates or fees when a fund’s weekly liquid assets fall below 30% under rule 2a–7 may contribute to the risk of triggering runs, particularly from institutional investors that commonly monitor their funds’ weekly liquid asset levels.311 As discussed above, some research suggests that, during peak market volatility in March 2020, institutional prime money market fund outflows accelerated as funds’ weekly liquid assets went closer to the 30% threshold.312 In order to avoid approaching or breaching the 30% weekly liquid asset threshold for the possible imposition of redemption gates, money market fund managers may also choose to sell less liquid portfolio securities during times of stress.313 310 See id. e.g., Comment Letter of the Systemic Risk Council (Apr. 12, 2021) (‘‘Systemic Risk Council Comment Letter’’); SIFMA AMG Comment Letter; Fidelity Comment Letter. 312 See, e.g., Li et al., supra footnote 31. See also ICI MMF Report, supra footnote 45. 313 Some commenters indicated that, on aggregate, prime money market funds pulled back little from commercial paper markets as they were khammond on DSKJM1Z7X2PROD with PROPOSALS2 311 See, VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 b. Liquidity Externalities and Dilution Costs Money market fund investors can incur dilution costs. Specifically, the value of shares held by investors staying in the fund may be diluted if other fund investors transact at a NAV that does not fully reflect the ex post realized costs of the fund’s trading induced by fund flows. Shareholders in floating NAV and stable NAV funds may bear dilution costs in different forms. In floating NAV funds, dilution is reflected in the fund’s NAV, which directly affects the yields of shareholders remaining in the fund. In stable NAV funds, dilution costs can accrue until the fund’s shadow price declines below $0.995, which may result in the fund breaking the buck and re-pricing its shares below $1.00. Fund sponsors can also choose to absorb some or all of the dilution costs for reputational reasons, but are not obligated to do so. Several factors can contribute to the dilution of investors’ interests in money market funds. First, trading costs can lead to dilution. To effect net redemptions or subscriptions, a fund incurs trading costs. If these costs are realized prior to NAV strike, they are distributed across both transacting and non-transacting investors. However, if these costs are realized after NAV strike, they are borne solely by non-transacting largely unable to resell commercial paper and CDs to issuing banks and such securities lack a liquid secondary market. See, e.g., ICI MMF Report, supra footnote 45. PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 shareholders that remain in the fund. For low levels of net redemptions or subscriptions, the difference between the two scenarios for non-transacting shareholders is low; however, for large net redemptions, the difference in dilution costs borne by non-transacting shareholders can be stark. Using a stylized example, Figure 2 compares the dilution attributed to trading costs that occurs when a fund trades to meet redemptions after NAV is struck (as is currently the case in the U.S.) with the dilution attributed to trading costs that occurs if a fund is able to trade to accommodate investor redemptions/subscriptions prior to the NAV strike (dotted straight line). This stylized example assumes that a fund holds a single asset whose value is constant, but liquidating the asset incurs a spread/haircut of 10%. Importantly, the haircut assumption in this stylized example is used purely for illustrative purposes; haircuts on assets in money market funds tend to be much smaller. However, this example demonstrates that larger redemptions can contribute nonlinearly to higher dilution for remaining shareholders when a fund trades after the NAV is struck compared to a scenario in which the fund trades before the NAV is struck.314 314 To the degree that some funds may determine their NAV using holdings as of the prior trading day, such practices may also exacerbate dilution. In Figure 2, if funds strike their NAV using current trading day holdings, the dotted line would not be decreasing. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7291 Figure 2: Dilution Flfects qfD!fferent Trading Timelines over 1 Day. Dilution co ci ;; ., 0 ::J 1ij > IO ci C 0 p a. .,,.,E ~ SI: 0 ., ,.!, 0 0.. Trading alter NAV (status quo) Trading before NAV 0.0 0.2 0.6 0.4 1.0 0.8 Second, stale prices could contribute to dilution, especially during times of market stress. Some assets that money market funds hold may become illiquid and stop trading during times of market stress. In such events, the only available prices for these assets are prices realized during pre-stress market conditions, i.e., stale prices. If a floating NAV fund’s NAV on a given date is based on stale prices, net redemptions at that NAV can dilute non-transacting fund shareholders when assets are eventually sold at prices that reflect their true value. Since funds with a stable NAV have a fixed share price at $1, stale prices only affect the shadow price per share and the probability that a fund breaks the buck and potentially leads to sponsor support. The stale pricing phenomenon has been documented in fixed income funds 315 and not specifically in money market funds. However, money market funds hold significant amounts of commercial paper, certificates of deposit, and other assets that do not have an active and robust secondary market, making them similarly opaque and difficult to accurately price, especially during times of market stress. Knowing that these and other factors 316 may contribute to dilution, 315 See, e.g., Choi, Jaewon, Mathias Kronlund, and Ji Yeol Oh. 2021. ‘‘Sitting Bucks: Stale Pricing in Fixed Income Funds.’’ Journal of Financial Economics, forthcoming. 316 For example, market risk may contribute to dilution costs. If a fund redeems investors at a given NAV, but must raise funds to meet those redemptions on a subsequent trading day during VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 money market fund investors may have an incentive to redeem quickly in times of stress to avoid realizing potential dilution, an effect exacerbated if they believe other investors will redeem.317 Some research in a parallel open end fund setting suggests that liquidity externalities may create a ‘‘first-mover advantage’’ that may lead to cascading anticipatory redemptions akin to traditional bank runs.318 There is a which the value of the fund’s holdings declines significantly, non-transacting shareholders will be diluted. Conversely, non-transacting money market fund investors can benefit if assets are sold at a price higher than NAV. While the value of the fund’s holdings can go both up and down, such market risk amplifies the risk fund shareholders would otherwise experience. However, since true market prices may be very difficult to forecast, the degree to which such dilution contributes to the first mover advantage is unclear. 317 Similar effects have been shown to create run dynamics in banking contexts. See, e.g., Diamond, Douglas and Philip Dybvig. 1983. ‘‘Bank Runs, Deposit Insurance, and Liquidity.’’ Journal of Political Economy 91(3): 401–419. 318 This research generally models an exogenous response to negative fund returns and not trading costs. However, these results may extend to trading costs to the degree that cost based dilution may reduce subsequent fund returns, which would trigger runs in these models. See e.g., Chen, Qi, Itay Goldstein, and Wei Jiang. 2010. ‘‘Payoff Complementarities and Financial Fragility: Evidence from Mutual Fund Outflows.’’ Journal of Financial Economics 97(2): 239–262. See also Goldstein, Itay, Hao Jiang, and David Ng. 2017. ‘‘Investor Flows and Fragility in Corporate Bond Funds.’’ Journal of Financial Economics 126(3): 592–613. See also Morris, Stephen, Ilhyock Shim, and Hyun Song Shin. 2017. ‘‘Redemption Risk and Cash Hoarding by Asset Managers.’’ Journal of Monetary Economics 89: 71–87. See also Zeng, Yao. 2017. ‘‘A Dynamic Theory of Mutual Fund Runs and Liquidity Management.’’ Working Paper. See also Ma, Yiming, Kairong Xiao, and Yao Zeng. 2021. PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 dearth of academic research about the degree to which dilution costs alone may trigger money market fund runs. In addition, theoretical models of such first-mover advantage typically rely on some exogenous mechanism to generate initial redemptions from funds.319 While stale NAV and trading costs can create incentives for early redemptions, redemptions may also occur for reasons that are not strategic, such as a desire to rebalance portfolios under stressed market conditions. Regardless of the reason for a fund experiencing net redemptions on any given day, such redemptions impose a cost on investors remaining in the fund in the absence of measures to take trading costs into account. In addition, since money market funds can trade portfolio holdings to meet redemptions or subscriptions, money market fund liquidity management can both dampen and magnify disruptions in underlying securities markets. ‘‘Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity.’’ Working Paper. See also Ma, Yiming, Kairong Xiao, and Yao Zeng. 2021. ‘‘Bank Debt versus Mutual Fund Equity in Liquidity Provision.’’ Working Paper. 319 For example, one model assumes that investors redeem from funds following poor performance. See Chen, Qi, Itay Goldstein, and Wei Jiang. 2010. ‘‘Payoff Complementarities and Financial Fragility: Evidence from Mutual Fund Outflows.’’ Journal of Financial Economics 97(2): 239–262. E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.008</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Fraction redeemed Haircut = 0. 1 7292 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 3. Money Market Fund Activities and Price Volatility a. Portfolio Composition and Interplay With Short-Term Funding Markets As described in the introduction, portfolio composition of money market funds is determined by fund type. Figure 3 and Figure 4 show portfolio holdings of prime and tax-exempt money market funds since 2016.320 Prime money market funds mostly hold certificates of deposit and time deposits, which average 33% of their portfolio holdings. The second largest category is financial commercial paper, which averages 18% of fund portfolio holdings. These categories of holdings decreased as portfolio shares after March 2020 as prime money market funds increased their Treasury holdings. Tax-exempt money market funds mostly hold variable rate demand notes, which average 50% with a slight downward trend over time. The second largest category is tender options bonds, which average 23%, with a slight upward trend over time. Figure 5 shows differences in portfolio holdings of commercial paper of retail and institutional prime money market funds: Generally retail money market funds have somewhat higher holdings of commercial paper compared to institutional funds. For instance, retail prime money market funds held on average 21% of financial commercial paper compared to 17% for institutional prime money market funds. BILLING CODE 8011–01–P Figure 3:· Portfolio lloldings ofPrime Money Market Funds 321 ,,,,,,,,,,,,,,,,,,_,r''==='"""=,,cf'=...,..='"'"'"~=~~=~=-e"'"-'===~~=-. 50% -CDslTime Deposits ---•FinandalCP Treasury Debt!Rllpos ---•GovtA Debt/Re 45% 40% :i 35% 0 30% 0 2S'lil t e: "'Oil i "'!:: A, "' ••• .... ABCP - - NOllFinandal CP • .... • • other Repos - - other 20% 15¾ 10% 320 The 2014 money market fund reforms were implemented in 2016. For the purposes of this economic analysis, the Commission’s baseline reflects rules currently in effect as well as how money market fund practices and portfolios evolved in the aftermath of the 2014 final rule. 321 The numbers on the x axis are months and years. CDs/Time Deposits are certificates of deposit or time deposits. Financial CP is commercial paper of issuers in the financial industry. Treasury Debt/ Repos are U.S. Treasury obligations or repurchase agreements collateralized by U.S. Treasury securities. Government Agency Debt/Repos are debt securities of Federal agencies and instrumentalities, as well as repurchase agreements collateralized by government agency securities. ABCP is asset-backed commercial paper. Non/Financial CP is commercial paper of issuers not in the financial industry. In a VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 repurchase agreement, one party sells an asset, usually a Treasury security or other fixed income security, to another party with an agreement to repurchase the asset at a later date at a slightly higher price. Repo contracts are a common form of short-term financing. In a repo, the party selling the security is similar to the lender in a securities lending agreement; the party purchasing the security is similar to a borrower in cash collateralized securities lending. In both cases, the transaction is facilitated by cash transfers from the purchaser (borrower) to the seller (lender). In a securities loan, the cash is in the form of collateral while in a repo transaction the cash is payment for the security. In both cases, the purchaser or borrower becomes the legal owner of the security. To unwind the repurchase agreement or securities loan, cash transfers back to the purchaser in terms PO 00000 Frm 00046 Fmt 4701 Sfmt 4725 of the repurchase cost for a repo or in the form of returned collateral in a securities loan. Repos and securities loans differ in that repos typically are primarily used for short-term financing while securities loans typically are used to gain access to the security itself. Also loans generally allow the lender to recall the security on demand while repos do not. Additionally, the cash received by the seller of a repo is often not re-invested but is used to finance the operations of a company whereas the cash received in a securities loan is generally reinvested in low risk fixed income securities for the life of the loan. See, e.g., Gorton, Gary and Andrew Metrick. 2012. ‘‘Securitized Banking and the Run on Repo,’’ Journal of Financial Economics 104. E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.009</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 5% Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7293 Figure 4: Portfolio Holdings of Tax-Exempt Money Market Funds 70% Va1iable Rate Demand Note ---•Tender Option Bonds -otherMtmicipal Sec11rity 60% :i I 50% C, ~ 'S '. 40% ti4' 30% I::<Iii ~ 20% 10% fi~,:e. 5: (ofl1fl_!e!c{q! F'__Cipe.! Hold{ng~__offJ:e_{ail_anqfl}!S!{ttt_ti.CJ!1_aJ frime F_U.f!~ ___ _ I 30% .............................................._................... _.........._........................-......--.....................................-...... .,.,.......................................-.................-..........-...................._.............. ·---··---·-·- underlying securities issuers’ ability to raise capital in short-term markets during stress periods. Figure 6 shows trends in holdings of commercial paper by money market funds. EP08FE22.011</GPH> reduced prices, if they have insufficient cash on hand from maturing daily and weekly liquid assets or cash from subscriptions, which can contribute to stress in underlying short-term funding markets. As a result, money market fund liquidity has the potential to impact VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.010</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 While money market funds are only one type of participant among many in short-term funding markets, money market fund activity may influence short-term funding markets. A wave of redemptions can force money market funds to liquidate portfolio holdings at 7294 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Figure 6: Trends in Money Market Fund Holding~ of Commercial Paper 45% i 40% :s 35% --Financial CP •••••••AllCP -ABCP --Non-Fillancial CP ~ ~ f i ....f:s .... i. . 30% 25% 0 0 !:: ....... ·••7~"' --~••lo-<l'♦.,..i..ct,,.,..-. ....""'"'•!i",:.::~~~:. 20% 1s,, 10% i:,.. --" ,, "~"'""""''"' '" '~"""'"" "'-~ ,,~. ~•'••• .. I Source:Federa!ReserveandFormN-MFP "'""'"'"• '" '""' •• "' ><,,,, '• •n " ' - " " •> '"··=•·-'•"''' •' •• ,,,. 11 Peak MMF Outflows: 3/17/2020 5% b. NAV and Price Volatility After the 2014 rule 2a–7 amendments, only one money market fund had its market NAV drop below $.9975 in 2020; 322 however, in a few instances, fund sponsors provided financial support by purchasing securities from affiliated institutional prime money market funds to prevent these funds from dropping below the 30% weekly liquid asset threshold.323 To reduce volatility in their market NAVs, money market funds invest in short-term, high-credit-quality, well diversified debt securities pursuant to rule 2a–7. Although the limits on maturity and credit risk of money market fund holdings under rule 2a–7 khammond on DSKJM1Z7X2PROD with PROPOSALS2 322 All money market funds have a market NAV, which is a four digit price that is calculated using available market prices and/or fair value market pricing models of the portfolio securities. In contrast, retail and government money market funds also have a stable NAV, which is a two digit price usually set at $1.00 that does not fluctuate and is calculated using amortized cost accounting. 323 See, e.g., ICI Comment Letter I; Wells Fargo Comment Letter. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 reduce risks a money market fund may face, they do not eliminate those risks. Risks that remain may cause the fund’s market NAV to deviate from $1. Changes in interest rates or a security’s credit rating, for example, could put temporary downward pressure on an asset’s price before it matures at par. In addition, if any securities were sold or matured for less than the amortized cost, then any deviation between the fund’s market price and $1 would become permanent. Finally, an issuer may default on payments of principal or interest, generating losses for funds holding the issuer’s securities. If the loss is large enough, a stable NAV fund could break the buck while a floating NAV fund could see a decline in its share price. We have examined the distribution of market NAVs before and after the compliance date of the 2014 amendments (October 2016).324 Figure 7 324 This analysis relies on Form N–MFP submissions between November 2010 and November 2020 for all money market funds. From PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 •• '"""'' r >, "•" " quantifies the trends in the distribution of money market fund market NAVs before and after the 2014 rule amendments went into effect and in the run up to the 2020 market stress. The distribution of money market fund market NAVs, as a whole, changed little over time. However, as can be seen from Figure 8 and Figure 9, the distribution of prime money market fund’s market NAVs tightened around the compliance date with the 2014 amendments. these filings, portfolio holdings and fund characteristics, including fund NAV prices from Item B.5, are extracted for each fund. Item B.5 requires filers to report the net asset value per share as of the close of business on each Friday of the month. To avoid duplication, master funds are removed from the sample: Although feeder funds generally have the same characteristics as their master fund, feeder funds have different investor redemption patterns, which can affect the fund’s market price. As a result, Form N–MFP filers generally provide market prices for the feeder funds and leave the market prices for master funds blank or zero. E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.012</GPH> . 7295 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Figure 7: Distribution ofAll Money Market Fund Market NA Vs from November 2010 to Februar1_2_0_20_._ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ .L0040· 1.0035 1----,,--,-----,----.,-------.,...--,------.,------.1+-+-"-----1 2014 MMF l'-'---~-----~---=--,--1,-1-+~===I Reform Compliance Date 1.0030 . € ., 1.0020 ii 1.0015 > LOOlO 1.0025 ... ~· i i i --MIN - - 3% ---•10% •••••••MEAN ---•90% - - 97% --MAX 1.0005 1.0000 3%(3rd 0.9!1115 Percentile) O.!l!l!IO means3% oftlle reporting fimdsfall o.!1985 o.!1980 0.9975 0.91170 ~~~~~~~~~~~~~~~~~~~~~-~~~~~--~~~~~~~~-~~~~~~ i' ~._., below this gray-dashed ~._'II~._'II~~ ~~ ~❖~❖~❖~❖ 11>❖ ~❖ ~❖ 11>❖ 11>'"' ~._-., ~¢ 11>¢ ~~ 11>~ 11>~ '1>~ 11>'., 11>"" 11>""' 11>""'~,,., 11>""' ~~ 11>~ ~~ s,~ s,~ ~{l 11>""'~{'~{l ~"' line. ~ -1} <§ ~· .... ~.. <§ ,I} ❖~ ~.. <§ ,I} ❖~ -1} ~.. ~.. ❖~ -1} <§ ~.. ❖~ ~.. ~.. ,I} ❖~ -1} ~.. ,I} ....~ -1} .,. ,I} ❖~ -1} ~.. ~· ..... ~ ~---~ Figure 8: Distribution ofPrime Money Market Fund Market NAVs.from November 2010 to February 2020. 1.0020 -MAX ij 1.0015 :: ·~ - - 97% ---•90% 1.0010 ...... •MEAN ---•10% ...> ~... 1,0005 - 6.9990 Percentile) means3% 3%(3rd ofthe reporting fuudsfall ., 0.9985 VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00049 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.013</GPH> EP08FE22.014</GPH> ·!... 0.9980 khammond on DSKJM1Z7X2PROD with PROPOSALS2 3% -MIN :i~ 0.9995 ; - 1.0000 7296 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Figure 9: Distribution ofRetail and Institutional Prime Money Market Fund Market NAVsfrom_October 2016 to February 2020. ~ L0020 "' t "C Retail Prime L0015 i:i. ~ 1.0010 SI !: 1.0005 z i i 1.0000 -MAX __ ------ : : : ~ ~ ----~ Inst. Prime 1 ____ _ > I It I I I r ! I I I I I I 11 I ' , , - , khammond on DSKJM1Z7X2PROD with PROPOSALS2 The dispersion of market NAVs across all retail prime money market funds each month in Figure 9 is larger than the dispersion of market NAVs of their institutional counterparts.325 This result is consistent with the possibility that, following the 2014 amendments, advisers to institutional prime and institutional municipal funds were under increased pressure to keep their weekly liquid assets high and their floating NAV near $1.0000, possibly because sophisticated institutional investors are more likely to track the 325 For example, between October 2016 and February 2020 the mean market NAV was $1.0001 with a standard deviation of $0.0003 for retail prime funds and for institutional prime funds the mean market NAV was $1.0001 with a standard deviation of $0.0002. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 r I , I I I l I I I I 11 I I I standard deviations and redeem shares in a crisis.326 In other words, the baseline daily disclosure of the market prices may allow institutional investors to monitor NAV fluctuations, and may influence the liquidity risk management of money market funds. Figure 10 and Figure 11 show the distribution of weekly retail and institutional prime money market fund market NAVs during the COVID–19 pandemic, respectively. On average, retail prime money market fund market NAVs dropped from $1.0002 to $0.9994 or 8 bps as a result of the market 326 See, e.g., Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher, Page 10, available at https://www.sec.gov/news/ studies/2012/money-market-funds-memo-2012.pdf. PO 00000 Frm 00050 Fmt 4701 Sfmt 4702 dislocation. Similarly, the average institutional prime money market fund market NAV dropped from $1.0003 to $0.9994 or 9 bps as a result of the market dislocation. The lowest market NAV for retail prime dropped from $0.9994 to $0.9980 or 14 bps. In contrast, institutional prime money market fund lowest market NAV dropped from $0.9999 to $0.9976 or 23 bps. No prime money market fund market NAV dropped below $0.9975. To the degree that the only available prices for some affected money market fund holdings during March 2020 stress may have been realized during pre-stress market conditions, these NAV fluctuations may underestimate the degree of asset volatility in these funds. E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.015</GPH> > i,', Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7297 Figure JO: Distribution of Weekly Retail Prime Money Market Fund Market NAVs During_ COVID-19 . 1.0025 € 1.0020 i 1.0015 II, z~ ..... I i I i I =J! II, ~ 1.0010 t.0005 1.0000 0.!1993 0.!1990 0.9985 0.!1980 Figure 11: Distribution of Weekly Institutional Prime Money Market Fund Market NA Vs Durin COVID-19 certificates of deposit of retail prime and institutional prime money market funds. EP08FE22.017</GPH> shows differences in the holdings of Treasuries, commercial paper, and VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.016</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Holdings of retail and institutional money market funds may contribute to NAV volatility of these funds. Figure 12 7298 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Figure 12: Commercial Paper, Certificates ofDeposit, and Treasuries as a Share of ~<!!!_ey Market Fund Por(fplios, by Prime Fund T Y , ~ e · - - - - ~ - - ~ - - - ~ - - - ~ so.. 70¾ 60% 1 50¾ ~ 40% c.. & t 30% Q jl,i 20% 10% market funds are also observed in the amount of the daily liquid assets and weekly liquid assets in prime fund portfolios, with retail fund daily and f igureJ 3:_Daily and Weekly Liquid Assets{?(Prime Money Market Funds_____ 90% i; L r-------------- -- .,,_,,__,.___,_,_,,,.,,_,-,~~-..-'---'----.S.-~~-"-~'--' - ----~------ - - - - -,,"_,_._"_,.,·~--,.., khammond on DSKJM1Z7X2PROD with PROPOSALS2 BILLING CODE 8011–01–C During peak volatility in March 2020, some funds experienced a reduction in their daily and weekly liquid asset values as they drew down on their liquid assets to meet large redemptions. Specifically, a high of 6 institutional prime funds on March 18 had weekly liquid assets below 35%, and one of the institutional prime money market funds had weekly liquid assets below 30%.327 327 See ICI MMF Report, supra footnote 45. ICI also reports that one of the institutional prime money market funds had weekly liquid assets of less than 30% on March 18, 2020. Currently, rule 2a–7 requires that a money market fund comply with the daily and weekly liquid asset standards at the time each security is acquired (rule 2a– 7(d)(4)(ii) and (iii)). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 .- - - ·- -·---"-•""='-~~---··,~-,.-· _..,,_,N.,.,_-s,,,-__,~,-,-~-~·,.,,,,_",._,-,.,,,_.,='-~"-""-~_,...,~s,-,_~~--~~--··~ The largest fund outflow was a weekly decrease of 55% in assets under management, and the fund’s weekly liquid assets declined from 38.8% to 32.2% over three consecutive days. C. Costs and Benefits of the Proposed Amendments 1. Removal of the Tie Between the Weekly Liquid Asset Threshold and Liquidity Fees and Redemption Gates a. Benefits The proposal would remove the tie between money market funds’ weekly liquid assets and the possible imposition of fees and redemption gates, as well as eliminate gate provisions PO 00000 __ Frm 00052 Fmt 4701 Sfmt 4702 ' _,,_,~.,.-._,._,__v-,-_....._~~"" ~v~~~~"''"'-,J from rule 2a–7. These amendments may benefit money market funds and their investors by reducing the risk of runs on money market funds, especially during times of liquidity stress. As discussed in the introduction, money market funds use a pool of assets subject to daily redemptions to invest in short-term debt instruments that are not perfectly liquid, which renders them susceptible to a first mover advantage in investor redemptions akin to bank runs.328 Moreover, money market fund 328 See, e.g., Schmidt, Lawrence, Allan Timmermann, and Russ Wermers. 2016. ‘‘Runs on money market mutual funds.’’ American Economic Review, 106(9): 2625–57. Run dynamics in funds have been explored in a large body of finance E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.019</GPH> The above portfolio differences between retail and institutional money weekly liquid assets being lower than those of institutional funds. Figure 13 reports daily and weekly liquid asset percentages for prime funds. EP08FE22.018</GPH> c. Liquidity Management Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 redemptions can impose liquidity externalities on shareholders remaining in the fund, as discussed in Section III.B.2. The possibility of a redemption fee or gate can magnify those incentives and externalities. Specifically, under the current baseline, money market funds may impose redemption fees or gates if their weekly liquid assets are below 30% of their total assets. Thus, as funds approach the 30% threshold, investors seeking to avoid a redemption gate or fee are incentivized to redeem before other redemptions further deplete a fund’s liquid assets. The proposal is expected to reduce such incentives to redeem. As a result, the proposed removal of the tie between weekly liquid assets and the potential imposition of liquidity fees or redemption gates may better enable funds to use their daily and weekly liquid assets to meet redemptions in times of stress without giving rise to risk of runs.329 This benefit may be strongest for money market funds that have weekly liquid assets close to the minimum threshold during times of liquidity stress, as they are currently most susceptible to runs. Moreover, money market fund investors would no longer face the possibility of the imposition of gates outside of liquidations, enhancing the attractiveness of money market funds as a highly liquid investment product. This amendment may also benefit money market fund investors. As discussed above, the weekly liquid asset triggers for the possible imposition of redemption fees or gates create incentives for investors to redeem first, at the expense of investors remaining in the fund who experience further dilution during the gating period. The proposed removal of the weekly liquid asset trigger as well as the elimination of redemption gates outside of liquidation may reduce the liquidity costs borne by investors remaining in the fund. This aspect of the proposal may increase the attractiveness of money market funds as a low risk cash management tool and sweep investor account to risk averse investors. b. Costs As discussed in Section II.A, the proposal would not only remove the tie between fund weekly liquid assets and research, including, for example: Zeng, Yao. 2017. ‘‘A dynamic theory of mutual fund runs and liquidity management.’’ Available at SSRN 2907718; Chen, Qi, Itay Goldstein, and Wei Jiang. 2010. ‘‘Payoff complementarities and financial fragility: Evidence from mutual fund outflows.’’ Journal of Financial Economics, 97(2): 239–262. 329 See, e.g., SIFMA AMG Comment Letter; State Street Comment Letter. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 the possibility of gating and fees, but would also eliminate gate and fee provisions from rule 2a–7. As a result, money market funds would only be able to impose gates in the event of liquidation. To the degree that the ability to impose redemption gates or fees under rule 2a–7 may be a useful redemption management tool during times of stress, the proposed amendment may reduce the scope of tools available to money market funds to manage their liquidity risk in times of stress. Four factors may mitigate this economic cost of the proposed amendment. First, no money market fund imposed a fee or a gate under the rule during the market stress of 2020, and investors exhibited anticipatory redemptions when funds approached the 30% weekly liquid threshold for the potential imposition of fees and gates. In light of these factors, money market funds may be unlikely to impose redemption gates outside of fund liquidation, even if we retained a redemption gate provision in rule 2a–7. As discussed in Section II.A, the possibility that a money market fund would impose redemption gates may influence investment and redemption decisions, which could trigger runs. Second, under the proposal, institutional prime and institutional taxexempt money market funds would be required to impose swing pricing, as discussed in greater detail below. NAV adjustments would not be tied to weekly liquid assets of the fund, but to the size of net redemptions and the liquidity costs redeeming investors are imposing on the shareholders remaining in the fund. The proposed swing pricing approach may be a more valuable tool for money market funds in managing investor redemptions than redemption gates and liquidity fees under rule 2a– 7. Moreover, the proposed increases to daily and weekly liquidity thresholds may increase fund liquidity buffers that can be used to manage liquidity costs of redemptions. Third, money market funds would continue to be able to suspend redemptions under rule 22e–3 in anticipation of fund liquidation. Specifically, money market funds would be able to suspend redemptions if a fund’s weekly liquid assets decline below 10% or, in the case of a stable NAV money market fund, if the board determines that the deviation between its amortized cost price per share and its market-based NAV per share may result in material dilution or other unfair results to investors or existing shareholders, in each case if the board PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 7299 also approves liquidation of the fund.330 Thus, money market funds would still have access to a form of gating during large liquidity shocks in connection with a fund liquidation. Fourth, as a result of the run dynamics described above, the tie between weekly liquid assets and the potential imposition of fees and gates may have contributed to incentives for money market fund managers to preserve their weekly liquid assets during liquidity stress, rather than using them to meet redemptions. Therefore, the tie between weekly liquid assets and the possibility of fees and gates may magnify liquidity stress because it incentivizes money market funds to sell less liquid assets with higher liquidity costs rather than absorb redemptions out of liquid assets. Thus, the proposed removal of fees and gates under rule 2a– 7 may reduce run risk and liquidity externalities in money market funds. 2. Raised Liquidity Requirements a. Benefits The proposed amendments increasing daily and weekly liquid asset requirements to 25% and 50% respectively may reduce run risk in money market funds. Early redemptions can deplete a fund’s daily or weekly liquid assets, which reduces liquidity of the remainder of the fund’s portfolio and increases the risk that a fund may need to sell less liquid assets into the market during fire sales. Thus, higher levels of daily and weekly liquid assets in a fund may reduce trading costs and the first mover advantage during a wave of redemptions, potentially disincentivizing runs. When money market funds experience runs, funds with higher daily and weekly liquid assets may experience lower liquidity costs as they may be more likely to be able to use their liquid assets to meet redemptions rather than be forced to sell assets during liquidity stress.331 Although liquidity dynamics in open end funds may differ from those in money market funds,332 some research in that context shows that fund illiquidity can contribute to run dynamics, as discussed in section III.B.2b. Some other work finds that less liquid open-end bond funds suffered more severe outflows during the COVID–19 crisis than liquid funds, and 330 See 17 CFR 270.22e–3. Prime MMFs at the Onset of the Pandemic Report, supra footnote 41, at 4. According to Form N–MFP filings, no prime money market fund reported daily liquid assets declining below the 10% threshold in March 2020. 332 For example, unlike open end funds, money market funds are subject to daily and weekly liquid asset requirements. 331 See E:\FR\FM\08FEP2.SGM 08FEP2 7300 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 that less liquid funds experienced redemptions well before more liquid funds.333 Other research shows that runs were more likely in less liquid funds for both U.S. and European institutional prime money market funds.334 The proposed increases to liquidity requirements may reduce the likelihood that funds need to sell portfolio securities during periods of market stress. This may reduce the potential effect of redemptions from money market funds on short-term funding markets during times of stress. Some commenters stated that redemptions from money market funds may not have contributed to stress in short-term debt markets during March 2020 and noted a relation between sales and the introduction of the Money Market Liquidity Facility (MMLF).335 For example, one industry group conducted a survey of members that indicated the two-thirds of the reduction in prime money market funds’ commercial paper holdings ($23 billion) represented sales to the MMLF after that facility was announced on March 18. The commenter suggested that because these sales moved assets from money market funds to the Federal Reserve’s balance sheet, these sales would not have placed downward pressure on prices.336 There may be varying interpretations of the effects of fund outflows in March 2020 on the prices of assets held by money market funds and, thus, the degree to which the proposed liquidity requirements may reduce the transaction costs and losses money market funds would face when selling portfolio securities into stressed markets. Importantly, the proposed liquidity requirements would enhance the ability of funds to meet large redemptions and reduce the dilution of remaining fund shareholders which would protect investors. Some commenters indicated that increases in the weekly liquid asset threshold would not necessarily result in enhanced money market fund liquidity because fund managers would continue to be 333 See Falato, Antonio, Itay Goldstein and Ali Hortac¸su. 2021. ‘‘Financial Fragility in the COVID– 19 Crisis: The Case of Investment Funds in Corporate Bond Markets.’’ Journal of Monetary Economics, forthcoming. 334 See Cipriani, Marco and Gabriele La Spada. 2020. ‘‘Sophisticated and Unsophisticated Runs.’’ FRB of New York Staff Report No. 956. See also Anadu, Kenechukwu, Marco Cipriani, Ryan Craver, and Gabriele La Spada. 2021. ‘‘The Money Market Mutual Fund Liquidity Facility.’’ FRM of New York Staff Report No. 980. 335 See, e.g., ICI Comment Letter I; ICI Comment Letter II; Federated Hermes Comment Letter I; SIFMA AMG Comment Letter. 336 See, e.g., ICI Comment Letter I; ICI Comment Letter II. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 reluctant to use a fund’s liquid assets to fulfill redemptions.337 Funds may choose between drawing down on daily or weekly liquid assets and selling other assets in distressed markets to meet redemptions. However, the proposed removal of the tie between weekly liquid assets and the potential imposition of redemption fees and gates may reduce the disincentives funds currently face to draw down their weekly liquid assets during a wave of redemptions. Before the 2014 amendments, the only consequence of a money market fund having weekly liquid assets below the 30% threshold was that the fund could not acquire any security other than a weekly liquid asset until its investments were above the 30% threshold. As a result, funds were more comfortable using their weekly liquid assets and dropping below the 30% threshold. For example, at the peak of the Eurozone sovereign crises in the summer of 2011 the lowest reported weekly liquid asset value was approximately 5%.338 In combination with the proposed elimination of the tie between weekly liquid assets and potential imposition of gates and fees, the proposed liquidity requirements may similarly increase the reliance of money market funds on daily and weekly liquid assets in meeting redemptions. However, the proposal would also require prompt notice of falling below liquidity thresholds, which may decrease these benefits, as discussed in greater detail in Section III.C.6. These benefits may also be mitigated to the extent that many money market funds may already voluntarily hold daily and weekly liquid assets in excess of the regulatory minimum thresholds.339 For example, the asset weighted average daily and weekly liquid assets for publicly offered institutional prime money market funds between October 2016 and February 2020 was 33% and 48% respectively.340 After the peak volatility in March 2020, money market funds generally increased their daily and weekly liquidity, with the asset weighted average daily and weekly liquid assets for publicly offered institutional prime money market funds rising to 44% and 56% respectively between March 2020 and November 2020. Importantly, the distribution of liquid assets is skewed, with approximately 50% of publicly offered institutional prime funds holding below average (44%) in daily liquid assets and 75% of funds holding below average (less than 56%) in weekly liquid assets. As a result, fewer prime funds may benefit from the proposed higher daily liquid asset threshold than the proposed higher weekly liquid asset threshold. Reduced run risk in money market funds may enhance the resilience of affected funds and reduce the risk that money market funds may rely on government backstops. Moreover, this amendment may benefit investors to the degree that increasing the liquidity of money market fund portfolios would allow funds to meet large redemptions from liquidity buffers more easily. For example, after the March 2020 market dislocation, some prime money market funds voluntarily shifted their portfolios by swapping out longer maturity commercial paper and certificates of deposit for more liquid Treasuries, allowing them to meet any future redemptions better. Raising liquidity thresholds may have a similar benefit. The magnitude of these economic benefits is likely to depend on the way in which money market funds may respond to the proposed amendments. Specifically, some affected money market funds (i.e., money market funds with less than the proposed 25% in daily and 50% in weekly liquid assets) may react to the proposal by increasing the maturity of the remainder of their portfolios, potentially reducing their liquidity to the extent that it is tied to maturity. However, under the current rules money market funds are constrained in the maturity and weighted average life of the assets they hold, which is intended to limit the degree to which funds are able to risk shift their portfolios while remaining registered as money market funds. Moreover, the liquidity stress in 2020 was so severe that commercial paper across a variety of maturities became illiquid. b. Costs 337 See, e.g., Wells Fargo Comment Letter; JP Morgan Comment Letter. 338 See, supra footnote 274, Figure 8. 339 Wells Fargo Comment Letter; JP Morgan Comment Letter; Western Asset Comment Letter (noting that reporting and transparency requirements encourage managers to maintain liquid assets in excess of the existing WLA threshold). 340 Averages were calculated by dividing the aggregate amount of daily (weekly) liquid assets from all funds by the aggregated amount of assets from all fund. PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 The proposed amendments would impose indirect costs on money market funds, investors, and issuers. Because less liquid assets are more likely to yield higher returns in the form of a liquidity premium,341 to the degree that the 341 See, e.g., Lee, Kuan-Hui. 2011. ‘‘The World Price of Liquidity Risk.’’ Journal of Financial Economics 99(1): 136–161. See also Acharya, Viral, and Lasse Pedersen. 2005. ‘‘Asset Pricing with E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 proposal improves the liquidity of money market fund portfolios, it would lower expected returns of those funds to investors that are already earning low and or zero net yields in a low interest rate environment. Several commenters have indicated that an increase in weekly liquid assets would likely decrease money market fund yields and make them less desirable to investors.342 This may reduce the attractiveness of money market funds to some investors. Reduced investor demand may lead to a decrease in the size of assets under management of affected money market funds and the wholesale funding liquidity they provide to other market participants. Investors that prefer to use money market funds as a cash management tool, giving them the ability to preserve the value of their investments and receiving a small yield, may move out of prime money market funds and into government money market funds that deliver lower yields, but have lower risk to the value of the investment. Moreover, to the degree that some money market funds are only viable because investors treat them as cash equivalents, this amendment may result in better matching of investors to funds that meet their risk tolerance and yield expectations, mitigating the above costs. The proposed increase of daily and weekly liquid assets may require as many as 15% of affected funds to increase their daily liquid assets and 50% of affected funds to increase their weekly liquid assets, as discussed in further detail below.343 The proposal would thus increase the demand of money market funds for daily liquid assets, such as repos, and the liquidity in overnight funding markets may then flow through banking entities to leveraged market participants, such as hedge funds. Thus, the proposal may reduce the liquidity risk borne by money market funds, but may result in a concentration of risk taking among Liquidity Risk.’’ Journal of Financial Economics, 77(2): 375–410. See also Pastor, Lubos, and Robert Stambaugh. 2003. ‘‘Liquidity Risk and Expected Stock Returns.’’ Journal of Political Economy 111(3): 642–685. 342 SIFMA AMG Comment Letter; Western Asset Comment Letter; Wells Fargo Comment Letter; JP Morgan Comment Letter. 343 The analysis is based on March 2020 redemptions from publicly offered institutional prime funds. The possible new thresholds determined by stress in publicly offered institutional prime fund portfolios are then applied to all money market funds (except for the daily liquid asset threshold for tax-free money market funds). As such, these figures also reflect the percentage of retail and institutional prime funds that would be impacted by the various liquidity thresholds. Important caveats and limitations of this analysis are discussed in Section III.D.2.a below. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 leveraged and less regulated market participants. At the same time, this shift could allocate risk that currently resides in money market funds to hedge funds and other more speculative vehicles. The proposed amendments may also impose indirect costs on issuers. Specifically, money market funds are significant holders of commercial paper and certificates of deposit, as described in the economic baseline,344 and most of the commercial paper they hold is issued by banks, including foreign bank organizations.345 Therefore, issuers of commercial paper and certificates of deposit are likely to experience incrementally reduced demand for their securities from money market funds, particularly demand for debt that would fall outside of the weekly liquid assets category. This may reduce such issuers’ access to capital and increase the cost of capital, negatively affecting capital formation in commercial paper and certificates of deposit. Issuers may respond to such changes by reducing their issuance of commercial paper and certificates of deposit and increasing issuance of longer-term debt. In a somewhat analogous setting, some research explores the effects of the 2014 money market fund reforms, which resulted in asset outflows from prime money market funds into government money market funds and affected funding for large foreign banking organizations in the U.S., on bank business models.346 One paper finds that banks were able to replace some of the lost funding, but reduced arbitrage positions that relied on unsecured funding, rather than reducing lending.347 Another paper finds that money market fund reforms led to an increase in the relative share of lending in bank assets and concludes that reduction in unstable funding can discourage bank investments in illiquid assets.348 Other research examined the effects of decreased holdings of European bank debt by money market funds during the Eurozone sovereign 344 To the degree that some money market funds hold significant quantities of commercial paper issued by foreign banks seeking dollar funding, such issuer costs may have a greater effect foreign issuers. 345 See ICI MMF Report, supra footnote 45. 346 These outflows around the October 2016 compliance date for the 2014 reforms, for example, led to reduced money market funds purchases of commercial paper with other entities like mutual funds eventually picking up the shortfall and an approximately 30 basis point spike in 90-day financial commercial paper rates for about three months. 347 See, e.g., Anderson, Alyssa, Wenxin Du, Bernd Schlusche. 2019. ‘‘Money Market Fund Reform and Arbitrage Capital.’’ Working Paper. 348 See Thomas Flanagan. 2020. ‘‘Funding Stability and Bank Liquidity.’’ Working Paper. PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 7301 crisis in 2011. One paper found that reduced wholesale dollar funding from money market funds during this period led to a sharp reduction in dollar lending by Eurozone banks relative to euro lending, which reduced the borrowing ability of firms reliant on Eurozone banks prior to the sovereign debt crisis.349 These potential costs of the proposed amendment to issuers may be mitigated by four potential factors. First, as discussed above, money market funds may respond to a higher weekly liquid asset threshold by increasing the maturity and liquidity risk in their nonweekly liquid asset portfolio allocations. This effect may dampen the adverse demand shock for commercial paper, but increase portfolio risk of affected money market funds. However, as discussed in Section II.C. above, for the past several years prime money market funds have maintained levels of liquidity that are close to or that exceed the proposed thresholds, without generally barbelling.350 Second, as discussed in Section III.B.3.a), money market funds hold less than a quarter of outstanding commercial paper, which could limit the impact of the proposal on commercial paper issuers and markets. Third, the proposed increases to liquidity requirements may increase some money market fund’s liquidity buffers, which may enable such funds to meet large redemptions from liquid assets and reduce the need to sell commercial paper to meet large redemptions during fire sales. This may enhance the stability of commercial paper markets during times of market stress—an effect that is also limited by the relative size of money market fund holdings of commercial paper. Fourth, money market funds are just one group of investors investing in commercial paper markets and hold less than a quarter of commercial paper outstanding, as discussed above. If money market funds pull back from commercial paper markets and commercial paper prices decrease as a result, other investors, such as mutual funds or insurance companies, may be attracted to commercial paper, absorbing some of the newly available supply, as observed after the 2016 reforms. 349 See Ivashina, Victoria, David Scharfstein, and Jeremy Stein, 2015. ‘‘Dollar Funding and the Lending Behavior of Global Banks.’’ Quarterly Journal of Economics 130(3): 1241–1281. 350 See BlackRock Comment Letter (stating that they have not seen evidence that barbelling was a problem in March 2020, or that money market fund portfolios were generally structured with a barbell). We similarly have not observed significant use of barbelling strategies among money market funds. E:\FR\FM\08FEP2.SGM 08FEP2 7302 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 3. Stress Testing Requirements khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. Benefits The proposal would also alter stress testing requirements for money market funds. Under the baseline, money market funds are required to stress test their ability to maintain 10% weekly liquid assets under the specified hypothetical events described in rule 2a–7 since breach of the 10% weekly liquid asset threshold would impose a default liquidity fee. The proposal would eliminate the default liquidity fee triggered by the 10% threshold and the corresponding stress testing requirement around the 10% weekly liquid asset threshold. Instead, the proposal would require funds to determine the minimum level of liquidity they seek to maintain during stress periods and to test whether they are able to maintain sufficient minimum liquidity under such specified hypothetical events, among other requirements. Money market funds may have different optimum levels of liquidity under times of stress. Many factors influence optimum levels of minimum liquidity, including the type of money market fund, investor concentration, investor composition, and historical distribution of redemption activity under stress. This aspect of the proposal may increase the value of stress testing as part of fund liquidity management by allowing funds to tailor their stress testing to the fund’s relevant factors, which may enhance the ability of funds to meet redemptions and the Commission’s oversight of money market funds. b. Costs Proposed amendments to fund stress testing requirements may impose direct and indirect costs. Specifically, a fund would be required to determine the minimum level of liquidity it seeks to maintain during stress periods, identify that liquidity level in its written stress testing procedures, periodically test its ability to maintain such liquidity level, and provide the fund’s board with a report on the results of the testing. As a baseline matter, funds are expected already to identify minimum levels of liquidity they seek to maintain during stress as part of routine liquidity management, and are required to test their ability to maintain such liquidity levels under the baseline liquidity thresholds. Money market funds have also established written stress testing procedures to comply with existing stress testing requirements and report the results of the testing to the board. Thus, such funds may experience costs related to altering existing stress testing VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 procedures as the proposal would move from bright line requirements to a principles based approach, as well as costs related to board reporting and recordkeeping. Moreover, to the degree that funds may not always have sufficient incentives to manage liquidity to meet redemptions, they may choose insufficiently low minimum levels of liquidity for stress testing, which may reduce the value of stress testing and corresponding reporting for board oversight of fund liquidity risk. However, funds may have significant reputational incentives to manage liquidity costs—incentives that have, for example, led many funds to voluntarily provide sponsor support. 4. Swing Pricing a. Benefits and Costs of Swing Pricing in Money Market Funds in General As discussed in the economic baseline, money market fund investors transacting their shares typically do not incur the costs associated with their transaction activity. Instead, these liquidity costs may be borne by shareholders remaining in the fund, which may contribute to a first-mover advantage and run risk.351 Moreover, as discussed above, liquidity management by money market funds imposes externalities on all participants investing in the same asset classes. This effect may be especially acute if there are large-scale net redemptions during times of market stress. The proposed amendments implementing swing pricing would require institutional prime and institutional tax-exempt money market funds to implement swing pricing procedures to adjust the fund’s floating NAV so as to charge redeeming shareholders for the liquidity costs they impose on the fund when a fund experiences net redemptions. The adjusted NAV would apply to redeemers and subscribers alike. Thus, adjusting the NAV down when a fund is faced with net redemptions charges redeemers for the liquidity costs of their redemptions, but also allows subscribers to buy into the fund at the lower, adjusted NAV.352 Under the proposal, 351 As discussed in the economic baseline, dilution costs most directly impact shareholders in floating NAV funds through changes to the NAV. In stable NAV funds, dilution costs can make the fund more likely to breach the $1 share price if dilution costs are large. It is also important to note that sponsors can choose to provide sponsor support to manage reputational costs. 352 Adjusting the NAV captures the liquidity costs that redeemers impose on the shareholders remaining in the fund. However, subscribers benefit from the lower NAV as well since subscribers buy into the fund at a lower NAV. Thus, the benefits PO 00000 Frm 00056 Fmt 4701 Sfmt 4702 the affected money market fund would recoup the full dilution costs by charging the redeemers for both the dilution cost of redemptions as well as the cost of allowing subscribers to buy into the fund at the lower adjusted NAV. As discussed in greater detail in the section that follows, the proposed swing pricing requirement would require funds to estimate swing factors differently depending on the level of redemptions. If net redemptions in a particular pricing period are at or below the market impact threshold (of 4% divided by the number of pricing periods per day), swing factors would be required to incorporate spread and other transaction costs. If net redemptions exceed the market impact threshold, swing factors would be required to reflect spread and other transaction costs, as well as a good faith estimate of market impact of net redemptions. Thus, the magnitude of the adjustments to the NAV during normal market conditions may be small since money market funds already hold relatively high quality and liquid investments and would hold even higher levels of liquidity under the proposal, which may reduce liquidity costs when meeting redemptions. One commenter indicated that because NAV adjustments may be small and investors are unable to observe at the time of placing their orders whether the fund will adjust its NAV, swing pricing may not have the intended impacts of swing pricing on investor behavior.353 The proposed swing pricing requirement may increase the variability of institutional funds’ NAV, which can reduce their attractiveness to investors. However, under the baseline, institutional funds experience NAV volatility, as demonstrated in Section III.B, and risk averse investors that prefer NAV stability may have already shifted to government money market funds or bank accounts around the 2016 implementation of money market fund reforms. Moreover, even if investors cannot observe whether the NAV will be adjusted on a particular day, if swing pricing accurately reflects liquidity costs, investors know that they would not be diluted if they stay in the fund, reducing their incentives to exit in anticipation of the application of a swing factor. Moreover, the rule is intended to address the dilution that can occur when a money market fund experiences net redemptions and is not intended to result in significant NAV of adjusting the NAV are shared between existing shareholders in the fund and subscribers. 353 See Fidelity Comment Letter. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 adjustments unless there is significant net redemption activity leading to large liquidity costs. The proposed swing pricing requirement may reduce dilution of non-redeeming shareholders in the face of net redemptions. Thus, swing pricing may reduce any first mover advantage, fund outflows, and any dilution resulting from these outflows.354 In other jurisdictions swing pricing is used as a mechanism to protect nontransacting shareholders from dilution attributable to trading costs, and as an additional tool to help funds manage liquidity risks.355 To the degree that swing pricing reduces dilution, swing pricing may serve to protect investors that remain in a fund, for instance, during periods of high net redemptions. In addition, the proposed elimination of the ability to impose liquidity fees and gates under rule 2a–7 may increase the benefit of swing pricing as an important tool for money market funds to manage the liquidity costs of large-scale redemptions. The above economic benefits of swing pricing may be reduced by several factors. First, several commenters have suggested that swing pricing adjustments would have been too small to affect investor redemptions and may not have addressed the issues that occurred in March 2020.356 The implementation of swing pricing in the proposal appears to differ from that in these comment letters in that when net redemptions exceed the market impact threshold, swing factors would be required to reflect estimates of market impacts assuming redemptions are met through the liquidation of a pro-rata share of total portfolio assets. Thus, when net redemptions are large, swing factors may be larger than estimated in these comment letters and may capture 354 See, e.g., Jin, Dunhong, Marcin Kacperczyk, Buge Kahraman, and Felix Suntheim. 2021. ‘‘Swing Pricing and Fragility in Open-end Mutual Funds.’’ Review of Financial Studies, forthcoming. 355 However, swing pricing in these other jurisdictions differs somewhat from our proposed approach. For example, swing pricing often involves adjusting a fund’s NAV in the event of net redemptions or net subscriptions. Recommendation of the European Systemic Risk Board (ESRB) on liquidity risk in investment funds, European Securities and Markets Authority (November 2020); Liquidity Management in UK Open-Ended Funds, Bank of England and the Financial Conduct Authority (March 26, 2021); and Jin, et al., Swing Pricing and Fragility in Open-end Mutual Funds (January 1, 2021) The Review of Financial Studies, forthcoming, available at SSRN: https://ssrn.com/ abstract=3280890 or https://dx.doi.org/10.2139/ ssrn.3280890. 356 See, e.g., Fidelity Comment Letter; Western Asset Comment Letter; GARP Risk Institute Comment Letter. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 more of the dilution costs currently borne by nontransacting shareholders. Second, the proposed swing pricing requirement only addresses the portion of dilution costs related to trading costs, and would not address other sources of dilution discussed in section III.B.2. Thus, the proposed requirement may only partly reduce the dilution costs that redemptions impose on nontransacting investors and the related liquidity externalities. We do not have granular data about daily money market fund holdings that would enable us to estimate the amount of dilution that could have been recaptured under the proposed approach in March 2020 or the prevalence of other sources of dilution discussed in Section III.B.2. To the best of our knowledge, such data is not publicly available, and we solicit any comment or data that could enable such quantification. Third, as discussed in greater detail in Section II, the proposed swing pricing approach would require affected funds to calculate swing factors based on, among other things, estimates of market impacts. To the degree that it may be difficult to value illiquid assets without an active secondary market, particularly in times of severe liquidity stress, funds may need to use their discretion in the estimation of market impact factors. This may give affected funds some discretion in the calculation of swing factors. To the extent that institutional investors may be sensitive to NAV adjustments under the proposal, some funds may use discretion in the calculation of swing factors to reduce the NAV adjustments. At the same time, funds may use discretion to apply larger NAV adjustments so as to manipulate and presumably improve reported fund performance. Importantly, the proposed rule would require affected funds to use good faith estimates of market impact factors. Moreover, discretion in the calculation of swing factors may increase noise in the NAV and may decrease comparability in returns. Investors may find it more difficult to interpret returns if swing pricing is applied inconsistently across funds. The proposal would require affected funds to implement swing pricing, rather than make it optional. While money market funds may have reputational incentives to manage liquidity to meet redemptions, affected funds also face collective action problems and disincentives stemming from investor behavior. Specifically, to the degree that institutional investors may use institutional prime and institutional tax-exempt funds for cash management and their flows are sensitive to NAV adjustments, funds PO 00000 Frm 00057 Fmt 4701 Sfmt 4702 7303 may be disincentivized to implement swing pricing and/or to adjust the NAV frequently. For example, even if all institutional money market funds recognized the benefits of charging redeeming investors for the liquidity costs of redemptions, no fund may be incentivized to be the first to adopt such an approach as a result of the collective action problem. By making swing pricing mandatory, rather than optional, the proposal is intended to ensure that funds adjust the NAV to capture the dilution costs of net redemptions and that money market fund returns are comparable across funds. Moreover, it may be suboptimal for an individual money market fund to implement swing pricing routinely, as the operational costs of doing so are immediate and certain, while the benefits are largest in relatively rare times of liquidity stress. The proposed application of swing pricing by all institutional prime and institutional tax-exempt funds is intended to ensure that swing pricing is deployed in times of severe stress by all affected funds, protecting investors from dilution costs when they are highest, and reducing liquidity externalities that money market funds may impose on other market participants trading the same asset classes. The proposed swing pricing requirement would impose certain costs, as analyzed in Section IV. These costs may be passed along in part or in full to institutional money market fund investors, that are already earning low and or zero net yields in a low interest rate environment, in the form of higher expense ratios or fees. In addition, the proposal would require affected funds to calculate the swing factor based on net, rather than gross redemptions. As a result, the redeeming investors would be charged both for the direct liquidity costs of their redemptions, as well as for the dilution cost that results from allowing subscribers to buy into the fund at a lower adjusted NAV. While this would result in the non-transacting shareholders recapturing more of the dilution costs from redemptions, this aspect of the proposal would charge redeeming investors for more than the direct dilution cost of their redemptions, which may disincentivize redemptions and incentivize subscriptions. The proposal may reduce investor demand for institutional prime and institutional tax-exempt money market funds. If the proposal reduces investor demand in some funds, it would lead to a decrease in assets under management of these money market funds, thereby potentially reducing the wholesale funding liquidity they provide to other E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7304 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules market participants. The implementation of the floating NAV for institutional money market funds in 2016 resulted in a large scale reallocation of investor capital into stable NAV money market funds, as discussed in Section II.A. Thus, investor demand for institutional money market funds may depend on the low variability of their NAVs. The proposed swing pricing requirement would increase the volatility of affected money market fund NAVs, particularly in times of market stress. Some commenters also suggested that swing pricing would reduce investor interest in money market funds.357 A reduction in the number of money market funds and/or the amount of money market fund assets under management as a result of any further money market fund reforms would have a greater negative impact on money market fund sponsors whose fund groups consist primarily of money market funds, as opposed to sponsors that offer a more diversified range of mutual funds or engage in other financial activities (e.g., brokerage). These economic costs may be mitigated by three factors. First, the proposed swing pricing requirement is tailored to the level of net redemptions. When net redemptions are low (at or below the market impact factor threshold) and under normal market conditions, the proposed swing pricing requirement is economically equivalent to requiring funds strike the NAV at bid prices of securities (since other transaction costs may also be low under normal conditions). As discussed in the economic baseline, some fund complexes may already be striking NAV at bid prices. Second, money market funds hold assets that are more liquid and less risky when compared to other open-end funds. Under normal market conditions, funds may be able to apply a small swing factor that only affects the fund’s NAV to the fourth decimal place. Affected money market funds’ NAV adjustments would likely be greater during severe stress, when redeemers impose significant costs on the remaining fund investors. Third, the proposed swing pricing requirement would require redeeming investors to internalize the costs that their trading imposes on the investors remaining in the fund, reducing the liquidity externalities currently present in institutional prime and institutional tax exempt money market funds. Moreover, to the degree that some institutional investors may not be aware of the dilution risk of affected money market funds, the proposed swing pricing requirement may increase investor awareness of such risks. Importantly, the proposed swing pricing requirement may enhance allocative efficiency. As discussed above, the swing pricing requirement could cause some investors to move their assets to government money market funds to avoid the possibility of paying liquidity costs of redemptions. Government money market funds may be a better match for these investors’ preferences, however, in that government money market funds face lower liquidity costs and these investors may be unwilling to bear any liquidity costs. The proposed swing pricing requirement may impose costs on investors redeeming shares in response to poor fund management or a fund complex’s emerging reputational risk. Under the proposal, all net redemptions out of affected funds, regardless of the cause for the redemption, would result in the NAV being adjusted by the swing factor. While this may impose costs on efficiency—as redemptions out of poorly managed funds are efficient and an important part of market discipline of fund managers—this aspect of the proposal would also capture the liquidity costs that such redemptions impose on affected funds. Two factors may reduce the magnitude of these effects on the incentives of fund managers. First, money market funds are subject to requirements of rule 2a–7 and the proposal would increase minimum daily and weekly liquid asset requirements applicable to money market funds thereby further restricting fund managers from investing in illiquid assets. Second, the proposal would require disclosures regarding historical swing factors, which may make liquidity costs of redemptions more transparent to investors and lead to affected funds competing on swing factors they charge investors. In addition, the proposed swing pricing requirement may pose a number of implementation challenges and impose related costs on money market funds, third party intermediaries, and investors.358 First, swing pricing would require affected money market funds to estimate both direct and indirect trading costs on a daily or more frequent basis, which may be particularly time consuming and challenging during times of stress. Liquidity costs are not 357 See, e.g., BlackRock Comment Letter; GARP Risk Institute Comment Letter; mCD IP Comment Letter. 358 See, e.g., SIFMA AMG Comment Letter; JP Morgan Comment Letter; GARP Risk Institute Comment Letter. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00058 Fmt 4701 Sfmt 4702 normally charged separately to money market funds, but are expressed in less favorable prices or the inability to sell assets under stress. Moreover, money market fund holdings of many assets, such as municipal securities, certificates of deposit and commercial paper, are not exchange traded and many such assets do not have an active secondary market. As a result, estimating transaction costs and market impact factors of each component of a money market fund portfolio may be time consuming and difficult, especially during a liquidity freeze. Moreover, to the degree that some affected funds may engage in interfund borrowing to meet redemptions, such costs would not be captured by the proposed approach. Second, the implementation of swing pricing would require affected money market funds to receive timely information about order flows. Some commenters indicated that swing pricing in money market funds is currently impractical because some intermediaries may report flows with a delay.359 However, as discussed in section III.B.1.a above, many affected money market funds impose order cutoff times that ensure that they receive orders prior to striking their NAV. Therefore, many affected money market funds may already have the necessary information to determine when the fund has net redemptions and a swing factor needs to be applied. Affected money market funds that do not already have cut-off times may introduce cut-off times for order submissions by intermediaries, such as broker-dealers, retirement fund administrators, investment advisers, transfer agents, and banks, bearing related costs. Such funds may face additional operational complexity and costs to implement a cut-off time or otherwise gather the necessary information to determine whether it has net redemptions for each pricing period. Third, the proposed swing pricing requirement is likely to reduce the feasibility and increase the costs of same day settlement and the ability of affected funds to offer multiple NAV strikes per day.360 Specifically, affected money market funds may not have enough time to accurately estimate flows, make pricing decisions, and strike the NAV while meeting their existing settlement timeframes. This 359 See, e.g., ICI Comment Letter I; PIMCO Comment Letter; Fidelity Comment Letter; Federated Hermes Comment Letter I. 360 See, e.g., ICI Comment Letter I; SIFMA AMG Comment Letter; Western Asset Comment Letter; Federated Hermes Comment Letter I; JP Morgan Comment Letter; Institute of International Finance Comment Letter; CCMR Comment Letter. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules may cause affected funds to reduce the number of NAV strikes per day or move the last NAV strike to an earlier time, which could reduce the attractiveness of affected money market funds for liquidity-seeking investors. Some research finds that funds offering multiple intraday NAVs and redemptions experienced significantly larger outflows during times of stress when compared with single-strike funds.361 While this research does not distinguish between causal impacts of multiple NAV strikes a day on run risk and selection effects (with more liquidity seeking investors being attracted to multiple-strike funds), it suggests that multiple-strike funds were more prone to large investor redemptions in March 2020. Thus, the proposed swing pricing requirement for multiple NAV strikes per day funds may represent a tradeoff between potential adverse effects on the ability of some affected funds to offer intraday redemptions and slower settlement on the one hand, and potential reductions in run risk in money market funds on the other. Fourth, the proposed swing pricing requirement may increase costs of tax reporting. Specifically, the swing pricing requirement may increase tax reporting burdens for investors if the requirement prevents an investor from using the NAV method of accounting for gain or loss on shares in a floating NAV money market fund or affects the availability of the exemption from the wash sale rules for redemptions of shares in these funds. i. Benefits The proposed implementation of swing pricing to institutional prime and tax-exempt funds is characterized by four features. First, the swing factor must reflect spread and transaction costs, as applicable. Second, if the institutional fund has net redemptions exceeding 4% divided by the number of pricing periods per day, the swing factor would also require the inclusion of estimated market impacts that net redemption would have on the value of the fund portfolio. Swing pricing administrators would have flexibility to include market impacts in the swing factor if net redemptions are at or below the market impact threshold. Third, the proposal would require funds to calculate the swing factor under the Under the proposal, when net redemptions are at or below the market impact threshold of 4% divided by the number of pricing periods per day, the swing factor would be determined based on the spread costs and other transaction costs (i.e., brokerage commissions, custody fees, and any other charges, fees, and taxes associated with portfolio security sales). As discussed above, such direct transaction costs contribute to dilution of shareholders remaining in the fund and this aspect of the proposal may reduce dilution costs of non-transacting investors. Notably, adjusting the NAV by the spread costs of redemptions is economically equivalent to striking the NAV at the bid price and, as discussed above, some money market funds may already do so in the regular course of business. As a result, the swing pricing requirement for funds when net redemptions are at or below the market impact threshold would primarily affect institutional funds that use mid-market pricing to compute their current NAVs. In addition, when net redemptions are at or below the market impact threshold, the proposal would require the NAV adjustment to reflect other transaction costs, which currently contribute to dilution of non-transacting shareholders. Based on an analysis of historical daily redemptions out of institutional prime and institutional taxexempt money market funds between December 2016 and October 2021 and discussed in greater detail in Section III.D.4, approximately 5% of trading days 362 may involve such net 361 See, e.g., Casavecchia, Lorenzo, Georgina Ge, Wei Li, and Ashish Tiwari. 2021. ‘‘Prime Time for Prime Funds: Floating NAV, Intraday Redemptions and Liquidity Risk During Crises.’’ Working paper. 362 This analysis is based on historical daily redemptions. Since multiple NAV-strike a day funds would apply the threshold multiple times a day under the proposal, this analysis may under- b. Benefits and Costs of Specific Aspects of the Proposed Implementation of Swing Pricing khammond on DSKJM1Z7X2PROD with PROPOSALS2 assumption that the fund would sell all assets in the fund portfolio proportionally to the amount of net flows to meet net redemptions (the socalled vertical slice of the fund portfolio), rather than absorb redemptions out of liquid assets (the socalled horizontal slice of the fund portfolio). Fourth, the NAV adjustment would only occur when affected funds have net redemptions and not when they have net subscriptions. These features of the proposed swing pricing requirement aim to more fully and in a more tailored manner address the liquidity externalities that redeemers impose on investors remaining in the fund and are expected to result in reductions in the first mover advantage and run risk in institutional money market funds. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00059 Fmt 4701 Sfmt 4702 7305 redemptions. Approximately 3 out of the 53 (5%) institutional funds as of October 2021 would have outflows exceeding this threshold on an average trading day. As can be seen from that analysis, net flows on most days are low, so funds rarely experience large net redemptions that have significant market impact that would dilute investors.363 Under the proposal, if net redemptions exceed the market impact threshold of 4% divided by the number of pricing periods per day, the swing factor would be required to include not only the spread costs and other transaction costs, but also good faith estimates of the market impact of net redemptions. To the extent funds are able to estimate/forecast market impact costs accurately, the proposed requirement to assess the market impact of redemptions when net redemptions exceed the market impact threshold would result in redeeming investors bearing not only the direct spread and transaction costs from their redemptions, but also the impact of their redemptions on the market value of the fund’s holdings. This may allow shareholders remaining in the fund to capture more of the dilution cost of redemptions, which includes not only direct transaction costs and near-term price movements, but the impact of the redemptions on the fund’s portfolio as a whole. However, the magnitude of this benefit may be reduced by the fact that the proposal would only require market impact factor adjustments if redemptions exceed the market impact threshold. Based on an analysis of historical daily redemptions, approximately 5% of trading days may involve such net redemptions.364 Importantly, the proposed implementation of swing pricing would require funds to calculate the swing factor as if the fund were selling the prorata share of all of the fund’s holdings, rather than, for example, assuming the fund would absorb redemptions out of daily liquid assets. If a fund were to absorb large redemptions out of daily or weekly liquid assets, the immediate transaction costs imposed on the funds would be lower. However, the fund would have less remaining daily and weekly liquidity and transacting shareholders would be diluting remaining investors in a manner not captured by estimated transaction costs. or over-estimate how frequently a threshold may be applied. 363 The threshold is based on historical data demonstrating that the 4% threshold approximately corresponds to the 5th percentile of daily fund flows. 364 Id. E:\FR\FM\08FEP2.SGM 08FEP2 7306 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Thus, this aspect of the proposal would make redeeming investors bear not just the immediate costs of covering redemptions, but also the costs of rebalancing the fund portfolio to the pre-redemption levels of liquid asset holdings. Finally, the proposal would apply swing pricing to net redemptions, rather than both net redemptions and net subscriptions. Redemptions, not subscriptions, pose the greatest run risk. This aspect of the proposal may reduce the operational costs of implementing swing pricing by eliminating the need for funds to perform the swing factor analysis when they are faced with net subscriptions. ii. Costs The proposed implementation of swing pricing may give rise to burdens on money market funds. As described in the economic baseline, money market fund holdings exhibit little price volatility outside of times of severe stress, such as during the 2008 financial crisis and March 2020 volatility. The proposal would require funds to apply swing pricing during pricing periods with net redemptions, which would impose operational burdens on money market funds. However, these burdens may be mitigated by the fact that the funds scoped into this proposed requirement already have to perform an analysis to float the NAV 365 and the fact that some affected money market funds may already be using bid prices to strike the NAV. In addition, the proposed approach would require redeeming shareholders to bear liquidity costs larger than the direct liquidity costs they may impose on the fund. Specifically, the proposal would require institutional funds to calculate the swing factor assuming the fund would absorb flows by trading the pro-rata share of all of the fund’s holdings, rather than specific asset types. Given the nature of money market fund holdings (as described in the economic baseline), money market funds typically absorb redemptions out of daily and weekly liquid assets. Moreover, their ability to do so may be increased by the proposed amendments to raise the daily and weekly liquid asset requirements. At the same time, assets other than daily and weekly liquid assets—such as municipal securities and commercial paper that do not mature in the near term—may become illiquid in times of stress and may need to be held to maturity by the fund. Thus, the realized transaction 365 See 17 CFR 270.2a–7(c)(1)(ii); 17 CFR 270.2a– 4. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 costs of most redemptions may be zero as funds absorb them out of daily liquidity, while the true liquidity costs of redemptions may consist of the depletion of daily and weekly liquidity during times of stress (when rebalancing is especially expensive) rather than the sale of illiquid assets. This aspect of the proposal, therefore, could impose a large cost on redeemers that does not represent the actual cost realized from their trading activity, which may reduce the attractiveness of affected money market funds to investors. Notably, liquidity costs paid by redeemers under the proposed swing pricing requirement would flow back to remaining shareholders, disincentivizing redemptions and reducing the first mover advantage during times of stress. Moreover, market impact factors (which are estimates of the percent change in the price of an asset per dollar sold) and spread costs may be difficult to estimate precisely, especially in times of stress and when many of the assets money market funds hold lack a liquid secondary market. These difficulties may be attenuated to the degree that funds may be calculating market impact factors to assess trading costs and determine optimal trading strategies; however ex ante estimates of transaction costs and market impact factors may be more difficult than ex post assessment of trading costs and market impacts. This aspect of the proposal may lead money market funds to disinvest from some securities and asset classes with less trade and quotation data for an accurate estimate of market impact factors. While this may decrease liquidity risk in institutional funds, this may also reduce the amount of maturity and liquidity transformation they perform. Moreover, to the degree that funds’ estimation of market impacts and spread costs may be imprecise, funds may charge redeeming investors an inaccurate fee that under- or overestimates the actual liquidity costs funds incurred by funds after redemptions. The proposal seeks to reduce such costs by requiring the calculation of market impact factors in swing pricing only when net redemptions exceed 4% divided by the number of pricing periods per day. 5. Amendments Related to Potential Negative Interest Rates As a baseline matter, negative interest rates have not occurred in the United States and money market funds are not currently implementing reverse distribution mechanisms. Moreover, government and retail money market funds and their transfer agents are already required to be able to process PO 00000 Frm 00060 Fmt 4701 Sfmt 4702 transactions at a floating NAV. Thus, the proposal would restrict how money market funds may react to possible future market conditions resulting in negative fund yields and would effectively expand existing requirements related to processing orders under floating NAV conditions to all intermediaries. Government and retail money market funds would also be required to keep records identifying intermediaries able to process orders at a floating NAV. The proposal is intended to create transparency for investors in stable NAV funds in the event of negative yields. As discussed in Section III.D., the reverse distribution mechanism, if implemented by some funds, may mislead investors about the value of their investments. Requiring stable NAV funds to implement a floating NAV in a negative yield environment may better inform investors about the performance of their investment than allowing such funds to preserve a stable NAV, but decrease the number of investor shares.366 Moreover, the proposed amendments related to fund intermediaries may facilitate a transition of stable NAV funds to floating NAV in a negative yield environment. Notably, these benefits would only be realized in persistently negative yield environments. The proposed amendments may impose significant operational burdens and costs on investors. For example, requiring retail funds to switch from a stable NAV to a floating NAV may create accounting and tax complexities for some retail investors.367 In addition, a floating NAV requirement may be incompatible with popular cash management tools such as check-writing and wire transfers that are currently offered for many stable NAV money market fund accounts.368 The proposed requirement that government and retail money market funds determine that their intermediaries have the capacity to process the transactions at floating NAV and the related recordkeeping requirements would impose burdens on these funds, as estimated in Section IV. For example, affected money market funds may have to review their contracts with intermediaries, and some contracts may need to be renegotiated. Funds would have flexibility in how they make this determination for each financial intermediary, which may 366 Jose Joseph Comment Letter. e.g., ICI Comment Letter I; Federated Hermes Comment Letter I; Madison Grady Comment Letter; Comment Letter of Carter Ledyard Milburn (Apr. 15, 2021). 368 See, e.g., ICI Comment Letter I; Madison Grady Comment Letter. 367 See, E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules reduce these costs for some funds. Moreover, intermediaries that are currently unable to process transactions in stable NAV funds at a floating NAV may need to upgrade their processing systems to be able to continue to transact in government and retail funds. If some intermediaries are unable or unwilling to do so, the proposed requirement may adversely impact the size of intermediary distribution networks of some funds, which can limit access or increase the costs of investor access to some affected funds. However, there may be economies of scope in intermediating orders for both stable NAV and floating NAV funds, especially since some investors may allocate assets in both stable NAV and floating NAV funds. To the extent that many of the same intermediaries may process orders for floating and stable NAV money market funds, such intermediaries may already have processing systems adequate capable of processing transactions in stable NAV funds at a floating NAV should such a transition occur. Nevertheless, the use of stable NAV money market funds as sweep vehicles may present operational difficulties for intermediaries, and the burdens of the rule may increase the costs of and reduce the reliance on stable NAV funds for sweep accounting. As with other costs of the proposal, any compliance costs borne by money market funds may be passed along to investors in the form of higher fund expense ratios. The proposed amendments are justified because they serve to protect investors of stable NAV funds and create price transparency in the event of negative yields. 6. Amendments to Disclosures on Form N–CR, Form N–MFP, and Form N–1A khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. Benefits and Costs of the Proposed Prompt Notice of Liquidity Threshold Events on Form N–CR and Board Reporting The proposed amendments would require money market funds to file a Form N–CR report whenever 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. Specifically, in the event of such a liquidity threshold event, the amendments would require money market funds to disclose: the date of the initial liquidity threshold event, the percentage of the fund’s total assets invested in both weekly liquid assets and daily liquid assets on the day of the event, and a brief description of the facts and circumstances leading to the event. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 As a baseline matter, daily and weekly liquid assets are currently required to be disclosed on fund websites on a daily basis. Relative to that baseline, the proposed requirement for funds to report on Form N–CR may enhance Commission oversight and transparency about money market fund liquidity during times of stress by providing additional information about the circumstances of a fund’s significantly reduced liquidity levels. The proposed amendments may also have the effect of incentivizing funds to maintain daily and weekly liquidity above the reporting thresholds, including in times of stress. Publication of notices surrounding liquidity threshold events may inform investors about reasons behind the threshold event. To the degree that some funds’ liquidity threshold events may be indicative of persistent liquidity problems or mismanagement of liquidity risk, and to the extent that notices may better inform investors about such causes (relative to baseline website disclosures of liquidity levels), publication of such notices may trigger investor redemptions out of the most distressed funds. However, this risk may be reduced because under the proposed swing pricing approach, redeemers would be charged the cost of their redemptions and related dilution costs would be recaptured by the shareholders remaining in the fund. The proposal would also require money market funds to notify their boards when they drop below the 12.5% daily and 25% weekly liquidity asset thresholds, as discussed in section II.C.2. Since the proposal would require that liquidity threshold events are reported on Form N–CR, we preliminarily believe that funds would routinely notify the board of such events without an explicit board notification requirement. However, to the degree that some fund boards may not be notified of some events subject to Form N–CR reporting, the board notification requirement could enhance the oversight of fund boards over liquidity management, particularly during periods of stress. The proposed amendments to Form N–CR would impose direct compliance costs by imposing reporting burdens discussed in Section IV. Due to economies of scale, such costs may be more easily borne by larger fund families. In addition, the proposed prompt notice requirement may give rise to two sets of costs. First, the proposed requirement may lead fund managers to manage their portfolios specifically to try to avoid a reporting event, rather than in a way that is most PO 00000 Frm 00061 Fmt 4701 Sfmt 4702 7307 efficient for fund shareholders. Second, the proposed requirement may result in money market fund managers spending compliance resources on amending Form N–CR to describe the circumstances of the liquidity threshold event, which may divert managerial resources away from managing redemptions in times of stress. Costs borne by money market funds may be passed along to investors in the form of higher fees and expenses. However, as discussed above, the promptness of the notice requirement may enhance Commission oversight and transparency to investors, incentivize funds to closely monitor their liquidity levels, and ultimately better protect investors. b. Benefits and Costs of the Proposed Form N–MFP Amendments Proposed amendments to Form N– MFP would require reporting of daily data points on a monthly basis, of securities that prime funds have disposed of before maturity, of the composition of institutional money market funds’ shareholders and concentration of money market fund shareholders, and of additional information about repurchase agreement transactions (including through the proposed removal of a provision that allows aggregate information when multiple securities of an issuer are subject to a repurchase agreement), among other changes. Broadly, the proposed amendments to Form N–MFP may make the form more usable by filers, regulators, and investors, and may increase transparency around money market fund activities in four ways. First, the amendments may reduce uncertainty among filers and reduce filing errors. Second, the proposed requirement that the funds report their liquid assets, flows, and NAV on a daily basis may reduce costs of accessing this information relative to the baseline of routinely accessing and downloading information across many fund websites. Third, additional information about fund repo activities would enable investors and the Commission to better assess fund liquidity risks and oversee the industry. Fourth, information about shareholder concentration and composition can help the Commission and investors understand and evaluate potential redemption behavior and related investor risks. In addition, the proposal would add disclosure requirements to Form N– MFP intended to capture information about the relevant funds’ use of swing pricing, which would include each swing factor applied during the reporting period, the number of times a E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7308 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules fund applies a swing factor during the reporting period, and the end-of-day NAV per share (as adjusted by a swing factor, as applicable) for each business day of the reporting period. These amendments are expected to benefit investors in money market funds by reducing information asymmetries between institutional funds and investors about these funds’ swing pricing practices. Investors in these funds experience price fluctuations and, thus, accept price risks inherent in floating NAVs. However, swing pricing has not yet been implemented by any U.S. open-end fund, and money market funds are currently not permitted to use swing pricing. The purpose of the proposed disclosure requirement is, thus, to inform investors about the manner in which affected money market funds implement swing pricing. Such transparency may result in greater allocative efficiency as investors with low tolerance of liquidity risk and costs may choose to reallocate capital to money market funds that have lower liquidity risk and costs. In addition, to the degree that uncertainty about the proposed swing pricing requirement may reduce the attractiveness of affected money market funds to investors, transparency about historical swing factors may reduce those adverse effects. The proposed amendments to Form N–MFP would impose initial and ongoing PRA costs, as discussed in Section IV below. We understand that money market funds generally already maintain the information they would be required to report on Form N–MFP pursuant to other regulatory requirements or in the ordinary course of business. However, funds would incur some costs in reporting the information. We continue to note that, due to economies of scale, such costs may be more easily borne by larger fund families, and that costs borne by money market funds may be passed along to investors in the form of higher fees and expenses. In addition, the proposed disclosures of each swing factor, the number of times a swing factor was applied, and the end-of-day NAV per share (which would reflect applicable swing pricing adjustments to that end of day NAV) may create incentives for money market funds to compete on this dimension. Specifically, institutional investors who use institutional funds for cash management and prefer lower variability in the value of their investments may move capital from money market funds that had high historical swing factors to funds with lower swing factors. However, while NAV swings penalize redeemers, they VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 benefit investors remaining in the fund, which may make funds actively using swing pricing more attractive to longer term institutional investors. c. Benefits and Costs of the Proposed Amendments to Form N–1A The proposal would require institutional money market funds to provide swing pricing disclosures to investors, including a risk disclosure. Specifically, the proposal would require funds required to implement swing pricing to explain how they use swing pricing and describe the effects of swing pricing on the fund’s average annual total returns for the applicable period(s). This aspect of the proposed amendments to Form N–1A is expected to enhance transparency about institutional fund’s swing pricing practices. NAV adjustments under the proposed swing pricing requirement would be a novel aspect of pricing, influencing both the dilution risk and the returns of affected funds. Disclosure about the effects of swing pricing on historical fund returns is expected to help investors understand the liquidity costs of redemptions from a particular fund, as well as the degree to which the fund would recapture dilution of shareholders remaining in the fund. However, the proposed amendments would impose direct reporting burdens estimated in Section IV—costs that may be more easily borne by larger fund complexes due to economies of scale, and costs that may be passed along in part or in full to end investors. The proposed amendments would also remove current disclosures related to the imposition of liquidity fees and any suspension of redemptions, the need for which would be obviated by the proposal to remove fees and gates from rule 2a–7. d. Benefits and Costs of Proposed Requirements Related to Identifying Information on Form N–CR and Form N–MFP The proposed amendments would also require the registrant name, series name, related definitions, and LEIs for the registrant and series on Form N–CR. In addition, the proposal would require money market funds to report LEIs for the series on Form N–MFP.369 The LEI is used by numerous domestic and international regulatory regimes for identification purposes.370 As such, 369 Under the baseline, money market funds are already currently required to report registrant LEIs on Form N–CEN. 370 Other regulators with LEI requirements include the U.S. Federal Reserve, E.U.’s MiFid II regime, and Canada’s IIROC; the LEI is also used by private market participants for risk management PO 00000 Frm 00062 Fmt 4701 Sfmt 4702 requiring these additional disclosures could enable data users such as investors and regulators to crossreference the data reported on Forms N– CR with data reported on Forms N–MFP and with data received from other sources more easily, thereby expanding the scope of information available to such data users in their assessments.371 All money market funds already have registrant and series LEI due to baseline Form N–CEN reporting requirements. The proposed amendments to Form N– MFP would also require other information to better identify different types of money market funds, such as amendments to better identify Treasury funds and funds that are used solely by affiliates and other related parties. These amendments would help the Commission and market participants to identify certain categories of money market funds more efficiently. However, the proposed requirements to improve identifying information may give rise to direct compliance costs associated with amending reporting on Forms N–CR and N–MFP, as discussed in Section IV. In addition to the entity identification information (e.g., registrant name, series name, related definitions, and LEIs) discussed above, the proposed amendments would also expand security identification information by adding a CUSIP requirement for collateral securities that money market funds report on Form N–MFP. CUSIP numbers are proprietary security identifiers and their use (including storage, assignment, and distribution) entails licensing restrictions and fees that vary based on factors such as the number of CUSIP numbers used.372 Money market funds are currently required to disclose CUSIP numbers for each holding they report on Form N– MFP.373 As such, the incremental compliance cost on money market funds associated with the proposed CUSIP requirement, compared to the baseline, would be limited to those costs, if any, incurred by money market funds as a result of storing additional CUSIP numbers (to the extent money market funds do not already store CUSIP and operational efficiency purposes. See https:// www.leiroc.org/lei/uses.htm. 371 Fees and restrictions are not imposed for the usage of or access to LEIs. 372 The CUSIP system (formally known as CUSIP Global Services) is owned by the American Bankers Association and managed by Standard & Poor’s Global Market Intelligence. See CGS History, available at https://www.cusip.com/about/ history.html, and License Fees, available at https:// www.cusip.com/services/license-fees.html. 373 See Item C.3 of Form N–MFP. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules numbers for their collateral securities).374 khammond on DSKJM1Z7X2PROD with PROPOSALS2 e. Benefits and Costs of Proposed Structured Data Requirement for Form N–CR The proposed amendments would require money market funds to submit reports on Form N–CR using a structured, machine-readable data language—specifically, in an XMLbased language created specifically for Form N–CR (‘‘N–CR-specific XML’’).375 Currently, money market funds submit reports on Form N–CR in HTML or ASCII, neither of which is a structured data language.376 This aspect of the proposed amendments is expected to benefit investors in money market funds by facilitating the use and analysis, both by the public and by the Commission, of the event-related disclosures reported by money market funds on Form N–CR, as compared to the current baseline. The improved usability of Form N–CR could enhance market and Commission monitoring and analysis of reported events, thus providing greater transparency into potential risks associated with money market funds on an individual level and a population level. We anticipate that the incremental costs associated with requiring money market funds to submit reports on Form N–CR in N–CR-specific XML, compared to the baseline of submitting Form N– CR in HTML or ASCII, would be low given that money market funds already utilize XML-based languages to meet similar requirements in their other reporting, and can utilize their existing capabilities for preparing and submitting Form N–CR.377 Under the 374 CUSIP license costs vary based upon, among other factors, the quantity of CUSIP numbers to be used, on a tiered model, with the lowest tier being up to 500 CUSIP numbers. See CGS License Structure, available at https://www.cusip.com/ services/license-fees.html#/licenseStructure. Based on our understanding of current CUSIP licenses and usage among money market funds, we do not believe the proposed CUSIP reporting requirement for collateral securities is likely to impose incremental compliance costs on money market funds by moving them into a new CUSIP license pricing tier. 375 This would be consistent with the approach used for other XML-based structured data languages created by the Commission for certain specific EDGAR Forms, including Form N–CEN and Form N–MFP. See Current EDGAR Technical Specifications, available at https://www.sec.gov/ edgar/filer-information/current-edgar-technicalspecifications. 376 See supra footnote 247. 377 See supra footnote 331. In addition, money market funds would be given the option of filing Form N–CR using a fillable web form that will render into N–CR-specific XML in EDGAR, rather than filing directly in N–CR-specific XML using the technical specifications published on the Commission’s website. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 proposed rule, money market funds that choose to submit Form N–CR directly in N–CR-specific XML (rather than use the fillable web form) would incur the incremental compliance costs of updating their existing preparation and submission processes to incorporate the new technical schema for N–CR-specific XML.378 7. Amendments Related to the Calculation of Weighted Average Maturity and Weighted Average Life The Commission is proposing amendments to rule 2a–7 to specify that WAM and WAL must be calculated based on percentage of each security’s market value in the portfolio, rather than based on amortized cost of each portfolio security. These amendments may enhance consistency and comparability of disclosures by money market funds in data reported to the Commission and provided on fund websites. A consistent definition of WAM and WAL across funds can enhance transparency for investors seeking to assess the risk of various money market funds and may increase allocative efficiency. Moreover, greater comparability of WAM and WAL across money market funds may enhance Commission oversight of risks in money market funds. These amendments are not expected to give rise to direct compliance costs. Specifically, we understand that all money market funds currently determine the market values of their portfolio holdings.379 Thus, the costs of these proposed amendments may be de minimis. D. Alternatives 380 1. Alternatives to the Removal of the Tie Between the Weekly Liquid Asset Threshold and Liquidity Fees and Redemption Gates The proposal could have replaced the 30% weekly liquid asset threshold for the imposition of redemption gates or fees with a different threshold. This alternative would allow money market funds to impose gates or fees during large redemptions to reduce some of the dilution costs during large redemptions. However, this alternative could still trigger runs on money market funds close to the regulatory threshold in times of liquidity stress. When funds approach any regulatory threshold that can trigger a redemption gate or fee, 378 See infra Section IV.E. market funds that use a floating NAV use market values when determining a fund’s NAV, while money market funds that maintain a stable NAV are required to use market values to calculate their market-based price at least daily. 380 This discussion supplements the discussion of alternatives in other sections of the release. 379 Money PO 00000 Frm 00063 Fmt 4701 Sfmt 4702 7309 investors are incentivized to redeem ahead of others to avoid a potential gate or fee and retain access to their capital during liquidity stress. Thus, the existence of a transparent threshold, rather than the size of the threshold itself, may make money market funds vulnerable to runs. Moreover, even under the proposed removal of redemption fees and gates under rule 2a–7, money market funds are still able to reduce dilution costs during large redemptions under current rule 22e–3 where a fund’s weekly liquid assets drop below 10%. A fund’s board could also determine to impose redemption fees under Rule 22c–2. The proposal could also have reduced or eliminated the transparency of the trigger for the imposition of redemption gates and liquidity fees. For example, the proposal could have required fund boards to impose their own policies and procedures around factors they would take into account before redemption gates and fees are imposed that are not transparent to investors. As another alternative, the proposal could have required fund managers to seek regulatory approval confidentially before a fund is able to impose a redemption fee or gate. As yet another alternative, the proposal could have preserved the 30% weekly liquid asset trigger for the potential imposition of a fee or gate, while prohibiting the public disclosure of weekly liquid assets. These alternatives would increase uncertainty among investors about how close a given money market fund is to imposing a redemption gate or fee in times of severe market stress. Because the first mover advantage is strongest when a fund is on the cusp of imposing a redemption gate or fee (as many money market fund investors may be risk averse and the potential imposition of redemption gates could reduce shareholders’ access to liquidity), investor uncertainty about whether a fund is approaching a redemption gate or fee could prevent runs. The alternatives making the imposition of redemption gates or fees discretionary, subject to regulatory approval, or mechanical but triggered by an unobserved level of weekly liquid assets would also increase investor uncertainty but could disrupt run dynamics. However, these alternatives involve drawbacks. First, while such alternatives could interrupt runs on the funds closest to the imposition of the redemption gate or fee, they could also trigger runs on funds that were less illiquid and less likely to impose redemption gates or fees. For example, a lack of transparency about which funds are close to imposing liquidity E:\FR\FM\08FEP2.SGM 08FEP2 7310 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules fees or gates may lead risk averse investors to redeem from money market funds in general to preserve access to their capital during times of liquidity stress, which can lead to runs on more liquid and less liquid funds alike. Second, requiring money market fund managers to receive permission from the Commission before a redemption gate or fee is imposed may create undue delay during market stress events.381 Third, these alternatives would not present the same benefits from the proposed approach, which would both reduce run incentives related to the potential imposition of redemption gates or fees and, upon net redemptions, require redeeming shareholders to pay for the dilution cost they impose on the fund (under the proposed swing pricing approach discussed below). 2. Alternatives to the Proposed Increases in Liquidity Requirements a. Alternative Thresholds The proposal could have included a variety of alternative daily and weekly liquid asset thresholds. To quantify the potential effect of various liquidity thresholds on the probability that money market funds would confront liquidity stress, we modeled stress in publicly offered institutional prime fund portfolios using the distribution of redemptions from 42 institutional prime funds observed during the week of March 16 to 20, 2020 (‘‘stressed week’’) at various starting levels of daily and weekly liquid assets. The possible new thresholds determined by stress in publicly offered institutional prime fund portfolios were then applied to all money market funds except for the daily liquid asset threshold for tax-free money market funds. We also calculated from the distribution of daily and weekly liquidity asset values what percentage of retail and institutional prime funds combined would be impacted by the various liquidity thresholds. The analysis below estimates the probability that a publicly offered institutional prime fund with a given level of daily and weekly liquid assets would deplete daily liquid assets to meet redemptions (and have to liquidate assets under stressed market conditions) on a given day during the stressed week.382 Specifically, Figure 14 below plots the probability that a fund will run out of daily liquid assets on a given day of the stressed week. For the proposed thresholds of weekly liquid assets at 50% and daily liquid assets at 25%, Figure 14 shows that less than 10% of funds would deplete daily liquid assets and be unable to absorb redemptions out of daily liquid assets on at least one of the five stressed days. By contrast, a threshold of 15% daily liquid assets and 40% weekly liquid assets would approximately double the estimate of funds that would deplete daily liquidity to meet redemptions on at least one of the days of a stressed week (to approximately 20%). As referenced above, the largest weekly and daily redemption during the week of March 16 to 20, 2020, was approximately 55% and 25% respectively. Thus, an approach aimed at eliminating the risk of funds having insufficient liquid assets to absorb redemptions (using redemption data from March 16 to20, 2020) would require funds to hold more than 55% of weekly and at least 25% of daily liquid assets. Lower thresholds increase the probability that some funds may deplete their liquid assets to meet redemptions, but also reduce the adverse impacts described above. Figure I 4: The Probability that A Fund will Run Out ofDaily Liquid Assets under {2ifferent Mif!!1!!1!m Liquid!fJLTh7:,.<!§J!f!1-ds Assu~i,1!g}flA._J2LA + 25~;____ -~---·--------. ___ .. ···- .••· • ; I WLA=50% \\'LA=60% DLA=35% -Dayl ---•Day2 Table 5 quantifies the daily probability that a publicly offered institutional prime fund depletes daily liquid assets to meet redemptions under four scenarios: The current baseline daily and weekly liquid asset thresholds, thresholds based on the largest daily and weekly redemption during the week of March 16, 2020; pre381 See, e.g., SIFMA AMG Comment Letter; Comment Letter of James L Setterlund (Apr. 12, 2021) (‘‘James Setterlund Comment Letter’’). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 COVID weighted mean daily and weekly liquid assets; and post-COVID weighted mean daily and weekly liquid assets. The baseline scenario would require no change for money market funds; the ‘‘biggest redemptions’’ alternative would require approximately 10% of all prime funds (including both institutional and retail prime funds) to 382 See PO 00000 increase their daily liquid assets and approximately 75% of all prime funds to increase their weekly liquid assets. The alternative of imposing thresholds at the ‘‘pre-COVID’’ mean would require approximately 25% of all prime funds to increase their daily and 50% of all prime funds to increase their weekly liquid assets. Finally, the alternative supra footnote 206. Frm 00064 Fmt 4701 Sfmt 4702 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.020</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 ....... Day3 ••••••• Day4 ---•Days - A t Least One Day Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules that would impose ‘‘post-COVID’’ average liquidity metrics on the industry would require approximately 50% of all prime funds to increase daily 7311 and 75% of all prime funds to increase weekly liquid assets. This analysis includes a number of modeling assumptions. First, institutional prime fund redemptions were historically higher than redemptions out of retail funds, which may bias the analysis to overestimate the probability a retail or private institutional prime fund runs out of liquidity on a given day. Second, the analysis assumes that assets maturing on a given business day will be available at the end of that day. Third, the analysis assumes no assets are sold into a distressed market and redemptions are absorbed fully into a fund’s liquid assets. Fourth, the models do not include government agency securities with a maturity in excess of seven days, and assume Treasury securities have daily liquidity regardless of maturity and can be sold without any loss. Fifth, the analysis assumes that funds would go below the 30% weekly liquid asset threshold, continuing to meet redemptions out of liquid assets, rather than hold on to the weekly liquid assets. As discussed above, the removal of the trigger for the potential imposition of redemption gates may increase the willingness of money market funds to meet redemptions with daily and weekly liquid assets. Sixth, these estimates are based on redemption patterns in March 2020 and the distribution of future redemptions may differ, in part, as a result of the proposed amendments. Therefore, the above estimates show that alternatives imposing higher minimum daily and weekly liquidity thresholds relative to the proposal would require funds to hold more liquid assets, reducing the risk of fund liquidations or selloffs that may necessitate future government backstops. However, higher minimum VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 liquidity thresholds would require a larger number of money market funds to reallocate their portfolios towards lower yielding investments. In addition, higher liquidity thresholds may lead funds to increase the risk in the remainder of their portfolios to attract investor flows or to keep fund yields from sliding below zero and ensure the viability of the asset class (the latter risk may be more pronounced in very low interest rate environments). Moreover, higher liquidity requirements may increase the availability of funding liquidity through repos to leveraged market participants, resulting in a higher levels of risk taking in less transparent and less regulated sectors of the financial system. As discussed in more detail in Section III.C.2.a, an analysis of redemptions during market stress of March 2020 shows that, under the proposed liquidity thresholds, the probability that a fund depletes available weekly liquidity on at least one day during the stressed week was only approximately 9%. Thus, the proposed liquidity thresholds may be sufficient to meet redemptions during periods of liquidity stress. Similarly, lower thresholds relative to the proposal would allow funds to hold less liquid assets, increasing fund liquidity risks. However, lower thresholds would decrease the number of money market funds having to shift portfolios; would reduce the incentives of funds to take larger risks in the less liquid portion of their portfolios; and would reduce the concentration of liquidity in repos that are used by leveraged market participants for funding liquidity. The proposed thresholds reasonably balance these economic costs and benefits. PO 00000 Frm 00065 Fmt 4701 Sfmt 4702 b. Caps on Fund Holdings of Certain Assets As an alternative to increasing the minimum daily and weekly liquid asset requirements, the Commission considered proposing caps on money market fund holdings of certain assets, such as commercial paper and certificates of deposit. Commercial paper and certificates of deposit lack an actively traded secondary market and are difficult to value or sell during times of liquidity stress. Limiting money market fund holdings of such instruments may reduce run risk to the degree that the illiquidity of all or a portion of a fund’s portfolio may create externalities from redeeming investors borne by investors remaining in the fund, which may incentivize early redemptions. However, this alternative relies on the assumption that commercial paper and certificates of deposit homogeneously reduce the liquidity of a fund’s portfolio by more than other money market fund holdings across maturities. These assumptions may not always hold for different money market funds and over different time horizons. Moreover, to the degree that investors prefer funds that deliver higher returns and money market funds benefit from investor expectations of implicit government backstops during times of liquidity stress, money market funds may react to this alternative by changing the maturity structure of their portfolio and reallocating into other securities with potentially higher liquidity risk. For example, money market funds may substitute short-term commercial paper and certificates of deposit that are classified as daily or weekly liquid assets with longer term commercial paper and certificates of deposit that E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.021</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Table 5: Probability a Publicly Offered Institutional Prime Fund Runs out ofLiquidity under the Baseline and 3 Alternative Thresholds Probability that a Fund Depletes Available Liquidity Liguidity on a Given Day At Least Model DLA WLA Day 1 Day2 Day3 Day4 Day 5 One Day Current Threshold 10% 30% 9.5% 21.5% 22.3% 18.6% 3.3% 32.3% Biggest Redemptions 25% 55% 2.4% 1.4% 3.6% 3.6% 0.0% 6.5% Pre-COVID (Weighted Mean) 33% 48% 0.0% 0.4% 2.5% 3.9% 1.7% 5.7% Post-COVID 44% 56% 0.0% 0.0% 0.0% 0.5% (Weighted Mean} 0.0% 0.5% khammond on DSKJM1Z7X2PROD with PROPOSALS2 7312 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules would not be classified as daily or weekly liquid assets. Finally, because this alternative would involve defining the types of instruments subject to the cap, issuers may be able to create new financial instruments that are similar, and perhaps synthetically identical, to commercial paper and certificates of deposit along risk and return dimensions, but that would not be subject to the caps. The proposed approach, which would increase minimum daily and weekly liquid asset requirements, may reduce liquidity and run risk in money market funds without such potential drawbacks, while ensuring funds have minimum liquidity to meet large redemptions. As another alternative, the proposal could have replaced the minimum daily and weekly liquid asset thresholds with asset restrictions, such as imposing a minimum threshold for holdings of government securities 383 and repos backed by government securities. Under the baseline, such assets are generally categorized as daily liquid assets. Thus, such an approach would have the effect of replacing minimum daily and weekly liquid asset thresholds with a single daily liquid asset threshold, and restricting the types of assets that would qualify as daily liquid assets. This alternative would reduce the liquidity risk of liquid assets held by money market funds, which may help them meet redemptions without transaction costs. However, waves of redemptions as experienced in 2008 and 2020 occur over multiple days, suggesting that money market funds need to have both daily and weekly liquidity to meet redemptions. Moreover, asset restrictions imposing large minimum thresholds for holdings of government securities would decrease not only the risk, but also the yield of money market funds and their attractiveness to investors, reducing the viability of the asset class in low interest rate environments. This approach would also further concentrate money market fund holdings in specific types of assets, which may increase the likelihood of funds selling the same assets to meet redemptions in times of stress. Finally, under the baseline, funds falling below minimum liquid asset thresholds may not acquire any assets other than daily or weekly liquid assets, respectively, until funds meet those minimum thresholds. The proposal 383 See, e.g., CCMR Comment Letter. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 would retain this baseline approach, while increasing the absolute daily and weekly liquid asset thresholds. As an alternative, the proposal could have imposed penalties on funds or fund sponsors upon dropping below the required minimum liquidity threshold. Similarly, the proposal could have imposed a minimum liquidity maintenance requirement, which would require that a money market fund maintain the minimum daily liquid asset and weekly liquid asset thresholds at all times instead of the current requirement to maintain the minimums immediately after the acquisition of an asset. During the market stress in 2020, funds experiencing large redemptions were reluctant to draw down on weekly liquid assets due to the existence of the threshold for the potential imposition of redemption fees and gates. Such alternatives may have a similar effect of penalizing money market funds for using liquidity when liquidity is most scare, which may make money market funds reluctant to use daily and weekly liquid assets to meet large redemptions during market stress. As a result, money market funds would be incentivized to sell less liquid assets, such as longer maturity commercial paper, into distressed markets, rather than risk penalties and dropping below minimum liquidity maintenance requirements. This may increase transaction costs borne by redeeming investors and may result in money market fund redemptions magnifying liquidity stress in underlying securities markets. 3. Alternative Stress Testing Requirements As an alternative to the proposed amendments to stress testing requirements, the proposal could have modified weekly liquidity thresholds that funds must use for stress testing. For example, the proposal could have required money market funds to perform stress testing using 15%, 20%, or 30% minimum weekly liquid asset thresholds. As another example, the proposal could have required money market funds to use specific minimum daily and weekly liquid asset thresholds. These alternatives would reduce the discretion of fund managers to identify their own optimal liquid asset thresholds for purposes of stress testing. However, as discussed above, optimum levels of liquidity will vary depending on the type of money market fund, investor concentration, investor PO 00000 Frm 00066 Fmt 4701 Sfmt 4702 composition, and historical distribution of redemption activity under stress, among other factors. The alternatives establishing bright line thresholds for stress testing could reduce the ability of funds to stress test against the most optimal liquid asset thresholds, which may reduce usability of stress testing results for board and Commission oversight. 4. Alternative Implementations of Swing Pricing a. Alternative Thresholds for the Application of Market Impact Factors As described in Section II.B above, the proposal would require funds to apply different swing factor calculations depending on the size of net redemptions. Specifically, if net redemptions are at or below 4% of the fund’s NAV divided by the number of pricing periods per day, the swing factor would reflect spread and transaction costs of redemptions. If net redemptions exceed 4% of the fund’s NAV divided by the number of pricing periods per day, the swing factor would include not only spread and transaction costs, but also a good faith estimation of market impacts of net redemptions. The proposal could have used a different net redemption threshold for the application of market impact factors. For example, the proposal could have required funds to estimate market impacts if net redemptions exceed 2% or 0.5% divided by the number of pricing periods per day. Based on an analysis in Table 6 below, these alternatives would require funds to estimate market impact factors on 10% or 25% of trading days.384 Since net flows of these funds are zero at the median, and because there are only 53 institutional funds in our sample, a 10%-ile or 25%-ile alternative threshold would correspond to approximately 5 and 13 funds respectively having outflows greater than the threshold on an average trading day, relative to approximately 3 funds under the proposal. Alternatively, the proposal could have used different redemption thresholds for the swing factor calculation for institutional prime or institutional tax-exempt funds. 384 This analysis is based on historical daily redemptions, but multiple NAV-strike a day funds would apply the threshold multiple times a day under the proposal. Thus, this analysis may underor over-estimate how frequently a threshold may be applied. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7313 Table 6: Daily Flows ofInstitutional Money Market Funds 385 Institutional Funds Prime Only Prime + Tax Exem2t khammond on DSKJM1Z7X2PROD with PROPOSALS2 Higher (lower) net redemption thresholds for the calculation of market impact factors would reduce (increase) the number of pricing periods for which affected money market funds must calculate market impact factors for portfolio securities, reducing (increasing) related costs and operational challenges. However, higher (lower) net redemption thresholds would also reduce (increase) the amount of dilution from redemptions that is recaptured by money market funds and accrue to non-transacting shareholders. As can be seen from Table 6, the proposed 4% market impact threshold would represent approximately the 5th percentile of daily redemptions. We note that 1st and 5th percent correspond to standard confidence levels in statistical testing, and such confidence levels have been used in other Commission rules.386 Importantly, when daily net redemptions reach 4%, most funds may experience significant market impact if they were to sell a pro-rata share of their portfolio holdings to meet redemptions. Thus, the proposed market impact threshold may appropriately tailor the market impact factor requirement to relatively rare pricing periods of extreme stress. As another alternative, the proposal could have defined the market impact threshold on a fund-by-fund basis, with reference to a fund’s historical flows.387 385 This table reports the results of an analysis of daily flows reported in CraneData on 1,228 days between December 2016 and October 2021. As of September 2021, CraneData covered 87% of the funds and 96% of total assets under management. Flows at the class level were aggregated to the fund level. Flows of feeder funds were aggregated for an approximation of flows for the corresponding master fund. 386 For example, rule 18f-4 requires that an open end fund’s value at risk model use a 99% confidence level. The Commission also considered requiring a different confidence level for the value at risk test, such as the 95% or 99% confidence levels. See, e.g., Use of Derivatives by Registered Investment Companies and Business Development Companies, Investment Company Act Release No. 34084 (Nov. 2, 2020) [85 FR 83162 (Dec. 21, 2020)], at 83250. 387 As another possibility, the proposal we could have allowed funds discretion over which historical period could be chosen. However, because money market funds may not internalize the externalities that their liquidity management imposes on VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 Percentiles 10% 25% 50% 75% 90% 95% -1.9% -0.5% 0.0% 0.6% 2.2% 3.9% -2.1% -0.5% 0.0% 0.6% 2.3% 4.1% For example, each fund could have been required to determine the trading days for which it had its highest flows over a set time period, and set its market impact threshold based on the 5% of trading days with the highest redemptions.388 While this alternative could allow funds to customize their market impact thresholds to their historical redemption flows, it may reduce the comparability of money market fund returns for investors because swing factors, including the associated market impact factor, influence reported fund returns. Finally, such an alternative may create strategic incentives for fund complexes to open and close funds depending on historical redemption activity. For example, to the degree that the estimation of market impact factors may be burdensome, fund families may choose to close funds that experienced high redemptions to avoid the application of market impact factors. b. Other Alternative Approaches to Market Impact Factors The proposal could have required institutional funds to apply swing pricing as proposed, but without any requirement to estimate market impact factors. As a related alternative, the proposal could have made the use of market impact factors in swing factor calculations less prescriptive and more principled-based or optional in their entirety. These alternatives would reduce the likelihood and frequency with which affected money market funds would estimate market impacts, which may reduce costs and operational challenges of doing so. However, this may reduce the frequency and size of investors in the same asset class, they may not be incentivized to use such discretion in a way that mitigates those externalities. For example, some affected funds may choose a historical time period that results in market impact thresholds that are too high, so that market impact factors are rarely applied. Moreover, because market impact thresholds would influence NAV adjustments and reported returns, the alternative may reduce the comparability of money market fund returns for investors. 388 As another alternative, the rule could have required policies and procedures regarding the choice of a threshold percent level based on historical data. PO 00000 Frm 00067 Fmt 4701 Sfmt 4702 NAV adjustments and the benefits of swing pricing for non-transacting shareholders. Increased discretion may allow funds to tailor the calculation of market impact factors to individual portfolio and asset characteristics and prevailing market conditions. This may make swing factors a more precise measure of liquidity costs assessed to redeeming investors. However, because swing factor adjustments influence reported fund returns, greater discretion over the calculation of swing factors may reduce the comparability of money market fund returns for investors. Moreover, because money market funds may not internalize the externalities that their liquidity management practices may impose on investors in the same asset class, they may not be incentivized to use such discretion in a way that mitigates those externalities. c. Other Alternative Implementations of Swing Pricing Under the proposal, all institutional prime and institutional tax exempt money-market funds would be required to apply swing pricing during pricing periods with net redemptions. As an alternative, the proposal could have required a fund to adopt policies and procedures that specify how the fund would determine swing pricing thresholds and swing factors based on a principles based approach, instead of specifying swing factor calculations and thresholds in the rule. As another alternative, the proposal could have made the application of swing pricing optional. The operational costs of implementing swing pricing are immediate and certain, while the benefits are largest in relatively rare times of liquidity stress. Moreover, while money market funds may have reputational incentives to manage liquidity to meet redemptions—and fund sponsors may have chosen to provide sponsor support in the past— institutional money market funds also face disincentives from investor behavior and collective action problems. Specifically, to the degree that institutional investors may use institutional prime and institutional tax- E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.046</GPH> Average Fund Count 5% 37 -3.5% 47 -3.7% khammond on DSKJM1Z7X2PROD with PROPOSALS2 7314 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules exempt funds for cash management and are sensitive to NAV adjustments, funds may be disincentivized to swing the NAV and recapture the dilution costs for shareholders remaining in the fund. These alternatives may allow funds not to implement swing pricing or to implement a swing pricing approach with higher swing thresholds and different swing factors (for example, without estimating market impacts). Relative to the proposal, these alternatives may allow funds to better tailor their liquidity management and swing pricing design to investor composition, portfolio and asset characteristics, and prevailing market conditions. This alternative may also avoid operational costs and challenges of swing pricing for some funds. To the degree that the implementation of swing pricing may increase the variability of fund NAVs which reduces the attractiveness of affected funds to investors, these alternatives may reduce potential adverse impacts of swing pricing on the size of the institutional money market fund sector, the number of institutional money market funds available to investors, and the availability of wholesale funding liquidity in the financial system. However, affected funds may not internalize the externalities that they impose on investors in the same asset classes or the externalities that redeeming investors impose on investors remaining in the fund. In addition, as a result of the collective action problem and disincentives from investor flows, no fund may be incentivized to be the first to implement swing pricing, even if all institutional money market funds recognize the value of charging redeeming investors for the liquidity costs of redemptions. Thus, these alternatives could reduce the likelihood that funds adjust the NAV to capture the dilution costs of net redemptions relative to the proposal because affected funds may not internalize the externalities that they impose on investors in the same asset class. This may reduce or eliminate important benefits of the proposed swing pricing requirement, including protecting non-transacting investors from dilution, reducing first-mover advantage and run risk, and reducing liquidity externalities money market funds may impose on market participants transacting in the same asset classes. In addition, relative to the proposal, these alternatives would increase fund manager discretion over the choice of swing threshold, swing factors, and the application of swing pricing in general. As a result, because VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 the application of swing pricing in general and swing factor adjustments in particular influence reported fund returns, greater discretion over the application of swing pricing may reduce the comparability of money market fund returns for investors. The proposal could have required institutional funds to adjust the NAV only when net flows exceed a certain swing threshold (either regulatory threshold or threshold selected by each institutional fund), allowing funds to not adjust the NAV at all when redemptions are low. As described in the economic baseline, money market funds generally hold highly liquid assets, and the proposal would require money market funds to hold even higher levels of daily and weekly liquid assets. As a result, unless both net redemptions and price uncertainty are large, institutional funds may be able to absorb redemptions of transacting investors without imposing large liquidity costs on the remaining investors. Thus, the alternative may allow institutional funds to avoid the costs and operational burdens of calculating spread and transaction costs when net redemptions are low. However, alternatives that allow funds not to apply swing pricing when net redemptions are below a swing threshold selected by the fund may reduce the expected economic benefits of swing pricing. First, if money market funds are able to select their own swing thresholds, they may choose to set high swing thresholds, reducing the probability that funds would swing the NAV under normal conditions. To the degree that money market fund investors use institutional funds as a very low risk or cash-like investment vehicle and are averse to any fluctuations in the value of their money market fund holdings, these funds may seek to only swing the NAV when redemptions are large enough that they would have required fund liquidation. Second, in 2020 institutional money market fund investors appeared to be highly sensitive to the possibility that a redemption gate or fee would be imposed. To the extent money market investors are able or attempt to forecast when swing pricing would apply or attempt to do so, the existence of a swing threshold may incent these investors to redeem before the swing. Importantly, formulating a swing threshold based on redemptions in a particular pricing period, rather than based on historical redemptions, is likely to interrupt self-fulfilling run dynamics and eliminate incentives for strategic redemptions around swing thresholds. PO 00000 Frm 00068 Fmt 4701 Sfmt 4702 The proposal could have allowed funds to calculate the swing factor under the assumption that the fund would absorb redemptions out of liquid assets (the so-called horizontal slice of the fund portfolio) or otherwise provide funds with flexibility to determine the costs based on how they would satisfy redemptions on a given day. Money market funds may manage their liquidity so as to be able to absorb redemptions out of daily and weekly liquid assets, rather than having to sell a pro-rata share of their portfolio holdings. Moreover, the proposal would require money market funds to hold higher levels of daily and weekly liquid assets. Assets that are not daily and weekly liquid assets can be illiquid and generally may need to be held to maturity by the fund. Thus, the alternative would allow funds to avoid swinging the NAV if they are able to, for example, by absorbing redemptions out of more liquid assets. This may reduce uncertainty for investors about the magnitude of the potential NAV adjustment, especially when liquidity is not scarce. However, this alternative would result in redeeming investors not being charged for the true liquidity costs of redemptions, which consist not only of the immediate costs of liquidating fund assets, but also of the cost of leaving the fund more depleted of liquidity and thus more vulnerable to future redemptions. As another alternative, the proposal could have required that affected money market funds calculate the swing factor based on the fund’s best estimate of the liquidity costs of redemptions. Under this alternative, swing factors may more accurately capture the costs of redemptions as funds would be able to tailor swing factors to their liquidity management strategies (whether that is, for example, liquidating pro-rata shares of portfolio holdings, absorbing redemptions out of daily or weekly liquidity, some combination of the two, or borrowing). However, this alternative would increase fund discretion in the calculation of swing factors, and fund manager incentives may not be aligned with incentives to accurately estimate liquidity costs of redemptions. For example, larger swing factors applied to redemptions benefit the fund and can improve reported fund performance. At the same time, disclosures about historical swing factors can incentivize fund managers to apply excessively low swing factors to attract investors. The proposal could have required institutional funds to allocate the aggregate dollar cost of trading to gross (as opposed to net) redemptions. Under the alternative, redeeming investors E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules would bear the dilution cost of the redemptions, but not the dilution cost that comes from subscribers being able to buy into the fund at the lower adjusted NAV.389 This approach could result in redeeming investors paying only the liquidity costs of their orders. However, this alternative may not fully compensate shareholders remaining in the fund for the full dilution cost associated with redemptions. The proposal also could have required that institutional funds apply swing pricing to both net redemptions and net subscriptions. Relative to the proposal, this alternative would involve greater benefits to non-transacting investors by not only capturing the dilution costs of redemptions, but also the dilution costs arising out of the need to invest net subscriptions. At the same time, waves of subscriptions may be less likely to destabilize the money market fund sector in a way that leads to government support. Moreover, the alternative would increase the ongoing operational costs of swing pricing—costs that are expected to be passed along to fund investors that are already earning low or zero net yields in a low interest rate environment. Finally, as discussed in Section II above, applying the proposed swing pricing requirements to fund subscriptions would require these funds to make certain assumptions about how they invest cash from new subscriptions and, in some cases, these assumptions would be inconsistent with requirements in rule 2a–7. khammond on DSKJM1Z7X2PROD with PROPOSALS2 5. Liquidity Fees As an alternative to the proposed swing pricing requirement, the proposal could have required that institutional prime and institutional tax exempt money market funds establish boardapproved procedures to impose liquidity fees that capture liquidity externalities of redemptions. As a related alternative, the proposal could have required institutional prime and tax-exempt money market funds to establish a dynamic liquidity fee framework that uses the same, or similar, parameters as swing pricing for determining when to impose a fee and how to calculate the fee. For instance, the liquidity fee framework could apply a fee any time the fund has net redemptions, and calculate the amount 389 Some regulatory authorities in other countries allow fund managers to choose one of two allocation rules: A rule under which costs are fully borne by subscribing and redeeming investors and a rule under which costs are borne on a pro-rata basis by transacting investors. See, e.g., ‘‘Code of Conduct for Asset Managers Using Swing Pricing and Variable Anti-Dilution Levies,’’ 2016, available at https://www.afg.asso.fr. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 of the fee in the same or similar way as the swing factor under our proposed approach. Alternatively, the liquidity fee framework could be modified in the same or similar manner as one of the swing pricing alternatives discussed above (e.g., the fee could apply only when net redemptions exceed a certain threshold, or the fee calculation method could be based on how the fund expects to satisfy redemptions instead of assuming sale of a vertical slice of the fund’s portfolio). While the PWG Report largely analyzed liquidity fees in the context of the removal of the ties between weekly liquid asset thresholds and the potential imposition of fees and gates, several commenters discussed the above related liquidity fee alternatives (collectively, the ‘‘alternative liquidity fee approach’’). For example, some commenters recommended allowing the board to impose liquidity fees when it determines that doing so is in the best interest of shareholders, without reference to a specific weekly liquid asset threshold.390 Some commenters suggested a modified fee framework whereby money market funds would be required to have policies and procedures that provide the fund’s board with direction on when to impose fees and how to calculate them, in order to impose fees that reflect the cost of liquidity.391 Two such commenters suggested that the Commission could identify non-binding factors to consider (e.g., net redemptions; portfolio specific characteristics like liquid assets, investor concentration, and diversity of holdings; and market-based metrics).392 Under these commenters’ suggested approach, funds would be required to disclose the possibility of liquidity fees to investors but could avoid providing information that would allow investors to preemptively redeem before fees apply. Like the proposed swing pricing approach, the liquidity fee alternative would require funds to recapture the liquidity costs of redemptions to make non-redeeming investors whole. Thus, many of the economic costs and benefits of the proposed swing pricing approach are also expected with the liquidity fee alternative. Specifically, like the proposed swing pricing requirement, the liquidity fee 390 See, e.g., JP Morgan Comment Letter; Federated Hermes I Comment Letter; Federated Hermes II Comment Letter; Wells Fargo Comment Letter; ICI I Comment Letter; Western Asset Comment Letter. 391 See, e.g., JP Morgan Comment Letter; ICI I Comment Letter; Western Asset Comment Letter. 392 See, e.g., JP Morgan Comment Letter; ICI I Comment Letter. PO 00000 Frm 00069 Fmt 4701 Sfmt 4702 7315 alternative may reduce dilution of nonredeeming shareholders in the face of net redemptions. Liquidity fees may reduce the first mover advantage, fund outflows during market stress, and dilution. To the degree that liquidity fees may reduce dilution, they may protect investors that remain in the fund, for instance, during periods of high net redemptions. Similar to the proposal, the magnitude of liquidity fees applied by affected funds may be quite small since money market funds hold relatively high quality and liquid investments, which may reduce liquidity costs when meeting redemptions. The fact that the alternative may result in relatively small liquidity fees as well as the inability of investors to observe at the time of placing their orders whether the liquidity fee will be applied may interrupt self-fulfilling run dynamics and reduce the likelihood of strategic behavior around liquidity fees. The alternative would address the dilution that can occur when a money market experiences net redemptions and would not result in large liquidity fees unless there is significant net redemption activity leading to large liquidity costs. Some of the direct and indirect costs of the liquidity fee alternative may be similar to those of the proposed swing pricing requirement. First, a liquidity fee framework in which funds are more likely to apply liquidity fees relative to the baseline may reduce investor demand for institutional prime and institutional tax-exempt money market funds. Reduced investor demand may lead to a decrease in assets under management of affected money market funds, thereby potentially reducing the wholesale funding liquidity they provide to other market participants. If some institutional money market fund investors are concerned about preserving their invested capital and to the degree that the liquidity fee alternative would require redeeming investors to bear the liquidity risk of their redemptions (a risk they do not currently internalize), the alternative may reduce investor demand for institutional money market funds. Second, the liquidity fee alternative could impose costs on investors redeeming shares in response to poor fund management or a fund complex’s emerging reputational risk. The alternative would assess liquidity fees based on the liquidity costs of effecting redemptions and regardless of the cause for the redemptions. Similar to the proposed swing pricing approach, this could reduce the strength of market discipline of poor fund management. E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7316 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Third, liquidity fees would require affected funds to pass along liquidity costs of redemptions onto investors. This may decrease the need of funds to provide and investor expectation of sponsor support to cover liquidity costs of redemptions. As a result, like the proposed swing pricing approach, the liquidity fee alternative could magnify the incentives of affected funds to invest in more illiquid assets, may reduce their incentives to manage downside liquidity risk, and may reduce fund incentives to find the cheapest way to source liquidity to meet redemptions. In addition, fund managers may be incentivized to apply liquidity fees frequently and to use their discretion to apply larger liquidity fees because they improve a fund’s reported returns and benefit the fund. These factors may be partly mitigated by reputational incentives of fund managers, to the degree that the large and frequent application of liquidity fees may discourage liquidity seeking investors from allocating to such funds. Fourth, the implementation of the alternative liquidity fee approach would pose some operational challenges and impose related costs on money market funds, third party intermediaries, as well as investors. Similar to the proposed swing pricing approach, the calculation of liquidity fees would require affected money market funds to estimate spread and other costs on days with net redemptions, which may be particularly time consuming and challenging during times of stress. As discussed above, many assets that money market funds hold are not exchange traded and do not have an active secondary market. As a result, estimating spread costs and market impact factors of each component of a money market fund portfolio may be time consuming and difficult, especially during a liquidity freeze. The liquidity fee alternative also has several important differences from the proposed swing pricing approach, and these differences give rise to different economic benefits, costs, and operational challenges. Specifically, the proposed swing pricing approach would recapture dilution costs of redemptions by adjusting the NAV of the fund as a whole depending on the volume of net redemptions, spread and other costs, and estimates of market impacts. The liquidity fee alternative would, instead, require funds to assess liquidity fees on redeeming investors depending on the same or similar considerations. As a result, the alternative liquidity fee approach may have several benefits relative to the proposed swing pricing approach. First, liquidity fees could be VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 more transparent than a swing factor adjustment to the fund’s NAV, as redeeming investors would more clearly see application of a separate fee. However, while redeeming investors would enjoy greater transparency regarding liquidity fees, other investors would not observe when a liquidity fee is charged. Second, similar to the proposed swing pricing approach, liquidity fees would mitigate dilution. However, under the proposed swing pricing approach redeemers compensate the fund for the dilution of redemptions as well as the dilution from subscriptions. Thus, redeemers would subsidize subscribers in the fund—an incentive effect that may be particularly important when liquidity is scarce and a fund is facing a wave of redemptions. By contrast, the alternative liquidity fee approach could charge redeeming investors fees that compensate the fund for dilution from redemptions only. While the liquidity fee alternative would not create a positive incentive for subscriptions, it would avoid charging subscribers for more than the liquidity cost of their redemptions. Third, if liquidity fees are to be assessed after the NAV is struck, it could reduce the operational challenges and time pressures of swing pricing and allow affected money market funds to charge the ex post trading costs to redeeming investors. The alternative liquidity fee approach could avoid the potentially adverse impacts of swing pricing on settlement cycles and may be less likely to affect the number of NAV strikes some funds currently offer each day. Importantly, the alternative liquidity fee approach could give rise to several sets of operational concerns and related costs. In contrast with the proposed swing pricing approach, which is implemented through affected funds adjusting the NAV, the alternative liquidity fee approach would require intermediaries to assess fees to investors. As a result, the alternative liquidity fee approach would require greater involvement by intermediaries in applying the fees and submitting the proceeds to the fund. While intermediaries to non-government money market funds and other service providers should be equipped to impose liquidity fees under the current rule, the alternative liquidity fee approach would likely result in more frequent and varying application of fees than the current rule contemplates. Requiring intermediaries to apply a fee more frequently, with the potential to change in amount from pricing period-topricing period, could introduce additional operational complexity and PO 00000 Frm 00070 Fmt 4701 Sfmt 4702 cost. By consequence, intermediaries may need to develop or modify policies, procedures, and systems designed to apply fees to individual investors and submit liquidity fee proceeds to the fund. In addition, liquidity fees may require more coordination with a fund’s service providers than swing pricing, since fees need to be imposed on an investor-by-investor basis by each intermediary, which may be particularly difficult with respect to omnibus accounts. Moreover, funds may not have insight into whether an intermediary is appropriately and fairly applying the liquidity fee to redeeming investors and affected funds may need to develop or modify policies and procedures reasonably designed to ensure intermediaries are appropriately and fairly applying the fees. Finally, due to the costs that the alternative may impose on intermediaries and distribution networks of affected funds, the alternative liquidity fee approach may require money market funds to alter their intermediary distribution contracts, networks, and flow aggregation practices. We lack data to quantify such burdens and costs and solicit comment and data that would inform this analysis. 6. Expanding the Scope of the Floating NAV Requirements The proposal could have expanded the floating NAV requirements to a broader scope of money market funds. For example, the proposal could have imposed floating NAV requirements on all prime money market funds, but not on tax-exempt funds.393 As another alternative, the proposal could have imposed floating NAV requirements on all prime and tax-exempt money market funds.394 Finally, the proposal could have required that all money market funds float their NAVs.395 Expanding the scope of the floating NAV requirements beyond institutional prime and institutional tax-exempt funds would involve several main benefits. First, a floating NAV may increase transparency about the risk of money market fund investments. Portfolios of money market funds give rise to liquidity, interest rate, and credit risks—risks that are relatively low under normal market conditions, but may be 393 See, e.g., PIMCO Comment Letter; Vanguard Comment Letter. 394 See, e.g., Schwab Comment Letter; Northern Trust Comment Letter. 395 See, e.g., Comment Letter of the CFA Institute (Apr. 14, 2021) (‘‘CFA Comment Letter’’); Comment Letter of Better Markets, Inc. (Apr. 12, 2021) (‘‘Better Markets Comment Letter’’); Systemic Risk Council Comment Letter; Comment Letter of Professor David Zaring, The Wharton School (Apr. 2, 2021) (‘‘Prof. Zaring Comment Letter’’). E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules magnified during market stress. To the degree that investors in stable NAV funds are currently treating them as if they were holding U.S. dollars due to a lack of transparency about risks of such funds, expanding the scope of the floating NAV requirements may enhance investor protections and enable investors to make more informed investment decisions. Some commenters stated that expanding a floating NAV requirement could enhance transparency about the underlying performance of creditsensitive assets within prime money market funds.396 Another commenter indicated that a floating NAV provides investors with more accurate information about the fund’s financial condition, enhances transparency about the risks of the fund’s portfolio holdings, and is consistent with the valuation of investment funds generally.397 Yet another commenter suggested that a floating NAV can provide more flexibility and resilience than a stable NAV, but tax-exempt money market funds could continue to support a stable NAV as long as the Commission tightened portfolio restrictions on such funds.398 Second, these alternatives could reduce run risk in affected stable NAV funds. Specifically, floating the NAV may reduce the first mover advantage in redemptions, partly mitigating investor incentives to run. Some commenters supported the benefits of a floating NAV requirement in discouraging herd redemption behavior across all prime money market funds,399 and suggested that a floating NAV may reduce the advantages of sophisticated investors that redeem quickly under stressed conditions.400 We are also aware of research that examined fund outflows outside the U.S. and found reduced outflows in floating NAV funds.401 As a caveat, to the degree that heavy redemptions in floating NAV funds reduce available liquidity and credit quality of remaining fund holdings, investors may still be incentivized to redeem early, albeit at a NAV below $1. In this sense, floating the NAV may 396 See, e.g., PIMCO Comment Letter. e.g., CFA Comment Letter. 398 Id. (noting that tax-exempt money market funds invest in entities that often have the taxing power to support their debt, may not be able to discharge their debt obligations through bankruptcy, and issue notes that offer contractual liquidity). 399 See, e.g., PIMCO Comment Letter. 400 See, e.g., Better Markets Comment Letter. 401 See, e.g., Witmer, Jonathan. 2016. ‘‘Does the Buck Stop Here? A Comparison of Withdrawals from Money Market Mutual Funds with Floating and Constant Share Prices.’’ Journal of Banking and Finance 66: 126–142. khammond on DSKJM1Z7X2PROD with PROPOSALS2 397 See, VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 reduce, but not eliminate incentives for early redemptions during market selloffs that are present in securities markets and open-end funds more generally. Some commenters stated that floating the NAV of stable NAV funds would do little to reduce redemption activity during periods of market stress, particularly given that institutional prime funds experienced heavy redemptions in March 2020 despite having a floating NAV.402 Another commenter opposed a floating NAV requirement, suggesting that it likely would not address run risk but may give the appearance of discouraging runs.403 Some academic research 404 shows that floating the NAV in the US has not eliminated run risk in the redemption decisions of investors in institutional funds. However, that research does not distinguish between causal impacts of a floating NAV requirement and investor selection effects. Specifically, the paper does not rule out the possibility that investors that need liquidity the most invest in floating NAV and multi-strike funds and that such investors are also most likely to redeem in times of liquidity stress. Yet another paper models the problem theoretically and finds that a stable NAV can reduce risk taking by money market funds in low interest rate environments because it can create default risk and the need to have a buffer of safe assets, reducing risky investment when risk-free rates fall.405 Third, floating the NAV of a broader range of money market funds could more accurately capture their role in asset transformation and corresponding risks. As quantified in Section III.B.3.a, retail prime and retail tax exempt funds have some risky portfolio holdings. Specifically, some of the underlying holdings of retail money market funds are similar to those of institutional prime funds, which experienced significant stress in 2020. One 402 SIFMA AMG Comment Letter; ICI Comment Letter I; Western Asset Comment Letter; Fidelity Comment Letter; Federated Hermes Comment Letter I; JP Morgan Comment Letter; BlackRock Comment Letter; Americans for Financial Reform Comment Letter; Comment Letter of Madison E. Grady (Apr. 14, 2021) (‘‘Madison Grady Comment Letter’’). 403 Comment Letter of Professor Jeffrey N. Gordon, Columbia Law School (Feb. 26, 2021) (noting that money market funds should not be treated similarly to other mutual funds because MMF investors typically redeem en masse during periods of liquidity stress and money market fund investments tend to be concentrated in the credit issuances of financial firms). 404 See, Casavecchia, Lorenzo, Georgina Ge, Wei Li, and Ashish Tiwari. 2021. ‘‘Prime Time for Prime Funds: Floating NAV, Intraday Redemptions and Liquidity Risk During Crises.’’ Working paper. 405 See La Spada, Gabriele. 2018. ‘‘Competition, Reach for Yield, and Money Market Funds.’’ Journal of Financial Economics 129(1): 87–110. PO 00000 Frm 00071 Fmt 4701 Sfmt 4702 7317 commenter 406 supported floating the NAV for government money market funds, citing redemption pressure and run risks associated with U.S. debt ceiling negotiations and potential credit rating downgrades of U.S. Government securities and suggesting that all money market fund investors should be aware that all such funds can, and do, fluctuate in value. Expanding the floating NAV requirements to all money market funds would result in a consistent regulatory treatment of money market funds. Moreover, it may enhance the allocative efficiency in the money market fund industry and may enhance competition between floating NAV and stable NAV funds. For example, some commenters indicated that the disparate treatment of floating NAV and stable NAV funds led to a significant migration of institutional investments from prime and tax-exempt money market funds to government money market funds.407 An alternative that would expand the scope of the floating NAV requirement to all money market funds may lead to outflows from government money market funds back into prime and tax-exempt sectors. Floating NAV alternatives would give rise to three groups of costs. First, such alternatives may reduce the attractiveness of affected money market funds to investors and may result in significant reductions in the size of the money market fund sector.408 The Commission understands that retail investors use money market funds as a safe, cash-like product. To that extent, floating the NAV of some or all stable NAV funds may lead investors of stable NAV funds to reallocate capital into cash accounts subject to deposit insurance.409 In a somewhat parallel setting, in the aftermath of the 2016 implementation of the floating NAV requirement for institutional prime and institutional tax-exempt funds, approximately $1 trillion left newly floating NAV funds and flowed into government money market funds, matched by corresponding outflows from floating NAV products. About 90% of these outflows came from the larger institutional prime funds, while the remaining 10% came from the smaller institutional tax-exempt funds. Thus, many investors may flee to safety in times of stress and may be unlikely to 406 See, e.g., Better Markets Comment Letter. e.g., CFA Comment Letter. 408 See, e.g., SIFMA AMG Comment Letter; Western Asset Comment Letter; Federated Hermes Comment Letter I (noting that some investors may choose to move assets to banks or to less regulated and less transparent products such as private funds). 409 See, e.g., Schwab Comment Letter. 407 See, E:\FR\FM\08FEP2.SGM 08FEP2 7318 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 remain invested in money market funds affected by the floating NAV alternative. Some commenters stated that a floating NAV requirement would, indeed, diminish the appeal of money market funds relative to other cash management vehicles.410 Importantly, such reallocation effects are not necessarily suboptimal per se, if it is a result of greater investor awareness of the risks of money market fund investments. Second, if the floating NAV alternatives resulted in a decrease in the size of the money market fund industry, they would adversely impact the availability of wholesale funding liquidity and access to capital for issuers. Prior research suggests that increasingly constrained balance sheets of regulated financial institutions after the financial crisis reduced both their involvement in arbitrage activities and their willingness to provide leverage to other arbitrageurs, leading to growing mispricings across markets.411 Given this baseline, a reduction of wholesale funding liquidity available to arbitrageurs may magnify mispricings across securities markets. However, under the alternative, wholesale funding costs would more accurately reflect true costs of funding liquidity, since the alternative would reduce the distortions arising out of implicit government guarantees of money market funds. Similarly, a reduction in the size of affected money market funds or the money market fund industry as a whole would increase the costs of or decrease access to capital for issuers in shortterm funding markets.412 However, the current reliance of some issuers on short-term financing from money market funds that is susceptible to refinancing and run risks may be sustainable, in part, due to perceived government backstops of money market funds and lack of transparency to investors about the risks inherent in money market fund investments. While the alternative 410 See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter I; Federated Hermes Comment Letter I; JP Morgan Comment Letter; Comment Letter of the National Association of State Treasurers and Government Finance Officers Association (Apr. 12, 2021) (‘‘NAST and GFOA Comment Letter’’); Comment Letter of the State Financial Officers Foundation and Ron Crane (Apr. 26, 2021) (‘‘SFOF and Crane Comment Letter’’); Madison Grady Comment Letter. 411 See, e.g., Boyarchenko, Nina, Thomas Eisenbach, Pooja Gupta, Or Shachar, and Peter Van Tassel. 2020. ‘‘Bank-Intermediated Arbitrage.’’ Federal Reserve Bank of New York Staff Report No. 854. 412 SIFMA AMG Comment Letter; ICI I; Federated Hermes Comment Letter I; JP Morgan Comment Letter; NAST and GFOA Comment Letter (describing increased borrowing costs for municipalities upon the implementation of floating NAVs for institutional funds); SFOF and Crane Comment Letter; Madison Grady Comment Letter. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 would impose potentially significant costs on issuers, it would do so by reducing cross-subsidization of money market funds and increasing transparency about risks of money market fund investments. Third, the floating NAV alternative would involve significant operational, accounting, and tax challenges. Specifically, the Commission is concerned that switching retail funds from stable NAV to floating NAV may create accounting and tax complexities for some retail investors.413 A floating NAV requirement may be incompatible with popular cash management tools such as check-writing and wire transfers that are currently offered for many stable NAV money market fund accounts.414 In addition, a floating NAV alternative would involve many of the same implementation burdens on broker-dealers, retirement plan administrators, and other intermediaries 415 as the proposed amendment requiring that stable NAV funds determine that their intermediaries are capable of transacting at non-stable prices. Importantly, the floating NAV alternative would not address three key market failures in money market funds. First, floating the NAV may reduce, but does not eliminate, the first mover advantage and corresponding run incentives during selloffs. As discussed above, floating NAV funds experienced a significant amount of redemptions in 2020. During past episodes of stress in money market funds (in 2008 and 2020), retail investor redemptions were far more limited than redemptions out of institutional prime money market funds. Moreover, as referenced above, in 2020 capital flowed into government money market funds as investors fled to safety. Future redemption dynamics in stable NAV funds may evolve as a function of investor type, risk tolerance, investment horizons, liquidity needs, and sophistication, among others. However, modest historical redemptions out of stable NAV funds may suggest that they are currently less susceptible to run risk, reducing the value of floating NAV alternatives for such funds. Second, floating NAV alternatives would not alter economic incentives of stable NAV fund managers to reduce 413 See, e.g., ICI Comment Letter I; Federated Hermes Comment Letter I; Madison Grady Comment Letter; Comment Letter of Carter Ledyard Milburn (Apr. 15, 2021). 414 See, e.g., ICI Comment Letter I; Madison Grady Comment Letter. 415 See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter I; Federated Hermes Comment Letter I; Western Asset Comment Letter; JP Morgan Comment Letter; Dreyfus Comment Letter; BlackRock Comment Letter. PO 00000 Frm 00072 Fmt 4701 Sfmt 4702 risk taking. For example, floating the NAV would not incentivize stable NAV fund managers to hold enough liquid assets and to have low enough credit risk to meet redemptions in times of stress; nor would it constrain portfolio composition. Insofar as investor flows remain sensitive to fund performance, and fund managers are compensated for performance, money market funds may have incentives to take greater risks to deliver higher returns. The proposed liquidity requirement amendments, while not altering incentives of fund managers, may meaningfully constrain money market fund portfolio composition and risk taking. Third, floating NAV alternatives may not influence the liquidity risk of affected money market funds as directly as the proposal. At their core, money market funds transform capital subject to daily redemptions into short-term debt instruments that carry liquidity and credit risk. Some research suggests that floating the NAV would not reduce, and may even increase risk taking incentives.416 However, as can be seen from Section III.B.3.b, the distribution of market NAV fluctuations among prime money market funds decreased around the compliance date with the 2014 amendments. In contrast, the proposed increases to daily and weekly liquidity requirements may directly reduce the amount of liquidity risk in money market fund portfolios. 7. Countercyclical Weekly Liquid Asset Requirement The PWG Report raised an alternative countercyclical weekly liquid asset requirement approach. For instance, during periods of market stress, the minimum weekly liquid asset threshold could decrease, for example, by 50%. The proposal could have specified the definitions of market stress that would trigger a change in weekly liquid asset thresholds. Alternatively, the proposal could have specified that decreases in weekly liquid asset thresholds would be triggered by Commission administrative order or notice.417 Such alternatives could help clarify that money market funds’ liquidity buffers are meant for use in times of stress and may provide assurance to investors that funds may utilize their liquidity reserves to absorb redemptions.418 To the degree that these 416 See, e.g., La Spada, Gabriele. 2018. ‘‘Competition, Reach for Yield, and Money Market Funds.’’ Journal of Financial Economics 129(1): 87– 110. 417 See ABA Comment Letter. 418 See BlackRock Comment Letter; ABA Comment Letter; mCD IP Comment Letter; CFA Comment Letter. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules alternatives may increase the willingness of affected funds to absorb redemptions out of daily or weekly liquidity during times of stress, the alternatives may reduce liquidity costs borne by fund investors and may reduce incentives to redeem. However, an analysis of investor redemptions out of institutional prime and institutional tax exempt funds during market stress of 2020 points to a high level of sensitivity of redemptions to threshold effects. Thus, any decrease in regulatory minimum thresholds may create investor concerns about liquidity stress in money market funds and trigger an increase in investor redemptions. Moreover, under the current baseline, rule 2a–7 does not prohibit a fund from operating with weekly liquid assets below the regulatory minimum. The proposed elimination of the tie between liquidity thresholds and fees and gates under rule 2a–7may more efficiently incentivize funds to use their liquidity buffers in times of stress, while removing threshold effects around weekly liquidity levels.419 Moreover, alternatives involving Commission orders or notices triggering decreases in weekly liquidity thresholds may impede or slow fund liquidity management decisions during times of market stress. In addition, Commission action to reduce liquidity requirements may be read as a signal of broader stress in money market funds and may accelerate investor redemptions under stress.420 khammond on DSKJM1Z7X2PROD with PROPOSALS2 8. Alternatives to the Amendments Related to Potential Negative Interest Rates As an alternative to the proposed amendments related to potential negative interest rates, the proposal could have allowed stable NAV funds to use the reverse distribution mechanism in lieu of requiring stable NAV funds to float the NAV in the event of persistent negative interest rates. This alternative would be consistent with the practice of European money market funds, which 419 See JP Morgan Comment Letter (expressing the view that the introduction of fees and gates in the 2014 reform effectively nullified the intent of the 2010 reform’s requirement that money market funds maintain a 30% WLA minimum in order to ensure that a fund could meet shareholder redemptions even when market conditions have deteriorated). 420 See Western Asset Comment Letter; Fidelity Comment Letter; JP Morgan Comment Letter; SIFMA AMG Comment Letter (noting that ‘‘[t]o the extent the Commission does consider countercyclical weekly liquid asset requirements, SIFMA AMG urges the Commission to further consider how the Commission could construct a countercyclical requirement that would apply on an automatic basis, versus requiring Commission action’’). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 used a reverse distribution mechanism for a period of time, before the European Commission determined this approach was not consistent with the 2016 EU money market fund regulations. As another alternative, the proposal could have mandated that in the event of persistent negative interest rates, all stable NAV funds must use the reverse distribution mechanism. Alternatives allowing (requiring) stable NAV funds to use a reverse distribution mechanism in the event of negative fund yields would reduce (eliminate) NAV fluctuations in a negative yield environment, which may enhance (preserve) the use of stable NAV funds for sweep accounting. Such alternatives may, thus, increase demand for government and retail money market funds, with positive effects on the availability of wholesale funding liquidity and capital formation. The alternatives would avoid disruptions to distribution networks of stable NAV funds if some of their intermediaries would be unable or unwilling to upgrade systems to process transactions at a floating NAV. However, such alternatives may decrease price transparency to investors in stable NAV funds and may give rise to investor protection concerns. As discussed in Section II, under a reverse distribution mechanism, investors would observe a stable share price but a declining number of shares for their investment when a fund generates a negative gross yield. This may decrease the transparency and salience of negative fund yields to investors, particularly for less sophisticated retail investors. One commenter indicated that investors may observe a stable share price and assume that their investment in a fund with a stable share price is holding its value while the investment is actually losing value over time.421 While disclosures could partly mitigate such informational asymmetries, we believe that reverse distribution mechanisms may mislead or confuse investors about the value and performance of their investments, particularly for retail money market fund investors. 9. Alternatives to the Amendments Related to Processing Orders Under Floating NAV Conditions for All Intermediaries The proposal also could have not expanded existing requirements related 421 Jose Joseph Comment Letter (suggesting that if money market funds generate negative yields, ‘‘[u]nilaterally redeeming the shares[] by reverse distribution is like cheating’’ and that funds should instead inform shareholder and move to a floating NAV to be fair and transparent). PO 00000 Frm 00073 Fmt 4701 Sfmt 4702 7319 to processing orders under floating NAV conditions to all intermediaries. Under this approach, stable NAV money market funds would not be required to keep records identifying which intermediaries they were able to identify as being able to process orders at a floating NAV. This alternative would avoid the costs of the proposed amendments related to intermediaries being required to upgrade systems if they are unable to process transactions in stable NAV funds at a floating NAV. However, beyond negative interest rates, there are other scenarios in which stable NAV money market funds may need to be able to float their NAVs, such as if they break the buck due to credit events or other market stress. Thus, this alternative could result in some intermediaries of stable NAV money market funds being unable to process certain transactions during severe stress, which could adversely affect the ability of investors to access their investments and further magnify stress in money market funds and short-term funding markets. Therefore, expanding the floating NAV processing conditions to all intermediaries, as proposed, would be appropriate even if we were to permit or require stable NAV funds to use a reverse distribution method. 10. Alternatives to the Amendments Related to WAL/WAM Calculation The proposal would amend rule 2a– 7 to require that WAM and WAL are calculated based on the percentage of each security’s market value in the portfolio. The Commission could have instead proposed to base the calculation on amortized cost of each portfolio security. Similar to the proposal, such an alternative would also enhance consistency and comparability of disclosures by money market funds in data reported to the Commission and provided on fund websites. Thus, the alternative would achieve the same benefits as the proposal in terms of enhancing transparency for investors and enhancing the ability of the Commission to assess the risk of various money market funds and increasing allocative efficiency. However, relative to the proposal, the alternative may give rise to higher compliance costs. While all money market funds are required to determine the market values of portfolio holdings, no such requirements exist for amortized costs of portfolio securities. Thus, funds that do not currently estimate amortized costs would be required to do so for the WAL and WAM calculation. Moreover, amortized cost may be a poor proxy of a security’s value if market conditions change E:\FR\FM\08FEP2.SGM 08FEP2 7320 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 drastically due to, for example, liquidity or credit stress, and if the fund is unable to hold the security until maturity. This may distort WAL and WAM calculations during market dislocations—when comparable and accurate information about fund risks may be most important for investment decisions. 11. Sponsor Support Dilution occurs because shareholders remaining in the fund effectively buy back shares at NAV from redeeming investors. The assets underlying those shares are eventually sold at a price that may differ from that NAV for the reasons described in the economic baseline, causing dilution in some cases. The proposal could have required money market fund sponsors to provide explicit sponsor support to cover dilution costs. For stable NAV funds, this alternative would mean purchasing assets so that their value remains $1 per share. For floating NAV funds, this would require a sponsor to pay redeeming shareholders the NAV, transfer the corresponding pro-rata assets to their balance sheet, sell the assets, and cover the difference between the value of those assets and the redemption NAV from their own capital. The proposal only considers the mitigation of one of the factors that contributes to dilution (trading costs), but does not significantly change current incentives around the liquidity mismatch between money market fund assets and liabilities. In contrast, this alternative may significantly change incentives around the liquidity mismatch between money market fund assets and liabilities. Specifically, this alternative would give fund sponsors a more direct incentive to manage the amount of dilution risk they impose on a fund via their choice of fund investments. Directly exposing the sponsor, rather than money market fund investors, to the dilution risk associated with the difference between NAV and the ultimate liquidation value of the fund’s underlying securities could have several benefits. First, money market funds would have a stronger incentive to overcome any operational impediments that expose them to unnecessary risk. For example, funds might be incentivized to invest in developing more accurate valuation models of opaque assets so they can hedge their exposure to the difference between NAV and asset liquidation prices. Second, the amount of required operating capital to process redemptions/subscriptions would be higher for money market VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 funds that held relatively less liquid securities, and money market funds would have to charge higher fees to raise that capital. Such fees would effectively externalize the costs of investing in less liquid assets via money market funds. As those fees increase, money market funds that hold less liquid assets might become less desirable to investors, and money market fund investors might select into other structures, such as closed-end funds, that are a more natural fit with illiquid assets. These benefits may be reduced to the degree that the sponsor support requirement may incentivize money market funds to take additional risks to recoup the sponsor’s costs or may incentivize fund managers to increase risk taking due to the backstop of the sponsor support.422 Such an alternative approach may significantly disrupt the money market fund industry. First, it would make sponsoring money market funds a more capital intensive business, which might reduce or create barriers to entry into the money market fund industry, disadvantage smaller funds and fund complexes, and increase concentration.423 Second, it could cause fund sponsors to opt, instead, for other open-end funds, ETFs, or closed-end funds as vehicles for certain less liquid assets. Third, it may reduce the attractiveness of money market funds to investors as it may reduce fund yields and the number of available money market funds.424 The alternative, may thus, significantly reduce the number of fund sponsors offering money market funds and the number of money market funds available to investors. Importantly, we recognize that some aspects of the proposal—such as the proposed swing pricing amendments, the proposed increases to liquidity requirements, and the proposed amendments related to negative interest rates—may reduce the attractiveness of affected money market funds for investors and the size of the money market fund sector. These adverse effects may flow through to institutions, such as banks, and to leveraged participants, such hedge funds, that rely on banks for liquidity and capital formation. 422 See JP Morgan Comment Letter; ICI Comment Letter I. 423 See, e.g., Western Asset Comment Letter; Fidelity Comment Letter; State Street Comment Letter; BlackRock Comment Letter; JP Morgan Comment Letter (stating that bank-affiliated sponsors would likely be required to hold capital against any potential support obligation). 424 See Western Asset Comment Letter; Federated Hermes I Comment Letter. PO 00000 Frm 00074 Fmt 4701 Sfmt 4702 The effects of the sponsor support alternative on investors may be mixed. On the one hand, sponsor support may increase the ability of investors to redeem their shares in full without bearing liquidity costs. On the other hand, sponsor support could lead some investors to believe that their investments carry no risk and may make investors less discerning in their choice of money market fund allocations.425 Moreover, sponsor support reduces investor risk only to the degree that fund sponsors are well capitalized and easily capable of providing sponsor support. Uncertainty surrounding the ability of the sponsor to provide support to the money market fund could trigger a wave of shareholder redemptions, particularly during stressed conditions.426 12. Disclosures a. Eliminating Website Disclosure of Fund Liquidity Levels The proposal could have eliminated the requirement that money market funds post their daily and weekly liquid assets on their websites. As discussed above, the Commission understands that the public nature of fund liquid asset disclosures, in combination with the regulatory thresholds for the potential imposition of redemption fees and gates, may have triggered a run on institutional money market funds and made other funds reluctant to use liquid assets to absorb redemptions if it meant approaching or falling below regulatory thresholds. The proposal would partly mitigate run incentives surrounding disclosures of daily liquid assets, by removing the tie between liquid assets and the potential imposition of fees and gates, but also increasing minimum daily and weekly liquidity requirements and imposing a requirement to promptly report liquidity threshold events. Moreover, money market funds play an important asset transformation role and inherently carry liquidity risks. The Commission believes that public disclosures of money market fund liquidity convey important information to investors about the liquidity risks of their investments. b. Alternatives to the Proposed Form N– MFP Amendments We could have proposed Form N– MFP amendments without including some or all of the proposed new collections of information. For example, the proposal could have amended Form 425 See Federated Hermes I Comment Letter; ICI I Comment Letter; Carter, Ledyard, Milburn Comment Letter. 426 Federated Hermes I Comment Letter. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 N–MFP without requiring new disclosures related to repurchase agreement transactions or related to investor concentration and composition. While these alternatives may have reduced compliance burdens compared to the proposal, compliance with disclosure requirements may involve significant fixed costs. As a result, the elimination of one or several items from the proposed amendments may not lead to a proportional reduction in compliance burdens. Moreover, information about repurchase agreement transactions, fund liquidity management, investor concentration and composition, and sales of securities into the market would provide important benefits of transparency for investors and would enhance Commission oversight. The proposal would require the disclosure of every swing factor applied in the reporting period by date. Alternatively, the proposal could have required the disclosure of less information about when the fund swings the NAV. For example, the proposal could have required disclosure of the lowest, median, and highest swing factor a fund applied in a given reporting period. Alternatives proposing less information about fund swing pricing practices and eliminating current website disclosures of daily fund flows would reduce the scope of the economic benefits and costs of the proposed amendments described above. To the degree that disclosures of swing factors may make swing factors more salient to investors and may lead funds to compete on swing factors, alternatives proposing less disclosure about swing factors can reduce those effects. Moreover, to the degree that granular disclosure about historical swing factors can incentivize or inform strategic redemption behavior, alternatives involving less disclosure about swing factors can reduce those effects. c. Alternatives to the Proposed Form N– CR Amendments The proposal could have required money market funds to make notices concerning liquidity threshold events public with a delay (e.g., 15, 30, or 60 days). The proposal alternatively could have required that some or all information about the liquidity threshold event be kept confidential upon filing. Under the baseline, such funds are required to report daily and weekly liquid assets daily on fund websites. To the degree that the publication of such notices gives investors additional information about fund liquidity management and can VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 trigger investor redemptions out of funds with low levels of weekly and daily liquid assets, the alternatives may reduce the risk of redemptions around liquidity thresholds and the increase the willingness of funds to absorb redemptions out of their weekly liquidity relative to the proposal. However, relative to the proposal, the alternatives would reduce the availability of a central source that investors could use to identify when money market funds fall more than 50% below liquidity requirements. The delayed reporting alternative also would reduce the amount of information available to investors surrounding the context for the liquidity threshold events as notices are likely to clarify reasons for the threshold event. Thus, the alternative would reduce transparency for investors around liquidity management of affected money market funds, which may reduce allocative efficiency. Notably, a delay in publication of the notices may increase staleness of the information in the notices. In addition, the proposal could have amended Form N–CR to include some of the proposed new collections of information on Form N–MFP. For example, the proposal could have amended Form N–CR to include information about sales of securities into the market of prime funds that exceed a particular size. This alternative would enhance the timeliness of such reporting. Thus, the alternative may enhance transparency about fund liquidity management for investors, which may enhance informational and allocative efficiency and Commission oversight. However, the alternative would increase direct reporting burdens related to the filing of Form N–CR— costs that may flow through in part or in full to end investors in the form of fund expenses. Moreover, timely reporting of prime funds’ sales of portfolio securities may signal fund liquidity stress to investors even where funds may be able to maintain their daily and weekly liquidity levels. This may influence investor decisions to redeem out of reporting funds; thus, relative to the proposal, the alternative may place heavier redemption pressure on reporting funds. With respect to the proposed structured data requirement for Form N–CR, the proposal could have required Form N–CR to be submitted in the Inline eXtensible Business Reporting Language (Inline XBRL), rather than the proposed N–CR-specific XML. As with N–CR-specific XML, Inline XBRL is a structured data language and would provide similar benefits to investors PO 00000 Frm 00075 Fmt 4701 Sfmt 4702 7321 (e.g., facilitating analysis of the eventrelated disclosures reported by money market funds on Form N–CR and thereby providing more transparency into potential risks associated with money market funds). From a filer compliance perspective, money market funds have experience complying with Inline XBRL compliance requirements, because they are required to tag prospectus risk/return summary disclosures on Form N–1A in Inline XBRL. This existing experience would counter the incremental implementation cost of complying with an Inline XBRL requirement under the alternative.427 However, unlike N–CR-specific XML, which the Commission would create specifically for Form N–CR submissions on EDGAR, Inline XBRL is an existing data language that is maintained by a public standards setting body, and it is used for different disclosures across various Commission filings (and for uses outside of regulatory disclosures). Due to the number of individual transactions that might be reported as Form N–CR data and the constrained nature of the content of Form N–CR and the absence of a clear need for the N– CR disclosures to be used outside the Form N–CR context, the alternative to include an Inline XBRL requirement might result in formatting for human readability of tabular data within a web browser that provides no additional analytical insight. This would likely include more complexity than is called for by the disclosures on Form N–CR, thus potentially making the disclosures more burdensome to use for analysis and possibly muting the benefits to investors of a structured data requirement, compared to the proposed N–CR-specific XML requirement. d. Alternatives to the Proposed Amendments to Form N–1A The proposal could have required more information relative to the proposal about how affected money market funds implement swing pricing. Alternatively, the proposal could have required the disclosure of less information than proposed about when the fund swings the NAV. Expanding disclosure requirements relative to the proposal would help better inform investors about swing pricing practices of different funds and could help liquidity seeking investors make more efficient capital allocation decisions. Similarly, alternatives proposing less 427 For example, registered open-end management investment companies (including money market funds) must tag their Form N–1A prospectus risk/ return summary disclosures in Inline XBRL. See Instruction C.3.g to Form N–1A; 17 CFR 232.405(b)(2). E:\FR\FM\08FEP2.SGM 08FEP2 7322 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules information about fund swing pricing practices and eliminating current website disclosures of daily fund flows would reduce the scope of the economic benefits and costs of the proposed amendments described above. The proposed disclosures may inform investors about swing pricing that may be applied to their redemptions, while not being so granular as to incentivize strategic investor behavior. Importantly, the proposed swing pricing approach would involve fewer incentives for strategic behavior and runs, compared to the baseline redemption gates with a transparent liquidity trigger for two reasons. First, under the proposed swing pricing approach, strategic early redemptions are more likely to cause the fund to swing. Second, swinging the NAV benefits investors staying in the fund by recapturing the dilution costs that redeeming investors impose on the fund. khammond on DSKJM1Z7X2PROD with PROPOSALS2 13. Capital Buffers The PWG Report also discussed the alternative capital buffer requirement. For example, the proposal could have required that money market funds maintain a NAV buffer, or a specified amount of additional assets available to absorb daily fluctuations in the value of the fund’s portfolio securities.428 For example, one option would require that stable NAV money market funds have a risk-based NAV buffer of up to 1% to absorb day-to-day fluctuations in the value of the funds’ portfolio securities. Floating NAV money market funds could reserve their NAV buffers to absorb fund losses under rare circumstances only, such as when a fund suffers a large drop in NAV or is closed. The required minimum size of a fund’s NAV buffer could be determined based on the composition of the money market fund’s portfolio, with specified buffer requirements for daily liquid assets, other weekly liquid assets, and all other assets. Some commenters on the PWG Report expressed support of capital buffers, indicating that such a provision could provide some protection from losses, including the default of a major asset or certain market fluctuations, but would not by itself prevent all investor runs.429 Another commenter stated that a capital 428 See, e.g., Lewis, Craig. April 6, 2015. ‘‘Money Market Fund Capital Buffers,’’ available at https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=2687687; See also Hanson, Samuel G., David S. Scharfstein, and Adi Sunderam. May 2014. ‘‘An Evaluation of Money Market Fund Reform Proposals,’’ available at https://www.imf.org/ external/np/seminars/eng/2013/mmi/pdf/ Scharfstein-Hanson-Sunderam.pdf. 429 See, e.g., CFA Comment Letter; Systemic Risk Council Comment Letter. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 buffer could enable money market funds to sustain broad losses without resorting to fire sales that further depress share values, and would also increase investor confidence about a fund’s ability to withstand periods of market turmoil.430 Similarly, some commenters supported capital buffers as a source of strength if redemptions or declining asset values began to affect a fund.431 One commenter stated that a capital buffer is preferable to sponsor support or potential government backstops because investors would understand the scale and operation of the buffer in advance of its deployment.432 One commenter stated that a capital buffer should be required if money market funds are provided access to Federal Reserve liquidity backstops.433 The alternative may have four primary benefits. First, it could preserve the stable share price of money market funds with stable NAV and could reduce NAV variability in floating NAV money market funds. Money market funds that are supported by a NAV buffer would be more resilient to redemptions and liquidity stress in their portfolios than money market funds without a buffer. This may reduce shareholders’ incentive to redeem shares quickly in response to small losses or concerns about the liquidity of the money market fund portfolio, particularly during periods of severe liquidity stress. Second, a NAV buffer would require money market funds to provide explicit capital support rather than the implicit and uncertain support that is permitted under the current regulatory baseline. This would require funds to internalize some of the cost of the discretionary capital support sometimes provided to money market funds and to define in advance how losses will be allocated. In addition, a NAV buffer could reduce fund managers’ incentives to take risk beyond what is desired by fund shareholders because investing in less risky securities reduces the probability of buffer depletion. Third, a NAV buffer may also provide counter-cyclical capital to the money market fund industry. Once a buffer is funded it remains in place regardless of redemption activity. With a buffer, redemptions increase the relative size of 430 See, e.g., Better Markets Comment Letter (calculating that a sufficient buffer would need to be larger than the 3.9% of losses that money market funds have incurred in the past). 431 See, e.g., Prof. Zaring Comment Letter; Comment Letter of Fermat Capital Management, LLC (Mar. 2, 2021). 432 See, e.g., Better Markets Comment Letter. 433 See, e.g., Systemic Risk Council Comment Letter. PO 00000 Frm 00076 Fmt 4701 Sfmt 4702 the buffer because the same dollar buffer now supports fewer assets. The NAV buffer strengthens the ability of the fund to absorb further losses, reducing investors’ incentive to redeem shares. Fourth, by reducing the NAV variability in money market funds, a NAV buffer may facilitate and protect capital formation in short-term financing markets during periods of modest stress. To the degree that funds may avoid trading when markets are stressed, they may contribute to further illiquidity in short-term funding markets. A NAV buffer could enable funds to absorb small losses and thus could reduce this tendency. Thus, by adding resiliency to money market funds and enhancing their ability to absorb losses, a NAV buffer may benefit capital formation in the long term. A more stable money market fund industry may produce more stable shortterm funding markets, which could provide more reliability as to the demand for short-term credit to the economy. The alternative may involve both direct and indirect costs. In terms of direct costs, capital buffer requirements may be challenging to design and administer.434 From the standpoint of design of capital buffers, calibrating the appropriate size of the buffer as well as establishing the parameters for when a floating NAV fund should use its NAV buffer could present operational and implementation difficulties and, if not done effectively, could contribute to self-fulfilling runs on funds experiencing large redemptions. From the standpoint of administering capital buffers, floating NAV funds would need to establish policies and procedures around the use of buffers, replenishing capital buffers when they are depleted and raising requisite financing, regulatory reporting, and investor disclosures about buffers, among other things. Depending on how a capital buffer is structured (e.g., as sponsor provided capital or as a subordinated share class requiring shareholder approval), there may be other administrative, accounting, tax, and legal challenges and costs for fund sponsors and investors. The alternative may also involve three sets of indirect costs. First, the alternative would result in opportunity costs associated with maintaining a NAV buffer.435 Those contributing to 434 See, e.g., CCMC Comment Letter; Schwab Comment Letter; Northern Trust Comment Letter; Western Asset Comment Letter; Fidelity Comment Letter; State Street Comment Letter; GARP Risk Institute Comment Letter. 435 Some commenters noted that it would take a substantial amount of time to raise a capital buffer E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 the buffer would deploy valuable scarce resources to maintain a NAV buffer rather than being able to use the funds elsewhere. Estimates of these opportunity costs are not possible because the relevant data is not currently available to the Commission. Second, entities providing capital for the NAV buffer, such as the fund sponsor, would expect to be paid a return that sets the market value of the buffer equal to the amount of the capital contribution. Since a NAV buffer is designed to absorb the same amount of risk regardless of its size, the promised yield, or cost of the buffer, increases with the relative amount of risk it is expected to absorb (also known as a leverage effect).436 Third, money market funds with buffers may avoid holding riskier short-term debt securities (like commercial paper) and instead hold a higher amount of low yielding investments like cash, Treasury securities, or Treasury repos. This could lead money market funds to hold more conservative portfolios than investors may prefer, given tradeoffs between principal stability, liquidity, and yield. Moreover, the costs of establishing and maintaining a capital buffer would decrease returns to fund investors.437 The increased costs and decreased returns of a capital buffer requirement may decrease the size of the money market fund sector, which would affect short-term funding markets, and could lead to increased industry concentration.438 Moreover, this may by retaining fund earnings. See e.g., ICI Comment Letter I; Federated Hermes Comment Letter I (noting also that the issuance of a subordinated class of shares would go against the principles of the Investment Company Act that limit the use of leverage and the issuance of multiple classes of shares). One commenter proposed that a capital buffer be financed through the issuance of subordinated shares that would absorb losses before ordinary shareholders. See Prof. Hanson et al. Comment Letter (proposing a share class of approximately 3–4% of assets, with an estimated reduction in yield to ordinary shareholders of approximately 0.05%). Another commenter supported the development of contingent financing facilities to be provided by non-bank private investors. See Fermat Capital Comment Letter. Other commenters stated that the addition of a subordinated class of shares would add complexity to the industry and disproportionately affect smaller funds and new entrants. See also State Street Comment Letter (stating ‘‘we understand this proposal was considered during previous rounds of reform, but it was the SEC itself that questioned whether this would be a meaningful or effective solution’’). 436 The leverage effect reflects the concept that higher leverage levels induce an equity holder to demand higher returns to compensate for the higher risk levels. 437 See, e.g., SIFMA AMG Comment Letter; CCMC Comment Letter; Northern Trust Comment Letter; Fidelity Comment Letter; Federated Hermes I Comment Letter; CCMR Comment Letter. 438 See, e.g., SIFMA AMG Comment Letter; ICI I Comment Letter (stating that requiring advisers to VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 alter competition in the money market fund industry as capital buffer requirements may be easier to comply with for bank-sponsored funds, funds that are members of large fund families, and funds that have a large parent. Importantly, capital buffers may not have prevented the liquidity stresses that arose in March 2020.439 A NAV buffer does not protect shareholders completely from the possibility of heightened rapid redemption activity during periods of market stress, particularly in periods where the buffer is at risk of depletion, such as during March 2020. As the buffer becomes impaired (or if shareholders believe the fund may suffer a loss that exceeds the size of its NAV buffer), shareholders have an incentive to redeem shares quickly because, once the buffer fails, and shareholders will experience sudden losses. At the same time, capital buffers could lead some investors to believe that their investments carry no risk, which may influence investor allocations and adversely impact allocative efficiency. Moreover, capital buffers may not have the same benefits for investment products such as money market funds, where the investor bears the risk of loss, as they do for banks. 14. Minimum Balance at Risk Another alternative discussed in the PWG Report is minimum balance at risk. Specifically, the proposal could have required that a portion of each shareholder’s recent balance in a money market fund be available for redemption only with a time delay. Under the alternative, all shareholders could redeem most of their holdings immediately without being restricted by the minimum balance at risk. This alternative also could include a requirement to put a portion of redeeming investors’ holdback shares first in line to absorb losses that occur during the holdback period. A floating NAV fund could be required to use a minimum balance at risk mechanism to take a first-loss position would be a radical departure from the current role that fund advisers play under the federal securities laws); Western Asset Comment Letter; Fidelity Comment Letter; JP Morgan Comment Letter; Institute of International Finance Comment Letter; BlackRock Comment Letter; GARP Risk Institute Comment Letter; CCMR Comment Letter. 439 See, e.g., SIFMA AMG Comment Letter; Northern Trust Comment Letter; Fidelity Comment Letter; State Street Comment Letter; CCMR Comment Letter (stating that capital buffers are intended to reduce credit risk for investors, but the redemptions from money market funds in March 2020 were not driven by credit risk). See also Americans for Financial Reform Comment Letter (expressing some support for a capital buffer but stating that a capital buffer alone would not appear sufficient to absorb losses associated with the investor redemptions in March 2020). PO 00000 Frm 00077 Fmt 4701 Sfmt 4702 7323 allocate losses only under certain rare circumstances, such as when the fund has a large drop in NAV or is closed. Such an alternative could provide some benefits to money market funds. First, it would force redeeming shareholders to pay for the cost of liquidity during periods of severe market stress when liquidity is particularly costly. Such a requirement could create an incentive against shareholders participating in a run on a fund facing potential losses of certain sizes because shareholders will incur greater losses if they redeem.440 Second, it would allocate liquidity costs to investors demanding liquidity when the fund itself is under severe stress. This would be accomplished primarily by making redeeming shareholders bear first losses when the fund first depletes its buffer and then the fund’s value falls below its stable share price within 30 days after their redemption. Redeeming shareholders subject to the holdback are the ones whose redemptions may have contributed to fund losses if securities are sold at fire sale prices to satisfy those redemptions. If the fund sells assets to meet redemptions, the costs of doing so would be incurred while the redeeming investor is still in the fund because of the delay in redeeming holdback shares. Third, the alternative would provide the fund with a period of time to obtain cash to satisfy the holdback portion of a shareholder’s redemption. This may give the fund time for distressed securities to recover when, for example, the market has acquired additional information about the ability of the issuer to make payment upon maturity. The alternative would provide time for potential losses in fund portfolios to be avoided since distressed securities could trade at a heavy discount in the market but may ultimately pay in full at maturity. Implementing minimum balance at risk could involve operational challenges and direct implementation costs. The alternative would involve costs to convert existing shares or issue new holdback and subordinated holdback shares, changes to systems that would allow record-keepers to account for and track the minimum balance at risk and allocation of unrestricted, holdback or subordinated holdback shares in shareholder accounts, and systems to calculate and reset average account balances and 440 See, e.g., Americans for Financial Reform Comment Letter; CFA Comment Letter; Robert Rutkowski Comment Letter (support as an alternative to swing pricing). E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7324 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules restrict redemptions of applicable shares.441 These costs could vary significantly among funds depending on a variety of factors. In addition, funds subject to a minimum balance at risk may have to amend or adopt new governing documents to issue different classes of shares with different rights: Unrestricted shares, holdback shares, and subordinated holdback shares. The costs to amend governing documents would vary based on the jurisdiction in which the fund is organized and the amendment processes enumerated in the fund’s governing documents, including whether board or shareholder approval is necessary. The costs of obtaining shareholder approval, amending governing documents, or changing domicile would depend on a number of factors, including the size and the number of shareholders of the fund. In addition, this alternative would give rise to a number of indirect costs. First, the alternative may have different and unequal effects on investors in stable NAV and floating NAV money market funds. During the holdback period, investors in a stable NAV fund would only experience losses if the fund breaks the buck. Investors in a floating NAV fund, however, are always exposed to changes in the fund’s NAV and would continue to be exposed to such risk for any shares held back. These differential effects could reduce investor demand for floating NAV money market funds. Second, under the MBR alternative, there would still be an incentive to redeem in times of fund and market stress. The alternative could force shareholders that redeem more than a certain percent of their assets to pay for any losses, if incurred, on the entire portfolio on a ratable basis. The contingent nature of the way losses are distributed among shareholders forces early redeeming investors to bear the losses they are trying to avoid. Money market funds may choose to meet redemptions by selling assets that are the most liquid and have the smallest capital losses. Once a fund exhausts its supply of liquid assets, it may sell less liquid assets to meet redemption requests, possibly at a loss. If in fact assets are sold at a loss, the value of the fund’s shares could be impaired, motivating shareholders to be the first to leave. Third, minimum balance at risk may reduce the utility of money market 441 See, e.g., SIFMA AMG Comment Letter; Western Asset Comment Letter; Fidelity Comment Letter; ICI Comment Letter I; JP Morgan Comment Letter; BlackRock Comment Letter. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 funds for investors.442 Many current investors who value liquidity in money market funds may shift their investment to other short-term investments that offer higher yields or fewer restrictions on redemptions.443 A reduction in the number of money market funds and/or the amount of money market fund assets under management as a result of any further money market fund reforms would have a greater negative impact on money market fund sponsors whose fund groups consist primarily of money market funds, than on sponsors that offer a more diversified range of mutual funds or engage in other financial activities (e.g., brokerage). Given that one of the largest money market funds’ commercial paper exposures is to issuances by financial institutions, a reduction in the demand of money market instruments may have an impact on the ability of financial institutions to issue commercial paper. Fourth, the alternative may not have addressed the liquidity stresses that occurred in March 2020.444 The minimum balance at risk alternative generally impairs the liquidity of money market fund investments. To the degree that many investor redemptions in March 2020 were driven by exogenous liquidity needs (arising out of the Covid–19 pandemic), investors would still have strong incentives to redeem assets they could in order access liquidity. 15. Liquidity Exchange Bank Membership The PWG Report also discussed an alternative requiring prime and taxexempt money market funds to be members of a private liquidity exchange bank (‘‘LEB’’). The LEB would be a chartered bank that would provide a liquidity backstop during periods of market stress. Money market fund members and their sponsors would capitalize the LEB through initial contributions and ongoing commitment fees, for example. During times of market stress, the LEB would purchase eligible assets from money market funds that need cash, up to a maximum amount per fund. The intent of the LEB 442 See, e.g., SIFMA AMG Comment Letter; Western Asset Comment Letter; Fidelity Comment Letter; ICI I Comment Letter; Federated Hermes I Comment Letter; Healthy Markets Association Comment Letter. 443 See, e.g., SIFMA AMG Comment Letter; Western Asset Comment Letter; Fidelity Comment Letter; ICI I Comment Letter; JP Morgan Comment Letter; State Street Comment Letter; Healthy Markets Association Comment Letter; mCD IP Comment Letter. 444 See, e.g., CCMC Comment Letter; SIFMA AMG Comment Letter; ICI I Comment Letter; Fidelity Comment Letter. PO 00000 Frm 00078 Fmt 4701 Sfmt 4702 would be to diminish investors’ incentive to redeem in times of market stress while having the benefit of pooling liquidity resources rather than requiring each money market fund to hold higher levels of liquidity separately. This alternative, as well as broader industry-wide insurance programs, could mitigate the risk of liquidity runs in money market funds and their detrimental impacts on investors and capital formation.445 The alternative could replace money market funds’ historical reliance on discretionary sponsor support, which has covered capital losses in money market funds in the past but, as discussed above, also contributes to these funds’ vulnerability to liquidity runs. One commenter suggested that some sort of collective emergency insurance fund would be helpful to reduce the moral hazard of funds that may be reliant on future Federal Reserve facilities in times of market stress.446 Several commenters on the PWG Report opposed an LEB option for money market funds.447 These commenters expressed concern that the establishment and continued funding of an LEB for prime and tax-exempt money market funds would be operationally complex and impractical.448 Further, commenters suggested that a significant amount of capital would be necessary to create a meaningful liquidity backstop for money market funds and that such costs would be burdensome for sponsors and investors. Commenters suggested that if LEB membership were required, prime and tax-exempt money market funds could no longer exist in a manner that is attractive to investors due to increased fees and, as a result, advisers would simply stop sponsoring such products.449 One commenter pointed out that even a well-capitalized LEB 445 See, e.g., James Setterlund Comment Letter; Prof. Zaring Comment Letter; Systemic Risk Council Comment Letter. 446 See James Setterlund Comment Letter. 447 See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter I; Fidelity Comment Letter; Western Asset Comment Letter. 448 See ICI Comment Letter I (stating that ‘‘[o]ver ten years ago, ICI, with assistance from its members, outside counsel, and consultants, spent about 18 months developing a preliminary framework for a private liquidity facility, including how it could be structured, capitalized, governed, and operated. There were many drawbacks, limitations, and challenges to creating such a facility that we described in our framework and that are noted in the PWG Report. Each of these impediments remains today’’); see also State Street Comment Letter (stating ‘‘we understand this proposal was considered during previous rounds of reform, but it was the SEC itself that questioned whether this would be a meaningful or effective solution’’). 449 SIFMA AMG Comment Letter; ICI Comment Letter I; Western Asset Comment Letter. E:\FR\FM\08FEP2.SGM 08FEP2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules would struggle to absorb an adequate level of assets during the March 2020 downturn.450 Moreover, some commenters also expressed concern that an LEB that does not have sufficient liquidity would risk a run by causing investor alarm, similar to how redemption behavior increased in March 2020 when a fund’s level of weekly liquid assets neared 30%.451 Some commenters also suggested that the establishment of a chartered LEB would introduce complex banking regulatory issues and inherent conflicts of interest.452 Further, commenters expressed that any reform that involves pooling liquidity resources that are shared by all members could create moral hazard concerns by forcing more responsible funds that invest in safer assets to bear the costs of supporting less responsible funds.453 Lastly, commenters suggested that to be viable, the LEB would need access to the Federal Reserve discount window.454 This alternative may not significantly reduce the contagion effects from heavy redemptions at money market funds without undue costs. Membership in the LEB has the potential to create moral hazard and encourage excessive risktaking by money market funds, given the difficulties and costs involved in creating effective risk-based pricing for insurance and additional regulatory structure to offset this incentive. If the alternative actually increases moral hazard and decreases corresponding market discipline, it may in fact increase rather than decrease money market funds’ susceptibility to liquidity runs. These incentives may be 450 JP Morgan Comment Letter. AMG Comment Letter; Fidelity Comment Letter. 452 SIFMA AMG Comment Letter; Fidelity Comment Letter; Institute of International Finance Comment Letter (noting that ‘‘[t]he Federal Reserve’s Section 23A restrictions on affiliate transactions would impose significant constraints on LEB support to MMFs absent a clear exemption.’’); see also mCP (stating that ‘‘unless an exemption from a normal bank regulations were granted, that would put the LEB in clear breach of the Liquidity Coverage Ratio . . .’’). 453 SIFMA AMG Comment Letter; Fidelity Comment Letter; Western Asset Comment Letter. 454 See, e.g., JP Morgan Comment Letter; Fidelity Comment Letter; SIFMA AMG Comment Letter; Institute of International Finance Comment Letter. As the Commission recognized in 2014, ‘‘access to the discount window would raise complicated policy considerations and likely would require legislation. In addition, such a facility would not protect money market funds from capital losses triggered by credit events as the facility would purchase securities at the prevailing market price.’’ See 2014 Adopting Release, supra footnote 12, at paragraph accompanying n.2118. We believe that an LEB without such additional loss protection may not sufficiently prevent widespread liquidity induced runs on money market funds similar to those experienced in March 2020. khammond on DSKJM1Z7X2PROD with PROPOSALS2 451 SIFMA VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 countered by imposing a very costly regulatory structure and risk-based pricing system; however, related costs are likely to be passed along to investors and may reduce the attractiveness of money market funds relative to bank products and other cash management tools. Finally, it may be difficult to create private insurance at an appropriate cost and of sufficient capacity for a several trillion-dollar industry that tends to have highly correlated tail risk. E. Effects on Efficiency, Competition, and Capital Formation The proposed amendments are intended to reduce run risk, mitigate the liquidity externalities transacting investors impose on non-transacting investors, and enhance the resilience of money market funds. To the degree that the proposal would increase the resilience of money market funds, it may enhance the availability of wholesale funding liquidity to market participants and enhance their ability to raise capital, particularly during severe stress. The proposed amendments may also reduce the probability that runs would result in future government interventions, inform investors about liquidity risks of their money market fund investments, and enhance the ability of investors to optimize their portfolio allocations. The proposal may enhance the efficiency of liquidity provision. Specifically, money market funds and issuers of short-term debt that money market funds hold benefit from perceived government backstops and the safety and soundness of the financial system. When the liquidity of underlying assets in money market fund portfolios is impaired, investors benefit from selling money market fund shares before or instead of selling assets that funds hold. Thus, in times of market stress, liquidity demand may be directed to money market funds even though the relative cost of liquidity in money market funds may be greater, resulting in inefficient provision of liquidity. While the proposal would not result in money market funds fully internalizing the costs of investing in illiquid assets, to the degree that the proposal would reduce the need for future implicit government backstops in times of stress, the proposal may result in more efficient provision of liquidity. The proposed disclosure requirements are expected to enhance informational efficiency. To the degree that some investors may currently be uninformed about liquidity risks of money market fund investments, the proposed swing pricing and disclosure requirements PO 00000 Frm 00079 Fmt 4701 Sfmt 4702 7325 may increase transparency about liquidity costs transacting investors impose on remaining fund investors and liquidity risks in money market funds. While many investors may use money market funds as cash equivalents, money market funds use capital subject to daily or intraday redemptions to invest in portfolios of risky assets. This gives rise to liquidity risk and liquidity externalities between transacting and non-transacting investors, as discussed throughout the release. The possibility that a fund’s NAV may swing as a result of net redemptions, as well as the proposed disclosure requirements may help inform investors about the liquidity risks inherent in money market funds and liquidity costs of redemptions, particularly during times of stress. To the degree that greater transparency about liquidity risk of money market funds may lead some risk averse investors to use other instruments, such as banking products, in lieu of money market funds for cash management, allocative efficiency may increase. The proposal may have two groups of competitive effects. First, proposed increases in liquidity requirements may affect competition among prime money market funds. As discussed in detail in Section III.C.2, many affected funds already have liquidity levels that would meet or exceed the proposed minimum daily and weekly liquid asset thresholds. However, other funds would have to rebalance their portfolios to come into compliance with the proposed amendments, which may reduce the yields they are able to offer investors. The proposed amendments may, thus improve the competitive standing of funds that currently have higher levels of daily and weekly liquidity relative to funds that currently do not and may, thus, be able to offer higher yields to investors. Second, the proposed amendments may influence the competitive standing of prime money market funds relative to government money market funds. The proposed elimination of gates and fees and swing pricing may reduce the risk of runs on prime money market funds and may protect the value of investments of non-transacting shareholders. However, swing pricing may increase the variability of prime money market funds net asset values, while higher liquidity requirements may reduce the yields they are able to offer to investors. This may reduce their attractiveness to investors and may result in a greater reallocation of capital from prime to government funds, bank deposit accounts, insurance company E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7326 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules separate accounts, and other types of liquid vehicles. The proposed increases in minimum liquidity thresholds may reduce access to and increase costs of raising capital for some issuers of short-term debt, thereby potentially negatively affecting capital formation. Moreover, to the degree that raising liquidity thresholds may reduce money market fund yields and to the extent that swing pricing may increase uncertainty about investors’ redemption costs, the proposal may reduce the viability of prime money market funds as an asset class. This reallocation need not be inefficient since government money market funds or banking products may be more suitable for cash management by liquidity risk averse investors. Moreover, banking entities insured by the FDIC pay deposit insurance assessments, whereas money market funds do not internalize any portion of government interventions or externalities they impose on other investors in the same asset classes. Nevertheless, potential decreases in the size of the prime money market fund sector may have adverse follow-on effects on capital formation and the availability of wholesale funding liquidity to issuers and institutions seeking to arbitrage mispricings across markets. Issuers may respond to such changes by shifting their commercial paper and certificate of deposit issuance toward longer maturity instruments, which may reduce their exposure to rollover risk. These aspects of the proposal may be borne disproportionately by global or foreign banking organizations that rely on money market funds for dollar funding. Specifically, academic research has explored the effects of outflows from prime money market funds into government money market funds around the 2014 money market fund reforms on business models and lending activities of foreign banking organizations in the U.S. To the degree that the proposed amendments would result in further outflows from prime money market funds, banking organizations reliant on unsecured funding from money market funds may reduce arbitrage positions and investments in illiquid assets, rather than reducing lending.455 However, reduced wholesale dollar funding from money market funds may also lead to a reduction in capital formation through dollar lending by affected banks, which 455 See, e.g., Anderson, Alyssa, Wenxin Du, Bernd Schlusche. 2019. ‘‘Money Market Fund Reform and Arbitrage Capital.’’ Working Paper. See also Thomas Flanagan. 2020. ‘‘Funding Stability and Bank Liquidity.’’ Working Paper. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 may reduce the dollar borrowing ability of firms reliant on affected banks.456 Amendments related to potential negative interest rates may increase informational and allocative efficiency. In the event gross fund yields turn negative, the proposal would prohibit the use of reverse share distribution mechanisms, and would require stable NAV funds to float the NAV. This may enhance transparency of fund yields to investors, which may enhance informational and allocative efficiency in stable NAV funds. However, to the degree that stable NAV fund investors may use such accounts for sweep accounting or for cash management, floating the NAV under such circumstances may increase price variability of and decrease investor interest in affected retail or government money market funds. As a result, investors may move their capital to bank accounts or other cash alternatives, which may reduce the size of the retail and government money market fund sector. Since money market funds play an essential role in the provision of wholesale funding liquidity and since negative interest rates may be most likely during severe macroeconomic stress, the proposal may lead to a negative shock to wholesale funding liquidity and capital formation during peak macroeconomic stress. The proposed requirement that money market funds determine that their intermediaries have the capacity to process the transactions at floating NAV and the related recordkeeping requirements may affect competition among funds and intermediaries. Specifically, intermediaries that are currently unable to process stable NAV fund shares at floating NAV prices would have to update their transaction processing systems or lose the ability to process transactions with stable NAV money market funds. Such costs are more easily borne by larger intermediary complexes, which are also more likely to be processing both stable and floating NAV fund transactions and be already equipped for the potential transition. This may place smaller intermediaries processing transactions in stable NAV funds at a competitive disadvantage relative to larger intermediaries. In addition, funds heavily reliant for their distribution on smaller intermediaries that are not currently equipped to process transactions at a floating NAV may experience more significant disruptions to their distribution 456 See, e.g., Ivashina, Victoria, David Scharfstein, and Jeremy Stein, 2015. ‘‘Dollar Funding and the Lending Behavior of Global Banks.’’ Quarterly Journal of Economics 130(3): 1241–1281. PO 00000 Frm 00080 Fmt 4701 Sfmt 4702 networks. Such funds are more likely to bear higher compliance costs of the proposal and may lose investor capital to other funds that rely on larger intermediaries that are already in compliance with the proposed amendments. Notably, such reallocation need not be inefficient if larger intermediaries have superior processing systems and, due to economies of scale and scope, are able to process transactions for a variety of funds under different market conditions. However, it may place funds reliant on less technologically advanced intermediaries for their distribution at a competitive disadvantage relative to funds using better equipped intermediaries. It may also disadvantage smaller fund complexes generally as they may have fewer economies of scale and scope. The proposed amendments related to the methods of calculation of WAM and WAL may increase consistency and comparability of disclosures by money market funds in data reported to the Commission and provided on fund websites. The amendments, therefore, may reduce informational asymmetries between funds and fund investors about interest rate and liquidity risk exposures across fund portfolios. To the degree that consistency and comparability of WAM and WAL information may inform investors and may influence their capital allocation decisions, the proposed amendments may improve allocative efficiency. The proposed amendments related to the calculation of WAM and WAL are not expected to affect competition and capital formation. F. Request for Comment We request comment on all aspects of the economic analysis of the proposed amendments. To the extent possible, we request that commenters provide supporting data and analysis with respect to the benefits, costs, and effects on competition, efficiency, and capital formation of adopting the proposed amendments or any reasonable alternatives. In particular, we ask commenters to consider the following questions: 143. What additional qualitative or quantitative information should be considered as part of the baseline for the economic analysis of these amendments? What fraction of institutional prime and institutional taxexempt funds currently strike their NAV at the bid price of securities? 144. Are the costs and benefits of proposed amendments accurately characterized? If not, why not? Should any of the costs or benefits be modified? What, if any, other costs or benefits E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules should be taken into account? If possible, please offer ways of estimating these costs and benefits. What additional considerations can be used to estimate the costs and benefits of the proposed amendments? 145. Are the costs and benefits of proposed swing pricing amendments accurately characterized? If not, why not? How many institutional prime and institutional tax exempt money market funds already impose order cut-off times? Are the costs of funds doing so accurately characterized? What, if any, other costs or benefits should be taken into account? If possible, please offer ways of estimating these costs and benefits. 146. Are the costs and benefits of proposed amendments related to potential negative interest rates accurately characterized? If not, why not? Should any of the costs or benefits be modified? What, if any, other costs or benefits should be taken into account? If possible, please offer ways of estimating these costs and benefits. What additional considerations can be used to estimate the costs and benefits of the proposed amendments? 147. Are the effects on competition, efficiency, and capital formation arising from the proposed amendments accurately characterized? If not, why not? 148. Are the economic effects of the above alternatives accurately characterized? If not, why not? Should any of the costs or benefits be modified? What, if any, other costs or benefits should be taken into account? 149. Are the economic effects of the dynamic liquidity fee alternative to the proposed swing pricing requirement accurately characterized? If not, why not? Should any of the costs or benefits be modified? What, if any, other costs or benefits should be taken into account? 150. Are the economic effects of the alternative approaches to implementing swing pricing adequately characterized? If not, why not? Should any of the costs or benefits be modified? What, if any, other costs or benefits should be taken into account? 151. Are the economic effects of the sponsor support alternative accurately characterized? If not, why not? Should any of the costs or benefits be modified? What, if any, other costs or benefits should be taken into account? 152. Are the economic effects of the minimum balance at risk alternative accurately characterized? If not, why not? Should any of the costs or benefits be modified? What, if any, other costs or benefits should be taken into account? 153. Are the economic effects of the Inline XBRL alternative for Form N–CR VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 accurately characterized? If not, why not? Should any of the costs or benefits be modified? What, if any, other costs or benefits should be taken into account? 154. Are there other reasonable alternatives to the proposed amendments that should be considered? What are the costs, benefits, and effects on competition, efficiency, and capital formation of any other alternatives? 155. Are there data sources or data sets that can help refine the estimates of the costs and benefits associated with the proposed amendments? If so, please identify them. IV. Paperwork Reduction Act A. Introduction The proposed amendments to rule 2a– 7 rule 31a–2, and Forms N–1A, N–CR, and N–MFP contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).457 We are submitting the proposed collections of information to the Office of Management and Budget (‘‘OMB’’) for review in accordance with the PRA.458 The titles for the existing collections of information are: (1) ‘‘Rule 2a–7 under the Investment Company Act of 1940, Money market funds’’ (OMB Control No. 3235–0268); (2) ‘‘Rule 31a–2: Records to be preserved by registered investment companies, certain majority-owned subsidiaries thereof, and other persons having transactions with registered investment companies’’ (OMB Control No. 3235–0179; (3) ‘‘Form N–1A under the Securities Act of 1933 and under the Investment Company Act of 1940, registration statement of open-end management investment companies’’ (OMB Control No. 3235–0307); (4) ‘‘Rule 30b1–8 under the Investment Company Act of 1940, current report for money market funds and Form N–CR, current report, money market fund material events’’ (OMB Control No. 3235–0705); and (5) ‘‘Rule 30b1–7 under the Investment Company Act of 1940, monthly report for money market funds, and Form N–MFP, monthly schedule of portfolio holdings of money market funds’’ (OMB Control No. 3235–0657). An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. We discuss below the collection of information burdens associated with proposed amendments to rules 2a–7 and 31a–2 as well as to Forms N–1A, N–CR, and N–MFP. 457 44 458 44 PO 00000 U.S.C. 3501–3520. U.S.C. 3507(d); 5 CFR 1320.11. Frm 00081 Fmt 4701 Sfmt 4702 7327 B. Rule 2a–7 Certain provisions of our proposed rule would affect the baseline collection of information requirements of rule 2a– 7 Several of the amendments create new collection of information requirements or modify existing ones. These amendments include: (1) Removal of fee and gate provisions from rule 2a–7 and the associated board determinations of whether to impose a fee or gate; (2) new provisions requiring institutional prime and institutional tax-exempt money market funds to establish and implement swing pricing policies and procedures and deliver a board report no less frequently than annually; and (3) new provisions requiring government and retail money market funds to maintain and keep current records identifying the financial intermediaries the fund has determined have the capacity to transact at non-stable prices per share and the intermediaries for which the fund was unable to make this determination. The retention period with respect to the swing pricing policies and procedures, board reports, and financial intermediary determinations is six years, the first two years in an easily accessible place. The respondents to these collections of information will be money market funds. We estimate that there are 318 money market funds subject to rule 2a– 7, although the proposed new collections of information would each apply to certain subsets of money market funds, as reflected in the below table.459 The new collections of information are mandatory for the identified types of money market funds that rely on rule 2a–7. The proposed amendments are designed to enable Commission staff in its examinations of money market funds to determine compliance with the rule. To the extent the Commission receives confidential information pursuant to the collections of information, such information will be kept confidential, subject to the provisions of applicable law.460 In our most recent Paperwork Reduction Act submission for rule 2a– 7, we estimated the annual aggregate compliance burden to comply with the collection of information requirement of 459 Based on Form N–MFP filings, there were 318 money market funds as of July 2021. 460 See, e.g., 5 U.S.C. 552. Exemption 4 of the Freedom of Information Act provides an exemption for trade secrets and commercial or financial information obtained from a person and privileged or confidential. Exemption 8 of the Freedom of Information Act provides an exemption for matters that are contained in or related to examination, operating, or condition reports prepared by, or on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions. E:\FR\FM\08FEP2.SGM 08FEP2 7328 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules rule 2a–7 is 337,328 burden hours with an internal cost burden of $92,875,630 and an external cost burden estimate of $38,100,454.461 The table below summarizes our PRA initial and ongoing annual burden estimates associated with the proposed amendments to rule 2a–7. BILLING CODE 8011–01–P Table 7: Proposed Burden Estimates for Rule 2a-7 Internal initial burden hours Internal annual burden hours1 Wage rate 2 Internal time costs $1,5623 -$10,935 Annual external cost burden DJPJSEJ ESTllvlAES Removal offee and gate provisions 0 hours -7 hours Number of funds X Swing pricing policies and procedures 54 hours 5 X 2L 20 hours 6 x2 4 X 2 hours $382 7 $7,640 $4,470 8 $8,940 $9,676 Swing pricing board reporting 4 hours 9 X $2,419 10 Swing pricing recordkeeping 4 hours· 1 X $113' 2 Number of fund complexes X Recordkeeping related to financial intermediary determinations 3 hours Number of funds X $110'5 2 hours' 4 X $452 2513 2513 $220 26516 X 265 16 Total new annual burden (I +II + Ill) 1,266 hours $704,130 Current burden estimates 337,328 hours $92,875,630 $38,100,454 Revised burden estimates 338,594 hours $93,579,760 $38,100,454 Notes: 1. This estimate includes the initial burden estimates amortized over a three-year period. 461 The most recent rule 2a–7 PRA submission was approved in 2019 (OMB Control No. 3235– 0268). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00082 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.022</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 2. The Commission's estimates of the relevant wage rates (with the exception of the board of directors) are based on salary information for the securities industry compiled by the Securities Industry and Financial Markets Association's Office Salaries in the Securities Industry 2013 The estimated wage figures are modified by Commission staff to accountfor an 1,8OO-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, overhead, and adjusted to account for the effects of inflation. These PRA estimates assume that the same types of professionals would be involved in the proposed requirements that we believe otherwise would be involved in complying with other information collection requirements in rule 2a-7. Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7329 3. Represents the wage rate and burden hour allocations the Commission used in its most recent PRA submission. In that submission, the Commission estimated 5 hours for an attorney (at a rate of $401 per hour) and 2 hours for a board of 9 directors (at a rate of $4,465 per hour). 4. In its most recent PRA submission, the Commission estimated that 2 funds per year would have weekly liquid assets below 30% of total assets, which would require a board determination of whether to impose fees or gates. Because our proposal would remove the fee and gate provisions from the rule, we similarly propose to remove the burdens that have been allocated to these provisions. 5. We are estimating for the purpose of this analysis that each fund complex would incur a one-time average burden of 48 hours to document swing pricing policies and procedures, with 24 hours spent by a senior accountant and 24 hours spent by a chief compliance officer. Since a fund board approves the fund's swing pricing policies and procedures and reviews, no less frequently than annually, a written report that includes certain required elements, we estimate a one-time burden of 6 hours per fund complex associated with the fund board's review and approval of swing pricing policies and procedures. 6. We estimate that each fund complex will spend 4 hours each year, on average, to update swing pricing policies and procedures, with 2 hours spent by a senior accountant and 2 hours spent by a chief compliance officer. 7. Represents a blended wage rate of a senior accountant ($221 per hour) and a chief compliance officer ($542 per hour). 8. Represents an estimated cost per hour for an entire board of directors, assuming an average of 9 board members per board. 9. We estimate that each fund complex would spend 2 hours each year, on average, preparing the required written report to the board. We estimate an annual burden of 2 hours per fund complex associated with the fund board's review of the swing pricing administrator's report. 10. Represents a wage rate of a compliance attorney at $373 per hour and 2 hours for a board of 9 directors at a rate of $4,770 per hour. 11. We estimate that the burden is four hours per fund complex each year to retain the proposed swing pricing records. with 2 hours spent by a general clerk and 2 hours spent by a senior computer operator. 12. Represents a blended wage rate of general clerk ($64 per hour) and senior computer operator ($97 per hour). 13. Represents the number of fund complexes that have institutional prime and institutional tax-exempt funds as of July 2021, based on Form N-MFP data. We estimate the burdens related to swing pricing at the fund complex level because we believe funds in the same complex would experience certain efficiencies in developing and updating written policies and procedures and in board oversight of swing pricing. 14. We estimate that each fund complex would spend 2 hours each year, on average, making the required determinations whether fund intermediaries are capable of transacting in fund shares at other than a stable NAV, typically using a senior compliance examiner. 15. Represents a blended wage rate of general clerk ($64 per hour) and senior computer operator ($97 per hour). 16. Represents the number of government and retail money marketfunds as of July 2021, based on Form N-MFP data. C. Rule 31a–2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Section 31(a)(1) of the Investment Company Act requires registered investment companies and certain others to maintain and preserve records as prescribed by Commission rules. Rule 31a–1 specifies the books and records that must be maintained. Rule 31a–2 specifies the time periods that entities must retain certain books and records, including those required to be maintained under rule 31a–1. The retention of records, as required by rule 31a–2, is necessary to ensure access by Commission staff to material business and financial information about funds and certain related entities. This information will be used by the Commission staff to evaluate fund compliance with the Investment VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 Company Act and regulations thereunder. We are proposing that certain money market funds retain books and records containing schedules evidencing and supporting each computation of an adjustment to net asset value of their shares based on swing pricing policies and procedures established and implemented pursuant to proposed rule 2a–7(c)(2). The respondents to these collections of information will be money market funds. The new collections of information are mandatory for the money market funds subject to rule 2a– 7(c)(2). We estimate that there are 53 institutional prime and institutional taxexempt money market funds that would be subject to the proposed collection of information requirements related to swing pricing. To the extent the Commission receives confidential PO 00000 Frm 00083 Fmt 4701 Sfmt 4702 information pursuant to the collections of information, such information will be kept confidential, subject to the provisions of applicable law.462 In our most recent Paperwork Reduction Act submission for rule 31a– 2, we estimated the annual aggregate compliance burden to comply with the collection of information requirement of rule 31a–2 is 696,464 burden hours with an internal cost burden of $54,672,424 and an external cost burden estimate of $115,372,485.463 The table below summarizes our PRA annual burden estimates associated with the proposed amendments to rule 31a– 2. 462 See id. most recent rule 31a–2 PRA submission was approved in 2020 (OMB Control No. 3235– 0179). 463 The E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.023</GPH> BILLING CODE 8011–01–C 7330 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Table 8: Proposed Burden Estimates for Rule 31a-2 Internal annual burden hours Wage rate1 Internal time cost Annual external cost burden PROPOSED ESTIMATES $64 (general clerk) $96 Annual burden associated with proposed swing pricing amendments for money 1.5 hours market funds 1.5 hours Number of funds x53 x53 x53 Total new annual burden 159 hours $12,826 $31,800 Current Burden Estimates 696,464 hours $56,672,424 $115,372,485 Revised Burden Estimates 696,623 $56,685,250 $115,404,285 X $600 $97 (senior computer operator) $146 X Notes: 1. See supra Table 7, at note 2. The proposed amendments to Form N–MFP would include additional data collection and certain technical improvements that will assist our monitoring and analysis of money market funds. We are proposing to increase the frequency of certain data points from weekly to daily, collect new information about securities that have been disposed of before maturity, collect new information about the composition and concentration of money market funds’ shareholders, collect additional information and remove the ability for funds to aggregate certain required information about repurchase agreement transactions, as well as certain other information about the fund’s portfolio securities (e.g., the acquisition date for a security). We are also proposing amendments to improve identifying information about the fund, including changes to better identify different categories of government money market funds, changes to identify privately offered funds that are used for internal cash management purposes, and amendments to provide the name and other identifying information for the registrant, series, and class. The proposed amendments to Form N–MFP VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 also include several changes to clarify current instructions or items. The information collection requirements on Form N–MFP are designed to assist the Commission in analyzing the portfolio holdings of money market funds, and thereby augment our understanding of the risk characteristics of individual money market funds and money market funds as a group and industry trends. The proposed amendments enhance our oversight of money market funds and our ability to respond to market events. Preparing a report on Form N–MFP is mandatory for money market funds that rely on rule 2a–7, and responses to the information collections will not be kept confidential. The respondents to these collections of information will be money market funds. The Commission estimates there are 318 money market funds that report information on Form N–MFP although certain components of the proposed new collections of information would apply to certain subsets of money market funds, as reflected in the below table. We estimate that 35% of money market funds (or 111 money market funds) license a software solution and file reports on Form N–MFP in house. We estimate that the remaining 65% of money market funds (or 207 money PO 00000 Frm 00084 Fmt 4701 Sfmt 4702 market funds) retain the services of a third party to provide data aggregation and validation services as part of the preparation and filing of reports on Form N–MFP on the fund’s behalf. We understand that the required data in the proposed amendments to Form N–MFP generally are already maintained by money market funds pursuant to other regulatory requirements or in the ordinary course of business. Accordingly, for the purposes of our analysis, we do not believe that the proposed amendments add significant burden hours for filers of Form N–MFP. In our most recent Paperwork Reduction Act submission for Form N– MFP, we estimated the annual aggregate compliance burden to comply with the collection of information requirement of Form N–MFP is 64,667 burden hours with an internal cost burden of $6,754,832 and an external cost burden estimate of $8,682,037.464 The table below summarizes our PRA initial and ongoing annual burden estimates associated with the proposed amendments to Form N–MFP. BILLING CODE 8011–01–P 464 This estimate is based on the last time the PRA submission for the rule’s information collection was approved in 2019 (OMB Control No. 3235–0657). E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.024</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 D. Form N–MFP 7331 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Table 9: Proposed Burden Estimates for Form N-MFP Internal initial burden hours Internal annual burden hours1 Wage rate2 Internal time costs $304 3 $608 Annual external cost burden PROPOSED E:3Tl~li'\TE:3 Reporting on disposed securities 3 hours 2 hours Number of funds for disposed securities information• Other proposed amendments X 9 hours X 64 x64 $304 2 7 hours $2,128 $912 Number of funds 5 x 318 x318 x318 Total new annual burden (I +II) 2,354 hours $715,616 $290,016 Current burden estimates 64,667 hours $6,754,832 $3,179,700 Revised burden estimates 67,021 hours $7,470,448 $3,469,716 Notes: 1. This estimate includes the initial burden estimates amortized over a three-year period. 2. See supra Table 7, at note 2. These PRA estimates assume that the same types of professionals would be involved in the proposed reporting requirements that we believe otherwise would be involved in preparing and filing reports on Form N-MFP. 3. This represents a blended hourly rate of $304 for a Financial Reporting Manager ($297 per hour), Fund Senior Accountant ($221 per hour), Senior Database Administrator ($349 per hour), Senior Portfolio Manager ($336 per hour), and Compliance Manager ($316 per hour)). The blended hourly rate was calculated as ($297 + $221 + $349 + $336 + $316)/ 5 = $304. 4. This reflects that our proposal requires that only prime money market funds report information about disposed securities on Form N-MFP. We estimate thatthere were 64 prime funds as of July 2021, based on Form N-MFP filings. 5. We estimate that there were 318 money market funds as of July 2021, based on Form N-MFP filings. 6. This estimate is based on the following information and calculations: (35% x $4,805 (the average cost to license a third-party software solution per year)= $1,681.75) + (65% x $11,440 (the average cost of retaining the services of a thirdparty vendor to prepare and file reports on Form N-MFP on the fund's behalf)= $7,436) = basis for existing external N-MFP filing costs. We estimate that the new NMFP requirements will add an additional 10% costs (eg, ($1,68175 + $7,436 = $9,117.75) x 10% = $912 per fund). $912 x 318 = $290,016 The proposed amendments to Form N–CR would include the removal of the disclosure items related to fund suspensions of redemptions and liquidity fees. The proposal would require a fund to file a report when its investments are more than 50% below the minimum weekly liquid asset or daily liquid asset requirements. In addition, the proposal would require money market funds to file Form N–CR reports in a custom XML data language. The information collection requirements are designed to assist Commission staff in its oversight of money market funds and its ability to respond to market events. We estimate that there are 318 money market funds subject to Form N– CR reporting requirements, but a fund is required to file a report on Form N–CR VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 only when a reportable event occurs.465 Compliance with the disclosure requirements of Form N–CR is mandatory for money market funds that rely on rule 2a–7, and the responses to the disclosure requirements will not be kept confidential. In our most recent Paperwork Reduction Act submission for Form N– CR, we estimated that we would receive, in the aggregate, an average of 6 reports filed on Form N–CR per year. We also estimated the annual aggregate compliance burden to comply with the collection of information requirement of Form N–CR is 51 burden hours with an internal cost burden of $19,839, and an 465 Based on Form N–MFP filings, there were 318 money market funds as of July 2021. PO 00000 Frm 00085 Fmt 4701 Sfmt 4702 external cost burden estimate of $6,111.466 The table below summarizes our PRA initial and ongoing annual burden estimates associated with the proposed amendments to Form N–CR. Our most recent Paperwork Reduction Act submission for Form N–CR based the burden estimates on the number of Form N–CR reports filed between 2018 and 2020, and no funds filed reports related to liquidity fees or suspensions of redemptions during that period (or at any other time). As a result, we do not believe that removing the items related to liquidity fees and suspensions of redemptions would affect the current burden estimates. 466 The most recent Form N–CR PRA submission was approved in 2021 (OMB Control No. 3235– 0705). E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.025</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 E. Form N–CR 7332 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Table 10: Proposed Burden Estimates for Form N-CR Internal initial burden hours Internal annual burden hours 0 hours 4.5 hours 0 hours 4 hours Wage rate1 Internal time costs X $492 (legal professional) $2,214 x $285 (financial professional) $1,140 Reporting of liquidity threshold events Total annual burden per response 8.5 hours2 $3,354 Number of responses x1 x1 Estimated burden for reporting of liquidity threshold events (I) 8.5 hours $3,354 Submission in a structured data language 0 hours 2 hours X $277 (programmer) $554 Number of responses xp xp Estimated burden for submission in a structured data format (II) 14 hours $3,878 Total estimated burden (1+11) 22.5 $7,232 Current Burden Estimates 51 $19,839 Revised Burden Estimates 73.5 $27,071 Notes: 1. See supra Table 7, at note 2. These PRA estimates assume that the same types of professionals would be involved in the proposed reporting requirements that we believe otherwise would be involved in preparing and filing reports on Form N-CR. The financial professional category is the blended average hourly rate for a senior portfolio manager ($336), financial reporting manager ($297), and senior accountant ($221). The legal professional category is a blended average hourly rate for a deputy general counsel ($610) and compliance attorney ($373). 2. This estimated burden also includes notifying the board of liquidity threshold events, which will involve providing the same information within the same period as the Form N-CR report. 3. This estimate includes 6 reports filed per year in addition to the 1 estimated annual response resulting from the reporting of liquidity threshold events. The proposed amendments to Form N–1A would include a requirement for any money market fund that is not a government money market fund or a retail money market fund to provide swing pricing disclosures to investors, including an explanation of the fund’s use of swing pricing and a general description of the effects of swing pricing on the fund’s average annual total returns for the applicable period(s). The proposed amendments would additionally include a proposal to remove the current disclosures related to the imposition of liquidity fees and any suspension of redemptions. Compliance with the disclosure requirements of Form N–1A is mandatory for money market funds that rely on rule 2a–7, and the responses to the disclosure requirements will not be kept confidential. The purpose of the information collection requirements on Form N–1A VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 are to meet the filing and disclosure requirements of the Securities Act and the Investment Company Act and to enable funds to provide investors with information necessary to evaluate an investment in the fund. The proposed amendments to Form N–1A are designed to provide investors with information about a fund’s swing pricing policies and procedures and how swing pricing may affect an investor, which investors can use to inform their investment decisions. The respondents to these collections of information will be money market funds. The Commission estimates there are 318 money market funds that are subject to Form N–1A, although the proposed new collections of information would apply to certain subsets of money market funds. The Commission estimates there are 53 money market funds that will provide swing pricingrelated disclosures on Form N–1A. We estimate that 129 money market funds PO 00000 Frm 00086 Fmt 4701 Sfmt 4702 will remove the current disclosures related to the imposition of liquidity fees and any suspension of redemptions. Given the removal of the prior disclosure requirements, we do not believe that the proposed amendments add significant burden hours for filers of Form N–1A. In our most recent Paperwork Reduction Act submission for Form N– 1A, we estimated the annual aggregate burden to comply with the collection of information requirement of Form N–1A is 1,672,077 burden hours with an internal cost burden of $474,392,078, and an external cost burden estimate of $132,940,008.467 The table below summarizes our PRA initial and ongoing annual burden estimates associated with the proposed amendments to Form N–1A. 467 The most recent Form N–1A PRA submission was approved in 2019 (OMB Control No. 3235– 0307). E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.026</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 F. Form N–1A 7333 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Table 11: Proposed Burden Estimates for Form N-lA Internal initial burden hours Internal annual burden hours1 Wage rate2 Internal time costs 2 hours 1.67 hours3 $356 4 $595 Number of funds for swing pricingrelated disclosure X 89 hours Removal of liquidity fee and redemption gate-related disclosure -0.5 hours6 X $31,535 $356 4 -$178 129 7 X 129 -64.5 hours -$22,962 Total estimated burden (1-11) 24.5 $8,573 Current Burden Estimates 1,672,077 $474,392,078 V. Initial Regulatory Flexibility Analysis khammond on DSKJM1Z7X2PROD with PROPOSALS2 535 Estimated annual burden reduction for removal of fee and gate-related disclosure (II) BILLING CODE 8011–01–C Section 3(a) of the Regulatory Flexibility Act of 1980 468 (‘‘RFA’’) requires the Commission to undertake an initial regulatory flexibility analysis (‘‘IRFA’’) of the proposed rule amendments on small entities unless the Commission certifies that the rule, if adopted, would not have a significant economic impact on a substantial number of small entities.469 Pursuant to 5 U.S.C. 605(b), the Commission hereby certifies that the proposed amendments to rule 2a–7, rule 31a–2, and Forms N– MFP and N–CR under the Investment Company Act, and Form N–1A under the Investment Company Act and the Securities Act, would not, if adopted, have a significant economic impact on a substantial number of small entities. We are proposing amendments to rule 2a–7 under the exemptive and rulemaking authority set forth in sections 6(c), 8(b), 22(c), and 38(a) of the Investment Company Act of 1940 [15 U.S.C. 80a–6(c), 80a–8(b), 80a–22(c), 80a–37(a)]. The proposed amendments would remove the liquidity fee and redemption gate provisions in rule 2a– 7 under the Act. The proposed amendments would further require institutional prime and tax-exempt money market funds to implement swing pricing policies and procedures to require redeeming investors to bear 469 5 X Estimated burden for swing pricingrelated disclosure (I) Number of funds for removal of liquidity fee and redemption gaterelated disclosure 468 5 53 5 U.S.C. 603(a). U.S.C. 605(b). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 the costs of their decision to redeem. The proposed amendments to rule 2a– 7 would increase the daily liquid asset and weekly liquid asset minimum liquidity requirements to 25% and 50%, respectively, to provide a more substantial buffer in the event of rapid redemptions. The proposed amendments would provide guidance and amend rule 2a–7 to address how money market funds with stable net asset values should handle a negative interest rate environment. Finally, the proposed amendments would specify the calculation method for weighted average maturity and weighted average life. We are proposing amendments to rule 31a–2 under the authority set forth in section 31(a) of the Investment Company Act [15 U.S.C. 80a–30(a)]. The proposed amendments would require certain money market funds to maintain records related to swing pricing. In addition, we are proposing amendments to Forms N–MFP and N–CR under the Investment Company Act under the authority set forth in sections 8(b), 30(b), 31(a), and 38 of the Investment Company Act [15 U.S.C. 80a–8(b), 80a– 29(b), 80a–30(a), 80a–37]. We propose amendments to Form N–1A under the Investment Company Act and the Securities Act, under the authority set forth in sections 5, 6, 7, 10, and 19(a) of the Securities Act [15 U.S.C. 77e, 77f, 77g, 77j, and 77s(a)] and sections 8, 24(a), 24(g), 30, and 38 of the Investment Company Act [15 U.S.C. 80a–8, 80a–24(a), 80a–24(g), 80a–29, and 80a–37]. These proposed PO 00000 Frm 00087 Fmt 4701 Sfmt 4702 amendments would update the reporting requirements on Forms N– MFP and N–CR to improve the availability of information about money market funds, as well as make certain conforming changes to Form N–1A to reflect our proposed changes to the regulatory framework for these funds. Based on information in filings submitted to the Commission, we believe that only one money market fund is a small entity.470 For this reason, the Commission believes the proposed amendments to rule 2a–7, rule 31a–2, Forms N–MFP, N–CR, and N–1A, would not, if adopted, have a significant economic impact on a substantial number of small entities. We encourage written comments regarding this certification. We solicit comment as to whether the proposed amendments to rule 2a–7, rule 31a–2, Forms N–MFP, N–CR, and N–1A could have an effect on small entities that has not been considered. We request that commenters describe the nature of any impact on small entities and provide empirical data to support the extent of such impact. VI. Consideration of Impact on the Economy For purposes of the Small Business Regulatory Enforcement Fairness Act of 470 Under the Investment Company Act, an investment company is considered a small business or small organization if it, together with other investment companies in the same group of related investment companies, has net assets of $50 million or less as of the end of its most recent fiscal year. See 17 CFR 270.0–10. E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.027</GPH> Swing pricing-related disclosure 7334 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 1996, or ‘‘SBREFA,’’ 471 we must advise OMB whether a proposed regulation constitutes a ‘‘major’’ rule. Under SBREFA, a rule is considered ‘‘major’’ where, if adopted, it results in or is likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers or individual industries; or (3) significant adverse effects on competition, investment or innovation. We request comment on the potential impact of the proposed rule on the economy on an annual basis. Commenters are requested to provide empirical data and other factual support for their views to the extent possible. VII. Statutory Authority The Commission is proposing amendments to rule 2a–7 of the Act under the exemptive and rulemaking authority set forth in sections 6(c), 8(b), 22(c), and 38(a) of the Investment Company Act of 1940 [15 U.S.C. 80a– 6(c), 80a–8(b), 80a–22(c), 80a–37(a)]. The Commission is proposing amendments to rule 31a–2 under the Act pursuant to the authority set forth in section 31(a) of the Investment Company Act [15 U.S.C. 80a–30(a)]. The Commission is proposing amendments to Form N–1A pursuant to the authority set forth in sections 5, 6, 7, 10, and 19(a) of the Securities Act [15 U.S.C. 77e, 77f, 77g, 77j, and 77s(a)] and sections 8, 24(a), 24(g), 30, and 38 of the Investment Company Act [15 U.S.C. 80a–8, 80a–24(a), 80a–24(g), 80a–29, and 80a–37]. The Commission is proposing amendments to Form N–MFP pursuant to the authority set forth in sections 8(b), 30(b), 31(a), and 38(a) of the Investment Company Act [15 U.S.C. 80a–8(b), 80a–29(b), 80a–30(a), and 80a–37(a)]. The Commission is proposing amendments to Form N–CR pursuant to the authority set forth in sections 8(b), 30(b), 31(a), and 38(a) of the Investment Company Act [15 U.S.C. 80a–8(b), 80a–29(b), 80a–30(a), and 80a–37(a)]. List of Subjects in 17 CFR Parts 270 and 274 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Investment companies, Reporting and recordkeeping requirements, Securities. Text of Rule and Form Amendments For the reasons set out in the preamble, the Commission proposes to amend title 17, chapter II, of the Code of Federal Regulations as follows: 471 Public Law 104–121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 601). VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PART 270—RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940 1. The general authority citation for part 270 continues to read as follows: ■ Authority: 15 U.S.C. 80a–1 et seq., 80a– 34(d), 80a–37, 80a–39, and Pub. L. 111–203, sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted. * * * * * 2. Amend section 270.2a–7 by: a. Revising paragraphs (c)(1)(ii) and (c)(2); ■ b. Adding paragraph (c)(3); and ■ c. Revising paragraphs (d)(1)(ii) and (iii), (d)(4)(ii) and (iii), (g)(8)(i), (g)(8)(ii)(A), (h)(8), (h)(10) introductory text, (h)(10)(i)(B)(2), (h)(10)(iii) through (v), (h)(11), and (j). The revisions and addition read as follows: ■ ■ § 270.2a–7 Money market funds * * * * * (c) * * * (1) * * * (ii) Any money market fund that is not a government money market fund or a retail money market fund must compute its price per share for purposes of distribution, redemption and repurchase by rounding the fund’s current net asset value per share (including any adjustment to that price under paragraph (c)(2) of this section) to a minimum of the fourth decimal place in the case of a fund with a $1.0000 share price or an equivalent or more precise level of accuracy for money market funds with a different share price (e.g., $10.000 per share, or $100.00 per share). (2) Swing pricing. (i) Swing pricing requirement. Notwithstanding § 270.22c–1, any money market fund that is not a government money market fund or a retail money market fund must establish and implement swing pricing policies and procedures as described in paragraph (2)(ii) of this section. (ii) The fund’s swing pricing policies and procedures must: (A) Provide that the fund must adjust its current net asset value per share by a swing factor if the fund has net redemptions for the pricing period. In determining whether the fund has net redemptions for a pricing period and the amount of net redemptions, the swing pricing administrator is permitted to make such determination based on receipt of sufficient investor flow information for the pricing period to allow the fund to reasonably estimate whether it has net redemptions and the amount of net redemptions. This investor flow information may consist of PO 00000 Frm 00088 Fmt 4701 Sfmt 4702 individual, aggregated, or netted orders, and may include reasonable estimates where necessary. (B) Specify the process for determining the swing factor, in accordance with paragraph (c)(2)(iii) of this section. (iii) In determining the swing factor, the swing pricing administrator must make good faith estimates, supported by data, of the costs the fund would incur if it sold a pro rata amount of each security in its portfolio to satisfy the amount of net redemptions for the pricing period. (A) If the fund has net redemptions for the pricing period, the good faith estimates must include, for each security in the fund’s portfolio: (1) Spread costs, such that the fund is valuing each security at its bid price; (2) Brokerage commissions, custody fees, and any other charges, fees, and taxes associated with portfolio security sales; and (B) If the amount of the fund’s net redemptions for the pricing period exceeds the market impact threshold, the good faith estimates also must include, for each security in the fund’s portfolio, market impacts, which a fund must determine by: (1) Establishing a market impact factor for each security, which is an estimate of the percentage change 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; and (2) Multiplying the market impact factor for each security by the dollar amount of the security that would be sold if the fund sold a pro rata amount of each security in its portfolio to meet the net redemptions for the pricing period. (C) The swing pricing administrator may estimate costs and market impact factors for each type of security with the same or substantially similar characteristics and apply those estimates to all securities of that type rather than analyze each security separately. (iv) The fund’s board of directors, including a majority of directors who are not interested persons of the fund must: (A) Approve the fund’s swing pricing policies and procedures; (B) Designate the swing pricing administrator. The administration of swing pricing must be reasonably segregated from portfolio management of the fund and may not include portfolio managers; (C) Review, no less frequently than annually, a written report prepared by E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules the swing pricing administrator that describes: (1) Its review of the adequacy of the fund’s swing pricing policies and procedures and the effectiveness of their implementation, including their effectiveness at eliminating or reducing any liquidity costs associated with satisfying shareholder redemptions; (2) Any material changes to the fund’s swing pricing policies and procedures since the date of the last report; and (3) Its review and assessment of the fund’s swing factors and market impact threshold, considering the requirements of paragraphs (c)(2)(ii)(B) and (c)(2)(iii) of this section, including the information and data supporting the determination of the swing factors and the swing pricing administrator’s determination to use a smaller market impact threshold, if applicable. (v) Any fund (a ‘‘feeder fund’’) that invests, pursuant to section 12(d)(1)(E) of the Act (15 U.S.C. 80a–12(d)(1)(E), in another fund (a ‘‘master fund’’) may not use swing pricing to adjust the feeder fund’s net asset value per share; however, a master fund subject to this paragraph (c)(2) must use swing pricing to adjust the master fund’s net asset value per share, pursuant to the requirements in this paragraph (c)(2). (vi) For purposes of this paragraph (c)(2): (A) Investor flow information means information about the fund investors’ purchase and redemption activity for the pricing period. (B) Market impact threshold means an amount of net redemptions for a pricing period that equals the value of four percent of the fund’s net asset value 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. (C) Pricing period means 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 net asset value under § 270.22c–1, notwithstanding any adjustment to that price that paragraph (c)(2) of this section may require. (D) Swing factor means the amount, expressed as a percentage of the fund’s net asset value and determined pursuant to the fund’s swing pricing policies and procedures, by which a fund adjusts its net asset value per share. (E) Swing pricing administrator means the fund’s investment adviser, officer, or officers responsible for administering the swing pricing policies and procedures. The swing pricing administrator may consist of a group of persons. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 (3) Prohibited activities. A money market fund may not reduce the number of its shares outstanding to seek to maintain a stable net asset value per share or stable price per share. (d) * * * (1) * * * (i) * * * (ii) Maintain a dollar-weighted average portfolio maturity (‘‘WAM’’) that exceeds 60 calendar days, with the dollar-weighted average based on the percentage of each security’s market value in the portfolio; or (iii) Maintain a dollar-weighted average portfolio maturity that exceeds 120 calendar days, determined without reference to the exceptions in paragraph (i) of this section regarding interest rate readjustments (‘‘WAL’’) and with the dollar-weighted average based on the percentage of each security’s market value in the portfolio. * * * * * (4) * * * (ii) Minimum daily liquidity requirement. The money market fund may not acquire any security other than a daily liquid asset if, immediately after the acquisition, the fund would have invested less than twenty-five percent of its total assets in daily liquid assets. This provision does not apply to tax exempt funds. (iii) Minimum weekly liquidity requirement. The money market fund may not acquire any security other than a weekly liquid asset if, immediately after the acquisition, the fund would have invested less than fifty percent of its total assets in weekly liquid assets. * * * * * (f) * * * (4) Notice to the board of directors. (i) The money market fund must notify its board of directors within one business day following the occurrence of: (A) The money market fund investing less than twelve and a half percent of its total assets in daily liquid assets; or (B) The money market fund investing less than twenty-five percent of its total assets in weekly liquid assets. (ii) Following an event described in paragraphs (f)(4)(i) or (ii) of this section, the money market fund must provide its board of directors with a brief description of the facts and circumstances leading to such event within four business days after occurrence of the event. (g) * * * (8) * * * (i) General. The periodic stress testing, at such intervals as the board of directors determines appropriate and reasonable in light of current market PO 00000 Frm 00089 Fmt 4701 Sfmt 4702 7335 conditions, of the money market fund’s ability to maintain sufficient minimum liquidity, and the fund’s ability to minimize principal volatility (and, in the case of a money market fund using the amortized cost method of valuation or penny rounding method of pricing as provided in paragraph (c)(1) of this section, the fund’s ability to maintain the stable price per share established by the board of directors for the purpose of distribution, redemption and repurchase), based upon specified hypothetical events that include, but are not limited to: * * * * * (ii) * * * (A) The date(s) on which the testing was performed and an assessment of the money market fund’s ability to maintain sufficient minimum liquidity and to minimize principal volatility (and, in the case of a money market fund using the amortized cost method of valuation or penny rounding method of pricing as provided in paragraph (c)(1) of this section to maintain the stable price per share established by the board of directors); and * * * * * (h) * * * * * * * * (8) Reports. For a period of not less than six years (the first two years in an easily accessible place), written copies of the swing pricing reports required under paragraph (c)(2)(iv)(C) and the stress testing reports required under paragraph (g)(8)(ii) of this section must be maintained and preserved. * * * * * (10) Website disclosure of portfolio holdings and other fund information. The money market fund must post prominently on its website the following information: (i) * * * (B) * * * (2) Category of investment (indicate the category that identifies the instrument from among the following: U.S. Treasury Debt; U.S. Government Agency Debt, if categorized as couponpaying notes; U.S. Government Agency Debt, if categorized as no-coupon discount notes; Non-U.S. Sovereign, Sub-Sovereign and Supra-National debt; Certificate of Deposit; Non-Negotiable Time Deposit; Variable Rate Demand Note; Other Municipal Security; Asset Backed Commercial Paper; Other Asset Backed Securities; U.S. Treasury Repurchase Agreement, if collateralized only by U.S. Treasuries (including Strips) and cash; U.S. Government Agency Repurchase Agreement, collateralized only by U.S. Government Agency securities, U.S. Treasuries, and E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 7336 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules cash; Other Repurchase Agreement, if any collateral falls outside Treasury, Government Agency and cash; Insurance Company Funding Agreement; Investment Company; Financial Company Commercial Paper; Non-Financial Company Commercial Paper; and Other Instrument. If Other Instrument, include a brief description); * * * * * (iii) A schedule, chart, graph, or other depiction showing the money market fund’s net asset value per share (which the fund must calculate based on current market factors before applying the amortized cost or penny-rounding method, if used, and which must incorporate the application of a swing factor under paragraph (c)(2) of this section, if applied), rounded to the fourth decimal place in the case of funds with a $1.0000 share price or an equivalent level of accuracy for funds with a different share price (e.g., $10.000 per share), as of the end of each business day during the preceding six months, which must be updated each business day as of the end of the preceding business day. (iv) A link to a website of the Securities and Exchange Commission where a user may obtain the most recent 12 months of publicly available information filed by the money market fund pursuant to § 270.30b1–7. (v) For a period of not less than one year, beginning no later than the same business day on which the money market fund files an initial report on Form N–CR (§ 274.222 of this chapter) in response to the occurrence of any event specified in Part C of Form N–CR, the same information that the money market fund is required to report to the Commission on Part C (Items C.1, C.2, C.3, C.4, C.5, C.6, and C.7) of Form N– CR concerning such event, along with the following statement: ‘‘The Fund was required to disclose additional information about this event on Form N–CR and to file this form with the Securities and Exchange Commission. Any Form N–CR filing submitted by the Fund is available on the EDGAR Database on the Securities and Exchange Commission’s internet site at https://www.sec.gov.’’ (11) Processing of transactions. (i) A government money market fund and a retail money market fund (or its transfer agent) must have the capacity to redeem and sell securities issued by the fund at a price based on the current net asset value per share pursuant to § 270.22c–1. Such capacity must include the ability to redeem and sell securities at prices that do not correspond to a stable price per share. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 (ii) With respect to each financial intermediary that submits orders, itself or through its agent, to purchase or redeem shares directly to the government money market fund or retail money market fund, its principal underwriter or transfer agent, or to a registered clearing agency, the fund (or on the fund’s behalf, the principal underwriter or transfer agent) must either: (A) Determine that the financial intermediary has the capacity to redeem and sell securities issued by the fund at a price based on the current net asset value per share pursuant to § 270.22c– 1. Such capacity must include prices that do not correspond to a stable price per share; or (B) Prohibit the financial intermediary from purchasing in nominee name on behalf of other persons, securities issued by the fund. (iii) A government money market fund and a retail money market fund must maintain and keep current records identifying the financial intermediaries the fund has determined have the capacity described in paragraph (h)(11)(ii)(A) of this section and the financial intermediaries for which the fund was unable to make this determination. A fund must preserve a written copy of such records for a period of not less than six years following each identification of a financial intermediary (the first two years in an easily accessible place). (iv) For purposes of this paragraph (h)(11), the term ‘‘financial intermediary’’ has the same meaning as in § 270.22c–2(c)(1). * * * * * (j) Delegation. The money market fund’s board of directors may delegate to the fund’s investment adviser or officers the responsibility to make any determination required to be made by the board of directors under this section other than the determinations required by paragraphs (c)(1) (board findings), (c)(2) (swing pricing requirement), (f)(1) (adverse events), (g)(1) and (2) (amortized cost and penny rounding procedures), and (g)(8) (stress testing procedures) of this section. ■ 3. Amend § 270.31a–2 by revising paragraph (a)(2) to read as follows: § 270.31a–2 Records to be preserved by registered investment companies, certain majority-owned subsidiaries thereof, and other persons having transactions with registered investment companies. (a) * * * (2) Preserve for a period not less than six years from the end of the fiscal year in which any transactions occurred, the first two years in an easily accessible PO 00000 Frm 00090 Fmt 4701 Sfmt 4702 place, all books and records required to be made pursuant to paragraphs (b)(5) through (12) of § 270.31a–1 and all vouchers, memoranda, correspondence, checkbooks, bank statements, cancelled checks, cash reconciliations, cancelled stock certificates, and all schedules evidencing and supporting each computation of net asset value of the investment company shares, including schedules evidencing and supporting each computation of an adjustment to net asset value of the investment company shares based on swing pricing policies and procedures established and implemented pursuant to § 270.22c– 1(a)(3) or § 270.2a–7(c)(2), and other documents required to be maintained pursuant to § 270.31a–1(a) and not enumerated in § 270.31a–1(b). * * * * * PART 274—FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940 4. The general authority citation for part 274 continues to read as follows: ■ Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24, 80a–26, 80a–29, and Pub. L. 111– 203, sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted. * * * * * 5. Amend Form N–1A (referenced in §§ 239.15A and 274.11A) by revising Instruction 2(b) to Item 3, Item 4(b)(1)(ii), Item 6(d), and Item 16(g). ■ Note: The text of Form N–1A does not, and these amendments will not, appear in the Code of Federal Regulations. Form N–1A * * * * * Item 3. Risk/Return Summary: Fee Table * * * * * Instructions * * * * * 2. Shareholder Fees (a) * * * (b) ‘‘Redemption Fee’’ includes a fee charged for any redemption of the Fund’s shares, but does not include a deferred sales charge (load) imposed upon redemption. * * * * * Item 4. Risk/Return Summary: Investments, Risks, and Performance * * * * * (b) Principal Risks of Investing in the Fund. (1) Narrative Risk Disclosure. (i) * * * (ii)(A) If the Fund is a Money Market Fund that is not a government Money E:\FR\FM\08FEP2.SGM 08FEP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Market Fund, as defined in § 270.2a– 7(a)(16), or a retail Money Market Fund, as defined in § 270.2a–7(a)(25), include the following statement: You could lose money by investing in the Fund. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. Also, the Fund may adjust the price of its shares to reflect the Fund’s liquidity costs from net sales of the Fund’s shares. If you sell on a day when net sales occur, you may receive less for your shares than the value of the fund’s net assets that day. An investment in the Fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor is not required to reimburse the fund for losses, and you should not expect that the sponsor will provide financial support to the Fund at any time, including during periods of market stress. (B) If the Fund is a Money Market Fund that is a government Money Market Fund, as defined in § 270.2a– 7(a)(16), or a retail Money Market Fund, as defined in § 270.2a–7(a)(25), include the following statement: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so, particularly during periods of market stress. An investment in the Fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor is not required to reimburse the fund for losses, and you should not expect that the sponsor will provide financial support to the Fund at any time, including during periods of market stress. Instruction. If an affiliated person, promoter, or principal underwriter of the Fund, or an affiliated person of such a person, has contractually committed to provide financial support to the Fund, and the term of the agreement will extend for at least one year following the effective date of the Fund’s registration statement, the statement specified in Item 4(b)(1)(ii)(A) or Item 4(b)(1)(ii)(B) may omit the last sentence (‘‘The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 time, including during periods of market stress.’’). For purposes of this Instruction, the term ‘‘financial support’’ includes any capital contribution, purchase of a security from the Fund in reliance on § 270.17a– 9, purchase of any defaulted or devalued security at par, execution of letter of credit or letter of indemnity, capital support agreement (whether or not the Fund ultimately received support), performance guarantee, or any other similar action reasonably intended to increase or stabilize the value or liquidity of the fund’s portfolio; however, the term ‘‘financial support’’ excludes any routine waiver of fees or reimbursement of fund expenses, routine inter-fund lending, routine inter-fund purchases of fund shares, or any action that would qualify as financial support as defined above, that the board of directors has otherwise determined not to be reasonably intended to increase or stabilize the value or liquidity of the fund’s portfolio. * * * * * Item 6. Purchase and Sale of Fund Shares * * * * * (d) If the Fund uses swing pricing, explain the Fund’s use of swing pricing; including what swing pricing is, the circumstances under which the Fund will use it, and the effects of swing pricing on the Fund and investors, and provide the upper limit the Fund has set on the swing factor (except a Money Market Fund that uses swing pricing does not need to disclose a swing factor upper limit). With respect to any portion of a Fund’s assets that is invested in one or more open-end management investment companies that are registered under the Investment Company Act, the Fund shall include a statement that the Fund’s net asset value is calculated based upon the net asset values of the registered open-end management companies in which the Fund invests, and, if applicable, state that the prospectuses for those companies explain the circumstances under which they will use swing pricing and the effects of using swing pricing. * * * * * Item 16. Description of the Fund and Its Investments and Risks * * * * * (g) Money Market Fund Material Events. If the Fund is a Money Market Fund, disclose, as applicable, any PO 00000 Frm 00091 Fmt 4701 Sfmt 4702 7337 occasion during the last 10 years on which an affiliated person, promoter, or principal underwriter of the Fund, or an affiliated person of such a person, provided any form of financial support to the Fund, including a description of the nature of support, person providing support, brief description of the relationship between the person providing support and the Fund, date support provided, amount of support, security supported (if applicable), and the value of security supported on date support was initiated (if applicable). Instructions 1. * * * 2. If during the last 10 years, the Fund has participated in one or more mergers with another investment company (a ‘‘merging investment company’’), provide the information required by Item 16(g) with respect to any merging investment company as well as with respect to the Fund; for purposes of this Instruction, the term ‘‘merger’’ means a merger, consolidation, or purchase or sale of substantially all of the assets between the Fund and a merging investment company. If the person or entity that previously provided financial support to a merging investment company is not currently an affiliated person, promoter, or principal underwriter of the Fund, the Fund need not provide the information required by Item 16(g) with respect to that merging investment company. 3. The disclosure required by Item 16(g) should incorporate, as appropriate, any information that the Fund is required to report to the Commission on Items C.1, C.2, C.3, C.4, C.5, C.6, and C.7 of Form N–CR [17 CFR 274.222]. 4. The disclosure required by Item 16(g) should conclude with the following statement: ‘‘The Fund was required to disclose additional information about this event [or ‘‘these events,’’ as appropriate] on Form N–CR and to file this form with the Securities and Exchange Commission. Any Form N–CR filing submitted by the Fund is available on the EDGAR Database on the Securities and Exchange Commission’s internet site at https://www.sec.gov.’’ * * * * * ■ 6. Form N–MFP (referenced in § 274.201) is revised to read as follows: Note: The text of Form N–MFP does not, and these amendments will not, appear in the Code of Federal Regulations. BILLING CODE 8011–01–P E:\FR\FM\08FEP2.SGM 08FEP2 7338 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON,DC 20549 FORMN-MFP MONTHLY SCHEDULE OF PORTFOLIO HOLDINGS OF MONEY MARKET FUNDS VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00092 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.028</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 (See instructions following the required items) Intentional misstatements or omissions of fact constitute federal and criminal violations. 7339 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules See 18 U.S.C. 1001. General Information Item 1. Report for: m ml dd /y yy y Item 2. Name of Registrant: Item 3. CIK Number of Registrant: Item 4. LEI of Registrant: Item 5. Name of Series: Item 6. LEI of Series: Item 7. EDGAR Series Identifier: Item 8. Total number of share classes in the series: Item 9. Do you anticipate that this will be the fund's final filing on Form N-MFP? [] Yes [] No (If Yes, anS¾'er Items 9.a 9.c.) [] No b. Is the fund merging with, or being acquired by, another fund? [] Yes No VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00093 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 [] EP08FE22.029</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. Is the fund liquidating? [] Yes 7340 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules c. If applicable, identify the successor fund by CIK, Securities Act file number, and EDGAR series identifier: Item 10. Has the fund acquired or merged with another fund since the last filing? [] Yes [] No (If Yes, ans1,ver Item JO.a.) a. Identify the acquired or merged fund by CIK, Securities Act file number, and EDGAR series identifier: Item 11. Provide the name, email address, and telephone number of the person authorized to receive information and respond to questions about this Form N- MFP: Name Email Telephone Part A. Series-Level Information about the Fund Item A. l. Securities Act FileNumber. Item A.2. InvestmentAdviser. a. SEC file number of investment adviser. Item A.3. Sub-Adviser. If a fund has one or more sub-advisers, disclose the name of each sub-adviser. Item A.4. Independent Public Accountant. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00094 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.030</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. SEC file number of each sub-adviser. Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7341 a. City and state of independent public accountant. Item A.5. Administrator. If a fund has one or more administrators, disclose the name of each administrator. Item A.6. Transfer Agent. a. CIK Number. b. SEC file number of transfer agent. [] No Item A.7. Master-Feeder Funds. Is this a Feeder Fund? [] Yes (If Yes, answer Items A. 7.a - 7.c.) a. Identify the Master Fund by CIK or, if the fund does not have a CIK, by name. b. Securities Act file number of the Master Fund. c. EDGAR series identifier of the Master Fund. [] No Item A.8. Master-Feeder Funds. Is this a Master Fund? [] Yes (If Yes, answer Items A.8.a -8.c.) b. Securities Act file number of each Feeder Fund. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00095 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.031</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. Identify all Feeder Funds by CIK or, if the fund does not have a CIK, by name. 7342 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules c. EDGAR series identifier of each Feeder Fund. Item A.9. Is this series primarily used to fund insurance company separate accounts? []Yes []No ItemA.10. Category. Indicate the category that identifies the money market fund from among the following: [ ] Government [] Prime [ ] Single State [ ] Other Tax Exempt a. Is this fund a Retail Money Market Fund? [ ]Yes [] No b. If this is a Government Money Market Fund, does the fund typically invest at least 80% of the value of its assets in U.S. Treasury obligations or repurchase agreements collateralized by U.S. Treasury obligations? [] No [ ]Yes Item A.11. Dollar-weighted average portfolio maturity ("WAM'' as defined in rule 2a7(d)(l )(ii)). Item A.12. Dollar-weighted average life maturity ("WAL" as defined in rule 2a7(d)(l)(iii)). Calculate WAL without reference to the exceptions in rule 2a-7(d) regarding interest rate readjustments. Item A.13. Liquidity. Provide the following, as of the close of business on each business day of the month reported: a. Total Value of Daily Liquid Assets to the nearest cent. b. Total Value of Weekly Liquid Assets (including Daily Liquid Assets) to the nearest cent. d. Percentage of Total Assets invested in Weekly Liquid Assets (including VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00096 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.032</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 c. Percentage of Total Assets invested in Daily Liquid Assets. Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7343 Daily LiquidAssets). Item A.14. Provide the following, to the nearest cent: a. Cash. (See General Instructions E.) _________ b. Total Value of portfolio securities. (See General Instructions E.) i. If any portfolio securities are valued using amortized cost, the total value of the portfolio securities valued at amortized cost. c. Total Value of other assets (excluding amounts provided in A.14.a-c.) Item A.15. Total value ofliabilities, to the nearest cent. Item A.16. Net assets of the series, to the nearest cent. Item A.17. Number of shares outstanding, to the nearest hundredth. Item A.18. Does the fund seek to maintain a stable price per share? [] Yes [ ]No Item A.19. 7-day gross yield. For each business day, based on the immediately preceding 7 business days, calculate the fund's yield by determining the net change, exclusive of capital changes and income other than investment income, in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then multiplying the base period return by (365/7) with the resulting yield figure carried to at least the nearest hundredth of one percent. The 7-day gross yield should not reflect a deduction of shareholders fees and fund operating expenses. For master funds and feeder funds, report the 7-day gross yield at the master-fund level. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00097 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.033</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. If yes, state the price the fund seeks to maintain. 7344 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Item A.20. Net asset value per share. Provide the net asset value per share, calculated using available market quotations (or an appropriate substitute that reflects current market conditions) and including the application of a Swing Factor, if applied, rounded to the fourth decimal place in the case of a fund with a $1.0000 share price (or an equivalent level of accuracy for funds with a different share price), as of the close of business on each business day of the month reported. _ _ _ _ _ _ _ __ Item A.21. Is this Fund established as a cash management vehicle for affiliated funds or other accounts managed by related entities or their affiliates and not available to other investors? [] Yes [] No Item A.22. Swing Factor. For a fund that is not a Government Money Market Fund or a Retail Money Market Fund: a. Provide the number of times the fund applied a Swing Factor during the reporting period. _ _ _ _ _ _ _ _ _ _ _ __ b. For each business day of the month reported, provide the amount of any Swing Factor applied by the fund. If on a single business day the fund applied a Swing Factor during multiple pricing periods (as defined in rule 2a-7(c)(2)(vi)(C)), provide each Swing Factor applied on that day. Report NIA for any business day on which the fund did not apply a Swing Factor. Part B: Class-Level Information about the Fund For each Class of the Series ( regardless of the number of shares outstanding in the Class), disclose the following: Item B .1. Full name of the Class. ----------- Item B.2. EDGAR Class identifier. ---------- Item B.3. Minimum initial investment. - - - - - - - - Item B.4. Net assets of the Class, to the nearest cent. _ _ __ Item B.6. Net asset value per share. Provide the net asset value per share, calculated using available market quotations (or an appropriate substitute that reflects current market conditions) and including the application of a Swing Factor, if applied, rounded to the fourth decimal place in the case of a fund with a VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00098 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.034</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Item B.5. Number of shares outstanding, to the nearest hundredth. _ _ Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7345 $1.0000 share price (or an equivalent level of accuracy for funds with a different share price), as of the close of business on each business day of the month reported. - - - - - - - - - - - Item B.7. Net shareholder flow. Provide (a) the daily gross subscriptions (including dividend reinvestments) and gross redemptions, rounded to the nearest cent, as of the close of business on each business day of the month reported; and (b) the total gross subscriptions (including dividend reinvestments) and total gross redemptions for the month reported. For purposes of this Item, (i) report gross subscriptions (including dividend reinvestments) and gross redemptions as of the trade date, and (ii) for Master-Feeder Funds, only report the required shareholder flow data at the Feeder Fund level. Item B.8. 7-day net yield for each business day of the month reported, as calculated under Item 26(a)(l) of Form N-lA (§ 274. l lA ofthischapter) except based on the 7 business days immediately preceding a given business day. Item B.9. During the reporting period, did any person pay for or waive all or [] part of the fund's operating expenses or management fees? Tus []~ If Yes, answer Item B.9.a.: a. Total amount of the expense payment or fee waiver, or both (reported in dollars). Item B.10. For each person who owns of record or is known by the Fund to own beneficially 5% or more of the shares outstanding in the Class, provide the following information. For purposes of this question, if the Fund knows that two or more beneficial owners of the Class are affiliated with each other, treat them as a single beneficial owner when calculating the percentage ownership and identify separately each affiliated beneficial owner and the percentage interest of each affiliated beneficial owner. An affiliated beneficial owner is one that directly or indirectly controls or is controlled by a. Name b. ----------- Percent of shares outstanding in the Class owned ofrecord _ _ c. Percent of shares outstanding in the Class owned beneficially _ _ __ VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00099 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.035</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 another beneficial owner or is under common control with any other beneficial owner. 7346 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Item B .11. Shareholder Composition. If the fund is not a government money market fund or retail money market fund, identify the percentage of investors within the following categories: a. Non-Financial corporations: _ _ _ __ b. Pension plans: _ _ _ __ c. Non-Profits: d. ----- State or municipal government entities (excluding governmental pension plans): e. Registered investment companies: _ _ _ __ f. Private funds: ----- g. Depository institutions and other banking institutions: h. Sovereign wealth funds: _ _ _ __ 1. Broker-dealers: J. Insurance companies: _ _ _ __ k. Other: ----- If Other, provide a brief description of the types of investors included in this category. _ _ _ _ _ __ Part C: Schedule of Portfolio Securities For each security held by the money market.fund, disclose the following information. Separately provide the required information for the initial acquisition ofa security and any subsequent acquisitions of the security. Item C.1. The name of the issuer or the name of the counterparty in a repurchase agreement. Item C.3. The CUSIP. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00100 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.036</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Item C.2. The title of the issue. Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7347 Item C.4. The LEI. Item C.5. Other identifier. In addition to CUSIP and LEI, provide at least one of the following other identifiers, if available: a. The ISIN; _ _ _ _ _ _ _ __ b. The CIK; _ _ _ _ _ _ _ __ c. The RSSD ID; - - - - - - - - or d. Other unique identifier. _ _ _ _ _ __ Item C.6. Security acquisition. a. Provide the trade date on which the fund acquired the security. mm/dd/yyy y b. Provide the yield of the security as of the trade date(s). Item C.7. The category of investment. Indicate the category that most closely identifies the instrument from among the following: [] U.S. Treasury Debt [] U.S. Government Agency Debt (if categorized as couponpaying notes) [ ] U.S. Government Agency Debt Sub- []Non-US.Sovereign, (if categorized as no- Sovereign and Supra- coupon discount notes) National Debt [ ] Non-Negotiable Time [] Certificate of Deposit [] Variable Rate Demand Note Security [ ] Asset Backed Commercial Paper Securities [] U.S. Treasury Repurchase Agreement VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00101 Fmt 4701 Sfmt 4725 [] Other Municipal [ ] Other Asset Backed [] U.S. Government E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.037</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Deposit 7348 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Agency if collateralized only by U.S. Treasuries Repurchase Agreement (including Strips) and cash Government collateralized only by U.S. Agency securities, U.S. and cash Treasuries, [ ] Other Repurchase Agreement Funding ifcollateral falls outside Treasury, [ ] Insurance Company Agreement Government Agency, and cash [ ] Investment Company [ ] Financial Company Commercial Paper [] Non-Financial Company Commercial Paper [] Tender Option Bond [ ] Other Instrument If Other Instrument, include a brief description. _ _ _ _ _ __ Item C.8. If the security is a repurchase agreement, is the fund treating the acquisition of the repurchase agreement as the acquisition of the underlying securities (i.e., collateral) for purposes of portfolio diversification under rule 2a-7? [] Yes [] No Item C.9. For all repurchase agreements, specify whether the repurchase agreement is "open" (i.e., the repurchase agreement has no specified end date and, by its terms, will be extended or "rolled" each business day (or at another specified period) unless the investor chooses to terminate it), and describe the securities subject to the repurchase agreement (i.e., collateral). a. Is the repurchase agreement "open"? [] Yes [] No b. Is the repurchase agreement centrally cleared? [] Yes [] No If Yes, provide the name of the central clearing counterparty (CCP). [] d. The name of the collateral issuer. - - - - - - - - e. LEI. VerDate Sep<11>2014 19:10 Feb 07, 2022 ------------- Jkt 256001 PO 00000 Frm 00102 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.038</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 c. Is the repurchase agreement settled on the triparty platform [ ]Yes No Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7349 f. The CUSIP. - - - g. Maturity date. _ __ h. Coupon or yield. _ __ i. The principal amount, to the nearest cent. _ _ _ _ _ _ _ __ j. Value of collateral, to the nearest cent. _ _ _ _ _ _ _ _ __ k. The category of investment that most closely represents the collateral, selected from among the following: [ ] Asset-Backed Securities [] Agency Collateralized Mortgage Obligations [] Agency Debentures and Agency Strips [ ] Agency MortgageBacked Securities [ ] Private Label Collateralized Mortgage Securities Obligations [ ] Corporate Debt [] Equities [ ] Money Market [] U.S. Treasuries (including strips) [] Cash [] Other Instrument. If Other Instrument, include a brief description, including, if applicable, whether it is a collateralized debt obligation, municipal debt, whole loan, or international debt. Item C.10. Is the security an Eligible Security? [ ] Yes [ ] No Item C.12. The maturity date determined by taking into account the maturity shortening provisions of rule 2a-7(i) (i.e., the maturity date used to VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00103 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.039</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Item C.1 I.Security rating(s) considered. Provide each rating assigned by any NRSRO that the fund's board of directors (or its delegate) considered in determining that the security presents minimal credit risks (together with the name of the assigning NRSRO). If none, leave blank. 7350 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules calculate W AM under rule 2a-7(d)(l)(ii)). mm/dd/yyyy Item C.13. The maturity date determined without reference to the exceptions in rule 2a-7(i) regarding interest rate readjustments (i.e., the maturity date used to calculate WAL under rule 2a-7(d)(l)(iii)). mm/dd/yyyy Item C.14. The maturity date determined without reference to the maturity shortening provisions of rule 2a-7(i) (i.e., the ultimate legal maturity date on which, in accordance with the terms of the security without regard to any interest rate readjustment or demand feature, the principal amount must unconditionally be paid). mm/dd/yyyy Item C.15. Does the security have a Demand Feature on which the fund is relying to [] N If determine the quality, maturity or liquidity of the security? [] Y Yes, answer Items C. 15.a - 15.e. Where applicable, provide the information required in Items C. 15. b-15. e in the order that each Demand Feature issuer was reported in Item C.15.a. a. The identity of the Demand Feature issuer(s). b. The amount (i.e., percentage) of fractional support provided by each Demand Feature issuer. c. The period remaining until the principal amount of the security may be recovered through the Demand Feature. e. Rating(s) considered. Provide each rating assigned to the demand feature(s) or demand feature provider(s) by any NRSRO that the board of directors (or its delegate) considered in evaluating the quality, maturity or liquidity of the security (together with the name of the assigning NRSRO). If none, leave blank. _ _ _ _ _ _ _ _ __ Item C.16. Does the security have a Guarantee (other than an unconditional letter of credit disclosed in item C.14 above) on which the fund is relying to VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00104 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.040</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 d. Is the demand feature conditional? [] Yes [] No Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7351 determine the quality, maturity or liquidity of the security? [] Yes [] No If Yes, answer Items C.16.a 16. c. Where applicable, provide the information required in Item C.16.b 16.c in the order that each Guarantor was reported in Item C.16.a. a. The identity of the Guarantor(s). b. The amount (i.e., percentage) of fractional support provided by each Guarantor. c. Rating(s) considered. Provide each rating assigned to the guarantee(s) or guarantor(s) by any NRSRO that the board of directors (or its delegate) considered in evaluating the quality, maturity or liquidity of the security (together with the name of the assigning NRSRO). If none, leave blank. Item C.17. Does the security have any enhancements, other than those identified in Items C.14 and C.15 above, on which the fund is relying to determine the quality, maturity or liquidity of the security? [] Yes [] No If Yes, answer Items C.17.a 17.d Where applicable, provide the information required in Items C.17.b 17.d in the order that each enhancement provider was reported in Item C.17.a. a. The identity of the enhancement provider(s). b. The type of enhancement(s). d. Rating(s) considered. Provide each rating assigned to the enhancement(s) or enhancement provider(s) by any NRSRO that the board of directors (or its delegate) considered in evaluating the quality, maturity or liquidity of the security (together with the name of the assigning NRSRO). If none, leave blank. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00105 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.041</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 c. The amount (i.e., percentage) of fractional support provided by each enhancement provider. 7352 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Item C.18. The yield of the security as of the reporting date. _ _ _ _ _ _ _ __ Item C.19. The total Value of the fund's position in the security, to the nearest cent: (See General Instruction E.) a. Including the value of any sponsor support: _ _ _ _ _ _ _ __ b. Excluding the value of any sponsor support: _ _ _ _ _ _ _ __ Item C.20. The percentage of the money market fund's net assets invested in the security, to the nearest hundredth of a percent. % ------------------ Item C.21. Is the security categorized at level 3 in the fair value hierarchy under U.S. Generally Accepted Accounting Principles (ASC 820, Fair Value Measurement)? []Yes []No Item C.22. Is the security a Daily Liquid Asset? []Yes []No Item C.23. Is the security a Weekly Liquid Asset? []Yes []No Item C.24. Is the security an Illiquid Security? []Yes []No Item C.25. Explanatory notes. Disclose any other information that may be material to other disclosures related to the portfolio security. If none, leave blank. Part D. Disposition of Portfolio Securities Item D.1. Disclose the amount of portfolio securities the money market fund sold or disposed of during the reporting period by category of investment. Do not include portfolio securities that the fund held until maturity. A money market fund that is a government money market fund or a tax exempt fund, as defined in rule 2a7(a)(23) [17 CFR 270.2a-7(a)(23)], is not required to respond to Part D. b. U.S. Government Agency Debt (if categorized as coupon- VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00106 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.042</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. U.S. Treasury Debt, to the nearest cent. Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules 7353 paying notes), to the nearest cent. c. U.S. Government Agency Debt (if categorized as nocoupon discount notes), to the nearest cent. d. Non-US. Sovereign, Sub-Sovereign and Supra-National Debt, to the nearest cent. e. Certificate of Deposit, to the nearest cent. f. Non-Negotiable Time Deposit, to the nearest cent. g. Variable Rate Demand Note, to the nearest cent. h. Other Municipal Security, to the nearest cent. 1. Asset Backed Commercial Paper, to the nearest cent. J. Other Asset Backed Securities, to the nearest cent. k. U.S. Treasury Repurchase Agreement (if collateralized only by U.S. Treasuries (including Strips) and cash), to the nearest cent. 1. U.S. Government Agency Repurchase Agreement (collateralized only by U.S. Government Agency securities, U.S. Treasuries, and cash), to the nearest cent. - - - - - - - - - - - - - m. Other Repurchase Agreement (if collateral falls outside Treasury, Government Agency, and cash), to the nearest cent. o. Investment Company, to the nearest cent. p. Financial Company Commercial Paper, to the nearest cent. VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 PO 00000 Frm 00107 Fmt 4701 Sfmt 4725 E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.043</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 n. Insurance Company Funding Agreement, to the nearest cent. 7354 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules q. Non-Financial Company Commercial Paper, to the nearest cent. r. Tender Option Bond, to the nearest cent. s. Other Instrument, to the nearest cent. If Other Instrument, include a brief description SIGNATURES Pursuant to the requirements of the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. (Registrant) mm/dd/yy (Signature) Name Title Commission pursuant to rule 30b1–7 under the Act (17 CFR 270.30b1–7). The Commission may use the information provided on Form N–MFP in its regulatory, disclosure review, inspection, and policymaking roles. U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Form N–MFP Monthly Schedule of Portfolio Holdings of Money Market Funds Form N–MFP is to be used by registered open-end management investment companies, or series thereof, that are regulated as money market funds pursuant to rule 2a–7 under the Investment Company Act of 1940 (‘‘Act’’) (17 CFR 270.2a–7) (‘‘money market funds’’), to file reports with the VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 General Instructions A. Rule as To Use of Form N–MFP Form N–MFP is the public reporting form that is to be used for monthly reports of money market funds required by section 30(b) of the Act and rule 30b1–7 under the Act (17 CFR 270.30b1–7). A money market fund must report information about the fund PO 00000 Frm 00108 Fmt 4701 Sfmt 4702 and its portfolio holdings as of the last business day or any subsequent calendar day of the preceding month. The Form N–MFP must be filed with the Commission no later than the fifth business day of each month, but may be filed any time beginning on the first business day of the month. Each money market fund, or series of a money market fund, is required to file a separate form. If the money market fund does not have any classes, the fund must provide the information required by Part B for the series. A money market fund is not required to respond to an item that is wholly inapplicable. If an item requests information that is not E:\FR\FM\08FEP2.SGM 08FEP2 EP08FE22.044</GPH> BILLING CODE 8011–01–C EP08FE22.045</GPH> *Print name and title of the signing officer under his/her signature. Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules applicable (for example, a company does not have an LEI), respond N/A. A money market fund may file an amendment to a previously filed Form N–MFP at any time, including an amendment to correct a mistake or error in a previously filed form. A fund that files an amendment to a previously filed form must provide information in response to all items of Form N–MFP, regardless of why the amendment is filed. B. Application of General Rules and Regulations The General Rules and Regulations under the Act contain certain general requirements that are applicable to reporting on any form under the Act. These general requirements should be carefully read and observed in the preparation and filing of reports on this form, except that any provision in the form or in these instructions shall be controlling. C. Filing of Form N–MFP A money market fund must file Form N–MFP in accordance with rule 232.13 of Regulation S–T. Form N–MFP must be filed electronically using the Commission’s EDGAR system. D. Paperwork Reduction Act Information A registrant is not required to respond to the collection of information contained in Form N–MFP unless the Form displays a currently valid Office of Management and Budget (‘‘OMB’’) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. 3507. khammond on DSKJM1Z7X2PROD with PROPOSALS2 E. Definitions References to sections and rules in this Form N–MFP are to the Investment Company Act of 1940 [15 U.S.C. 80a] (the ‘‘Investment Company Act’’), unless otherwise indicated. Terms used in this Form N–MFP have the same meaning as in the Investment Company Act or related rules, unless otherwise indicated. As used in this Form N–MFP, the terms set out below have the following meanings: ‘‘Cash’’ means demand deposits in depository institutions and cash holdings in custodial accounts. ‘‘Class’’ means a class of shares issued by a Multiple Class Fund that represents VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 interests in the same portfolio of securities under rule 18f–3 [17 CFR 270.18f–3] or under an order exempting the Multiple Class Fund from sections 18(f), 18(g), and 18(i) [15 U.S.C. 80a– 18(f), 18(g), and 18(i)]. ‘‘Fund’’ means the Registrant or a separate Series of the Registrant. When an item of Form N–MFP specifically applies to a Registrant or a Series, those terms will be used. ‘‘Government Money Market Fund’’ means a money market fund as defined in 17 CFR 270.2a–7(a)(14). ‘‘LEI’’ means, with respect to any company, the ‘‘legal entity identifier’’ assigned by or on behalf of an internationally recognized standards setting body and required for reporting purposes by the U.S. Department of the Treasury’s Office of Financial Research or a financial regulator. ‘‘Master-Feeder Fund’’ means a twotiered arrangement in which one or more Funds (or registered or unregistered pooled investment vehicles) (each a ‘‘Feeder Fund’’) holds shares of a single Fund (the ‘‘Master Fund’’) in accordance with section 12(d)(1)(E) [15 U.S.C. 80a–12(d)(1)(E)]. ‘‘Money Market Fund’’ means a registered open-end management investment company, or series thereof, that is regulated as a money market fund pursuant to rule 2a–7 (17 CFR 270.2a– 7) under the Investment Company Act of 1940. ‘‘Retail Money Market Fund’’ means a money market fund as defined in 17 CFR 270.2a–7(a)(21). ‘‘RSSD ID’’ means the identifier assigned by the National Information Center of the Board of Governors of the Federal Reserve System, if any. ‘‘Securities Act’’ means the Securities Act of 1933 [15 U.S.C. 77a–aa]. ‘‘Series’’ means shares offered by a Registrant that represent undivided interests in a portfolio of investments and that are preferred over all other series of shares for assets specifically allocated to that series in accordance with rule 18f–2(a) [17 CFR 270.18f– 2(a)]. ‘‘Swing Factor’’ means a swing factor as defined in 17 CFR 270.2a– 70(c)(2)(vi)(D). ‘‘Value’’ has the meaning deÉned in section 2(a)(41) of the Act (15 U.S.C. 80a–2(a)(41)). ■ 7. Amend Form N–CR (referenced in § 274.222) by: ■ a. Revising the General Instructions in Sections A, C, D, and F and revising Parts A and C; ■ b. Removing Parts E, F, and G and replacing them with new Part E; and ■ c. Redesignating Part H to Part F. The revisions read as follows: PO 00000 Frm 00109 Fmt 4701 Sfmt 4702 7355 Note: The text of Form N–CR does not, and these amendments will not, appear in the Code of Federal Regulations. Form N–CR * * * * * General Instructions A. Rule as To Use of Form N–CR Form N–CR is the public reporting form that is to be used for current reports of money market funds required by section 30(b) of the Act and rule 30b1–8 under the Act. A money market fund must file a report on Form N–CR upon the occurrence of any one or more of the events specified in Parts B–F of this form. Unless otherwise specified, a report is to be filed within one business day after occurrence of the event. A report will be made public immediately upon filing. If the event occurs on a Saturday, Sunday, or holiday on which the Commission is not open for business, then the report is to be filed on the first business day thereafter. * * * * * C. Information To Be Included in Report Filed on Form N–CR Upon the occurrence of any one or more of the events specified in Parts B– F of Form N–CR, a money market fund must file a report on Form N–CR that includes information in response to each of the items in Part A of the form, as well as each of the items in the applicable Parts B–F of the form. D. Filing of Form N–CR A money market fund must file Form N–CR in accordance with rule 232.13 of Regulation S–T. Reports on Form N–CR must be filed electronically using the Commission’s Electronic Data Gathering, Analysis, and Retrieval (‘‘EDGAR’’) system in accordance with Regulation S–T. Consult the EDGAR Filer Manual and Appendices for EDGAR filing instructions. * * * * * F. Definitions References to sections and rules in this Form N–CR are to the Investment Company Act (15 U.S.C. 80a), unless otherwise indicated. Terms used in this Form N–CR have the same meaning as in the Investment Company Act or rule 2a–7 under the Investment Company Act, unless otherwise indicated. In addition, the following definitions apply: ‘‘Fund’’ means the registrant or a separate series of the registrant. ‘‘LEI’’ means, with respect to any company, the ‘‘legal entity identifier’’ as assigned by a utility endorsed by the E:\FR\FM\08FEP2.SGM 08FEP2 7356 Federal Register / Vol. 87, No. 26 / Tuesday, February 8, 2022 / Proposed Rules Global LEI Regulatory Oversight Committee or accredited by the Global LEI Foundation. ‘‘Registrant’’ means the investment company filing this report or on whose behalf the report is filed. ‘‘Series’’ means shared offered by a Registrant that represent undivided interests in a portfolio of investments and that are preferred over all other series of shares for assets specifically allocated to that series in accordance with rule 18f–2(a) (17 CFR 270.18f– 2(a)). * * * * * Part A: General Information Item A.1 Report for [mm/dd/yyyy]. Item A.2 Name of registrant. Item A.3 CIK Number of registrant. Item A.4 LEI of registrant. Item A.5 Name of series. Item A.6 EDGAR Series Identifier. Item A.7 LEI of series. Item A.8 Securities Act File Number. Item A.9 Provide the name, email address, and telephone number of the person authorized to receive information and respond to questions about this Form N–CR. * * * * * khammond on DSKJM1Z7X2PROD with PROPOSALS2 Part C: Provision of Financial Support to Fund If an affiliated person, promoter, or principal underwriter of the fund, or an affiliated person of such a person, provides any form of financial support to the fund (including any (i) capital contribution, (ii) purchase of a security from the fund in reliance on § 270.17a– 9, (iii) purchase of any defaulted or devalued security at par, (iv) execution of letter of credit or letter of indemnity, (v) capital support agreement (whether or not the fund ultimately received support), (vi) performance guarantee, or (vii) any other similar action reasonably intended to increase or stabilize the value or liquidity of the fund’s portfolio; excluding, however, any (i) routine waiver of fees or reimbursement of fund expenses, (ii) routine inter-fund lending (iii) routine inter-fund purchases of fund shares, or (iv) any action that VerDate Sep<11>2014 19:10 Feb 07, 2022 Jkt 256001 would qualify as financial support as defined above, that the board of directors has otherwise determined not to be reasonably intended to increase or stabilize the value or liquidity of the fund’s portfolio), disclose the following information: Item C.1 Description of nature of support. Item C.2 Person providing support. Item C.3 Brief description of relationship between the person providing support and the fund. Item C.4 Date support provided. Item C.5 Amount of support. Item C.6 Security supported (if applicable). Disclose the name of the issuer, the title of the issue (including coupon or yield, if applicable), at least two identifiers, if available (e.g., CUSIP, ISIN, CIK, LEI), and the date the fund acquired the security. Item C.7 Value of security supported on date support was initiated (if applicable). Item C.8 Brief description of reason for support. Item C.9 Term of support. Item C.10 Brief description of any contractual restrictions relating to support. Instruction. If an affiliated person, promoter, or principal underwriter of the fund, or an affiliated person of such a person, purchases a security from the fund in reliance on § 270.17a–9, the fund must provide the purchase price of the security in responding to Item C.6. A report responding to Items C.1 through C.7 is to be filed within one business day after occurrence of an event contemplated in this Part C. An amended report responding to Items C.8 through C.10 is to be filed within four business days after occurrence of an event contemplated in this Part C. * * * * * Part E: Liquidity Threshold Events If a fund has invested less than: (i) 25% of its total assets in weekly liquid assets or (ii) 12.5% of its total assets in daily liquid assets, disclose the following information: PO 00000 Frm 00110 Fmt 4701 Sfmt 9990 Item E.1 Initial date on which the fund invested less than 25% of its total assets in weekly liquid assets, if applicable. Item E.2 Initial date on which the fund invested less than 12.5% of its total assets in daily liquid assets, if applicable. Item E.3 Percentage of the fund’s total assets invested in both weekly liquid assets and daily liquid assets as of any dates reported in Items E.1 or E.2. Item E.4 Brief description of the facts and circumstances leading to the fund investing less than 25% of its total assets in weekly liquid assets or less than 12.5% of its total assets in daily liquid assets, as applicable. Instruction. A report responding to Items E.1, E.2, and E.3 is to be filed within one business day after occurrence of an event contemplated in this Part E. An amended report responding to Item E.4 is to be filed within four business days after occurrence of an event contemplated in this Part E. Part F: Optional Disclosure If a fund chooses, at its option, to disclose any other events or information not otherwise required by this form, it may do so under this Item F.1. Item F.1 Optional disclosure. Instruction. Item F.1 is intended to provide a fund with additional flexibility, if it so chooses, to disclose any other events or information not otherwise required by this form, or to supplement or clarify any of the disclosures required elsewhere in this form. Part F does not impose on funds any affirmative obligation. A fund may file a report on Form N–CR responding to Part F at any time. * * * * * By the Commission. Dated: December 15, 2021. Vanessa A. Countryman, Secretary. [FR Doc. 2021–27532 Filed 2–7–22; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\08FEP2.SGM 08FEP2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 87, Number 26 (Tuesday, February 8, 2022)]
[Proposed Rules]
[Pages 7248-7356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-27532]

[[Page 7247]]

Vol. 87

Tuesday,

No. 26

February 8, 2022

Part II

Securities and Exchange Commission

-----------------------------------------------------------------------

17 CFR Parts 270 and 274

Money Market Fund Reforms; Proposed Rule

Federal Register / Vol. 87 , No. 26 / Tuesday, February 8, 2022 /
Proposed Rules

[[Page 7248]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 270 and 274

[Release No. IC-34441; File No. S7-22-21]
RIN 3235-AM80

Money Market Fund Reforms

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing amendments to certain rules that govern money market funds
under the Investment Company Act of 1940. The proposed amendments are
designed to improve the resilience and transparency of money market
funds. The proposal would remove the liquidity fee and redemption gate
provisions in the existing rule, which would eliminate an incentive for
preemptive redemptions from certain money market funds and could
encourage funds to more effectively use their existing liquidity
buffers in times of stress. The proposal would also require
institutional prime and institutional tax-exempt money market funds to
implement swing pricing policies and procedures to require redeeming
investors to bear the liquidity costs of their decisions to redeem. The
Commission is also proposing to increase the daily liquid asset and
weekly liquid asset minimum liquidity requirements, to 25% and 50%
respectively, to provide a more substantial buffer in the event of
rapid redemptions. The proposal would amend certain reporting
requirements on Forms N-MFP and N-CR to improve the availability of
information about money market funds, as well as make certain
conforming changes to Form N-1A to reflect our proposed changes to the
regulatory framework for these funds. In addition, the Commission is
proposing rule amendments to address how money market funds with stable
net asset values should handle a negative interest rate environment.
Finally, the Commission is proposing rule amendments to specify how
funds must calculate weighted average maturity and weighted average
life.

DATES: Comments should be received on or before April 11, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm).

Paper Comments

Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-22-21. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
website (https://www.sec.gov/rules/proposed.shtml). Comments are also
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Operating
conditions may limit access to the Commission's public reference room.
All comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Blair Burnett, David Driscoll, Adam
Lovell, or James Maclean, Senior Counsels; Angela Mokodean, Branch
Chief; or Brian Johnson, Assistant Director at (202) 551-6792,
Investment Company Regulation Office; Keri Riemer, Senior Counsel;
Penelope Saltzman, Senior Special Counsel; or Thoreau Bartmann,
Assistant Director, Chief Counsel's Office, (202) 551-6825; Viktoria
Baklanova, Analytics Office, Division of Investment Management,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment amendments to 17 CFR 270.2a-7 (rule 2a-7) and 17 CFR 270.31a-2
(rule 31a-2) under the Investment Company Act of 1940,\1\ Form N-1A
under the Investment Company Act and the Securities Act,\2\ and Forms
N-MFP and N-CR under the Investment Company Act.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 80a et seq.
\2\ 15 U.S.C. 77a et seq.
---------------------------------------------------------------------------

Table of Contents

I. Introduction
A. Types of Money Market Funds and Existing Regulatory Framework
B. March 2020 Market Events
II. Discussion
A. Amendments To Remove Liquidity Fee and Redemption Gate
Provisions
1. Unintended Effects of the Tie Between the Weekly Liquid Asset
Threshold and Liquidity Fees and Redemption Gates
2. Removal of Redemption Gates From Rule 2a-7
3. Removal of Liquidity Fees From Rule 2a-7
B. Proposed Swing Pricing Requirement
1. Purpose and Terms of the Proposed Requirement
2. Operational Considerations
3. Tax and Accounting Implications
4. Disclosure
C. Amendments to Portfolio Liquidity Requirements
1. Increase of the Minimum Daily and Weekly Liquidity
Requirements
2. Consequences for Falling Below Minimum Daily and Weekly
Liquidity Requirements
3. Proposed Amendments to Liquidity Metrics in Stress Testing
D. Amendments Related to Potential Negative Interest Rates
E. Amendments To Specify the Calculation of Weighted Average
Maturity and Weighted Average Life
F. Amendments to Reporting Requirements
1. Amendments to Form N-CR
2. Amendments to Form N-MFP
G. Compliance Date
III. Economic Analysis
A. Introduction
B. Economic Baseline
1. Affected Entities
2. Certain Economic Features of Money Market Funds
3. Money Market Fund Activities and Price Volatility
C. Costs and Benefits of the Proposed Amendments
1. Removal of the Tie Between the Weekly Liquid Asset Threshold
and Liquidity Fees and Redemption Gates
2. Raised Liquidity Requirements
3. Stress Testing Requirements
4. Swing Pricing
5. Amendments Related to Potential Negative Interest Rates
6. Amendments to Disclosures on Form N-CR, Form N-MFP, and Form
N-1A
7. Amendments Related to the Calculation of Weighted Average
Maturity and Weighted Average Life
D. Alternatives
1. Alternatives to the Removal of the Tie Between the Weekly
Liquid Asset Threshold and Liquidity Fees and Redemption Gates

[[Page 7249]]

2. Alternatives to the Proposed Increases in Liquidity
Requirements
3. Alternative Stress Testing Requirements
4. Alternative Implementations of Swing Pricing
5. Liquidity Fees
6. Expanding the Scope of the Floating NAV Requirements
7. Countercyclical Weekly Liquid Asset Requirement
8. Alternatives to the Amendments Related to Potential Negative
Interest Rates
9. Alternatives to the Amendments Related to Processing Orders
Under Floating NAV Conditions for All Intermediaries
10. Alternatives to the Amendments Related to WAL/WAM
Calculation
11. Sponsor Support
12. Disclosures
13. Capital Buffers
14. Minimum Balance at Risk
15. Liquidity Exchange Bank Membership
E. Effects on Efficiency, Competition, and Capital Formation
F. Request for Comment
IV. Paperwork Reduction Act
A. Introduction
B. Rule 2a-7
C. Rule 31a-2
D. Form N-MFP
E. Form N-CR
F. Form N-1A
V. Initial Regulatory Flexibility Analysis
VI. Consideration of Impact on the Economy
VII. Statutory Authority

I. Introduction

Money market funds are a type of mutual fund registered under the
Investment Company Act of 1940 (``Act'') and regulated pursuant to rule
2a-7 under the Act.\3\ Money market funds are managed with the goal of
providing principal stability by investing in high-quality, short-term
debt securities, such as Treasury bills, repurchase agreements, or
commercial paper, and whose value does not fluctuate significantly in
normal market conditions. Money market fund investors receive dividends
that reflect prevailing short-term interest rates and have access to
daily liquidity, as money market fund shares are redeemable on demand.
The combination of limited principal volatility, diversification of
portfolio securities, payment of short-term yields, and liquidity has
made money market funds popular cash management vehicles for both
retail and institutional investors. Money market funds also provide an
important source of short-term financing for businesses, banks, and
Federal, state, municipal, and Tribal governments.
---------------------------------------------------------------------------

\3\ Money market funds are also sometimes called ``money market
mutual funds'' or ``money funds.''
---------------------------------------------------------------------------

In March 2020, in connection with an economic shock from the onset
of the COVID-19 pandemic, certain types of money market funds had
significant outflows as investors sought to preserve liquidity.\4\ We
are proposing to amend rule 2a-7 to remove provisions in the rule that
appear to have contributed to investors' incentives to redeem from
certain funds during this period. For the category of funds that
experienced the heaviest outflows in March 2020 and in prior periods of
market stress, we are proposing a new swing pricing requirement that is
designed to mitigate the dilution and investor harm that can occur
today when other investors redeem--and remove liquidity--from these
funds, particularly when certain markets in which the funds invest are
under stress and effectively illiquid. We are also proposing to
increase liquidity requirements to better equip money market funds to
manage significant and rapid investor redemptions. In addition to these
reforms, we are proposing changes to improve transparency and
facilitate Commission monitoring of money market funds. We also propose
to clarify how certain money market funds would operate if interest
rates became negative. Finally, we propose to specify how funds must
calculate weighted average maturity and weighted average life.\5\
---------------------------------------------------------------------------

\4\ See infra Section I.B (discussing these events in more
detail).
\5\ We have consulted and coordinated with the Consumer
Financial Protection Bureau regarding this proposed rulemaking in
accordance with section 1027(i)(2) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
---------------------------------------------------------------------------

A. Types of Money Market Funds and Existing Regulatory Framework

Different types of money market funds exist to meet differing
investor needs. ``Prime money market funds'' hold a variety of taxable
short-term obligations issued by corporations and banks, as well as
repurchase agreements and asset-backed commercial paper.\6\
``Government money market funds,'' which are currently the largest
category of money market fund, almost exclusively hold obligations of
the U.S. Government, including obligations of the U.S. Treasury and
Federal agencies and instrumentalities, as well as repurchase
agreements collateralized by government securities.\7\ Compared to
prime funds, government money market funds generally offer greater
safety of principal but historically have paid lower yields. ``Tax-
exempt money market funds'' (or ``municipal money market funds'')
primarily hold obligations of state and local governments and their
instrumentalities, and pay interest that is generally exempt from
Federal income tax for individual taxpayers.\8\ Within the prime and
tax-exempt money market fund categories, some funds are ``retail''
funds and others are ``institutional'' funds. Retail money market funds
are held only by natural persons, and institutional funds can be held
by a wider range of investors, such as corporations, small businesses,
and retirement plans.\9\
---------------------------------------------------------------------------

\6\ Commission staff regularly publish comprehensive data
regarding money market funds on the Commission's website, available
at https://www.sec.gov/divisions/investment/mmf-statistics.shtml.
This data includes information about the monthly holdings of prime
money market funds by type of security.
\7\ Some government money market funds generally invest at least
80% of their assets in U.S. Treasury obligations or repurchase
agreements collateralized by U.S. Treasury securities and are called
``Treasury money market funds.''
\8\ In this release, we also use the term ``non-government money
market fund'' to refer to prime and tax-exempt money market funds.
\9\ A retail money market fund is defined as a money market fund
that has policies and procedures reasonably designed to limit all
beneficial owners of the fund to natural persons. See 17 CFR 270.2a-
7(a)(21) (rule 2a-7(a)(21)).
---------------------------------------------------------------------------

To some extent, different types of money market funds are subject
to different requirements under rule 2a-7. One primary example is a
fund's approach to valuation and pricing. Government and retail money
market funds can rely on valuation and pricing techniques that
generally allow them to sell and redeem shares at a stable share price,
typically $1.00, without regard to small variations in the value of the
securities in their portfolios.\10\ If the fund's stable share price
and market-based value per share deviate by more than one-half of 1%,
the fund's board may determine to adjust the fund's share price below
$1.00, which is also colloquially referred to as ``breaking the buck.''
\11\ Institutional prime and institutional tax-exempt money market
funds, however, are required to use a

[[Page 7250]]

``floating'' net asset value per share (``NAV'') to sell and redeem
their shares, based on the current market-based value of the securities
in their underlying portfolios rounded to the fourth decimal place
(e.g., $1.0000). These institutional funds are required to use a
floating NAV because their investors have historically made the
heaviest redemptions in times of market stress and are more likely to
act on the incentive to redeem if a fund's stable price per share is
higher than its market-based value.\12\
---------------------------------------------------------------------------

\10\ Under the amortized cost method, a government or retail
money market fund's portfolio securities generally are valued at
cost plus any amortization of premium or accumulation of discount,
rather than at their value based on current market factors. The
penny rounding method of pricing permits such a money market fund
when pricing its shares to round the fund's NAV to the nearest 1%
(i.e., the nearest penny). Together, these valuation and pricing
techniques create a ``rounding convention'' that permits these money
market funds to sell and redeem shares at a stable share price
without regard to small variations in the value of portfolio
securities. See 17 CFR 270.2a-7(c)(i), (g)(1), and (g)(2). See
generally Valuation of Debt Instruments and Computation of Current
Price Per Share by Certain Open-End Investment Companies (Money
Market Funds), Investment Company Act Release No. 13380 (July 11,
1983) [48 FR 32555 (July 18, 1983)] (``1983 Adopting Release'').
Throughout this release, we generally use the term ``stable share
price'' or ``stable NAV'' to refer to the stable share price that
these money market funds seek to maintain and compute for purposes
of distribution, redemption, and repurchases of fund shares.
\11\ These funds must compare their stable share price to the
market-based value per share of their portfolios at least daily.
\12\ See Money Market Fund Reform; Amendments to Form PF,
Investment Company Act Release No. 31166 (July 23, 2014) [79 FR
47735 (Aug. 14, 2014)] (``2014 Adopting Release''). As stated in the
2014 Adopting Release, this incentive exists largely in prime money
market funds because these funds exhibit higher credit risk that
makes declines in value more likely (compared to government money
market funds).
---------------------------------------------------------------------------

As of July 2021, there were approximately 318 money market funds
registered with the Commission, and these funds collectively held over
$5.0 trillion of assets.\13\ The vast majority of these assets are held
by government money market funds ($4.0 trillion), followed by prime
money market funds ($875 billion) and tax-exempt money market funds
($101 billion).\14\ Slightly less than half of prime money market
funds' assets are held by publicly offered institutional funds, with
the remaining assets almost evenly split between retail prime money
market funds and institutional prime money market funds that are not
offered to the public.\15\ The vast majority of tax-exempt money market
fund assets are held by retail funds.
---------------------------------------------------------------------------

\13\ Money Market Fund Statistics, Form N-MFP Data, period
ending July 2021, available at: https://www.sec.gov/files/mmf-statistics-2021-07.pdf. This data excludes ``feeder'' funds to avoid
double counting assets.
\14\ Id.
\15\ Some asset managers establish privately offered money
market funds to manage cash balances of other affiliated funds and
accounts.
---------------------------------------------------------------------------

The Commission adopted rule 2a-7 in 1983 and has amended the rule
several times over the years, including in response to market events
that have highlighted money market fund vulnerabilities.\16\ For
example, during 2007-2008, some prime money market funds were exposed
to substantial losses from certain of their holdings.\17\ At that time,
one money market fund ``broke the buck'' and suspended redemptions, and
many fund sponsors provided financial support to their funds.\18\ These
events, along with general turbulence in the financial markets, led to
a run primarily on institutional prime money market funds and
contributed to severe dislocations in short-term credit markets. The
U.S. Department of the Treasury and the Board of Governors of the
Federal Reserve System subsequently announced intervention in the
short-term markets that was effective in containing the run on prime
money market funds and providing additional liquidity to money market
funds.\19\
---------------------------------------------------------------------------

\16\ See 1983 Adopting Release, supra footnote 10; see also
infra footnote 20.
\17\ For a more detailed account of these events, see Money
Market Fund Reform, Investment Company Act Release No. 28807 (June
30, 2009) [74 FR 32688 (July 8, 2009)], at section I.D.
\18\ See id. at paragraphs accompanying nn.41 and 44. At this
time, all money market funds generally were permitted to maintain
stable prices per share.
\19\ The Treasury Department's Temporary Guarantee Program for
Money Market Funds temporarily guaranteed certain investments in
money market funds that participated in the program. The Federal
Reserve Board's Asset-Backed Commercial Paper Money Market Mutual
Fund Liquidity Facility extended credit to U.S. banks and bank
holding companies to finance their purchases of high-quality asset-
backed commercial paper from money market funds. See Press Release,
Treasury Department, Treasury Announces Guaranty Program for Money
Market Funds (Sept. 19, 2008), available at https://www.treasury.gov/press-center/press-releases/Pages/hp1161.aspx;
Press Release, Federal Reserve Board, Federal Reserve Board
Announces Two Enhancements to its Programs to Provide Liquidity to
Markets (Sept. 19, 2008), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20080919a.htm.
---------------------------------------------------------------------------

After the events of the 2008 financial crisis, the SEC adopted a
number of amendments to its money market fund regulations in 2010 and
2014.\20\ In 2010, the Commission adopted amendments to rule 2a-7 that,
among other things, for the first time required that money market funds
maintain liquidity buffers in the form of specified levels of daily and
weekly liquid assets.\21\ The amendments required that taxable money
market funds have at least 10% of their assets in cash, U.S. Treasury
securities, or securities that convert into cash (e.g., mature) within
one day (``daily liquid assets''), and that all money market funds have
at least 30% of assets in cash, U.S. Treasury securities, certain other
government securities with remaining maturities of 60 days or less, or
securities that convert into cash within one week (``weekly liquid
assets'').\22\ These liquidity buffers provide a source of internal
liquidity and are intended to help funds withstand high redemptions
during times of market illiquidity. The 2010 amendments also increased
transparency about a money market fund's holdings by introducing
monthly Form N-MFP reporting requirements and website posting
requirements. In addition, the Commission further limited the maturity
of a fund's portfolio, including by shortening the permitted weighted
average portfolio maturity and introducing a separate weighted average
life to limit the portion of a fund's portfolio held in longer-term
adjustable rate securities.
---------------------------------------------------------------------------

\20\ Money Market Fund Reform, Investment Company Act Release
No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (``2010
Adopting Release''); 2014 Adopting Release, supra footnote 12.
\21\ 2010 Adopting Release, supra footnote 20. See rule 17 CFR
270.2a-7(c)(5)(ii) and (iii).
\22\ See 17 CFR 270.2a-7(a)(8) (rule 2a-7(a)(8)) (defining
``daily liquid assets'') and 17 CFR 270.2a-7(a)(28) (rule 2a-
7(a)(28)) (defining ``weekly liquid assets'').
---------------------------------------------------------------------------

In 2014, the Commission further amended the rules that govern money
market funds. In these amendments the Commission provided the boards of
directors of non-government money market funds with new tools to stem
heavy redemptions by giving them discretion to impose a liquidity fee
or temporary suspension of redemptions (i.e., a gate) if a fund's
weekly liquid assets fall below 30%. These amendments also require all
non-government money market funds to impose a liquidity fee if the
fund's weekly liquid assets fall below 10%, unless the fund's board
determines that imposing such a fee is not in the best interests of the
fund. Additionally, in 2014 the Commission removed the valuation
exemption that permitted institutional non-government money market
funds to maintain a stable NAV, and required those funds to transact at
a floating NAV. The amendments provided guidance related to amortized
cost valuation, as well as introduced requirements for strengthened
diversification of money market funds' portfolios and enhanced stress
testing. The Commission also introduced a requirement that money market
funds report certain significant events on Form N-CR and made other
amendments to improve transparency, including additional website
posting requirements and amendments to Form N-MFP.
Following the 2014 amendments, government money market funds grew
substantially, while prime money market funds diminished in size, as
shown in the chart below.\23\
---------------------------------------------------------------------------

\23\ While the Commission adopted the amendments in 2014, the
compliance date for the floating NAV requirement for institutional
prime and institutional tax-exempt funds and for the fee and gate
provisions for all prime and tax-exempt funds was October 14, 2016.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[[Page 7251]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.002

The chart below depicts the distribution between retail and
institutional net assets in both prime and tax-exempt funds beginning
in October 2016.\24\
---------------------------------------------------------------------------

\24\ The 2014 amendments introduced a regulatory definition of a
retail money market fund and implemented it in October 2016. Data on
institutional and retail prime and tax-exempt money market funds
prior to this time may not be fully comparable with current data
and, thus, Chart 2 covers a period beginning in October 2016.
[GRAPHIC] [TIFF OMITTED] TP08FE22.003

Finally, Table 1 below depicts the key requirements currently
applicable to each type of money market fund.

[[Page 7252]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.004

BILLING CODE 8011-01-C

B. March 2020 Market Events

In March 2020, growing economic concerns about the impact of the
COVID-19 pandemic led investors to reallocate their assets into cash
and short-term government securities.\25\ These heavy asset flows
placed stress on short-term funding markets.\26\ For instance,
commercial paper and certificates of deposit markets in which prime
money market funds and other participants invest became ``frozen'' in
March 2020, making it more difficult to sell these instruments, which
have limited secondary trading even in normal times.\27\ Institutional
investors, in particular, sought highly liquid investments, including
government money market funds.\28\ In contrast, institutional prime and
tax-exempt money market funds experienced outflows beginning the week
of March 9, 2020, which accelerated the following week.\29\ Outflows
from retail prime and tax-exempt funds began the week of March 16, a
week after outflows in institutional funds began. Outflows from some
publicly offered institutional prime funds as a percentage of fund size
exceeded those in the September 2008 crisis, although the outflows in
dollar amounts were much smaller in March 2020, due in part to the
significant reductions in the size of prime money market funds that
occurred between September 2008 and March 2020.
---------------------------------------------------------------------------

\25\ See SEC Staff Report on U.S. Credit Markets
Interconnectedness and the Effects of the COVID-19 Economic Shock
(Oct. 2020) (``SEC Staff Interconnectedness Report'') at 2,
available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf.
\26\ Notably, this market stress in March 2020, including its
impact on money market funds, was more of a liquidity event than in
2008. In 2008 there were heightened concerns regarding the credit
quality of some money market funds' underlying holdings.
\27\ See SEC Staff Interconnectedness Report, supra footnote 25,
at 23.
\28\ More specifically, government money market funds had record
inflows of $838 billion in March 2020 and an additional $347 billion
of inflows in April 2020. See id. at 25.
\29\ Id.
---------------------------------------------------------------------------

During the two-week period of March 11 to 24, publicly offered
institutional prime funds had a 30% redemption rate (about $100
billion), which included outflows of approximately 20% of assets during
the week of March 20 alone.\30\ The largest weekly redemption rate from
a single publicly offered institutional prime fund during this period
was around 55%, and the largest daily outflow was about 26%. In
contrast, privately offered institutional prime funds had redemptions
of 3% of assets during the week of March 20, and lost approximately 6%
of their total assets ($17 billion) from March 9 through 20.
---------------------------------------------------------------------------

\30\ This discussion of the size of outflows in March 2020 is
based on the Report of the President's Working Group on Financial
Markets, Overview of Recent Events and Potential Reform Options for
Money Market Funds, infra footnote 39, and our additional analysis.
---------------------------------------------------------------------------

Retail money market funds had lower levels of outflows than
publicly offered institutional funds. Retail prime funds had outflows
of approximately 11% of their total assets ($48 billion) in the last
three weeks of March 2020. Outflows from tax-exempt money market funds,
which are mostly retail funds, were approximately 8% of their total
assets ($12 billion) from March 12 through 25.
As prime money market funds experienced heavy redemptions, their
holdings of weekly liquid assets generally declined. However, these
declines were not commensurate with the level of redemptions. Available
data suggests that managers were actively managing their portfolios to
avoid having weekly liquid assets below 30% of their total assets by,
in some cases, selling other portfolio securities to meet redemptions.
Available evidence, supported by many comment letters in response to
the Commission's request for comment discussed below, suggested that
funds' incentives to maintain weekly liquid assets above the 30%
threshold were directly tied to investors' concerns about the
possibility of redemption gates and liquidity fees under our rules if a
fund drops below that threshold.\31\ Based on Form N-MFP

[[Page 7253]]

data providing the size of each fund's weekly liquid assets as of the
end of each week, between March 13 and March 20, the weekly liquid
assets of most money market funds changed by less than 5%. In
particular, institutional prime money market funds that were closer to
the 30% weekly liquid asset threshold tended to increase their weekly
liquid assets, while those with higher weekly liquid assets tended to
decrease their weekly liquid assets.\32\ One institutional prime fund's
weekly liquid assets fell below the 30% minimum threshold set forth in
rule 2a-7.\33\ To support liquidity of fund portfolios, two fund
sponsors provided support to three institutional prime funds by
purchasing commercial paper and certificates of deposit the funds
held.\34\
---------------------------------------------------------------------------

\31\ See, e.g., Comment Letter of State Street Global Advisors
(Apr. 12, 2021) (``State Street Comment Letter''); Comment Letter of
Schwab Asset Management Solutions (Apr. 12, 2021) (``Schwab Comment
Letter''); Comment Letter of the Investment Company Institute (Apr.
12, 2021) (``ICI Comment Letter I''); Comment Letter of Wells Fargo
Funds Management, LLC (Apr. 12, 2021) (``Wells Fargo Comment
Letter''); Comment Letter of J.P. Morgan Asset Management (Apr. 12,
2021) (``JP Morgan Comment Letter''). See also, e.g., Li, Lei, Yi
Li, Marco Machiavelli, and Alex Xing Zhou, ``Runs and Interventions
in the Time of COVID-19: Evidence from Money Funds,'' working paper
(2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3607593 (``Li et al.'').
\32\ Based on our analysis, two-thirds of retail prime money
market funds and about half of institutional prime money market
funds increased their weekly liquid assets slightly during this
period.
\33\ The one money market fund that fell below the 30% threshold
did not impose a gate or fees.
\34\ As reported by these money market funds in their filings on
Form N-CR.
---------------------------------------------------------------------------

On March 18, 2020, the Federal Reserve, with the approval of the
Department of the Treasury, broadened its program of support for the
flow of credit to households and businesses by taking steps to enhance
the liquidity and functioning of money markets with the establishment
of the Money Market Mutual Fund Liquidity Facility (``MMLF''). The MMLF
provided loans to financial institutions on advantageous terms to
purchase securities from money market funds that were raising
liquidity, thereby helping enhance overall market functioning and
credit provisions to the broader economy.\35\ MMLF utilization reached
a peak of just over $50 billion in early April 2020, or about 5% of net
assets in prime and tax-exempt money market funds at the time.\36\
Along with other Federal Reserve actions and programs to support the
short-term funding markets, the MMLF had the effect of significantly
slowing outflows from prime and tax-exempt money market funds.\37\ The
MMLF ceased providing loans in March 2021.\38\
---------------------------------------------------------------------------

\35\ Information about the MMLF is available on the Federal
Reserve's website at https://www.federalreserve.gov/monetarypolicy/mmlf.htm. The Federal Reserve Bank of Boston operated the MMLF.
\36\ See PWG Report, infra footnote 39, at 17. Institutional and
retail prime and tax-exempt money market funds were eligible to
participate in the MMLF. See also Federal Reserve Bank of New York
Staff Reports, no. 980, The Money Market Mutual Fund Liquidity
Facility (Sept. 2021) at text accompanying nn. 19 and 22, available
at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr980.pdf (providing an analysis of prime funds'
participation in the MMLF and stating that through its life, the
MMLF extended loans to nine banks, which purchased securities from
30 institutional prime funds and 17 retail prime funds).
\37\ See, e.g., ``Federal Reserve Issues FOMC Statement'' (Mar.
15, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm; ``Federal Reserve Actions to
Support the Flow of Credit to Households and Businesses'' (Mar. 15,
2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm; ``Federal Reserve Board
Announces Establishment of a Commercial Paper Funding Facility
(CPFF) to Support the Flow of Credit to Households and Businesses''
(Mar. 17, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317a.htm; ``Federal Reserve
Board Announces Establishment of a Primary Dealer Credit Facility
(PDCF) to Support the Credit Needs of Households and Businesses''
(Mar. 17, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317b.htm; ``Federal Reserve
Board Broadens Program of Support for the Flow of Credit to
Households and Businesses by Establishing a Money Market Mutual Fund
Liquidity Facility (MMLF)'' (Mar. 18, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200318a.htm.
\38\ See supra footnote 35.
---------------------------------------------------------------------------

Report of the President's Working Group on Financial Markets and the
Commission's Request for Comment
The President's Working Group on Financial Markets (``PWG'') issued
a report discussing these events and several potential money market
fund reform options in December 2020 (the ``PWG Report'').\39\ The
Commission issued a request for comment (the ``Request for Comment'')
on the various reform options discussed in the PWG Report, and the
comment period closed in April 2021.\40\ We received numerous comments
in response to the Request for Comment, which are discussed throughout
this release. Several of the reforms we are proposing in this release
were included as potential reform options in the PWG Report.\41\
---------------------------------------------------------------------------

\39\ See Report of the President's Working Group on Financial
Markets, Overview of Recent Events and Potential Reform Options for
Money Market Funds (Dec. 2020), available at https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf.
\40\ Request for Comment on Potential Money Market Fund Reform
Measures in President's Working Group Report, Investment Company Act
Release No. 34188 (Feb. 4, 2021) [86 FR 8938 (Feb. 10, 2021)].
Comment letters received in response to the Request for Comment are
available at: https://www.sec.gov/comments/s7-01-21/s70121.htm.
\41\ After considering comments on the Commission's request for
comment, we are not proposing other reform options discussed in the
PWG Report. These other reform options included: (i) Reform of the
conditions for imposing redemption gates; (ii) minimum balance at
risk; (iii) countercyclical weekly liquid asset requirements; (iv)
floating NAVs for all prime and tax-exempt money market funds; (v)
capital buffer requirements; (vi) requiring liquidity exchange bank
(``LEB'') membership; and (vii) new requirements governing sponsor
support. The Commission has considered several of these reform
options in the past, including minimum balance at risk, floating
NAVs for a broader range of funds, capital buffers, and LEB
membership. See 2014 Adopting Release, supra footnote 12, at section
III.L. After considering comments, we believe the package of reforms
we are proposing is appropriately tailored to achieve our regulatory
goals. See infra Section III.D (discussing the reform alternatives
in the PWG Report that we are not proposing).
---------------------------------------------------------------------------

Reasons for Investors' Redemption Behavior
We considered several factors that may have driven investors'
redemptions during this period of market stress, including the
potential for the imposition of fees and gates as funds neared the 30%
weekly liquid asset threshold, declining NAVs, risk reduction, and
general concerns about the economic impact of the COVID-19 pandemic.
Evidence suggests that concerns about the potential for fees or gates
contributed to some investors' redemption decisions. For example, one
research paper indicated that institutional prime money market fund
outflows accelerated as funds' weekly liquid assets went closer to the
30% threshold.\42\ Another paper found that smaller institutional
investors redeemed more intensely from prime money market funds with
lower liquidity levels, whereas large institutional investors redeemed
heavily from prime money market funds regardless of fund liquidity
level.\43\ Weekly Form N-MFP data analyzed in Table 2 shows that most
of the largest asset outflows from institutional prime funds in the
third week of March 2020 were from those funds with weekly liquid
assets below 41%. The five institutional prime money market funds with
the lowest weekly liquid assets accounted for roughly 40% of the dollar
change in assets among all such money market funds. Although Table 2
shows that money market funds with weekly liquid assets closer to the
30% threshold had a higher percent of outflows during the week ending
March 20, 2020, some prime funds with higher levels of weekly liquid
assets also experienced large outflows.\44\ While Table 2 is based on
weekly data provided on Form N-MFP, a research report found that
---------------------------------------------------------------------------

\42\ See Li et al., supra footnote 31.
\43\ See BIS Quarterly Review: International banking and
financial market developments, Bank for International Settlements
(Mar. 2021), available at https://www.bis.org/publ/qtrpdf/r_qt2103.pdf.
\44\ For example, two institutional prime money market funds
with outflows greater than 40% had weekly liquid assets of 46% and
48%.

---------------------------------------------------------------------------

[[Page 7254]]

weekly liquid assets dropped during the third week of March 2020, but
started to recover by the end of the week.\45\
---------------------------------------------------------------------------

\45\ For example, on March 16 there were two institutional prime
money market funds with weekly liquid assets less than 35%, six on
March 18, and three on March 20. See ICI Report, Experiences of US
Money Market Funds During the Covid-19 Crisis (Nov. 2020) (``ICI MMF
Report''), available at https://www.ici.org/pdf/20_rpt_covid3.pdf.
---------------------------------------------------------------------------

Beyond concerns about the potential imposition of fees or gates,
general declines in liquidity levels may have been a concern for
investors because the declines can signify that a fund may be less
equipped to handle redemptions in the near-term. While declining
liquidity on its own likely contributed to some investors' redemption
decisions, a few commenters provided information from investor surveys
suggesting that the potential for gates, and to a somewhat lesser
extent the potential of liquidity fees, was a more common concern among
investors.\46\
---------------------------------------------------------------------------

\46\ See infra footnote 73 (discussing these surveys).
[GRAPHIC] [TIFF OMITTED] TP08FE22.005

We also considered the possibility that declining market-based
prices for retail and institutional non-government funds contributed to
investors' redemptions in March 2020. For retail funds that maintain a
stable NAV, declining market-based prices can contribute to investor
concerns that these funds may ``break the buck'' (i.e., have market-
based prices below $0.9950) and re-price their shares below $1.00. Most
retail prime and tax-exempt money market funds experienced declining
market-based prices in March 2020. However, only one retail tax-exempt
fund reported a market-based price below $0.9975, and that fund
subsequently received sponsor support in the form of a capital
contribution to reduce the deviation between the fund's market-based
price and its stable price per share.\47\ Moreover, retail prime and
tax-exempt money market funds with lower market-based prices did not
experience larger outflows than other retail prime and tax-exempt money
market funds, so these funds' flows in March 2020 appear to have been
unrelated to market-based prices. Like retail funds, most institutional
prime and tax-exempt money market funds experienced declines in their
market-based prices in March 2020. However, none of the market-based
prices dropped below $0.9975. Staff analysis and an external study did
not find a

[[Page 7255]]

correlation between market prices and institutional prime fund
redemptions during this time.\48\
---------------------------------------------------------------------------

\47\ PWG Report, supra footnote 39, at 15.
\48\ See Baklanova, Kuznits, and Tatum, ``Prime MMFs at the
Onset of the Pandemic: Asset Flows, Liquidity Buffers, and NAVs,''
SEC Staff Analysis (Apr. 15, 2021) (``Prime MMFs at the Onset of the
Pandemic Report'') at 5, available at https://www.sec.gov/files/prime-mmfs-at-onset-of-pandemic.pdf. Any statements therein
represent the views of the staff of the Division of Investment
Management. These statements are not a rule, regulation, or
statement of the U.S. Securities and Exchange Commission. The
Commission has neither approved nor disapproved their content. Such
statements, like all staff statements, have no legal force or
effect: They do not alter or amend applicable law, and they create
no new or additional obligations for any person. See also Li et al.,
supra footnote 31.
---------------------------------------------------------------------------

We also considered the potential relationship between a money
market fund's portfolio holdings and investors' redemption behavior.
Investor redemption behavior differed based on the overall nature of a
money market fund's portfolio, given that government money market funds
had significant inflows and prime money market funds had large
outflows. However, unlike the events of 2008, redemptions from prime
money market funds did not appear to be correlated to a fund's
particular holdings. For instance, prime money market funds with the
largest holdings of commercial paper and certificates of deposit did
not experience greater redemptions than other prime funds, even though
the commercial paper and certificates of deposit markets were
experiencing greater strains in March 2020 than other markets in which
money market funds invest.\49\
---------------------------------------------------------------------------

\49\ The five institutional prime money market funds with the
highest concentration of commercial paper and certificates of
deposit accounted for roughly 3% of the dollar change in assets
among all institutional prime money market funds. These five funds
each held between 71% and 83% of their assets in commercial paper
and certificates of deposit. In aggregate, these five funds held $31
billion in assets on March 13, 2020, and experienced a combined
outflow of $3 billion, or roughly 10% of their total assets, during
the week of March 20, 2020.
---------------------------------------------------------------------------

Beyond factors that relate to the regulatory framework for money
market funds, there are other factors that may have had a relationship
to investors' redemption incentives in March 2020. As some commenters
suggested, general uncertainty of a global health crisis and fears of
possible business disruptions and economic downturns in the real
economy as people stayed at home resulted in investors becoming
increasingly risk averse and seeking to preserve or increase
liquidity.\50\ Some commenters also asserted that some institutional
investor redemptions were ordinary course redemptions that otherwise
would have occurred, irrespective of the pandemic and market stress, to
meet near-term cash needs, including for operating cash, to make
quarterly corporate tax payments, or to meet payroll expenses.\51\
---------------------------------------------------------------------------

\50\ See, e.g., ICI Comment Letter I; JP Morgan Comment Letter;
Comment Letter of the Vanguard Group, Inc. (Apr. 12, 2021)
(``Vanguard Comment Letter''); Comment Letter of Federated Hermes,
Inc. (Apr. 12, 2021) (``Federated Hermes Comment Letter I'').
\51\ See, e.g., Comment Letter of Invesco (Apr. 12, 2021)
(``Invesco Comment Letter'') (stating that prime money market funds
experienced increased redemptions leading up to the quarterly
corporate tax deadline); Federated Hermes Comment Letter I (citing a
Carfang Group survey in which 50% of surveyed corporate treasurers
who redeemed from institutional prime funds in March 2020 stated
that they were doing so to meet operating cash needs); Comment
Letter of the Securities Industry and Financial Markets Association
Asset Management Group (Apr. 12, 2021) (``SIFMA AMG Comment
Letter'') (stating that tax return filings for partnerships and S-
corporations were due on March 16, 2020, and many businesses had
biweekly or semimonthly payroll expenses around the same time).
---------------------------------------------------------------------------

In addition, our staff identified some relationships between the
size of outflows and the type of adviser to the fund or the size of the
fund. This revealed that publicly offered prime institutional money
market funds managed by bank-affiliated advisers had the most outflows
in March 2020.\52\ Money market funds complexes with lower assets under
management in publicly offered prime institutional money market funds
also generally had larger outflows during this time.\53\
---------------------------------------------------------------------------

\52\ See Prime MMFs at the Onset of the Pandemic Report, supra
footnote 48, at 3. The analysis in this report concluded that the
largest outflows in mid-March 2020 were from the publicly offered
prime institutional money market funds with advisers owned by
banking firms. The funds with advisers owned by the largest U.S.
banks designated as global systemically important banks (``G-SIBs'')
accounted for 56% of the outflows in the third week of March, even
though these funds managed only around 28% of net assets in publicly
offered prime institutional money market funds.
\53\ Id at 3.
---------------------------------------------------------------------------

Connection Between Money Market Fund Outflows and Stress in Short-Term
Funding Markets
In markets for private short-term debt instruments, such as
commercial paper and certificates of deposit, conditions significantly
deteriorated in the second week of March 2020. Spreads for commercial
paper and certificates of deposits began widening sharply, and new
issuances declined and shifted to shorter tenors.\54\ While there is
limited secondary activity in these markets even in normal times,
several industry commenters discussed particular difficulties selling
commercial paper in March 2020.\55\ Moreover, where money market funds
were able to sell commercial paper during this period, increased
selling activity from institutional prime funds may have contributed to
stress in these markets as discussed below.
---------------------------------------------------------------------------

\54\ PWG Report, supra footnote 39, at 11.
\55\ See infra footnote 202 and accompanying paragraph.
---------------------------------------------------------------------------

Using Form N-MFP data, we observed that retail prime and privately
offered institutional prime funds did not sell significantly more long-
term portfolio securities (i.e., securities that mature in more than a
month) in March 2020 relative to their typical averages. Publicly
offered institutional prime funds, however, increased their sales of
long-term securities in March 2020 to 15% of total assets during this
time period, which includes assets sold to the MMLF and sponsors,
compared to a 4% monthly average during the period from October 2016
through February 2020. In March 2020, these funds sold around $52
billion in certificates of deposit and commercial paper with maturities
greater than one month.\56\ Of this amount, approximately $4 billion
was sold to fund sponsors, as reported on Form N-CR. Combining this
data with data provided by an industry group's member survey and
Federal Reserve data on the balance of the MMLF, prime money market
funds sold an estimated $80 billion in commercial paper and
certificates of deposit in March 2020, with approximately 5% ($4
billion) of that total sold to sponsors, 66% ($53 billion) pledged to
the MMLF, and 29% ($23 billion) sold in the secondary market.\57\ Thus,
we find that prime money market funds, particularly institutional
funds, were engaging in greater than normal selling activity in these
markets which, when combined with similar selling from other market
participants such as hedge funds and bond mutual funds, both
contributed to, and were impacted by, stress in short-term funding
markets.\58\
---------------------------------------------------------------------------

\56\ This analysis is based on longer-term holdings that these
funds reported on Form N-MFP in February 2020 but that they did not
report holding in March 2020. The estimate includes $24.3 billion in
certificates of deposit and $28.1 billion in commercial paper.
\57\ Our analysis of available data suggests that of the $80
billion in commercial paper and certificates of deposit sold in
March 2020, about $70 billion had maturities greater than a month
and about $10 billion had maturities less than a month. As of April
1, 2020, the MMLF balance was close to $53 billion according to the
Federal Reserve's weekly data, available at https://www.federalreserve.gov/releases/h41/20200402/. See ICI Comment
Letter I (providing information about money market fund selling
activity in March 2020 based on a member survey).
\58\ See, e.g., SEC Staff Interconnectedness Report, supra
footnote 25, at 4. At the end of February 2020, prime money market
funds offered to the public owned about 19% of commercial paper
outstanding. See PWG Report, supra footnote 39, at 11.

---------------------------------------------------------------------------

[[Page 7256]]

Conditions in short-term municipal debt markets also worsened
rapidly in March 2020. Stresses in short-term municipal markets
contributed to pricing pressures and outflows for tax-exempt money
market funds which, in turn, contributed to increased stress in
municipal markets.\59\ Table 2 shows that as tax-exempt money market
funds experienced heightened redemptions in the third week of March
2020 of 9.2%, they reduced their holdings (e.g., tender option bonds
and variable rate demand notes) by $12.9 billion that week.
---------------------------------------------------------------------------

\59\ See PWG Report, supra footnote 39, at 12. See also SEC
Staff Interconnectedness Report, supra footnote 25, at 27.
---------------------------------------------------------------------------

One commenter suggested that the overall issue in the municipal
securities market in March 2020 was selling pressure from many market
participants, and not selling pressure from tax-exempt money market
funds, which make up only a small portion of the overall market.\60\
This commenter suggested that other market participants were raising
cash by selling short-term municipal securities, which caused
meaningful discounts on the market value of those securities and
consequently placed downward pressure on market-based NAVs of tax-
exempt money market funds. The commenter also stated that longer-term
municipal money market securities, and not variable rate demand notes,
bore the brunt of the market stress in March 2020. Another commenter
suggested that tax-exempt money market funds sold longer-term holdings
in March 2020 to maintain an average weighted maturity of not more than
60 days, rather than to maintain weekly liquid assets above 30% (given
that these funds typically hold much higher levels of weekly liquid
assets).\61\ Our analysis found that tax-exempt money market funds sold
a larger amount of portfolio securities with maturities of more than a
month in March 2020 than they typically do. Retail tax-exempt money
market funds sold 16% of total assets of such holdings during this
period, compared to a monthly average of 3% during the period from
October 2016 through February 2020. Institutional tax-exempt money
market funds increased their sales of longer-term securities from 5% of
total assets during the period from October 2016 through February 2020
to 24% in March 2020. Similar to what we observed with prime money
market funds, tax-exempt funds engaged in greater than normal selling
activity.\62\
---------------------------------------------------------------------------

\60\ Vanguard Comment Letter.
\61\ Comment Letter of Stephen Keen (Apr. 28, 2021). This
commenter also disagreed with a statement in the PWG Report that a
spike in the SIFMA index yield caused a drop in market-based NAVs of
tax-exempt money market funds. The commenter suggested that it is
more likely that the fund reporting a market-based NAV below $0.9775
had already realized losses from earlier portfolio sales and sold
longer-term holdings in response to redemptions in March, with the
March redemptions increasing the significance of the realized
losses.
\62\ Although the tax-exempt money market funds held only $127
billion in assets in the third week of March 2020, they, like other
larger market participants, found it difficult to sell assets during
this period of market stress.
---------------------------------------------------------------------------

II. Discussion

A. Amendments To Remove Liquidity Fee and Redemption Gate Provisions

1. Unintended Effects of the Tie Between the Weekly Liquid Asset
Threshold and Liquidity Fees and Redemption Gates
Under current rule 2a-7, a money market fund has the ability to
impose liquidity fees or redemption gates (generally referred to as
``fees and gates'') after crossing a specified liquidity threshold.\63\
A money market fund may impose a liquidity fee of up to 2%, or
temporarily suspend redemptions for up to 10 business days in a 90-day
period, if the fund's weekly liquid assets fall below 30% of its total
assets and the fund's board of directors determines that imposing a fee
or gate is in the fund's best interests.\64\ Additionally, a non-
government money market fund is required to impose a liquidity fee of
1% on all redemptions if its weekly liquid assets fall below 10% of its
total assets, unless the board of directors of the fund determines that
imposing such a fee would not be in the best interests of the fund.\65\
Separately, a money market fund is required to provide daily disclosure
of the percentage of its total assets invested in weekly liquid assets
(as well as daily liquid assets) on its website to provide transparency
to investors and increase market discipline.\66\
---------------------------------------------------------------------------

\63\ Government funds are permitted, but not required, to impose
fees and gates, as discussed below.
\64\ If, at the end of a business day, a fund has invested 30%
or more of its total assets in weekly liquid assets, the fund must
cease charging the liquidity fee (up to 2%) or imposing the
redemption gate, effective as of the beginning of the next business
day. See 17 CFR 270.2a-7(c)(2)(i)(A) and (B), and (ii)(B).
\65\ The board also may determine that a lower or higher fee
would be in the best interests of the fund. See 17 CFR 270.2a-
7(c)(2)(ii)(A).
\66\ 17 CFR 270.2a-7(h)(10)(ii); 2014 Adopting Release, supra
footnote 12, at section III.E.9.a.
---------------------------------------------------------------------------

Fees and gates were intended to serve as redemption restrictions
that would provide a ``cooling off'' period to temper the effects of a
short-term investor panic and preserve liquidity levels in times of
market stress, as well as better allocate the costs of providing
liquidity to redeeming investors.\67\ However, these provisions did not
achieve these objectives during the period of market stress in March
2020. Based on available evidence, even though no money market fund
imposed a fee or gate, the possibility of the imposition of a fee or
gate appears to have contributed to incentives for investors to redeem
and for money market fund managers to maintain weekly liquid asset
levels above the threshold, rather than use those assets to meet
redemptions.\68\ These tools therefore appear to have potentially
increased the risks of investor runs without providing benefits to
money market funds as intended. As a result, and after considering
comments, we are proposing to remove the tie between liquidity
thresholds and fee and gate provisions and, moreover, to remove fee and
gate provisions from rule 2a-7 entirely.\69\
---------------------------------------------------------------------------

\67\ See 2014 Adopting Release, supra footnote 12, at section
III.L.1.a.
\68\ See supra Section I.B.
\69\ We also propose to remove related disclosure and reporting
provisions that require funds to disclose certain information about
the possibility of fees and gates in their prospectuses and to
report any imposition of fees or gates on Form N-CR, on the fund's
website, and in its statement of additional information. See Items
4(b)(1)(ii) and 16(g)(1) of current Form N-1A; Parts E, F, and G of
current Form N-CR; 17 CFR 270.2a-7(h)(10)(v).
---------------------------------------------------------------------------

Commenters broadly supported removal of the tie between weekly
liquid asset thresholds and the potential imposition of fees and
gates.\70\ Many commenters stated that this tie contributed to
investors' incentives to redeem in March 2020 as funds' weekly liquid
assets declined.\71\ Commenters suggested that, although the rule
allows but does not require a fund's board to impose redemption gates
or liquidity fees when the fund drops below the 30% weekly liquid asset
threshold, investors viewed the 30% threshold as a bright line
prompting redemptions.\72\

[[Page 7257]]

Some commenters also provided information suggesting that concerns
about the potential imposition of fees or gates contributed to
institutional investors' decisions to redeem.\73\ One commenter stated
that these concerns, combined with investors' ability to track weekly
liquid asset levels on a daily basis, drove investors' redemption
behavior.\74\ A few commenters suggested that investors were more
concerned about the potential for temporary suspensions of redemptions
than the potential for liquidity fees.\75\ In addition, a few
commenters stated that retail investors were less sensitive to concerns
about potential fees or gates than institutional investors.\76\
---------------------------------------------------------------------------

\70\ See e.g., ICI Comment Letter I; SIFMA AMG Comment Letter;
Comment Letter of Fidelity Management & Research Company LLC (Apr.
12, 2021) (``Fidelity Comment Letter''); Comment Letter of Northern
Trust Asset Management (Apr. 12, 2021) (``Northern Trust Comment
Letter''); Schwab Comment Letter; Comment Letter of Professors of
Finance, Stanford Graduate School of Business, and The University of
Chicago Booth School of Business (Apr. 9, 2021) (``Prof. Admati et
al. Comment Letter''); Comment Letter of Healthy Markets Association
(Apr. 19, 2021) (``Healthy Markets Comment Letter'').
\71\ See, e.g., ICI Comment Letter I; Vanguard Comment Letter;
Fidelity Comment Letter; Prof. Admati et al. Comment Letter; Comment
Letter of U.S. Chamber of Commerce Center for Capital Markets
Competitiveness (Apr. 12, 2021) (``CCMC Comment Letter'').
\72\ See Schwab Letter; ICI Comment Letter I; Comment Letter of
the Investment Company Institute (May 12, 2021) (``ICI Comment
Letter II''); JP Morgan Comment Letter; Wells Fargo Comment Letter.
\73\ See, e.g., JP Morgan Comment Letter (discussing an informal
survey of institutional investor clients in which respondents, on
average, identified the potential for gates as the most important
factor affecting their decisions to redeem among several possible
factors the survey identified); Federated Hermes Comment Letter I
(citing a survey of 39 treasury managers in which 49% of the
treasurers decreased their holdings of prime money market funds in
March 2020 and, of those treasurers, 87% mentioned the potential of
``redemption hurdles'' as a factor in their decision to redeem).
\74\ ICI Comment Letter I.
\75\ See Invesco Comment Letter (stating that investors were
less concerned about the price of their shares and more concerned
about not having access to their shares, particularly for investors
who were bolstering their liquidity positions ahead of what was an
unknown situation in March 2020); ICI Comment Letter I (stating that
investors view access to their money as paramount in stress periods
and are less concerned with ``losing a few pennies'' through, for
example, a fee); ICI Comment Letter II.
\76\ See, e.g., ICI Comment Letter I (stating that retail prime
money market funds did not exhibit the same pattern of increasing
redemptions as a fund neared the 30% threshold, despite the fact
that retail prime funds are subject to the same fee and gate
provisions as institutional prime funds); Fidelity Comment Letter.
---------------------------------------------------------------------------

Several commenters also discussed the effect of the connection
between liquidity thresholds and fees and gates on money market fund
managers' behavior in March 2020. These commenters stated that, rather
than use weekly liquid assets, some managers sold longer-dated
securities to meet redemptions to avoid falling below the 30%
threshold.\77\ Commenters asserted that these sales led to losses for
funds and their remaining investors, and contributed to downward
pricing pressure on the underlying securities.\78\ A few commenters
also suggested that the pressure for money market funds to maintain
liquidity buffers well above the 30% threshold exacerbated market
stress in March 2020 as most money market funds were seeking liquidity
at the same time to maintain or build their buffers in the face of
redemptions.\79\ Commenters also recognized that, in a few instances,
fund sponsors provided financial support by purchasing securities from
affiliated institutional prime money market funds to prevent these
funds from dropping below the 30% weekly liquid asset threshold.\80\
One commenter stated that, prior to the 2014 reforms that created the
connection between liquidity thresholds and fees and gates, money
market funds regularly used their liquidity buffers and had weekly
liquid assets below the 30% threshold without adverse consequences.\81\
---------------------------------------------------------------------------

\77\ See, e.g., State Street Comment Letter; ICI Comment Letter
I; JP Morgan Comment Letter.
\78\ See, e.g., JP Morgan Comment Letter.
\79\ See Schwab Comment Letter; State Street Comment Letter
(stating that the commenter observed that institutional prime money
market funds held, on average, weekly liquid assets of approximately
45% during March 2020).
\80\ See, e.g., ICI Comment Letter I; Wells Fargo Comment
Letter.
\81\ ICI Comment Letter I (stating that for the more than 6
years the 30% weekly liquid asset threshold was in effect but not
connected to fee and gate provisions, 68% of prime money market
funds and 10% of tax-exempt money market funds dropped below the 30%
threshold at least once, and at least one prime money market fund
was below this threshold in nearly each week during this period).
---------------------------------------------------------------------------

We recognize that the current fee and gate provisions did not have
their intended effect in March 2020 and, instead, appear to have
contributed to some of the stress that some money market funds and
short-term funding markets faced during that period. Some investors may
have feared that if they were not the first to exit their fund, there
was a risk that they could be subject to gates or fees, and this
anticipatory, risk-mitigating perspective potentially further
accelerated redemptions. As discussed above, our analysis and external
research are consistent with commenters' views on investor behavior and
found that prime and tax-exempt money market funds whose weekly liquid
assets approached the 30% threshold had, on average, larger outflows in
percentage terms than other prime and tax-exempt money market
funds.\82\
---------------------------------------------------------------------------

\82\ See supra Section I.B (discussing our analysis and external
papers).
---------------------------------------------------------------------------

2. Removal of Redemption Gates From Rule 2a-7
We are proposing to remove the ability of a money market fund to
impose redemption gates under rule 2a-7, as suggested by some
commenters.\83\ For example, a few commenters suggested that gates be
eliminated from rule 2a-7 entirely, or that funds be permitted to
suspend redemptions only under extraordinary circumstances, such as in
anticipation of a fund liquidation in accordance with rule 22e-3.\84\
One of these commenters suggested that, given the strong investor
aversion to gates and the likelihood that liquidation would be a
consequence of any board determination to impose a gate, the current
gate provisions contemplated for fund liquidations in existing rule
22e-3 may be sufficient.\85\ Based on the experience in March 2020, we
are concerned that redemption gates may not be an effective tool for
money market funds to stem heavy redemptions in times of stress due to
money market fund investors'--who typically invest in money market
funds for cash management purposes--general sensitivity to being unable
to access their investments for a period of time and tendency to redeem
from such funds preemptively if they fear a gate may be imposed. Under
the proposal, a money market fund would continue to be able to suspend
redemptions to facilitate an orderly liquidation of the fund under rule
22e-3. Rule 22e-3 generally allows a money market fund to suspend
redemptions if, among other conditions, (1) the fund, at the end of a
business day, has invested less than 10% of its total assets in weekly
liquid assets or, in the case of a government or retail money market
fund, the fund's price per share has deviated from its stable price
(i.e., it has ``broken the buck'') or the fund's board determines that
such a deviation is likely to occur, and (2) the fund's board has
approved the fund's liquidation. We continue to believe that the
ability to suspend redemptions in these circumstances can help address
the significant run risk and potential harm to shareholders.
---------------------------------------------------------------------------

\83\ See Vanguard Comment Letter; Comment Letter of Western
Asset Management Company, LLC (Apr. 12, 2021) (``Western Asset
Comment Letter''); see also JP Morgan Comment Letter; ICI Comment
Letter I.
\84\ See Vanguard Comment Letter (noting the negative potential
consequences if gates remain in the rule text); Western Asset
Comment Letter (recommending that gates be permitted only under
extraordinary circumstances, such as when a fund is in severe
difficulties or in anticipation of liquidation); JP Morgan Comment
Letter (suggesting either that the gate provision be removed from
the rule or that rule 2a-7 grant boards the discretion to impose
gates at any time if they deem it to be in the best interest of the
fund).
\85\ See JP Morgan Comment Letter.
---------------------------------------------------------------------------

Some commenters suggested other ways of removing the tie between
the weekly liquid asset threshold and a fund's ability to impose a
gate. For example, some suggested that fund boards should have
discretion to impose gates at any time they determine doing so is in
the best interests of the fund.\86\

[[Page 7258]]

One commenter stated that some institutional investors may still redeem
preemptively when a fund's weekly liquid assets approach the 30%
threshold out of fear of a gate, but asserted that granting the board
discretion without a liquidity threshold tie would reduce the incentive
for a large percentage of shareholders to preemptively redeem. The
commenter also suggested this approach could materially improve the
functioning of money market funds in any future liquidity events and
could be easily implemented within the existing regulatory
framework.\87\ A few other commenters recommended that any reform
should maintain a regulatory link between the weekly liquid asset
threshold and the imposition of gates, but that the weekly liquid asset
threshold should be lowered to 10% or 15%.\88\ These commenters
expressed concern that without clear regulatory protocol on when money
market funds could implement gates, boards might face too much pressure
in making this decision and investors may have additional uncertainty,
which could negatively affect investor redemption decisions.
---------------------------------------------------------------------------

\86\ See e.g., Wells Fargo Comment Letter; Federated Hermes
Comment Letter I; Comment Letter of the Institute of International
Finance (Apr. 12, 2021) (``Institute of International Finance
Comment Letter''); Comment Letter of the American Bankers
Association (Apr. 12, 2021) (``ABA Comment Letter''); JP Morgan
Comment Letter; ICI Comment Letter I; Comment Letter of Federated
Hermes, Inc. (Sept. 13, 2021) (``Federated Hermes Comment Letter
III'') (suggesting the rule identify certain types of information
that a fund's board could consider requesting from the adviser to
inform this decision).
\87\ Wells Fargo Comment Letter.
\88\ Comment Letter of Dreyfus Cash Investment Strategies (Apr.
12, 2021) (``Dreyfus Comment Letter''); Comment Letter of T. Rowe
Price (Apr. 12, 2021) (``T. Rowe Price Comment Letter''); Comment
Letter of BlackRock, Inc. (Apr. 12, 2021) (``BlackRock Comment
Letter'').
---------------------------------------------------------------------------

We are not proposing a gate provision, either with or without an
associated liquidity threshold, to limit the potential for investor
uncertainty and de-stabilizing preemptive investor redemption behavior
regarding the potential use of gates during stress events. Based on
investor behavior in March 2020, we are concerned that voluntary gates
may not be imposed, and if imposed, could lead to the closure of the
fund in question. Rule 22e-3 under the Act provides a mechanism for a
fund to suspend redemptions to facilitate an orderly liquidation, so we
believe that this provision provides adequate flexibility for
liquidating funds without incentivizing de-stabilizing investor
redemption behavior during stress events. In addition, without a
specific regulatory threshold or other specific guidelines to govern
the imposition of gates, it may be difficult for a fund's board to
determine whether it is in the fund's best interests to impose a
voluntary gate. We are concerned that the discretionary ability of the
board to impose gates could add uncertainty in times of market stress,
and investors may decide to redeem at this time simply to avoid the
potential imposition of a gate. Such preemptive redemptions could
increase pressure on fund liquidity during periods of market stress.
We request comment on our proposal to remove from rule 2a-7 the
ability of money market funds to impose redemption gates and to retain
the availability of a suspension under the terms set forth in rule 22e-
3, including the following:
1. Should we, as proposed, no longer allow money market funds to
impose redemption gates under rule 2a-7? Are there circumstances,
beyond those covered by rule 22e-3, in which the ability of a money
market fund to impose a gate or suspend redemptions would provide
benefits to money market funds and short-term funding markets?
2. Instead of removing the ability to impose gates from rule 2a-7,
should we retain gates as an available tool for money market funds? If
so, should we modify the current provision to remove the tie between
gate determinations and liquidity thresholds? Should a fund board be
able to impose a gate any time it determines that doing so is in the
best interests of the fund? If so, should a fund have to opt in ex ante
to having gates as a potential tool? In what circumstances would it
likely be in the fund's best interests to impose a gate? Would a board
impose a gate in practice and, if so, what are the practical
consequences of any such decision? Would it be effective to require a
fund to adopt board-approved policies and procedures that identify the
circumstances in which the fund would impose a gate? If so, what
factors should those policies and procedures consider for purposes of
when to impose a gate? How would this approach affect investor and fund
behavior? For example, would investors be likely to redeem preemptively
in times of stress out of concern that a fund may impose a gate, or
would investors view a redemption gate as unlikely under this approach?
3. If we retain the connection between redemption gates and
liquidity thresholds, what liquidity threshold should we use to permit
a board to impose a redemption gate? For example, should the liquidity
threshold remain at 30% weekly liquid assets, increase to 50% weekly
liquid asset in connection with our proposal to increase liquidity
requirements, or be lower than the current 30% threshold (e.g., 10% or
15% weekly liquid assets)? Should the board's ability to impose a
redemption gate instead be tied to a daily liquid asset threshold, such
as the current 10% threshold, the proposed 25% threshold discussed
below, or a lower threshold, such as 5%? How would these changes affect
investor and fund behavior? Are there other ways we should modify
provisions related to redemption gates to make them less likely to
incentivize preemptive redemptions in times of stress?
4. Should we allow certain types of money market funds to impose
redemption gates, but not others? For example, are retail investors
less sensitive to the potential imposition of gates, such that allowing
retail funds to impose gates is less likely to contribute to incentives
to redeem preemptively? Alternatively, should we only allow
institutional funds to impose gates given that these funds historically
have experienced higher levels of redemptions in times of stress?
5. If we retain a redemption gate provision in rule 2a-7, would the
board's ability to impose a redemption gate reduce the need for, or
otherwise affect, other regulatory provisions we are proposing (e.g.,
the swing pricing requirement for institutional prime and institutional
tax-exempt money market funds, increased liquidity requirements for all
money market funds)?
3. Removal of Liquidity Fees From Rule 2a-7
We also are proposing to remove from rule 2a-7 the provisions
allowing or requiring money market funds to impose liquidity fees once
the fund crosses certain liquidity thresholds. As a general matter, we
believe investors are less sensitive to the possibility of bearing
liquidity costs than they are to the possibility of redemption
gates.\89\ We also continue to believe it is important for
institutional prime and institutional tax-exempt money market funds to
have a tool to cause redeeming investors to bear the costs of liquidity
if they redeem during a period of stress. However, we do not believe
the current liquidity fee provisions in rule 2a-7 achieve this goal. In
March 2020, no money market funds imposed liquidity fees, despite the
fact that many institutional prime and tax-exempt funds were
experiencing significant outflows and some were selling

[[Page 7259]]

portfolio holdings to meet redemptions, sometimes at a significant loss
due to wider spreads given liquidity conditions in the market at that
time.\90\ In part, this is due to the design of the current rule, given
that only one institutional prime fund had weekly liquid assets below
the 30% threshold and could have therefore imposed a liquidity fee.
---------------------------------------------------------------------------

\89\ See supra footnote 75 (discussing comment letters that
expressed the view that the possibility of redemption gates was a
greater concern for investors in March 2020 than the possibility of
liquidity fees).
\90\ See, e.g., JP Morgan Comment Letter.
---------------------------------------------------------------------------

Some commenters recommended that we allow a fund's board to impose
liquidity fees whenever the board determines that doing so is in the
best interests of shareholders, without reference to a specific
liquidity threshold.\91\ A few other commenters suggested allowing fund
boards to impose liquidity fees when the fund's weekly liquid assets
reach a set level that is lower than the existing 30% threshold.\92\
Some commenters suggested that we require money market funds to have
policies and procedures that provide a fund's board with direction on
when to impose fees and how to calculate them.\93\ Another commenter
recommended that the rule identify certain types of information that
the board could request from the fund's adviser to inform its decision
of whether to impose liquidity fees and require the board to summarize
the basis of its decision to impose liquidity fees in a report to the
Commission.\94\ We are not proposing any of these approaches because we
do not believe they would result in timely decisions to impose
liquidity fees on days when the fund has net outflows that, due to
associated costs to meet those redemptions, will dilute the value of
the fund for remaining shareholders.\95\ Moreover, while one commenter
suggested removing the ability to impose fees from rule 2a-7, the
commenter did not support any alternative tools for imposing liquidity
costs on redeeming investors.\96\
---------------------------------------------------------------------------

\91\ See, e.g., Federated Hermes Comment Letter I; Comment
Letter of Federated Hermes, Inc. (June 1, 2021); Wells Fargo Comment
Letter.
\92\ See, e.g., BlackRock Comment Letter (suggesting 10%);
Dreyfus Comment Letter (suggesting 15%).
\93\ JP Morgan Comment Letter; ICI Comment Letter I; Western
Asset Comment Letter.
\94\ Federated Hermes Comment Letter III.
\95\ In contrast, the proposed swing pricing requirement
discussed below would not require board action to impose costs on
redeeming investors on a particular day and instead would connect
the liquidity costs to the amount of net redemptions for that
period, thus reducing the potential for a first-mover advantage or
other timing misalignment between an investor's redemption activity
and the imposition of liquidity costs.
\96\ Vanguard Comment Letter.
---------------------------------------------------------------------------

For institutional prime and tax-exempt money market funds, we are
concerned that the current rule--and the alternatives commenters
suggested--would not protect remaining investors in a fund from
dilution resulting from sizeable outflows in future periods of stress.
While we are proposing to remove liquidity fee provisions from the
rule, we believe it is important for these 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. As a result, we are proposing to require
institutional prime and tax-exempt money market funds to implement
swing pricing, as discussed in more detail below.
For retail prime and tax-exempt funds, these funds historically
have experienced lower, more gradual levels of redemptions in stress
periods than institutional funds. This was also true in March 2020,
when retail prime funds had outflows of approximately 11% over a three-
week period in comparison to institutional prime fund outflows of
approximately 30% over a two-week period. As discussed below, we are
proposing to increase liquidity requirements for all money market
funds, including retail funds. When the Commission originally
determined to apply the fee and gate provisions to retail funds, it
expressed concern that retail investors may be motivated to redeem
heavily in flights to quality, liquidity, and transparency (even if
they may do so somewhat more slowly than institutional investors) and
stated that it could not rule out the potential for heavy redemptions
in retail funds in the future.\97\ Although retail funds did not have
particularly heavy redemptions during the liquidity stress of March
2020, some retail prime funds participated in the MMLF, and it is
impossible to know whether outflows would have continued absent
official sector intervention that helped stabilize short-term funding
markets.\98\ We believe, however, that the significant increases to
daily and weekly liquid asset thresholds we are proposing--which would
have the largest effect on retail prime funds based on their average
historical liquidity levels--should result in these funds being able to
manage much heavier redemptions than they have experienced during any
previous stress period.\99\ As a result of the expected effect of the
liquidity requirement changes, we do not believe that retail prime and
tax-exempt money market funds need special provisions allowing them to
impose liquidity fees or other analogous tools under rule 2a-7.
---------------------------------------------------------------------------

\97\ See 2014 Adopting Release, supra footnote 13, at section
III.C.2.a.
\98\ See supra footnote 36 (noting that 17 retail prime funds
participated in the MMLF).
\99\ See infra paragraph accompanying footnote 209 (explaining
that while the proposal would require retail prime funds to maintain
higher levels of liquidity than they have historically maintained on
average, the resulting larger liquidity buffers would increase the
likelihood that these funds can meet redemptions without significant
dilution).
---------------------------------------------------------------------------

While the proposal would remove the liquidity fee provision in rule
2a-7, a money market fund's board of directors may nonetheless approve
the fund's use of redemption fees (up to but not exceeding 2% of the
value of shares redeemed) to eliminate or reduce as practicable
dilution of the value of the fund's outstanding securities under rule
22c-2 under the Act.\100\ As the Commission has previously recognized,
rule 22c-2 is not limited to recouping costs associated with short-term
trading strategies, such as market timing, and can be used to mitigate
dilution arising from shareholder transaction activity generally,
including indirect costs such as liquidity costs.\101\ Although rule
22c-2 generally classifies money market funds as excepted funds that
are not subject to the rule's requirements, the rule does not treat
money market funds as excepted funds if they elect to impose redemption
fees under the rule.\102\ Thus, to the extent a money market fund's
board determines that the ability to impose fees may be necessary to
protect its investors, the board could establish a redemption fee
approach to meet the needs of the fund, provided the fund otherwise
complies with rule 22c-2 (e.g., by entering into shareholder
information agreements with intermediaries) and discloses information
about the redemption fee in its prospectus in compliance with Form N-
1A. If a money market fund elects to impose redemption fees under rule
22c-2, its process for determining when to

[[Page 7260]]

apply a fee and in what amount generally should be designed to result
in timely application of a fee to address dilution.
---------------------------------------------------------------------------

\100\ See 17 CFR 270.22c-2 (rule 22c-2 under the Investment
Company Act) (providing that an open-end fund may impose a
redemption fee, not to exceed 2% of the value of the shares
redeemed, upon the determination by the fund's board of directors
that such fee is ``necessary or appropriate to recoup for the fund
the costs it may incur as a result of those redemptions or to
otherwise eliminate or reduce so far as practicable any dilution of
the value of the outstanding securities issued by the fund''). We
anticipate that retail prime and tax-exempt money market funds would
be more likely to rely on rule 22c-2 to impose redemption fees than
institutional prime and tax-exempt funds, as the institutional funds
would be subject to a proposed swing pricing requirement to address
dilution.
\101\ See Mutual Fund Redemption Fees, Investment Company Act
Release No. 26782 (Mar. 11, 2005) [70 FR 13328 (Mar. 18, 2005)];
Investment Company Swing Pricing, Investment Company Release No.
32316 (Oct. 13, 2016) [81 FR 82084 (Nov. 18, 2016)] (``Swing Pricing
Adopting Release''), at paragraph accompanying n.26.
\102\ See 17 CFR 270.22c-2(b).
---------------------------------------------------------------------------

We request comment on our proposal to no longer permit or require
money market funds to impose liquidity fees under rule 2a-7, including
on the following:
6. Should we remove the liquidity fee provisions from rule 2a-7, as
proposed? To what extent did the possibility of liquidity fees motivate
investors' redemption decisions in March 2020? If liquidity fees are
less of a concern for investors than redemption gates, would liquidity
fee provisions, on their own, be less likely to contribute to
preemptive redemptions in future stress periods? If so, are there
advantages to retaining the current liquidity fee provisions and their
connection to weekly liquid asset thresholds? If we retain the
connection between liquidity fees and liquidity thresholds, what
liquidity threshold should we use to permit a board to impose a
liquidity fee (e.g., the current 30% weekly liquid asset threshold or
10% daily liquid asset threshold, the 50% weekly liquid asset threshold
or 25% daily liquid asset threshold we propose to use for purposes of
funds' minimum liquidity requirements, or a lower threshold, such as
10% or 15% weekly liquid assets or 5% daily liquid assets)? How would
changes to the liquidity threshold that allows a fund board to consider
liquidity fees affect investor and fund behavior?
7. Rather than remove the current liquidity fee provisions, should
we modify the circumstances in which a money market fund may impose
liquidity fees? Should we permit a fund's board to impose liquidity
fees when it determines that fees are in the best interests of the
fund? Would a board use this tool in practice? What would be the
impediments (if any) of the board making this determination? Would the
board be able to act quickly enough to impose a fee so that redeeming
investors bear the costs associated with their redemptions and do not
have a first-mover advantage? Are there other ways we could achieve
these goals through a liquidity fee framework? For example, would it be
effective to require a fund to adopt board-approved policies and
procedures that identify the circumstances in which the fund would
impose a liquidity fee and how the fund would calculate the amount of
the fee, without requiring in-the-moment board decisions or action? If
so, what factors should those policies and procedures consider for
purposes of when to impose a liquidity fee (e.g., size of redemptions,
liquidity of the fund's portfolio, market conditions, and transaction
costs)? As another alternative, should we require a fund to adopt
board-approved policies and procedures that result in a fund
determining its liquidity costs each day it has net redemptions and
applying those costs through a fee? Under either of these approaches,
how should funds calculate the amount of a liquidity fee? Should this
calculation method be the same as or similar to the calculation of a
swing factor for purposes of our proposed swing pricing requirement or
the Commission's current swing pricing rule applicable to other mutual
funds? \103\ Should the calculation account for factors that boards may
consider in determining the level of a liquidity fee under the current
rule, such as changes in spreads for portfolio securities (whether
based on actual sales, dealer quotes, pricing vendor mark-to-model or
matrix pricing, or otherwise); the maturity of the fund's portfolio
securities; or changes in the liquidity profile of the fund in response
to redemptions and expectations regarding that profile in the immediate
future? \104\ Should the liquidity fee take into account the market
impact of selling the fund's securities to meet redemptions? \105\
Should the liquidity fee be based on an assumption that the fund meets
redemptions with its most liquid securities, a pro rata amount of each
security in its portfolio, or only the securities the fund intends to
use to meet redemptions? Should the liquidity fee be a set amount, such
as 0.5%, 1%, or 2% of the value of the shares redeemed? Instead of a
uniform fee amount, should the rule establish a default fee that funds
could adjust upward or downward, as appropriate?
---------------------------------------------------------------------------

\103\ See infra Section II.B.1 (discussing calculation of a
swing factor under our proposal); 17 CFR 270.22c-1(a)(3)(i)(C)
(describing calculation of a swing factor under the Commission's
current swing pricing rule applicable to non-money market funds).
\104\ See 2014 Adopting Release, supra footnote 12, at paragraph
accompanying n.303.
\105\ Market impact costs are costs incurred when the price of a
security changes as a result of the effort to purchase or sell the
security. Market impact costs reflect price concessions (amounts
added to the purchase price or subtracted from the selling price)
that are required to find the opposite side of the trade and
complete the transaction.
---------------------------------------------------------------------------

8. If we maintain a liquidity fee provision in the rule, should it
apply only to institutional prime and tax-exempt funds, or should
retail or government funds also be subject to the provision? What are
the key distinguishing characteristics of the funds that would lead to
differing approaches?
9. If we allowed or required funds to impose liquidity fees, are
there other changes we should make to the current framework? For
example, should we continue to limit the size of the liquidity fee to
no more than 2% of the value of the shares redeemed? Are there
circumstances in which the liquidity costs associated with meeting
redemptions may exceed 2% of the value of the shares redeemed, such
that increasing or removing the limit would better mitigate dilution?
10. If we adopted a modified liquidity fee framework that required
funds to apply liquidity fees more frequently than is contemplated by
the current rule, are there operational issues we would need to
consider? For example, are intermediaries able to apply liquidity fees
on a dynamic basis (e.g., where liquidity fees vary in size and may
apply more frequently than during periods of stress)?
11. Should we require money market funds to implement practices to
mitigate investor dilution but permit money market funds to choose
between imposing liquidity fees or imposing the proposed swing pricing
approach as the method for doing so? Should we allow money market funds
to choose other unspecified options for mitigating investor dilution?
What are the advantages and disadvantages of these approaches? What
factors would influence a fund's decision of whether to implement swing
pricing, a liquidity fee framework, or another method of mitigating
dilution?
12. Do money market funds view rule 22c-2 as a viable way to
implement liquidity fees, if the board approves the use of such fees?
Should we modify any of the requirements of rule 22c-2 or Form N-1A
that relate to redemption fees for these funds? For example, should we
specify that, like a liquidity fee under rule 2a-7, a money market fund
redemption fee under rule 22c-2 does not need to be disclosed in the
prospectus fee table? Would retail prime or retail tax-exempt funds opt
to rely on rule 22c-2? Would institutional prime or institutional tax-
exempt funds ever use rule 22c-2 in addition to the proposed swing
pricing requirement and, if so, why?

B. Proposed Swing Pricing Requirement

1. Purpose and Terms of the Proposed Requirement
We are proposing a swing pricing requirement specifically for
institutional prime and institutional tax-exempt money market funds
that would apply when the fund experiences net

[[Page 7261]]

redemptions.\106\ This requirement is designed to ensure that the costs
stemming from net redemptions are fairly allocated and do not give rise
to a first-mover advantage or dilution under either normal or stressed
market conditions.\107\ The swing pricing requirement would complement
our proposal to require funds to hold additional liquidity by requiring
redeeming investors to pay the cost of depleting a fund's liquidity.
Requiring swing pricing also would address a fund's potential
reluctance to impose a voluntary liquidity fee even when doing so might
be beneficial to the fund.
---------------------------------------------------------------------------

\106\ We refer to money market funds that are not government
money market funds or retail money market funds collectively as
``institutional funds'' when discussing the proposed swing pricing
requirement.
\107\ The proposed swing pricing requirement differs in certain
respects from the swing pricing provision in rule 22c-1, which does
not apply to money market funds. We are proposing a swing pricing
requirement specifically for institutional funds in rule 2a-7,
rather than proposing amendments to rule 22c-1, because we are
focused on money market fund reform in this release. The Fall 2021
Unified Agenda notes that the Division of Investment Management is
considering recommending changes to regulatory requirements relating
to open-end funds' liquidity and dilution management. See Securities
and Exchange Commission, Fall 2021 Unified Agenda, available at
www.reginfo.gov.
---------------------------------------------------------------------------

Swing pricing is a process of adjusting a fund's current NAV such
that the transaction price effectively passes on costs stemming from
shareholder transaction flows out of the fund to shareholders
associated with that activity.\108\ Trading activity and other changes
in portfolio holdings associated with meeting redemptions may impose
costs, including trading costs and costs of depleting a fund's daily or
weekly liquid assets. These costs, which currently are borne by the
remaining investors in the fund, can dilute the interests of non-
redeeming shareholders. This can create incentives for shareholders to
redeem quickly to avoid losses, particularly in times of market stress.
If shareholder redemptions are motivated by this first-mover advantage,
they can lead to increasing outflows, and as the level of outflows from
a fund increases, the incentive for remaining shareholders to redeem
may also increase. Regardless of whether investor redemptions are
motivated by a first-mover advantage or other factors, there can be
significant, unfair adverse consequences to remaining investors in a
fund in these circumstances, including material dilution of remaining
investors' interests in the fund. Swing pricing can reduce the
potential for dilution of investors who choose to remain in the fund.
---------------------------------------------------------------------------

\108\ While the term swing pricing typically refers to a process
of adjusting a fund's NAV for either net redemptions or net
subscriptions, the proposed swing pricing framework for money market
funds would only apply when a fund has net redemptions.
---------------------------------------------------------------------------

The proposed swing pricing requirement is designed to address these
concerns. Under the proposal, an institutional fund would be required
to adjust its current NAV per share by a swing factor reflecting spread
and transaction costs, as applicable, if the fund has net redemptions
for the pricing period.\109\ If the institutional fund has net
redemptions for a pricing period that exceed the ``market impact
threshold,'' which would be defined as 4% of the fund's net asset value
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, the swing factor would also include market
impacts, as described below.\110\ The ``pricing period'' would be
defined, in substance, to mean the period of time in which an order to
purchase or sell securities issued by the fund must be received to be
priced at the next computed NAV. This is designed to address money
market funds that compute their NAVs multiple times per day. For
example, if a fund computes a NAV as of 12:00 p.m. and 4:00 p.m., the
fund would determine if it had net redemptions for each pricing period
and, if so, apply swing pricing for the corresponding NAV
calculation.\111\ Consistent with the approach taken by the Commission
with respect to the swing pricing provision in rule 22c-1, an
institutional fund with multiple share classes must determine whether
it experienced net redemption activity across all share classes in the
aggregate, rather than determining net redemption activity on a class
by class basis.\112\
---------------------------------------------------------------------------

\109\ See proposed rule 2a-7(c)(2)(ii)(A). The proposal would
implement the swing pricing requirement by requiring an affected
money market fund to adopt swing pricing policies and procedures,
approved by the fund's board and administered by a ``swing pricing
administrator,'' as discussed in more detail below. In addition, and
consistent with the Commission's current swing pricing rule (rule
22c-1), with respect to master-feeder funds, only the master fund
can apply swing pricing under our proposed rule. See proposed rule
2a-7(c)(2)(v).
\110\ See proposed rule 2a-7(c)(2)(iii)(B) and proposed rule 2a-
7(c)(2)(vi)(B). See infra Section III.D.4 for a more detailed
analysis of the proposed market impact threshold and potential
alternative approaches.
\111\ Under the proposal a fund may estimate shareholder flow
information to determine whether the fund has net redemptions for a
pricing period and to determine the amount of net redemptions,
provided the swing pricing administrator receives sufficient
investor flow information to make a reasonable estimate. Although
institutional funds generally have more timely flow information than
other kinds of open-end funds, we believe reasonable estimates are
appropriate in the absence of complete flow information.
\112\ See Swing Pricing Adopting Release, supra footnote 102, at
paragraph accompanying n.175. If a fund were to only include the
transaction activity of a single share class, and were to swing one
share class and not another, one share class would pay expenses
incurred in the management of the fund's portfolio as a whole, which
would generally be inconsistent with rule 18f-3.
---------------------------------------------------------------------------

A mandatory swing pricing regime for net redemptions is intended to
address funds' (or fund boards') likely reluctance to impose a
voluntary swing pricing regime or voluntary liquidity fee. For example,
while money market funds were permitted to impose liquidity fees on
redeeming investors under rule 2a-7 if a fund had less than 30% of its
assets invested in weekly liquid assets no money market fund imposed
such fees during the March 2020 market turmoil. Moreover, even if all
institutional money market funds recognized the benefits of charging
redeeming investors for liquidity costs, we believe there is a
collective action problem in which no fund would want to be the first
to adopt such an approach. We believe past experience with the existing
liquidity fee regime supports a mandatory approach to dilution
mitigation for institutional funds.
The proposed swing pricing requirement would not apply to net
subscriptions because, for money market funds, we believe net
redemptions are more likely to contribute to dilution and other
liquidity costs than net subscriptions. Institutional funds have come
under significant stress twice in the last 13 years in the face of high
levels of redemptions--significant subscriptions into these funds have
not had similar effects. Beyond these considerations, we also recognize
that applying our proposed swing pricing requirements to institutional
fund subscriptions would require these funds to make certain
assumptions about how they invest cash from new subscriptions that
would be inconsistent with the requirements in rule 2a-7.\113\
---------------------------------------------------------------------------

\113\ For example, an institutional fund with weekly liquid
assets below the regulatory threshold must invest only in weekly
liquid assets and could not purchase a pro rata amount of each
security in its portfolio, but our proposed swing pricing framework
would require such a fund to assume the purchase of a pro rata
amount of each portfolio holding if the framework extended to net
subscriptions.
---------------------------------------------------------------------------

Our proposed money market fund swing pricing framework specifies
how an institutional fund would determine its swing factor, which would
differ based on the amount of net redemptions (see Figure 1, below).
The swing factor

[[Page 7262]]

would be determined by calculating identified types of costs the fund
would incur, as applicable, by selling a pro rata amount of each
security in its portfolio to satisfy the amount of net redemptions for
the pricing period.\114\
---------------------------------------------------------------------------

\114\ See proposed rule 2a-7(c)(2)(iii). The swing factor is the
amount, expressed as a percentage of the fund's net asset value, by
which the fund adjusts its net asset value per share.
---------------------------------------------------------------------------

The requirement that a money market fund calculate costs to sell a
pro rata amount of each security in its portfolio--a ``vertical slice''
of the portfolio--is designed to ensure that a fund's adjusted NAV
incorporate the costs of selling its less liquid holdings, which may
protect remaining shareholders from dilution and may discourage
investors from redeeming quickly during periods of market stress to
seek to avoid potential costs from a fund's future sale of less liquid
securities.\115\ For example, when investors redeem, if those
redemptions are met through daily or weekly liquid assets, the
redemptions leave the fund with less liquidity. This increases the
likelihood that further redemptions could require the fund to sell less
liquid assets or incur costs in rebalancing the portfolio. Although
further redemptions may be more likely to require the fund to sell less
liquid assets in times of market stress when redemptions may be
elevated, redeeming investors depleting a fund's daily and weekly
liquid assets can impose liquidity costs on the remaining shareholders
as well as the fund generally, even during non-stressed periods. This
depletion of a money market fund's liquidity can dilute the interests
of remaining investors and also can create a first-mover advantage for
investors who redeem in an attempt to avoid bearing the costs created
by other investors' redemptions.
---------------------------------------------------------------------------

\115\ As described in more detail below, a fund's swing pricing
administrator may estimate costs and market impact factors for each
type of security with the same or substantially similar
characteristics and apply those estimates to all securities of that
type rather than analyze each security separately.
---------------------------------------------------------------------------

The factors a fund must take into account when calculating the
swing factor vary depending on the size of net redemptions for the
pricing period (see Figure 1, below). If the fund has net redemptions
that do not exceed the market impact threshold, the swing factor
reflects the spread costs and other transaction costs (i.e., brokerage
commissions, custody fees, and any other charges, fees, and taxes
associated with portfolio security sales), as applicable, from selling
a vertical slice of the portfolio to meet those net redemptions.\116\
Including the spread cost in the swing factor calculation effectively
requires a fund to value a security in its portfolio at the bid price
when the fund has net redemptions. We understand that money market
funds may already price portfolio securities at the bid price when
striking their NAVs.\117\ As a result, the requirement to adjust the
fund's current NAV by a swing factor when it has net redemptions that
do not exceed the market impact threshold would generally affect
institutional funds that use mid-market pricing to compute their
current NAVs.\118\ Spread costs and other transaction costs associated
with portfolio security sales also are included in the Commission's
current swing pricing rule for non-money market funds. Those
transaction-related costs can create dilution for money market funds
just as they can for other kinds of funds, and we are including them in
this proposal for the same reasons the Commission included them in the
current swing pricing rule.\119\
---------------------------------------------------------------------------

\116\ See proposed rule 2a-7(c)(2)(iii)(A). Put another way, the
fund must take into account these factors if it has net redemptions
in any amount. If a fund has net redemptions that exceed its market
impact threshold, it must also apply a market impact factor.
\117\ See FASB ASC 820-10-35-36C. Generally accepted accounting
principles (``GAAP'') provide that if an asset measured at fair
value has a bid price and an ask price (for example, an input from a
dealer market), the price within the bid-ask spread that is most
representative of fair value in the circumstances shall be used to
measure fair value, and that the use of bid prices for asset
positions is permitted but not required for these purposes.
\118\ See FASB ASC 820-10-35-36D (stating that use of mid-market
pricing as a practical expedient for fair value measurements within
a bid-ask spread is not precluded). Very generally, mid-market
pricing values a security at the average of its bid price and ask
price. Since a seller generally asks for a higher price for a
security than a buyer bids for that security, the mid-market price
is incrementally higher than the bid price for a security, but lower
than its ask price.
\119\ Our proposed rule requires a money market fund to estimate
the costs that would result from selling a vertical slice of its
portfolio on a given day. Accordingly, our proposed rule does not
incorporate the separate reference to near-term costs that is
included in the general swing pricing rule. See 17 CFR 270.22c-
1(a)(3)(i)(C).
---------------------------------------------------------------------------

If net redemptions exceed the market impact threshold, a fund's
swing factor would also be required to include good faith estimates of
the market impact of selling a vertical slice of a fund's portfolio to
satisfy the amount of net redemptions for the pricing period. The fund
would estimate market impacts for each security in its portfolio by
first estimating the market impact factor. This factor is 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. Then, the fund would multiply the market impact
factor by the dollar amount of the security that would be sold if the
fund sold a pro rata amount of each security in its portfolio to meet
the net redemptions for the pricing period.\120\
---------------------------------------------------------------------------

\120\ See proposed rule 2a-7(c)(2)(iii)(B).
---------------------------------------------------------------------------

We understand that it may be difficult to produce timely, good
faith estimates of the market impact of selling a pro rata portion of
each instrument the fund holds. Recognizing these difficulties, and
because many securities held by institutional funds have similar
characteristics and would likely incur similar costs if sold, the
proposed rule would permit a fund to estimate costs and the market
impact factor for each type of security with the same or substantially
similar characteristics and apply those estimates to all securities of
that type in the fund's portfolio, rather than analyze each security
separately.\121\ As part of this process, we believe it would be
reasonable to apply a market impact factor of zero to the fund's daily
and weekly liquid assets, since a fund could reasonably expect such
assets to convert to cash without a market impact to fulfill
redemptions (e.g., because the assets are maturing shortly).
---------------------------------------------------------------------------

\121\ See proposed rule 2a-7(c)(2)(iii)(C). A fund could, for
example, determine the liquidity, trading, and pricing
characteristics of a subset of securities justifies the application
of the same costs and market impact factor to all securities of that
type within its portfolio.

---------------------------------------------------------------------------

[[Page 7263]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.000

We recognize that the market impact of selling a vertical slice of
the fund's portfolio is likely to be negligible when net redemptions
are small, and estimating the market impact of selling a security can
be challenging. As a result, we are proposing to require funds to
include market impact in their swing factors only when net redemptions
exceed the market impact threshold. To establish the amount of net
redemptions that should trigger application of the market impact
factor, we reviewed historical flow information for institutional money
market funds over a nearly five-year period.\122\ During this time,
institutional funds had daily outflows greater than 4% on approximately
5% of trading days.\123\ At these heightened levels of outflows, market
impacts are designed to estimate the full liquidity costs of selling a
vertical slice of a money market fund's portfolio because, for a money
market fund's less liquid investments, market impacts may impose
significant costs on a fund, particularly when net redemptions are
large or in times of stress. We also propose to allow the swing pricing
administrator to apply a market impact factor at a lower amount of net
redemptions. This flexibility is designed to recognize that there may
be circumstances in which a smaller market impact threshold would be
appropriate to mitigate dilution of fund shareholders, such as when a
fund holds a larger amount of less liquid investments or in times of
stress.\124\ We believe a fund's swing pricing administrator,
responsible for the day-to-day administration of the fund's swing
pricing program and therefore familiar with the fund's redemption
patterns and the operational requirements of the swing pricing program,
would be well positioned to determine whether a smaller market impact
threshold could be beneficial for the fund's investors to help mitigate
dilution. To address the concerns the Commission expressed in 2016 that
subjective estimates of market impact costs could grant excessive
discretion in the determination of a swing factor, we also are
providing additional parameters for estimating market impact to make
the calculation more objective as discussed above.\125\ These
requirements should help to limit subjectivity that could be abused,
and proposed recordkeeping rules would require funds to document their
market impact factors, facilitating our staff's review and oversight of
money market fund swing pricing.\126\
---------------------------------------------------------------------------

\122\ See infra Section III.D.4 for a more detailed analysis of
the proposed market impact threshold and potential alternative
approaches. The analysis is based on daily flows of institutional
prime and institutional tax-exempt funds reported in CraneData on
1,228 days between December 2016 and October 2021. As of September
2021, CraneData covered 87% of the funds and 96% of total assets
under management, resulting in a count of 37 institutional prime
funds and 10 institutional tax-exempt funds.
\123\ The proposed definition of market impact threshold would
require a fund to divide 4% of the fund's net asset value by the
number of pricing periods to arrive at the amount of net redemptions
that would trigger the threshold. In recognition that some
institutional funds have multiple pricing periods per day, and the
number of pricing periods may vary among funds, this aspect of the
definition is designed to provide a threshold that would apply more
consistently to funds with different numbers of pricing periods, as
opposed to a static figure applicable to all funds.
\124\ For example, investors that invest in funds with less
liquid portfolios may accept the risk of larger swings because they
believe that the fund's less liquid portfolio could generate higher
returns.
\125\ See Swing Pricing Adopting Release, supra footnote 101, at
paragraphs accompanying nn. 143 and 148. Specifically, a fund's
market impact factor calculation for a security would reflect 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, multiplied by the dollar amount of the
security that would be sold if the fund sold a pro rata amount of
each security in its portfolio to meet the net redemptions for the
pricing period.
\126\ See proposed rule 31a-2(a)(2).
---------------------------------------------------------------------------

With respect to application of a swing factor, a fund with multiple
share classes must use the same swing factor for each share class.
Because the economic activity causing dilution occurs at the fund
level, it would not be appropriate to employ swing pricing at the share
class level to target such dilution.\127\ In addition, when an
institutional fund applies the swing factor to its net asset value, it
must round the adjusted current net asset value per share to a minimum
of the fourth decimal place in the case of a fund with a $1.0000 share
price or an equivalent or more precise level of accuracy for money
market funds with a different share price (e.g., $10.000 per share, or
$100.00 per share).\128\
---------------------------------------------------------------------------

\127\ See Swing Pricing Adopting Release, supra footnote 101, at
paragraph accompanying n.178.
\128\ See proposed rule 2a-7(c)(1)(ii). This provision is
designed to provide the same level of pricing precision that an
institutional fund must calculate with respect to its floating NAV.
---------------------------------------------------------------------------

We are not proposing an upper limit on a fund's swing factor. The
Commission included a 2% upper limit in the current swing pricing rule
in light of concerns that, without an upper limit, a fund's application
of swing pricing could operate as a ``de facto gate'' or place an undue
restriction on investors' ability to redeem.\129\ We believe the more
specific parameters in this proposal for determining a fund's swing
factor sufficiently mitigate these concerns. Further, if a fund were to

[[Page 7264]]

experience such high costs, we believe it would be appropriate for
redeeming investors to bear the costs their redemptions create for the
benefit of remaining investors. Given our experience with investor
behavior in March 2020, we also believe that requiring redeeming
investors to internalize the liquidity costs of their redemptions would
make investors consider potential redemption requests more carefully,
particularly during periods of market stress, and would prevent
remaining investors from bearing costs imposed on the fund by redeeming
investors.
---------------------------------------------------------------------------

\129\ Swing Pricing Adopting Release, supra footnote 102, at
paragraph accompanying n.254.
---------------------------------------------------------------------------

Finally, we are proposing several requirements related to the
administration of the proposed swing pricing requirement. Specifically,
a money market fund's swing pricing policies and procedures must be
implemented by a board-designated administrator (the ``swing pricing
administrator''), and the administration of the swing pricing program
must be reasonably segregated from portfolio management of the fund and
may not include portfolio managers.\130\ The Commission's current swing
pricing rule also requires the board to designate a swing pricing
administrator and the administration of a swing pricing program that is
reasonably segregated from portfolio management of the fund and may not
include portfolio managers. We are proposing the requirement here for
the same reasons the Commission adopted it in that rule: Requiring
segregation of functions with respect to the administration of swing
pricing will provide better clarity of roles and reduce the possibility
of conflicts of interest in the administration of swing pricing.\131\
---------------------------------------------------------------------------

\130\ See proposed rule 2a-7(c)(2)(iv)(B) and proposed rule 2a-
7(c)(2)(vi)(E). Consistent with the Swing Pricing Adopting Release,
we believe that portfolio managers may have conflicts of interest
with respect to setting the swing factor, and therefore we do not
believe that they should be involved in setting the swing factor.
See Swing Pricing Adopting Release, supra footnote 102, at paragraph
accompanying n.293.
\131\ Swing Pricing Adopting Release, supra footnote 102, at
paragraph accompanying n.293.
---------------------------------------------------------------------------

We also are proposing requirements to facilitate board oversight of
swing pricing. A fund's board, including a majority of directors who
are not interested persons of the fund, would be required to (1)
approve the fund's swing pricing policies and procedures; (2) designate
the swing pricing administrator; and (3) review, no less frequently
than annually, a written report prepared by the swing pricing
administrator describing the adequacy and effectiveness of the
program.\132\ We propose to amend rule 2a-7 to provide that a money
market fund's board may not delegate its responsibilities to make the
determinations that the proposed swing pricing provisions would require
of the board.\133\ The swing pricing administrator's report to the
board would be required to describe (1) the administrator's review of
the adequacy of the fund's swing pricing policies and procedures and
the effectiveness of their implementation; (2) any material changes to
the fund's swing pricing policies and procedures since the date of the
last report; and (3) the administrator's review and assessment of the
fund's swing factors and market impact threshold, including the
information and data supporting the determination of the swing factors
and the swing pricing administrator's determination to use a smaller
market impact threshold, if applicable.\134\ The proposal, like the
Commission's current swing pricing rule, generally contemplates a board
role in compliance oversight, rather than board involvement in the day-
to-day administration of a fund's swing pricing program. Moreover,
money market fund boards in particular have significant
responsibilities regarding valuation- and pricing-related matters and
should be well-positioned to provide effective oversight of the
proposed swing pricing program. Accordingly, board approval of the
swing pricing policies and procedures, and targeted review of the
implementation of the fund's swing pricing program, will help ensure
that swing pricing operates in the best interests of the fund's
shareholders.
---------------------------------------------------------------------------

\132\ See proposed rule 2a-7(c)(2)(iv)(A) through (C).
\133\ See proposed rule 2a-7(j). Rule 2a-7(j) permits a money
market fund's board of directors to delegate to the fund's
investment adviser or officers the responsibility to make the
determinations required to be made by the board of directors under
the rule, except for certain specified provisions.
\134\ See proposed rule 2a-7(c)(2)(iv)(C)(1) through (3). The
report to the board, which must be delivered no less frequently than
annually, must include a description of the impact of the swing
pricing program on eliminating or reducing liquidity costs
associated with satisfying shareholder redemptions. The report must
include the information and data that support the administrator's
determination of the fund's swing factor each day.
---------------------------------------------------------------------------

We are proposing recordkeeping requirements that are consistent
with the requirements in our existing swing pricing rule. Specifically,
a fund must maintain a written copy of the reports provided by the
swing pricing administrator to the board for six years, the first two
in an easily accessible place.\135\ Similarly, existing recordkeeping
requirements applicable to all money market fund procedures would
require a fund to maintain its swing pricing policies and procedures
for six years, the first two in an easily accessible place.\136\
---------------------------------------------------------------------------

\135\ See proposed rule 2a-7(h)(8).
\136\ See 17 CFR 270.2a-7(h)(1).
---------------------------------------------------------------------------

Our proposed money market fund swing pricing framework considers
and addresses the comments we received on the swing pricing option
included in the PWG Report. Two of those comments supported a swing
pricing requirement for money market funds.\137\ One of these
commenters suggested that swing pricing would directly address investor
incentives for rapid redemptions from money market funds by ensuring
that all investors who redeem are at risk for any losses created by a
run, reducing or eliminating the incentive for early redemptions.\138\
However, most commenters opposed a swing pricing requirement.\139\
Several commenters suggested that swing pricing may not slow investor
redemptions and would not have addressed the issues that occurred in
March 2020.\140\ One of these commenters suggested that imposing an
additional cost through swing pricing would not materially affect
investor behavior, particularly because an investor does not know at
the time of placing its order whether the fund will adjust its
NAV.\141\ One commenter suggested that swing pricing may encourage
investors to accelerate redemptions and seek a first-mover
advantage.\142\ Certain commenters also expressed concern that swing
pricing would reduce investor interest in money market funds.\143\
---------------------------------------------------------------------------

\137\ Comment Letter of Robert Rutkowski (Apr. 13, 2021);
Comment Letter of the Americans for Financial Reform Education Fund
(Apr. 12, 2021) (``Americans for Financial Reform Comment Letter'').
\138\ Americans for Financial Reform Comment Letter.
\139\ See, e.g., Fidelity Comment Letter; Western Asset Comment
Letter; Comment Letter of the GARP Risk Institute (Mar. 16, 2021)
(``GARP Risk Institute Comment Letter''); Healthy Markets Comment
Letter; Comment Letter of PIMCO (Apr. 19, 2021) (``PIMCO Comment
Letter''); SIFMA AMG Comment Letter; ICI Comment Letter I; Federated
Hermes Comment Letter I; JP Morgan Comment Letter; BlackRock Comment
Letter; Institute of International Finance Comment Letter; State
Street Comment Letter; CCMC Comment Letter; T Rowe Price Comment
Letter; Comment Letter of the Investment Company Institute (June 3,
2021) (``ICI Comment Letter III'').
\140\ See, e.g., Fidelity Comment Letter; Western Asset Comment
Letter; GARP Risk Institute Comment Letter.
\141\ Fidelity Comment Letter.
\142\ Western Asset Comment Letter.
\143\ BlackRock Comment Letter; GARP Risk Institute Comment
Letter; Comment Letter of mCD IP Corporation (Apr. 12, 2021) (``mCD
IP Comment Letter'').

---------------------------------------------------------------------------

[[Page 7265]]

We recognize that investors would not know at the time of order
submission whether a fund would have net redemptions for that pricing
period and swing the fund's price accordingly. However, we believe the
implementation of a swing pricing regime for institutional funds may
cause some investors in those funds to choose not to redeem, including
in times of market stress, because those investors view the potential
swing factor and price adjustment as more tangible than the uncertain
possibility of potential future losses during times of reduced
liquidity. We do not agree that, as some commenters suggested, a swing
pricing requirement would encourage investors to preemptively redeem
and seek a first-mover advantage.\144\ Investors do not necessarily
know whether the fund's flows during any given pricing period will
trigger swing pricing or, if so, the size of the swing factor for that
period. In addition, redeeming investors would bear the cost of
liquidity under the proposed rule even when net redemptions are small,
meaning that there would not be a clear advantage to redeeming earlier
versus later. Rather than encourage preemptive redemptions, we believe
the proposed swing pricing requirement would discourage excessive
redemptions, particularly in times of stress, by requiring redeeming
investors to bear liquidity costs. For example, investors may determine
not to redeem during stress periods, or to redeem smaller amounts over
a longer period of time, which could help reduce concentrated
redemptions and associated liquidity pressures that institutional funds
can face in times of stress. The swing pricing requirement also could
cause some investors to move their assets to government money market
funds, as certain commenters stated, to avoid the possibility of paying
liquidity costs. Government money market funds may be a better match
for investors unwilling to bear liquidity costs, however, in that
government money market funds face lower liquidity costs. Even if for
some investors the prospect of swing pricing does not alter redemption
behavior on a particular day, we believe swing pricing results in
fairer, non-dilutive pricing, particularly when there are heavy
redemptions (even if the prospect of swing pricing does not materially
change the level of those redemptions).
---------------------------------------------------------------------------

\144\ We are not aware of any evidence that the use of swing
pricing in other jurisdictions has encouraged preemptive redemptions
by investors.
---------------------------------------------------------------------------

We recognize the Commission previously declined to extend swing
pricing to money market funds.\145\ In part, the Commission at that
time believed that swing pricing was not necessary due to the extensive
liquidity requirements applicable to such funds and the existing
liquidity fee regime that is permitted under rule 2a-7.\146\ However,
our proposed reforms would remove the ability of money market funds to
impose liquidity fees. In addition, although we are proposing to
increase money market funds' liquidity requirements, based on our
monitoring of the market stress in March 2020, we believe institutional
money market funds may continue to have incentives to sell illiquid
assets to meet redemptions in order to maintain a substantial buffer of
liquid assets or may otherwise be required to sell illiquid assets in a
stressed period. These incentives increase in times of stress but, as
discussed above, a fund's sale of less liquid assets or depletion of
daily and weekly liquid assets can create liquidity costs for the fund
in both normal and stressed circumstances. We understand institutional
investors frequently scrutinize liquidity levels in money market funds,
and some portals through which they invest even have alerts to identify
when a fund's reported liquidity levels decline, facilitating rapid
redemptions when a fund's liquidity begins to decline. Thus, we believe
that swing pricing would help institutional money market funds
equitably allocate costs that may result from these redemptions and
reduce other market externalities that increased liquidity requirements
in our rules may not fully counter and that would no longer be
countered by liquidity fees and redemption gates.
---------------------------------------------------------------------------

\145\ Swing Pricing Adopting Release, supra footnote 102, at
section II.A.3.a.
\146\ Id. See also 17 CFR 270.2a-7(c)(2) ``Liquidity fees and
temporary suspensions of redemptions.''
---------------------------------------------------------------------------

In addition to existing liquidity requirements and fee provisions,
the Commission stated in 2016 that swing pricing may be less
appropriate than a liquidity fee regime for money market funds because
their investors, and particularly investors in stable NAV money market
funds, are sensitive to price volatility.\147\ We continue to believe
that certain money market fund investors are sensitive to price
volatility. Institutional money market funds are currently subject to a
floating NAV requirement, however, and we do not believe that a swing
pricing requirement would impose significant additional price
volatility under normal market conditions.\148\
---------------------------------------------------------------------------

\147\ Swing Pricing Adopting Release, supra footnote 101, at
n.77 and accompanying text.
\148\ For example, as discussed above, we understand many
institutional funds already use bid prices when valuing their
portfolio investments and, thus, would not need to make additional
price adjustments to reflect spread costs. In addition, based on
historical flow data, we do not anticipate that funds would
regularly experience net redemption amounts that trigger the market
impact threshold.
---------------------------------------------------------------------------

We considered a framework that would apply the swing factor in the
form of a liquidity fee rather than an adjustment to the fund's
price.\149\ A liquidity fee could be used to impose liquidity costs on
redeeming investors and address dilution, much like a swing pricing-
related price adjustment. We recognize that a liquidity fee framework
could have certain advantages over a swing pricing requirement. For
example, liquidity fees provide greater transparency for redeeming
investors of the liquidity costs they are incurring. Liquidity fees
also provide a mechanism for imposing liquidity costs directly on
redeeming investors, without providing a discount to subscribing
investors through a downward adjustment of the fund's transaction price
that also must be taken into account to fully address dilution.
However, we believe that a swing pricing requirement also has several
advantages over liquidity fees. With swing pricing, a fund can pass
liquidity costs on to redeeming investors in a fair and equal manner,
without any reliance on intermediaries to achieve fair and equal
application of costs. While money market funds and their intermediaries
should be able to apply liquidity fees under the current rule, we also
believe applying dynamic liquidity fees that can change in size from
pricing period-to-pricing period may involve greater operational
complexity and cost than swing pricing. For instance, liquidity fees
may require more coordination with a fund's service providers because
these fees need to be imposed on an investor-by-investor basis by each
intermediary involved--which may be particularly difficult with respect
to omnibus accounts.\150\ On balance, we believe a swing pricing
requirement has operational advantages over liquidity fees, but we
request comment on using a liquidity fee

[[Page 7266]]

framework to impose liquidity costs and whether a liquidity fee
alternative may have fewer operational or other burdens than the
proposed swing pricing requirement while still achieving the same
overall goals.\151\ We also believe it is important for institutional
funds to use a uniform approach to impose liquidity costs on redeeming
investors, as we are concerned it would be confusing for investors if
some funds applied swing pricing and other funds applied liquidity
fees. In addition, we believe there are operational efficiencies with
funds using a uniform approach under these circumstances.
---------------------------------------------------------------------------

\149\ See infra Section III.D.5 (discussing our consideration of
a liquidity fee alternative in more detail).
\150\ Swing pricing, on the other hand, would require some funds
and intermediaries to create new systems and operational procedures
(discussed below), but once those are in place, swing pricing would
be incorporated in the process by which a fund strikes its NAV.
Intermediaries would then effect customer transactions at NAV, as
they do today, without further operational changes or coordination
with the fund. See infra Section III.D.5.
\151\ See infra Section II.B.2 for a discussion of the
operational considerations related to swing pricing.
---------------------------------------------------------------------------

Finally, we are not proposing to require retail money market funds
to implement swing pricing because these funds historically have had
smaller outflows than institutional funds during times of market
stress, including during March 2020. As a result, based on historical
experience, retail funds are less likely to have redemptions of a size
that would deplete the increased liquidity buffers we are proposing to
require. Retail investors also appear to focus less on a fund's
reported liquidity levels.\152\ Thus, retail fund managers may feel
more comfortable drawing down available liquidity from the fund's daily
liquid assets and weekly liquid assets to meet redemptions in times of
stress, without engaging in secondary market sales that could result in
significant liquidity costs. Investors typically view government money
market funds, in contrast to prime money market funds, as a relatively
safe investment during times of market turmoil, and government money
market funds have seen inflows during periods of market instability.
Government money market funds are also less likely to incur significant
liquidity costs when they purchase or sell portfolio securities due to
the generally higher levels of liquidity in the markets in which they
invest. Due to these differences in investor behavior and liquidity
costs among the various fund types, we are not proposing to require
retail money market funds or government money market funds to implement
swing pricing. Additionally, retail money market funds and government
money market funds typically maintain a stable NAV. Investors in these
funds, therefore, are accustomed to a stable NAV and may be more
sensitive to price volatility. Requiring a retail or government money
fund to adjust its NAV on any day it has net redemptions effectively
would require these funds to operate with a floating NAV. We do not
believe this is warranted in light of the differences in investor
behavior and liquidity costs discussed above and the increased
liquidity requirements we are proposing to apply to these funds.
---------------------------------------------------------------------------

\152\ See supra footnote 76 (discussing comments suggesting that
retail investors were less sensitive to declines in weekly liquid
assets in March 2020).
---------------------------------------------------------------------------

We request comment on our proposal to require any money market fund
that is not a government money market fund or a retail money market
fund to implement swing pricing.
13. As proposed, should we require any money market fund that is
not a government money market fund or a retail money market fund to
implement swing pricing? Should we permit, but not require, these funds
to implement swing pricing? If swing pricing were an optional tool,
would money market funds use it? Would they be more likely to use
optional swing pricing or optional liquidity fees, such as those which
rule 2a-7 currently contemplates?
14. Should we adopt a framework that requires a fund to adjust its
NAV for spread, other transaction costs, or market impacts only when
net redemptions exceed a certain percentage of a money market fund's
net assets? If so, should swing pricing apply only when a fund's net
redemptions exceed the market impact threshold under the proposed rule?
Should funds be able to set their own threshold?
15. Should we permit a money market fund to reasonably estimate
whether it has net redemptions and the amount of net redemptions, as
proposed, or should we require a fund to determine the actual amount of
net redemptions during a pricing period? Are there operational
complexities to this approach?
16. As proposed, should money market funds that strike NAV multiple
times per day be required to determine whether the fund has net
redemptions and, if so, the swing factor to apply for each NAV strike
(i.e., for each pricing period)? Are there alternative approaches we
should consider? If so, how could such an approach ensure that
investors are treated fairly?
17. Should we require swing pricing for both net redemptions and
net subscriptions, or only for net redemptions, as proposed? If we
require swing pricing for both net redemptions and net subscriptions,
what additional operational complexities or other considerations might
arise? If we required swing pricing for net subscriptions, should we
require funds to assume the purchase of a vertical slice of the fund's
portfolio and to value portfolio holdings at ask prices to reflect
spread costs?
18. As proposed, should we require the swing factor to account for
spread costs and other transaction costs if a fund's net redemptions
are at or below the market impact threshold? What effect would this
proposed requirement have on institutional funds that already use bid
prices when striking their NAVs? Should we instead require an
institutional fund to apply swing pricing when net redemptions are at
or below the market impact threshold only if the fund does not price at
the bid? What are the reasons a money market fund may not price at the
bid currently? Do pricing services that money market funds use
currently provide the option for funds to receive either mid or bid
prices (or both)? Are there any impediments to a fund's ability to
determine a bid price for each portfolio security? Should we remove or
revise any of the cost categories that would apply when net redemptions
are at or below the market impact threshold?
19. Should we require the swing factor to account for spread costs,
other transaction costs, and market impacts if the amount of net
redemptions exceeds the market impact threshold, as proposed? Should we
remove or revise any of these cost categories? Do funds need additional
guidance on any of these categories, such as application of the market
impact factor? Would it be sufficient for funds experiencing net
redemptions to apply a swing factor that accounts for spread costs and
other transaction costs, but not market impacts? How effective would
this approach be in achieving the objectives of swing pricing discussed
throughout this release, including the goal of fairly allocating the
costs stemming from net redemptions and preventing those costs from
giving rise to a first-mover advantage or dilution?
20. Do some or all institutional funds already estimate market
impact factors, or perform similar analyses, to inform trading
decisions? If so, would these funds' prior experience smooth the
transition to making a good faith estimate of the market impact factor
under the proposal? What difficulties might funds experience in
developing a framework to analyze market impact factors and in
producing good faith estimates of market impact factors for purposes of
the proposed swing pricing requirement? Are there ways we could reduce
those difficulties, while still requiring redeeming investors to bear
costs that reasonably represent the costs they would otherwise impose
on the fund and its remaining shareholders?

[[Page 7267]]

21. Should we define the market impact threshold as an amount of
net redemptions for a pricing period that is the value of 4% of the
fund's net asset value divided by the number of pricing periods, as
proposed? Should the threshold at which a fund must include market
impacts in its swing factor be higher or lower than proposed? In
establishing the threshold amount, should we consider factors other
than historical flows? Should the Commission periodically reexamine and
adjust the market impact threshold to account for possible changes to
redemption patterns and market behavior over time? If so, how often?
Does identification of a specific threshold in rule 2a-7 raise gaming
or other concerns?
22. Rather than a set percentage of net redemptions, as proposed,
should we define the market impact threshold on a fund-by-fund basis,
with reference to a fund's historical flows (i.e., should each fund be
required to determine the trading days for which it had its highest
flows over a set time period, and set its market impact threshold based
on the 5% of trading days with the highest flows)? Should we define the
market impact threshold on a fund-by-fund basis with reference to
another metric other than net redemptions?
23. Should we permit the swing pricing administrator to use
discretion to establish a smaller market impact threshold, as proposed?
Should we prescribe the circumstances in which a smaller market impact
threshold would be permitted, the timing of such a determination by the
swing pricing administrator (e.g., if a swing pricing administrator
must formally establish a smaller market impact threshold that will
remain in place for a period of time), disclosure of such a
determination to the fund's investors, and recordkeeping requirements
in support of the determination? Should we require the fund's board,
instead of the swing pricing administrator, to approve use of a smaller
market impact threshold? Should the swing pricing administrator or the
board have flexibility to establish a larger market impact threshold
than proposed? If so, what are the circumstances in which a fund should
have flexibility to use a market impact threshold that is larger than
4% of the fund's net asset value divided by the number of pricing
periods?
24. Should money market funds be required to take into account
other costs in determining their swing factors, beyond those proposed?
For example, should we require consideration of borrowing costs that a
fund may incur to facilitate shareholder redemptions?
25. Does our proposed requirement that a fund calculate the swing
factor by assuming it would sell a pro rata amount of each security in
its portfolio properly account for liquidity costs? Are there other
considerations related to liquidity costs that the swing pricing
framework should take into account, such as shifts in the fund's
liquidity management or other repositioning of the fund's portfolio?
26. Should money market funds calculate the swing factor by
estimating the costs of selling only the securities the fund plans to
sell to satisfy shareholder redemptions during the pricing period,
rather than calculating the swing factor based on the costs the fund
would incur if it sold a pro rata amount of each security in its
portfolio? If so, what would the operational consequences be?
27. Should the rule permit, rather than require, funds to follow
the market impact threshold and swing factor calculations set forth in
the rule? If so, what considerations or factors should the rule require
a fund to consider when determining market impact thresholds and swing
factors if the fund determines not to follow the threshold or
calculations set forth in the rule? For example, should the rule
identify for these purposes the size, frequency, and volatility of
historical net redemptions; the liquidity of the fund's portfolio; or
the costs associated with transactions in the markets in which the fund
invests?
28. Should money market funds be subject to a numerical limit on
the size of swing factors? Should the limit instead be bound only by
liquidity costs associated with net redemptions for a given pricing
period, as proposed? Should we allow a fund to use a set swing factor,
such as 2% or 3%, in times of market stress when estimating a swing
factor with high confidence may not be possible? How would we define
market stress for this purpose? Should a fund's adviser, or a majority
of the fund's independent directors, be permitted to determine market
conditions were sufficiently stressed such that the fund would apply
the set swing factor? Are there other circumstances in which we should
permit a fund to use a default swing factor?
29. Should we permit a fund to estimate costs and market impact
factors for each type of security with the same or substantially
similar characteristics and apply those estimates to all securities of
that type in the fund's portfolio, as proposed? Should we define types
of securities with the same or substantially similar characteristics?
Should we provide additional guidance to support funds' determinations
as to whether securities have the same or substantially similar
characteristics?
30. Is it reasonable to apply a market impact factor of zero to the
fund's daily and weekly liquid assets? If not, should funds estimate
the market impact factor of such assets in the same way as other assets
under the rule, or should we prescribe a different methodology for such
assets? Are there particular circumstances in which it would not be
reasonable for a fund to use a market impact factor of zero for daily
and weekly liquid assets, such as in stressed market conditions?
31. Instead of specifying swing factor calculations and thresholds
in the rule, should we require a fund to adopt policies and procedures
that specify how the fund would determine swing pricing thresholds and
swing factors based on principles set forth in the rule? If so, should
the policies and procedures include the methodologies from the market
impact threshold calculation we proposed (i.e., net redemptions that
are at or above the 95th percentile of likely fund redemptions,
determined based on relevant historical data)? Should the policies and
procedures include the swing factor calculation (i.e., the percentage
decline in the value of the security, per dollar of the amount of the
security that would be sold, multiplied by the dollar amount of the
security that would be sold if the fund sold a pro rata amount of each
security in its portfolio to meet the net redemptions for the pricing
period)? Should the policies and procedures define the market impact
threshold with reference to a metric other than net redemptions? If we
require policies and procedures, should we specify the market impacts
and dilution costs that a fund's swing pricing program must address,
rather than specifying specific principles and calculation
methodologies?
32. Should we require boards to appoint a swing pricing
administrator? What individuals or entities are likely to fulfill the
role of swing pricing administrator? Should we require board
involvement in the day-to-day administration of a fund's swing pricing
program in addition to its compliance oversight role? How might funds
maintain segregation between portfolio management and swing pricing
administration? Should a fund's chief compliance officer have a
designated role in overseeing how the fund applies the proposed swing
pricing requirement?
33. Should we require board review of a swing pricing report more
or less

[[Page 7268]]

frequently than annually? Should we require an evolving level of board
review over time (e.g., every quarter for the first year after
implementation and then less frequently in following years as the fund
gains experience implementing the swing pricing program under various
market conditions)? Should we require the fund to disclose any material
inaccuracies in the swing pricing calculation to the board (e.g., as
they arise, no less frequently than quarterly, or at some other
frequency)?
34. Are there circumstances in which it would not be possible to
estimate the market impact factor with a high degree of accuracy? If
so, what modifications should we make to the proposal? For example,
should we instead adopt a liquidity fee framework that is consistent
with the current liquidity fee provision in rule 2a-7, but without the
link to weekly liquid asset thresholds?
35. How do the operational implications of swing pricing, as
proposed, differ from the operational implications of an economically
equivalent dynamic liquidity fee framework? What are the operational
implications of a requirement for institutional money market funds to
impose a liquidity fee that can change in size and that may need to be
applied with some frequency? Are fund intermediaries equipped to apply
dynamic fees on a regular basis? Would funds have insight into whether
and how intermediaries apply these fees to redeeming investors?
36. If we adopt a liquidity fee framework instead of a swing
pricing framework, should a fund be required to apply a liquidity fee
under the same circumstances in which a fund would be required to
adjust its net asset value under the proposed swing pricing
requirement? Should a fund be required to use the same approach to
calculating a liquidity fee as the proposed approach to calculating a
swing factor? Alternatively, should different trigger events or
calculation methods determine when a liquidity fee applies and the
amount of such fee? \153\
---------------------------------------------------------------------------

\153\ We also request comment on such liquidity fee alternatives
in Section II.A.3.
---------------------------------------------------------------------------

37. If we adopt a liquidity fee framework instead of a swing
pricing framework, should we adopt a simplified fee calculation
methodology? If so, should the simplified liquidity fee framework be
tied to the level of the fund's net redemptions, the liquidity of its
portfolio holdings, or some other input? Should the simplified
liquidity fee be a set percentage (i.e., a 1% fee), or should the fee
increase as redemptions, illiquidity, or other variables increase?
38. Should we permit or require retail or government money market
funds to implement swing pricing? Would retail or government money
market funds have access to sufficient flow information to apply swing
pricing, or would changes to current order processing methods be needed
to facilitate access to sufficient flow information?
39. Will our proposed swing pricing requirement cause investors to
move their assets out of the funds that must implement a swing pricing
program to funds that do not, such as government money market funds or
short term bond funds? What are the potential costs and benefits
associated with these decisions?
40. Should we provide any exclusions from the proposed swing
pricing requirement for institutional funds? For example, should we
provide an exclusion from the swing pricing requirement for affiliated
money market funds created by an adviser for the purpose of efficiently
managing cash across accounts within its advisory complex and not
available to other investors?
41. Will swing pricing reduce the threshold effects that stem from
investors seeking to redeem in advance of a liquidity fee or gate? Will
swing pricing cause some investors to choose not to redeem because the
potential swing factor and price adjustment may be more tangible than
the uncertain possibility of potential future losses during periods of
market stress?
42. Will swing pricing protect money market fund investors that
remain in the fund from dilution when the fund fulfills net shareholder
redemptions? Would the increased liquidity requirements that we are
proposing provide adequate protection from dilution without swing
pricing? Should we impose additional liquidity requirements for
institutional prime and institutional tax-exempt as an alternative to
swing pricing?
43. How might swing pricing affect investor behavior in a period of
liquidity stress? Will swing pricing increase money market fund
resilience by reducing the first mover advantage that some investors
may seek during periods of market stress? Will swing pricing encourage
investors to redeem smaller amounts over a longer period of time
because investors will not know whether the fund's flows during any
given pricing period will trigger swing pricing and, if so, the size of
the swing factor for that period?
44. Based on historical data, how would our swing pricing framework
affect money market funds' NAVs under normal market conditions?
45. Rather than requiring institutional funds to adopt a swing
pricing requirement, should we provide more than one approach to
mitigate dilution in rule 2a-7 and require each institutional fund to
determine its own preferred approach? If so, what approaches should the
rule provide? Should we, for example, allow a fund either to adopt
swing pricing or a liquidity fee? Are there other options that would be
appropriate under this approach? Should non-institutional funds be
permitted or required to adopt an anti-dilution approach? Would funds'
use of different approaches benefit investors by increasing investor
choice or, conversely, would these differences confuse investors or
make it more difficult for them to compare money market funds with each
other?
2. Operational Considerations
Many investors use institutional money market funds as a cash
management vehicle, and money market funds provide operational
efficiencies to serve those investors. Institutional money market fund
transactions often settle on the same day that an investor places a
purchase or sell order, which has made these funds an important
component of systems for processing and settling various types of
transactions. Some institutional money market funds also provide
shareholders with intraday liquidity and same-day settlement by pricing
fund shares periodically during the day (e.g., at 11 a.m. and 4 p.m.).
Many commenters opposed swing pricing due to operational issues,
some of which are unique to money market funds.\154\ For example,
several commenters stated swing pricing is currently impractical
because intermediaries typically report flows with a delay, so funds
would not be able to determine net shareholder flows in time to apply a
swing factor to the fund's net asset value, as needed.\155\ One
commenter suggested that a move from T+0 to T+1 settlement for money
market fund subscriptions and redemptions could make it difficult for

[[Page 7269]]

money market funds to act as sweep vehicles and could affect their
status as cash equivalents.\156\ Some commenters asserted that swing
pricing works better in Europe due to fundamental differences between
fund operations in the U.S. and Europe (i.e., earlier trading cut-off
times, greater use of currency-based orders versus share- or
percentage-based transactions, and more direct-sold funds).\157\
Several commenters expressed concern that intraday liquidity and/or
same-day settlement would not be available to investors if money market
funds were required to implement swing pricing.\158\ In addition, many
commenters also asserted that there would be significant costs and
burdens from implementing systems to accommodate swing pricing.\159\
---------------------------------------------------------------------------

\154\ See, e.g., Healthy Markets Comment Letter; PIMCO Comment
Letter; SIFMA AMG Comment Letter; ICI Comment Letter I; ICI Comment
Letter III; Western Asset Comment Letter; Fidelity Comment Letter;
State Street Comment Letter (expressing the view that swing pricing
can be a valuable liquidity management tool, but it is not easily
applicable to money market funds due to operational issues).
\155\ See, e.g., ICI Comment Letter I; PIMCO Comment Letter;
Fidelity Comment Letter; Federated Hermes Comment Letter I.
\156\ JP Morgan Comment Letter.
\157\ PIMCO Comment Letter; Fidelity Comment Letter; BlackRock
Comment Letter.
\158\ See, e.g., ICI Comment Letter I; SIFMA AMG Comment Letter;
Western Asset Comment Letter; Federated Hermes Comment Letter I; JP
Morgan Comment Letter; Institute of International Finance Comment
Letter; Comment Letter of the Committee on Capital Markets
Regulation (May 24, 2021) (``CCMR Comment Letter'').
\159\ See, e.g., SIFMA AMG Comment Letter; JP Morgan Comment
Letter; GARP Risk Institute Comment Letter.
---------------------------------------------------------------------------

We acknowledge that swing pricing will introduce new operational
complexity to institutional money market funds. A fund must determine
whether it has net redemptions, and the size of those net redemptions,
for the pricing period prior to striking its NAV, and this
determination would need to be completed multiple times per day for
funds that strike their NAV multiple times per day. However,
institutional money market funds often impose order cut-off times that
ensure that they receive flow data prior to striking their NAV.\160\
Therefore, we believe many of them would have the necessary flow
information to determine if there are net redemptions and the amount of
those net redemptions.\161\ This is in contrast to other open-end
mutual funds, which may receive purchase and redemption requests from
fund intermediaries even after the fund has struck its NAV. Due to the
cut-off times that many institutional money market funds impose, we
believe these money market funds would not be subject to significant
operational impediments with respect to having timely flow information
to inform swing pricing decisions. However, if an institutional money
market fund does not impose order cut-off times, such a fund may face
additional operational complexity and costs to implement a cut-off time
or otherwise gather the necessary information to determine whether it
has net redemptions.
---------------------------------------------------------------------------

\160\ Based on a 2021 staff analysis of information from
CraneData, a majority of the prime institutional money market funds
that impose an order cut-off time impose a 3:00 p.m. deadline for
same-day processing of shareholder transaction requests.
\161\ See proposed rule 2a-7(c)(2)(ii)(A) (permitting reasonable
high confidence estimates of investor flows to determine whether a
fund has net redemptions).
---------------------------------------------------------------------------

In addition, if a fund has net redemptions, it would be required to
calculate and apply the swing factor to the NAV prior to processing any
shareholder transactions. Funds that strike their NAV multiple times
per day may also need to calculate and apply a swing factor multiple
times per day. We acknowledge that the proposed swing pricing
requirement would impose additional administrative burdens and costs
that money market funds do not face under current regulation,
particularly if net redemptions exceed the market impact threshold or
if the fund currently values its securities at the midpoint when
striking its NAV. In addition, while we recognize that the need to
calculate and apply a swing factor could delay a fund's ability to
determine the transaction price, we believe it is unlikely that these
delays would result in funds having to settle transactions on T+1,
instead of T+0. We do not believe T+1 settlement is a likely result of
the proposed swing pricing requirement because funds could take steps
to maintain their ability to offer same-day settlement if they believe
this type of settlement is important to institutional investors. For
example, if necessary, relevant funds could choose to move their last
NAV strike to an earlier point in the day.\162\ Similarly, we
understand that the proposed swing pricing requirement could cause
relevant funds to reduce the number of NAV strikes they offer each day.
For example, a fund may determine that instead of offering three or
four separate NAV strikes each day, it may only offer one or two NAV
strikes to ease implementation of the proposed swing pricing
requirement. As a general matter, to the extent these operational
changes are necessary, we believe they are warranted to address
investor harm and dilution that occurs when redeeming investors reduce
the fund's liquidity and impose other costs on remaining investors.
---------------------------------------------------------------------------

\162\ We understand that, to offer same-day settlement, funds
must be able to complete Fedwire instructions before the Federal
Reserve's 6:45 p.m. ET Fedwire cut-off time. See, e.g., ICI Comment
Letter I. Moving the last NAV strike to a somewhat earlier point in
the day would provide the fund with additional time to calculate and
apply its swing factor and take other necessary steps prior to the
Fedwire cut-off time.
---------------------------------------------------------------------------

Prior money market fund reforms required institutional money market
funds to adopt a floating NAV. This requirement can introduce some
variability to a fund's NAV, particularly during times of market
stress. In the years since the implementation of the floating NAV
requirement, most institutional money market funds have typically been
able to maintain a floating NAV that remains close to $1.0000 or
another value chosen by the fund.\163\ The addition of a swing pricing
requirement could introduce greater variability to a fund's NAV,
particularly during volatile periods. For example, a fund's NAV could
float downward if the markets for its portfolio securities becomes more
illiquid and it has sizeable net redemptions, and the application of a
swing factor at such a time would cause additional variation in the
fund's NAV for shareholders that transact on that day. This variability
may reduce the appeal of institutional money market funds as cash
management tools if investors seek alternative investment options that
are not subject to fluctuation in value at times of market stress.
Further, while one commenter expressed concern that a swing pricing
requirement would affect money market funds' use in sweep arrangements,
it is our understanding that institutional prime and tax-exempt money
market funds currently are not used in sweep arrangements.\164\
---------------------------------------------------------------------------

\163\ For example, some funds maintain a floating NAV that
remains close to some other amount, such as $100.00.
\164\ Based on analysis of information from CraneData. See JP
Morgan Comment Letter (discussing the operational complexities of
swing pricing for money market funds that are used in sweep
platforms).
---------------------------------------------------------------------------

We request comment on the operational impact of our proposed swing
pricing requirement, including:
46. Are there key operational impediments with the proposed swing
pricing approach? Are there key inputs for the swing factor
calculation, including the market impact factor, that are operationally
and prohibitively difficult to ascertain within the time period needed
to calculate the swing factor? Are there key inputs that are not
operationally complex to obtain?
47. Are there instances in which an institutional money market fund
permits intermediaries to submit subscription or redemption requests
after the fund's cut-off time and to receive the NAV calculated for
that cut-off time, as long as the intermediary received the order prior
to the fund's

[[Page 7270]]

cut-off time? If so, when do such instances occur, and how frequently?
48. If institutional money market funds do not receive information
about subscription or redemption requests early enough to make swing
pricing decisions prior to striking NAV, are there rule-based solutions
that could improve the timing considerations regarding shareholder
flows and swing pricing (e.g., by requiring intermediaries to provide
earlier flow information to funds or by requiring specific cut-off
times for transaction requests)?
49. What proportion of institutional prime and institutional tax-
exempt money market funds use mid-market pricing? Would such funds
incur greater operational costs than a fund that uses bid pricing to
estimate the spread costs the fund would incur to sell a vertical slice
of its portfolio?
50. Do commenters agree with our assessment that institutional
prime and institutional tax-exempt money market funds could still offer
same-day settlement if they are required to implement swing pricing? If
not, how would swing pricing affect the ability of institutional money
market funds to settle transactions on a T+0 basis? If these funds
instead settle transactions on a T+1 basis, how might this affect
investors?
51. How might swing pricing affect the ability of institutional
money market funds to offer multiple NAV strikes per day? How many
institutional money market funds will reduce the number of times they
strike their NAV if we adopt swing pricing as proposed? How might
investors be affected if these funds are no longer able to offer
multiple NAV strikes, or as many NAV strikes, per day?
52. Should we require all money market funds, including stable NAV
money market funds, to adopt a floating NAV and to implement swing
pricing?
53. Will investors seek alternative cash management investment
options that are not subject to fluctuation in value at times of market
stress to avoid the additional NAV variability that results from swing
pricing? If so, which alternatives are investors most likely to use?
54. Are institutional prime and tax-exempt money market funds used
in cash sweep arrangements?
55. What other operational changes would be required for funds to
implement our swing pricing requirement as proposed?
3. Tax and Accounting Implications
When the Commission adopted the floating NAV requirement for all
prime and tax-exempt money market funds sold to institutional investors
in 2014, the Treasury Department amended its regulations to clarify
money market funds' reporting obligations.\165\ The Commission, the
Treasury Department, and the IRS recognized the difficulties and costs
associated with requiring floating NAV money market funds to comply
with then-existing tax reporting requirements, and the amended Treasury
regulations permit shareholders of floating NAV money market funds to
use the ``NAV method'' to report gains and losses.\166\ This method
allows investors to aggregate gains and losses for the calendar year on
their tax returns, rather than reporting individual transactions. The
Treasury Department and the IRS also clarified that the ``wash sale''
rule does not apply to redemptions in floating NAV money market
funds.\167\ The Commission staff will continue discussions with the
staff of the Treasury Department and IRS regarding the tax consequences
of the proposed swing pricing requirement, including any implications
for an investor's use of the NAV method of accounting for gain or loss
on shares in a floating NAV money market fund or the exemption from the
wash sale rules for redemptions of shares in these funds. We recognize
that if the proposed swing pricing requirement modifies the method of
accounting for gains or losses in relevant money market fund shares, or
has other tax implications, the tax reporting effects of the proposed
swing pricing requirement could increase burdens for investors.
---------------------------------------------------------------------------

\165\ Treas. Reg. Sec. 1.446-7.
\166\ Treas. Reg. Sec. 1.446-7.
\167\ See Rev. Proc. 2014-45 (2014-34 IRB 388) and Method of
Accounting for Gains and Losses on Shares in Money Market Funds;
Broker Returns With Respect to Sales of Shares in Money Market
Funds, RIN 1545-BM04 (June 15, 2016) [81 FR 44508 (July 8, 2016)] at
44511. Very generally, the wash sale rule prevents taxpayers from
taking an immediate loss from the sale of securities if
substantially identical securities are purchased within six months
of the sale.
---------------------------------------------------------------------------

From an accounting perspective, when institutional money market
funds were required to adopt a floating NAV, the Commission stated its
belief that an investment in a money market fund with a floating NAV
would meet the definition of a ``cash equivalent'' for accounting
purposes.\168\ One commenter expressed concern that a swing pricing
requirement could result in money market funds no longer qualifying as
cash equivalents.\169\ For the same reasons discussed in connection
with the 2014 reforms, we believe the adoption of swing pricing would
not preclude shareholders from classifying their investments in money
market funds as cash equivalents. Under normal circumstances, we
believe an investment in a money market fund that applies swing pricing
under our proposed rule would qualify as a ``cash equivalent'' for
purposes of U.S. GAAP.\170\ Under normal circumstances, we anticipate
that fluctuations in the amount of cash received upon redemption from a
fund that applies swing pricing would likely be small and would be
consistent with the concept of a ``known'' amount of cash. However, as
already exists today and, as noted by the Commission in 2014, events
may occur that give rise to credit and liquidity issues for money
market funds. If such events occur, shareholders would need to reassess
if their investments in that money market fund continue to meet the
definition of a cash equivalent.\171\ This is already the case absent
swing pricing, but we recognize that swing pricing may result in larger
fluctuations in a fund's share price during such periods of stress.
---------------------------------------------------------------------------

\168\ 2014 Adopting Release, supra footnote 12, at section VI
(amending the ``Codification of Financial Reporting Policies''
announced in Financial Reporting Release No. 1 (Apr. 15, 1982)).
\169\ JP Morgan Comment Letter.
\170\ See FASB Accounting Standards Codification Master
Glossary, available at https://asc.fasb.org/glossary.
\171\ See 2014 Adopting Release, supra footnote 12, at paragraph
accompanying n.428.
---------------------------------------------------------------------------

Consistent with the approach the Commission established for mutual
fund swing pricing, the proposed swing pricing requirement for
institutional money market funds would affect certain aspects of
financial reporting, as these funds would need to distinguish between
the GAAP NAV per share and the transactional price adjustment to the
NAV per share resulting from swing pricing (``swung price'').\172\ The
GAAP NAV per share is the amount of net assets attributable to each
share of capital stock outstanding at the close of the period, and the
swung price (if the NAV per share is adjusted due to swing pricing at
period end) would represent the transactional price on the last day of
the period, which is the NAV per share on the day with an adjustment by
the swing factor.\173\ Money market funds would disclose the GAAP NAV
per share (which will reflect the effects of swing pricing throughout
the reporting period, if applicable) on the statement of assets and
liabilities. This allows users of the financial statements to
understand the actual amount of net assets attributable to the fund's

[[Page 7271]]

remaining shareholders at period end.\174\ A money market fund using
swing pricing would, however, include the impact of swing pricing in
its financial highlights, and the per share impact of amounts retained
by the fund due to swing pricing should be included in the fund's
disclosures of per share operating performance.\175\ Swing pricing also
affects disclosure of capital share transactions included in a fund's
statement of changes in net assets.\176\ Finally, a money market fund
using swing pricing would be required to disclose in a footnote to its
financial statements: (1) The general methods used in determining
whether the fund's NAV per share will be adjusted due to swing pricing;
(2) whether the fund's NAV per share has been adjusted by swing pricing
during the period; and (3) a general description of the effects of
swing pricing on the fund's financial statements.\177\
---------------------------------------------------------------------------

\172\ See Swing Pricing Adopting Release, supra footnote 102, at
section II.A.3.g.
\173\ See 17 CFR 210.6-04.19 and FASB ASC 946-10-20 (discussing
the concept of the GAAP NAV); Swing Pricing Adopting Release, supra
footnote 102, at section II.A.3.g.
\174\ See Swing Pricing Adopting Release, supra footnote 102, at
section II.A.3.g.
\175\ See Item 13 of Form N-1A (requiring disclosure of the
swung price per share, if applicable, as a separate line item below
the ending GAAP NAV per share on the financial highlights); FASB ASC
946-205-50-7 (requiring specific per share information to be
presented in the financial highlights for registered investment
companies, including disclosure of the per share amount of purchase
premiums, redemption fees, or other capital items).
\176\ See 17 CFR 210.6-09.4(b). This rule requires funds to
disclose the number of shares and dollar amounts received for shares
sold and paid for shares redeemed. For funds that implement swing
pricing, Regulation S-X would require the dollar amount disclosed to
be based on the NAVs used to process investor subscriptions and
redemptions, including those processed using swung prices during the
reporting period.
\177\ See rule 6-03(n) of Regulation S-X.
---------------------------------------------------------------------------

We request comment on the tax and accounting implications of our
proposed swing pricing requirement, including:
56. Would swing pricing impose additional complications with
respect to the tax treatment of floating NAV money market fund
investments? If so, how could we address such complications?
57. Would the implementation of swing pricing for institutional
money market funds affect the treatment of shares of such funds as
``cash equivalents'' for accounting purposes? Would a cap on the swing
factor, such as a 2% cap, reduce uncertainty about the treatment of
institutional money market fund shares as ``cash equivalents''?
58. Should the financial reporting effects of swing pricing differ
for money market funds, as opposed to other types of mutual funds?
59. Are there other tax or accounting implications of institutional
money market funds using swing pricing that we should address?
4. Disclosure
Form N-1A is used by open-end funds, including money market funds
and ETFs, to register under the Investment Company Act and to register
offerings of their securities under the Securities Act. Form N-1A
currently requires a fund to describe its procedures for pricing fund
shares, including an explanation that the price of fund shares is based
on the fund's NAV and a description of the method used to value fund
shares.\178\ In 2016, when the Commission adopted the swing pricing
rule for open-end funds that are not money market funds or ETFs, it
adopted amendments to Item 6 of Form N-1A to enhance disclosure of an
open-end fund's swing pricing procedures.\179\ Under our proposal,
institutional money market funds would be required to implement swing
pricing policies and procedures and therefore would be required to
comply with the swing pricing-related requirements of Form N-1A,
described in greater detail below.
---------------------------------------------------------------------------

\178\ See Item 11(a)(1) of Form N-1A.
\179\ See Swing Pricing Adopting Release, supra footnote 102, at
section II.B.1.
---------------------------------------------------------------------------

Money market funds subject to a swing pricing requirement under our
proposal also would be required to respond to the existing swing
pricing-related items on Form N-1A that were not historically
applicable to these funds. Specifically, the form requires a fund to
include a general description of the effects of swing pricing on the
fund's annual total returns as a footnote to its risk/return bar chart
and table.\180\ Form N-1A also requires a fund that uses swing pricing
to explain the fund's use of swing pricing, including its meaning, the
circumstances under which the fund will use it, and the effects of
swing pricing on the fund and investors.\181\ While Form N-1A requires
other funds that use swing pricing to disclose a fund's swing factor
upper limit, we are proposing to exclude money market funds from this
requirement because our proposal does not require these funds to
establish a swing factor upper limit.\182\
---------------------------------------------------------------------------

\180\ Items 4(b)(2)(ii) and (iv) of Form N-1A.
\181\ Item 6(d) of current Form N-1A.
\182\ Item 6(d) of proposed Form N-1A.
---------------------------------------------------------------------------

Money market funds use Form N-MFP to report key information to the
Commission each month. As part of our swing pricing framework for money
market funds, we propose to amend Form N-MFP to require money market
funds that are not government funds or retail funds to use their
adjusted NAV, as applicable, for purposes of reporting the series- and
class-level NAV per share.\183\ We also propose to require these funds
to report the number of times the fund applied a swing factor over the
course of the reporting period, and each swing factor applied.\184\
Together, these reporting requirements would help the Commission
monitor the size of the adjustments funds are making during normal and
stressed market conditions, as well as the frequency at which funds
apply swing factor adjustments.
---------------------------------------------------------------------------

\183\ See Items A.20 and B.5 of current Form N-MFP; Items A.20
and B.6 of proposed Form N-MFP. As discussed below, we are also
proposing to amend these current reporting requirements to require
funds to provide series- and class-level NAVs per share as of the
close of each business day, rather than as of the close of business
on each Friday during the month reported. See infra Section
II.F.2.c.
\184\ See Item A.22 of proposed Form N-MFP.
---------------------------------------------------------------------------

Under current rule 2a-7, money market funds are required to provide
on their websites the money market fund's net asset value per share as
of the end of each business day during the preceding six months. This
disclosure must be updated each business day as of the end of the
preceding business day.\185\ We are proposing to amend this provision
to require money market funds that are not government funds or retail
funds to depict their adjusted NAV, taking into account the application
of a swing factor.\186\ We believe that, when a fund applies swing
pricing, the adjusted NAV is more useful for investors because it
represents the price at which transactions in the fund's shares
occurred.
---------------------------------------------------------------------------

\185\ 17 CFR 270.2a-7(h)(10)(iii).
\186\ See proposed rule 2a-7(h)(10)(iii).
---------------------------------------------------------------------------

We request comment on swing pricing disclosure requirements as
applicable to money market funds, including:
60. Are the existing swing pricing-related disclosure obligations
on Form N-1A appropriate for money market funds? In addition to the
question regarding the swing factor's upper limit, are there other
existing obligations that should not be applied to money market funds?
61. Would more information be useful to shareholders or other
market participants? If so, what additional information should we
require to be disclosed on Form N-1A, Form N-MFP, or elsewhere (e.g.,
fund websites or other marketing materials)? When should we require
such disclosure?
62. Should we require institutional funds to report the number of
times the fund applied a swing factor and each swing factor applied, as
proposed? Should we require the median, highest, and lowest (non-zero)
swing factor applied for each reporting period on Form N-MFP, rather
than requiring

[[Page 7272]]

disclosure of each swing factor applied? Should we require these funds
to provide additional information about swing pricing in their monthly
reports on Form N-MFP, such as the swing pricing administrator's
determination to use a lower market impact threshold (if applicable)?
Should we separately require funds to disclose information about market
impact factors, such as how many times a market impact factor was
included in the swing factor each month and the size of those market
impact factors (e.g., either the size of any market impact factor
applied, or the median, highest, and lowest (non-zero) amount)?
63. As proposed, should we require an institutional fund to use its
adjusted NAV, as applicable, for purposes of current requirements to
disclose a fund's NAV on its website and the series- and class-level
NAV disclosure requirements on Form N-MFP? Should we require an
institutional fund to indicate, for each NAV reported, whether a swing
factor was applied (i.e., whether the NAV was ``adjusted'')? As an
alternative to reporting the adjusted NAV, should we provide that the
website and Form N-MFP NAV disclosures should not include a swing
factor adjustment? If so, why would the unadjusted NAV be more useful
for these purposes? Alternatively, should we require an institutional
fund to disclose both its adjusted NAV and its unadjusted NAV on the
fund's website or on Form N-MFP? What are the advantages and
disadvantages of requiring funds to disclose both figures?
64. Requirements to disclose NAVs per share on fund websites and on
Form N-MFP require NAVs per share as of the close of business on a
given day, while some funds may have multiple pricing periods and
multiple NAVs each day. Should we require a fund to disclose its NAV
per share for each pricing period, instead of the end-of-day NAV per
share only? Would this additional transparency be helpful for
investors, or would it make NAV disclosure less useful for investors by
increasing the number of data points without significantly improving
the value of the data?
65. Will daily website disclosure of fund flows and the adjusted
NAV facilitate gaming of swing pricing or preemptive runs by investors
that wish to redeem in advance of a fund imposing a swing factor on a
particular day? If so, how? Are there changes we should make to reduce
the potential for gaming?

C. Amendments to Portfolio Liquidity Requirements

1. Increase of the Minimum Daily and Weekly Liquidity Requirements
Currently, rule 2a-7 requires that a money market fund, immediately
after acquisition of an asset, hold at least 10% of its total assets in
daily liquid assets and at least 30% of its total assets in weekly
liquid assets.\187\ Assets that make up daily liquid assets and weekly
liquid assets are cash or securities that can readily be converted to
cash within one business day or five business days, respectively.\188\
These requirements are designed to support funds' ability to meet
redemptions from cash or securities convertible to cash even in market
conditions in which money market funds cannot rely on a secondary or
dealer market to provide liquidity.\189\
---------------------------------------------------------------------------

\187\ See 17 CFR 270.2a-7(d)(4)(ii) and (iii) (rule 2a-
7(d)(4)(ii) and (iii)); see also supra footnote 22 and accompanying
paragraph. Tax-exempt money market funds are not subject to the
daily liquid asset requirements due to the nature of the markets for
tax-exempt securities and the limited supply of securities with
daily demand features. See 2010 Adopting Release, supra footnote 20,
at n.243 and accompanying text.
\188\ Daily liquid assets are: Cash; direct obligations of the
U.S. Government; certain securities that will mature (or be payable
through a demand feature) within one business day; or amounts
unconditionally due within one business day from pending portfolio
security sales. See rule 2a-7(a)(8). Weekly liquid assets are: Cash;
direct obligations of the U.S. Government; agency discount notes
with remaining maturities of 60 days or less; certain securities
that will mature (or be payable through a demand feature) within
five business days; or amounts unconditionally due within five
business days from pending security sales. See rule 2a-7(a)(28).
\189\ See 2010 Adopting Release, supra footnote 20, at n.213 and
accompanying and following text.
---------------------------------------------------------------------------

In March 2020, significant outflows from prime funds caused general
reductions in these funds' daily liquid assets and weekly liquid
assets. Although only one institutional prime fund reported weekly
liquid assets below the 30% threshold, it is likely that other funds
would have breached daily liquid asset or weekly liquid asset
thresholds at the time if they had used daily liquid assets or weekly
liquid assets to meet redemptions. As previously discussed, because the
fee and gate provisions in rule 2a-7 incentivized funds to maintain
weekly liquid assets above 30%, many funds took other actions (e.g.,
selling longer-term assets or receiving financial support) to meet
redemptions and remain above the minimum liquidity threshold. Some
funds experienced redemption levels that would have depleted required
levels of daily liquid assets or weekly liquid assets, if they had been
used. For example, the largest weekly outflow in March 2020 was around
55%, and the largest daily outflow was about 26% (both well above the
respective weekly liquid asset and daily liquid asset thresholds of 30%
and 10%).\190\ Further, since the fee and gate provisions in rule 2a-7
incentivized funds to maintain weekly liquid assets above the current
threshold, the proposed removal of the fee and gate provisions from
rule 2a-7 could have the effect of reducing fund liquidity levels by
eliminating such incentives. Accordingly, we are proposing to increase
daily and weekly liquid asset requirements to 25% and 50%,
respectively.\191\ We believe that these increased thresholds will
provide a more substantial buffer that would better equip money market
funds to manage significant and rapid investor redemptions, like those
experienced in March 2020, while maintaining funds' flexibility to
invest in diverse assets during normal market conditions.
---------------------------------------------------------------------------

\190\ See supra section I.B; see also Prime MMFs at the Onset of
the Pandemic Report, supra footnote 41, at 2-3. According to Form N-
MFP filings, no prime money market fund reported daily liquid assets
declining below the 10% threshold in March 2020.
\191\ See proposed rule 2a-7(d)(4)(ii) and (iii).
---------------------------------------------------------------------------

Several commenters supported increasing the minimum liquidity
requirements, believing that such increases could make money market
funds more resilient during times of market stress.\192\ Several
commenters acknowledged that historically, most prime money market
funds have maintained liquidity levels well above the regulatory
minimums in normal market conditions.\193\ Some commenters asserted
that raising the thresholds to the levels that most funds already
maintain would provide a more sufficient liquidity buffer.\194\ One
commenter suggested that requiring sufficiently higher weekly liquid
asset levels would provide investors with confidence that funds hold
adequate liquidity during periods of market uncertainty, thereby
reducing the

[[Page 7273]]

likelihood of a run.\195\ This commenter stated that an increased
weekly liquid assets requirement, along with the removal of the tie to
fees and gates, would most effectively address the structural
vulnerabilities in money market funds that were exposed in March 2020.
Some commenters suggested that the Commission analyze and monitor
market data to ensure that any new thresholds promote the goal of
improving the resilience of money market funds during times of market
stress while preserving the benefits that investors have come to expect
from money market funds.\196\
---------------------------------------------------------------------------

\192\ See e.g., ICI Comment Letter I; Comment letter of Samuel
G. Hanson, David S. Scharfstein, Adi Sunderam, Harvard Business
School (Apr. 12, 2021) (``Prof. Hanson et al. Comment Letter'');
Dreyfus Comment Letter (suggesting increasing the weekly liquid
asset minimum to 35%); Fidelity Comment Letter (supporting higher
liquidity requirements for institutional prime money market funds
specifically).
\193\ Dreyfus Comment Letter; SIFMA AMG Comment Letter; Western
Asset Comment Letter; ICI Comment Letter I (stating that
``institutional prime money market funds on average held 44 percent
of their assets in weekly liquid assets, and retail prime money
market funds held on average 41 percent of their assets in weekly
liquid assets'').
\194\ Dreyfus Comment Letter; ICI Comment Letter I.
\195\ Fidelity Comment Letter.
\196\ ICI Comment Letter I; Fidelity Comment Letter.
---------------------------------------------------------------------------

Other commenters opposed any increase in the minimum liquidity
management requirements.\197\ These commenters argued that such a
change would likely decrease the yield of prime money market funds.
They asserted that such a decrease in yield might reduce the spread
between prime and government money market funds, which could ultimately
decrease investor demand for prime money market funds. Further, some
commenters stated that most fund managers have shown discipline in
maintaining liquidity in excess of the existing thresholds.\198\ Some
of these commenters asserted that this practice will continue such that
increasing the minimum regulatory requirements would result in funds
holding even greater amounts of daily and weekly liquid assets at
levels that may be higher than is necessary or appropriate.\199\ One
commenter asserted that such an increase could have the unintended
effect of encouraging ``barbelling,'' in which fund managers compensate
for the impact on expected yield by increasing the maturity risk of
their remaining assets, potentially making the fund's portfolio more
susceptible to volatility overall.\200\ Lastly, one commenter stated
that an increase in the minimum liquidity management requirements is
likely to have marginal impact because the redemption behavior in March
2020 was motivated by a concern that money market funds would implement
fees and gates. This commenter asserted that if fees and gates are no
longer tied to weekly liquid asset thresholds, increasing the liquidity
requirements is unlikely to have a material impact on investor
behavior.\201\
---------------------------------------------------------------------------

\197\ See e.g., Western Asset Comment Letter; Wells Fargo
Comment Letter; JP Morgan Comment Letter; SIFMA AMG Comment Letter
(recommending that, if the Commission does increase the weekly
liquid asset threshold, it do so incrementally to observe the
effects of an increased threshold on portfolio management and
investor demand for money market funds).
\198\ Wells Fargo Comment Letter; JP Morgan Comment Letter;
Western Asset Comment Letter (noting that reporting and transparency
requirements encourage managers to maintain liquid assets in excess
of the existing weekly liquid asset threshold).
\199\ SIFMA AMG Comment Letter; Western Asset Comment Letter.
\200\ Western Asset Comment Letter.
\201\ SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

We believe it is important for money market funds to have a strong
source of available liquidity to meet daily redemption requests,
particularly in times of stress, when liquidity in the secondary market
can be less reliable for many instruments in which they invest. For
example, many industry commenters discussed difficulties selling
commercial paper in March 2020.\202\ One commenter explained that, in
the commercial paper market, market participants who want to sell
commercial paper frequently must ask the bank from whom they purchased
the paper to bid it back in the secondary markets, and banks typically
are unwilling to bid commercial paper from issuers if they are not a
named dealer on the issuer's program.\203\ The commenter asserted that
in March 2020, banks declined to bid for commercial paper even where
the bank sold the commercial paper or was a named dealer in the
issuer's program. The proposed increased liquidity requirements are
designed to provide a stronger liquidity buffer for funds to meet
redemptions even during periods of market stress when secondary markets
may be illiquid.
---------------------------------------------------------------------------

\202\ See, e.g., Western Asset Comment Letter; Invesco Comment
Letter; BlackRock Comment Letter; ICI Comment Letter I; State Street
Comment Letter.
\203\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

Moreover, we disagree with the assertion from some commenters that
higher liquidity thresholds would likely decrease the demand for prime
money market funds or encourage riskier portfolio construction and
``barbelling.'' As discussed below, for the past several years, prime
money market funds have maintained levels of liquidity that are close
to or that exceed the proposed thresholds, without generally
barbelling.\204\ This demonstrates that funds have the ability to
operate with the proposed minimum liquidity levels while continuing to
serve as an efficient and diversified cash management tool for
investors. In addition, while we acknowledge that requirements to
provide daily liquid asset and weekly liquid asset levels on funds
websites and on Form N-MFP may encourage funds to hold liquidity
buffers above the regulatory minimums, as some commenters suggested,
this would not be required by our rules nor would it be necessarily an
expected outcome. For example, funds may be more likely to operate as
they did prior to the adoption of fee and gates provision in rule 2a-7,
where they generally maintained liquidity levels slightly above the
regulatory thresholds and dropped below those thresholds as
needed.\205\
---------------------------------------------------------------------------

\204\ See BlackRock Comment Letter (stating that it has not seen
evidence that barbelling was a problem in March 2020, or that money
market fund portfolios were generally structured with a barbell). We
similarly have not found significant use of barbelling strategies
among money market funds.
\205\ See infra Section II.C.2 (proposing to maintain the
existing regulatory requirement that if a money market fund's
portfolio does not meet the minimum daily liquid asset or weekly
liquid asset threshold, the fund may not acquire any assets other
than daily liquid assets or weekly liquid assets, respectively,
until it meets these minimum thresholds).
---------------------------------------------------------------------------

To aid in the determination of new daily liquid asset and weekly
liquid asset thresholds, we created hypothetical portfolios and stress
tested them using the redemption patterns of institutional prime funds
from March 16 to 20, 2020, when prime money market funds experienced
their heaviest outflows.\206\ Our analysis calculated the probability
that a fund would have breached its liquid asset limits under various
daily liquid asset and weekly liquid asset combinations during this
period. The analysis estimates that if a fund held only the required
minimum liquidity thresholds of 10% daily liquid assets and 30% weekly
liquid assets, the fund would have a 32% chance of exhausting its
available liquidity and needing to sell less liquid assets on at least
one day during the five-day period. The analysis further reflects that
a fund that held 25% daily liquid assets and 50% weekly liquid assets
during the same period would have a 9% chance of running out of liquid
assets to meet redemptions on at least one day. At these liquidity
thresholds, a fund would have a near 2% chance of running out of
available liquidity on days 1, 2, and 5, and about a 5% chance of
exhausting available liquidity on days 3 and 4. The analysis also
assessed higher liquidity

[[Page 7274]]

levels, such as 50% daily liquid assets and 60% weekly liquid assets.
At these levels, a fund would not have exhausted its available liquid
assets on any day during the five-day period.
---------------------------------------------------------------------------

\206\ Each hypothetical portfolio was created using a specific
daily liquid asset and weekly liquid asset value (and, for the
weekly liquid asset value, the hypothetical portfolio used one of 20
separate distribution bins of assets maturing within 2 to 5 business
days, which were created to match the actual distribution observed
on Form N-MFP). The analysis yielded 840 possible outcomes for each
daily liquid asset and weekly liquid asset combination that were
used to calculate the probability that a fund would run out of
available liquidity on days 1, 2, 3, 4, and/or 5, representing March
16 to 20, 2020. Because a fund could run out on one or multiple
days, our analysis also calculated the probability available
liquidity would run out on at least one of the days.
---------------------------------------------------------------------------

Based on this analysis and other considerations discussed in this
section, we are proposing to increase the minimum liquidity
requirements to 25% daily liquid assets and 50% weekly liquid
assets.\207\ While these proposed liquidity levels do not reduce a
fund's liquidity risk to zero, we believe that, based on the analysis
above, the proposed thresholds would be sufficiently high to allow most
money market funds to manage their liquidity risk in a market crisis.
Moreover, the proposed increase in funds' required daily and weekly
liquid assets would be paired with the proposed removal of liquidity
fees and redemption gates from rule 2a-7. These two proposed changes,
together, should reduce incentives for managers to avoid using
liquidity buffers and therefore allow them to use the increased amounts
of required daily and weekly liquid assets to meet redemptions without
the concern that using the assets could lead to runs to avoid a fee or
gate. We also believe that the proposed liquidity buffers are
sufficiently high to allow funds to use their available liquidity as
needed, without raising investor concerns that the fund will rapidly
run out of weekly liquid assets or daily liquid assets merely because
its liquidity has dropped below the proposed 25% or 50% thresholds.
---------------------------------------------------------------------------

\207\ See proposed rule 2a-7(d)(4).
---------------------------------------------------------------------------

The proposed liquidity buffers of 25% daily liquid assets and 50%
weekly liquid assets are generally consistent with the average
liquidity levels prime money market funds have maintained over the past
several years. According to analysis of Form N-MFP data from October
2016 to February 2020, the average amount of daily liquid assets and
weekly liquid assets for prime money market funds was 31% and 49%,
respectively. The same analysis also showed that approximately 20% of
prime money market funds had daily liquid assets above 40% and weekly
liquid assets above 60% over the same period. We recognize that at the
higher levels of liquidity that funds typically have maintained, if
money market funds had used their liquidity buffers in March 2020, many
would have been able to fulfill redemptions requests without selling
longer-term portfolio securities or receiving sponsor support. However,
we understand that rule 2a-7's fee and gate provisions have been a
significant motivating factor for funds to maintain liquidity buffers
well above the current regulatory minimums. If we adopt the proposed
removal of the tie between the potential imposition of fees and gates
and a fund's liquidity, we are concerned that funds may subsequently
reduce their liquidity levels and not be equipped to handle future
stress. As we saw in March 2020, markets can become illiquid very
rapidly in response to events that fund managers may not anticipate.
The failure of a single fund to anticipate such conditions may lead to
a run affecting all or many funds. We think it would be ill-advised to
rely solely on the ability of managers to anticipate liquidity needs,
which may arise from events the money market fund manager cannot
anticipate or control. Thus, we are proposing modified liquidity
requirements that are more in line with the typical levels of liquidity
that funds have held over the past several years. If adopted, these
increased liquidity requirements should limit the potential effect on
fund liquidity that may otherwise arise from removing the fee and gate
provisions from rule 2a-7. With the exception of tax-exempt money
market funds, which will continue to be exempt from the daily liquid
asset requirements, our proposal does not establish different liquidity
thresholds by type of fund.\208\ Although outflows in March 2020 were
more acute in institutional prime money market funds than in retail
prime money market funds, we do not know that redemption patterns would
be the same in future periods of market turmoil, particularly without
official sector intervention to support short-term funding
markets.\209\ In addition, while the proposal would require retail
prime funds to maintain higher levels of liquidity than they have
historically maintained on average, the resulting larger liquidity
buffers would increase the likelihood that these funds can meet
redemptions without significant dilution.\210\ Moreover, retail prime
money market funds invest in markets that are prone to illiquidity in
stress periods, and increased liquidity requirements would provide
protections so that these funds can meet redemptions in times of stress
without additional tools such as liquidity fees, redemption gates, or
swing pricing. We believe that a uniform approach encourages sufficient
liquidity levels across all money market funds, thereby reducing the
potential incentive for investors to flee from funds that might
otherwise be perceived as holding insufficient liquidity during market
stress events.
---------------------------------------------------------------------------

\208\ See supra footnote 187 (discussing the current exception
tax-exempt funds have from the required daily liquid asset
investment minimum).
\209\ As an example, if retail investors are merely slower to
act initially in periods of market stress, retail prime and tax-
exempt funds may need higher liquidity levels to meet ongoing
redemptions if a stress period is not relatively brief.
\210\ Based on analysis of Form N-MFP data, retail prime money
market funds maintained average daily liquid assets of 24% and
average weekly liquid assets of 42% during the period of October
2016 through February 2020. In contrast, institutional prime fund
averages during this period were 37% and 54%, respectively.
---------------------------------------------------------------------------

The PWG Report and the Commission's associated Request for Comment
considered the creation of a new liquidity requirement category, such
as a biweekly liquid asset requirement.\211\ Commenters expressed
general opposition to a new liquidity category for money market
funds.\212\ Commenters suggested that such a category would increase
regulatory complexity and overcomplicate the regulatory framework
without additional benefit.\213\ Commenters also expressed skepticism
that issuers would underwrite assets with a two-week maturity, as there
is a very limited issuance market for assets in the biweekly maturity
category.\214\ After considering these comments, we are not proposing
to introduce a new category of liquidity requirements. We believe that
a new category, such as a requirement for biweekly assets, would be an
extension of the weekly liquid asset threshold without significant
benefits. This is because we expect that money market funds would
likely meet a biweekly requirement in the same way that they meet the
weekly liquid asset thresholds, by letting longer-dated securities roll
down in maturity.\215\ We believe it would be more efficient to
increase the weekly liquid asset requirement directly, as proposed,
than to increase it indirectly by adopting a new biweekly liquid asset
requirement.
---------------------------------------------------------------------------

\211\ See PWG Report at 26.
\212\ See, e.g., ICI Comment Letter I; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; Wells Fargo Comment Letter;
BlackRock Comment Letter.
\213\ ICI Comment Letter I; SIFMA AMG Comment Letter; Wells
Fargo Comment Letter; JP Morgan Comment Letter (asserting that
``[money market funds] typically already hold assets with a well
distributed range of maturities, with longer-dated positions
constantly rolling down towards maturity'').
\214\ SIFMA AMG Comment Letter; JP Morgan Comment Letter; ICI
Comment Letter I (noting that commercial paper, for example, is not
currently issued with 14-day maturities).
\215\ ICI Comment Letter I.
---------------------------------------------------------------------------

Another commenter recommended more substantial asset restrictions
for prime money market funds, such as a requirement that prime money
market funds hold 25-50% of their weekly liquid assets in short-term
U.S.

[[Page 7275]]

Government securities, including U.S. Government agency
securities.\216\ This commenter suggested that enhancing the quality,
not only the quantity, of a prime money market fund's liquid assets
would enhance investor confidence that such funds can withstand market
stress. We do not believe that this type of requirement would have a
significant effect, as most prime money market funds already hold a
significant percentage of their weekly liquid assets in Treasuries and
government agency securities.\217\ We continue to believe that
grounding our definitions of liquid assets in terms of maturity, rather
than type of security, is the best framework to determine a fund's
available liquidity for purposes of rule 2a-7. Instead of requiring
funds to hold a separate threshold of particular securities within the
daily and weekly liquid asset basket, as the commenter suggested, we
believe that increasing the minimum liquidity threshold, paired with
removing fees and gates from rule 2a-7, would be a more efficient
manner of enhancing funds' access to liquidity and thus their ability
to withstand market stress.
---------------------------------------------------------------------------

\216\ CCMR Comment Letter.
\217\ See Baklanova, Kuznits, and Tatum, How Do Prime MMFs
Manage Their Liquidity Buffers (July 21, 2021), available at https://www.sec.gov/files/how-do-prime-mmfs-manage-liquidity-buffers.pdf
(finding that investments in Treasuries and government agency
securities account, on average, for approximately 35% of prime
funds' weekly liquid assets).
---------------------------------------------------------------------------

We request comment on our proposal to increase the minimum
liquidity requirements to 25% daily liquid assets and 50% weekly liquid
assets, including the following:
66. Would our proposal to increase the minimum liquidity
requirements make money market funds more resilient during times of
market stress? Would a lower or higher threshold of daily or weekly
liquid assets better allow most money market funds' to meet potential
redemptions without selling less liquid asset in periods of market
stress? Should we instead propose to raise the minimum daily liquid
asset threshold to 20%, 30%, or 35% and/or the minimum weekly liquid
asset threshold to 40%, 55%, or 60%, for example? Why or why not?
67. Would our proposal to remove fee and gate provisions from rule
2a-7 encourage funds to maintain lower levels of liquidity during
normal market conditions? If so, do our proposed increased minimum
liquidity requirements limit the potential effect on fund liquidity
that may otherwise arise from our proposal to remove fee and gate
provisions from rule 2a-7? Should the proposed minimum liquidity
thresholds be higher or lower to accommodate such effect? Why or why
not?
68. To what extent would our proposed amendments reduce money
market fund liquidity risk?
69. What, if any, impacts would our proposed amendments have on
yields of prime money market funds? What would be the effect on yields
of lower or higher minimum liquidity requirements? Would increased or
decreased yields effect the desirability of prime money market funds
for retail and/or institutional investors? Would the proposed
amendments decrease the availability of prime money market funds?
70. How would the proposal affect funds' current incentives to
maintain liquidity buffers well above the regulatory minimums? Would
funds be more likely to hold daily liquid asset and weekly liquid asset
amounts that are closer to the regulatory minimums? Absent our proposed
increase to the minimum liquidity requirements, would the existing
requirement for funds to disclose liquidity information on a daily
basis on their websites provide sufficient incentive for funds to
maintain liquidity buffers well above the current regulatory minimums?
71. Would our proposal increase the propensity for prime money
market funds to ``barbell'' or invest in potentially risker and longer-
term assets outside of the portion of the fund's portfolio that
qualifies as daily liquid assets or weekly liquid assets? Why or why
not?
72. Should the proposal alter the current framework for which type
of money market funds are subject to the minimum liquidity
requirements? For example, should the requirements distinguish between
prime money market funds and government money market funds? Should
institutional money market funds and retail money market funds be
subject to the same minimum liquidity requirements, as proposed? Does
the fact that institutional money market funds experienced more
significant outflows than retail money market funds during recent
stress events reflect that institutional money market funds should be
subject to a different minimum liquidity requirement than retail money
market funds? Why or why not?
73. Should the proposed minimum liquidity requirements vary based
on external market factors? For example, would a countercyclical
minimum liquidity threshold, in which the minimum liquidity thresholds
decline when net redemptions are large or when the Commission provides
temporary relief from the higher liquidity threshold, better
incentivize money market funds to use liquidity during times of
significant outflows? \218\ If so, what specific factors should trigger
or inform a countercyclical minimum liquidity threshold?
---------------------------------------------------------------------------

\218\ The PWG Report discussed a countercyclical liquidity
buffer as a potential reform option. Most commenters opposed this
option and expressed concern that it may create a new trigger event
that could accelerate redemptions. See SIFMA AMG Comment Letter;
Western Asset Comment Letter; JP Morgan Comment Letter; Fidelity
Comment letter; Dreyfus Comment Letter. A few commenters supported
this option. See ABA Comment Letter; mCD IP Comment Letter.
---------------------------------------------------------------------------

74. Would the increased liquidity thresholds, along with other
changes we are proposing, affect investors' interest in monitoring
funds' liquidity levels or potential sensitivity to declines below the
liquidity thresholds? Are there any changes we should make to reduce
potential investor sensitivity to a fund dropping below a liquidity
threshold? For example, should we remove, or reduce the frequency of,
website liquidity disclosure?
75. Should the Commission consider revising the definition of daily
liquid assets and/or weekly liquid assets in any way? For instance,
should we amend the definition of weekly liquid assets to limit the
amount of non-government securities that can qualify as weekly liquid
assets? Alternatively, would explicitly limiting the amount of
investment in commercial paper and certificates of deposit for prime
money market funds alleviate stresses in the short-term funding market
during market downturns? Why or why not?
76. Should the Commission propose a new category of liquidity
requirements to rule 2a-7? Would a new category of liquidity
requirements with slightly longer maturities than the current
requirements (e.g., biweekly liquid assets) significantly enhance
funds' near-term portfolio liquidity during periods of stress in the
short-term funding markets? What would be the positive and negative
effects of a new category of liquidity requirements with slightly
longer maturities?
2. Consequences for Falling Below Minimum Daily and Weekly Liquidity
Requirements
Currently, rule 2a-7 requires that a money market fund comply with
the daily liquid asset and weekly liquid asset standards at the time
each security is acquired.\219\ A money market fund's

[[Page 7276]]

portfolio that does not meet the minimum liquidity standards has not
failed to satisfy the daily liquid asset and weekly liquid asset
conditions of rule 2a-7; the fund simply may not acquire any assets
other than daily liquid assets or weekly liquid assets, respectively,
until it meets these minimum thresholds. We are proposing to maintain
this approach with respect to the increased minimum liquidity
thresholds.
---------------------------------------------------------------------------

\219\ Rule 2a-7(d)(4)(ii) and (iii). Compliance with the minimum
liquidity requirement is determined at security acquisition, because
we believe that a money market fund should not have to dispose of
less liquid securities (and potentially realize an immediate loss)
if the fund fell below the minimum liquidity requirements as a
result of investor redemptions.
---------------------------------------------------------------------------

Commenters generally supported maintaining the current rule's
regulatory requirements when a fund's liquidity drops below the daily
or weekly liquidity threshold instead of including some type of
automatic penalty that would apply either to the fund or to the fund
sponsor under these circumstances, which was an option the PWG Report
discussed.\220\ Some commenters noted that the Investment Company Act
and the rules thereunder do not otherwise impose automatic penalties on
funds or fund sponsors.\221\ A commenter also noted that imposing a
penalty on the fund sponsor might further disincentivize managers from
using their existing liquidity in times of market stress.\222\ Several
commenters suggested that the reforms could require a money market fund
to overcorrect (e.g., invest only in liquid assets until its weekly
liquid assets exceed a specified percentage above the regulatory
minimum) if it fell below the minimum liquidity threshold.\223\ One of
these commenters further suggested that a fund be prohibited from
purchasing any non-overnight instruments until it reaches the required
liquidity minimum threshold.\224\
---------------------------------------------------------------------------

\220\ ICI Comment Letter I; SIFMA AMG Comment Letter; Fidelity
Comment Letter.
\221\ SIFMA AMG Comment Letter; Fidelity Comment Letter.
\222\ Fidelity Comment Letter.
\223\ SIFMA AMG Comment Letter; Fidelity Comment Letter; JP
Morgan Comment Letter; Dreyfus Comment Letter.
\224\ SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

As we saw in March 2020, markets can become illiquid very rapidly
in response to events that money market fund managers may not
anticipate. This demonstrates that it is important that fund managers
have the ability to sell their most liquid assets to meet investor
redemptions to avoid selling less liquid assets into a declining
market, which would likely have negative effects on the fund and its
remaining shareholders. Accordingly, we believe that any regulatory
amendments should allow funds to deploy their excess liquidity during
times of market stress, when such liquidity is typically needed most.
Imposing a new regulatory penalty when a fund drops below a minimum
liquidity threshold, or requiring the fund to ``overcorrect'' in that
case, could have the unintended effect of incentivizing some fund
managers to sell less liquid assets into a declining market rather than
use their excess liquidity during market stress events out of fear of
approaching or falling below the regulatory threshold.\225\ We
therefore are proposing to maintain the existing regulatory requirement
that if a money market fund's portfolio does not meet the minimum daily
liquid asset or weekly liquid asset threshold, the fund may not acquire
any assets other than daily liquid assets or weekly liquid assets,
respectively, until it meets these minimum thresholds.
---------------------------------------------------------------------------

\225\ To some extent, this could be similar to the effect we
observed in March 2020 of the tie between the weekly liquid asset
threshold and the potential imposition of liquidity fees or
redemption gates, when some fund managers sold less liquid assets to
avoid dropping below the regulatory threshold.
---------------------------------------------------------------------------

Moreover, the proposed rule would require a fund to notify its
board of directors when the 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 (a ``liquidity threshold event'').\226\
The proposal would require a fund to notify the board within one
business day of the liquidity threshold event.\227\ The proposed rule
would also require the fund to provide the board with a brief
description of the facts and circumstances that led to the liquidity
threshold event within four business days after its occurrence.\228\
Some commenters supported requiring a fund to notify its board
following the fund falling below a liquidity threshold.\229\
---------------------------------------------------------------------------

\226\ See proposed rule 2a-7(f)(4)(i).
\227\ Id.
\228\ See proposed rule 2a-7(f)(4)(ii).
\229\ JP Morgan Comment Letter; SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

The liquidity levels that trigger a liquidity threshold event
reflect that a fund's liquidity has decreased by more than 50% below at
least one of the proposed minimum daily and weekly liquid asset
requirements. This provision is designed to facilitate appropriate
board notification, monitoring, and engagement when a fund's liquidity
levels decrease significantly below the minimum liquidity
requirements.\230\ We understand that many funds today provide regular
reports to fund boards regarding fund liquidity, often in connection
with quarterly board meetings. We believe that the proposed board
notification requirement would provide the board with timely
information in a context that would better facilitate the board's
understanding and monitoring of significant declines in the fund's
liquidity levels.
---------------------------------------------------------------------------

\230\ Similar to these proposed board notification requirements,
we are proposing that funds file reports on Form N-CR upon a
liquidity threshold event. See infra Section II.F.1.a.
---------------------------------------------------------------------------

We request comment on the proposed regulatory requirements for
falling below the minimum liquidity thresholds, including the
following:
77. Should the Commission impose penalties on funds or fund
sponsors when a fund falls below a required minimum liquidity
requirement? For example, should we require funds to ``over-correct''
to a higher liquidity level after dropping below a minimum requirement?
If so, how long should a fund be required to maintain a higher level of
liquidity after the over-correction?
78. Should rule 2a-7 impose a minimum liquidity maintenance
requirement, i.e., require that a money market fund maintain the
minimum daily liquid asset and weekly liquid asset thresholds at all
times? What are the advantages and disadvantages of this approach?
79. Are the proposed requirements for the fund to notify its board
upon a liquidity threshold event appropriate? Would the proposed
requirement help boards monitor significant declines in fund liquidity
levels? Do funds currently notify the board when they fall below a
certain liquidity level?
80. Should the liquidity levels that trigger a liquidity threshold
event be 50% of the minimum liquidity requirements, as proposed? Would
a lower or higher percentage be more appropriate (e.g., 10%, 25%, or
75% below the minimum liquidity requirements)? Alternatively, should
the rule require funds to notify the board if the fund falls below the
minimum liquidity requirements (i.e., below 25% daily liquid assets or
50% weekly liquid assets)?
81. Should the rule also require the fund to provide a subsequent
notification to its board when the fund's liquidity returns above an
identified threshold (e.g., the fund's liquidity is at or above the 25%
daily liquid asset requirement and 50% weekly liquid asset
requirement)?
82. Is one business day sufficient time to allow a fund to notify
its board following a liquidity threshold event? Is four business days
sufficient time to allow a fund to provide its board with

[[Page 7277]]

a brief description of the facts and circumstances that led to a
liquidity threshold event? Should the rule provide more or less time
for either or both of these notifications? Should the rule require
either or both of these notifications to the fund's board to be
written?
83. Are the proposed requirements for the fund to notify the board
of the facts and circumstances that led to a liquidity threshold event
appropriate? Would the fund provide these details without the rule's
requirements (either on its own or after board inquiry)? Should the
rule require other specific information in this notification? If so,
what information and why? For example, should the rule require a fund
to provide a reasonable estimate for when the fund will come back into
compliance with the minimum liquidity requirements?
84. Should we instead require board notification if a fund has
dropped below a particular liquidity level for a specified period
(e.g., if the fund has dropped below the minimum liquidity
requirements, or some lower amount, for at least 3, 5, or 10
consecutive business days)? Should a liquidity threshold event for
purposes of the board notification requirement align with liquidity
threshold events that funds would be required to report on Form N-CR,
such that any changes to the scope of the proposed Form N-CR reporting
requirement would also apply to the board notification requirement?
3. Proposed Amendments to Liquidity Metrics in Stress Testing
Each money market fund is currently required to engage in periodic
stress testing under rule 2a-7 and report the results of such testing
to its board.\231\ Currently, one aspect of periodic stress testing
involves the fund's ability to have invested at least 10% of its total
net assets in weekly liquid assets under specified hypothetical events
described in rule 2a-7. The Commission chose the 10% threshold because
dropping below this threshold triggers a default liquidity fee, absent
board action, and thus, has consequences for a fund and its
shareholders.\232\ Because our proposal would no longer provide for
default liquidity fees if a fund has weekly liquid assets below 10%,
and our proposal would increase the weekly liquid asset minimum from
30% to 50%, we no longer believe that the rule should require funds to
test their ability to maintain 10% weekly liquid assets under the
specified hypothetical events described in rule 2a-7. Instead, we are
proposing to require funds to test whether they are able to maintain
sufficient minimum liquidity under such specified hypothetical
events.\233\ As a result, each fund would be required to determine the
minimum level of liquidity it seeks to maintain during stress periods,
identify that liquidity level in its written stress testing procedures,
periodically test its ability to maintain such liquidity, and provide
the fund's board with a report on the results of the testing.
---------------------------------------------------------------------------

\231\ See 17 CFR 270.2a-7(g)(8).
\232\ See 2014 Adopting Release, supra footnote 12, at Section
III.J.2.
\233\ See proposed rule 2a-7(g)(8)(i) and (g)(8)(ii)(A).
---------------------------------------------------------------------------

For purposes of stress testing, we are proposing to permit each
fund to determine the level of liquidity that it considers sufficient,
instead of continuing to provide a bright-line threshold that all funds
must use uniformly. We believe the proposed approach may improve the
utility of stress test results because they would reflect whether the
fund is able to maintain the level of liquidity it considers
sufficient, which may differ among funds for a variety of reasons
(e.g., type of money market fund or characteristics of investors, such
as investor concentration or composition that may contribute to large
redemptions).
We request comment on the proposed amendments to stress testing
requirements, including the following;
85. As proposed, should we remove the 10% weekly liquid asset
metric from current stress testing requirements and instead require
funds to determine the sufficient minimum liquidity level to test?
86. Should we instead identify a different liquidity threshold
funds must test (e.g., 15%, 20%, or 30% weekly liquid assets)? Under
this approach, should we require stress testing to consider both weekly
liquid assets and daily liquid assets? If so, what threshold should we
use for daily liquid assets (e.g., 5%, 10%, or 15%)?

D. Amendments Related to Potential Negative Interest Rates

Twice during the past 15 years, the Federal Reserve established the
lower bound of the target range for the federal funds rate at 0% to
spur borrowing and other economic activity in the face of economic
crises. In 2008, a crisis that originated in the financial sector
quickly spread to the rest of the U.S. economy, prompting the Federal
Reserve to establish a target federal funds rate of 0-0.25% for the
first time.\234\ The Federal Reserve raised the target range for the
federal funds rate in 2015, but the rise in rates from 2015 to 2018 was
relatively short lived.\235\ In early 2020, another crisis occurred,
amid growing economic concerns related to the COVID-19 pandemic and an
overall flight by investors to liquidity and quality. Once again, the
Federal Reserve lowered the target range for the federal funds rate to
0-0.25%.\236\ In this pervasive low interest rate environment, it is
very difficult for investors to generate substantial returns from
investments in U.S. Treasury securities and other high quality
government debt securities. This is true for money market funds, and
particularly true for government money market funds, which must invest
99.5% or more of their assets in cash, government securities, and/or
repurchase agreements that are collateralized fully.\237\ Government
and retail money market funds (or ``stable NAV funds'') can still
maintain a non-negative stable share price while investing in
instruments that yield a low but positive interest rate; however, if
interest rates turn negative and the gross yield of a fund's portfolio
turns negative, it would be challenging or impossible for the fund to
maintain a non-negative stable share price. The fund would begin to
lose money.
---------------------------------------------------------------------------

\234\ Statement of the Federal Open Markets Committee, December
16, 2008, available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20081216b.htm.
\235\ See Board of Governors of the Federal Reserve System,
``Open Market Operations,'' available at https://www.federalreserve.gov/monetarypolicy/openmarket.htm.
\236\ Statement of the Federal Open Markets Committee, March 15,
2020, available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm.
\237\ 17 CFR 270.2a-7(a)(14). The term ``government security,''
as defined in the Act, means any security issued or guaranteed as to
principal or interest by the United States, or by a person
controlled or supervised by and acting as an instrumentality of the
Government of the United States pursuant to authority granted by the
Congress of the United States; or any certificate of deposit for any
of the foregoing. 15 U.S.C. 80a-2(a)(16).
---------------------------------------------------------------------------

Despite keeping the lower bound of the federal funds rate target at
zero for many years, some policymakers at the Federal Reserve have at
times expressed the view that negative interest rates do not appear to
be an attractive monetary policy tool in the United States.\238\
However, other regulators and academics, including prior Federal
Reserve leaders, have suggested policymakers could consider negative
interest rates as a potential tool to counteract future economic

[[Page 7278]]

slowdowns.\239\ In addition, even if the Federal Reserve does not lower
the target federal funds rate below zero, market interest rates may
still move into negative territory if the federal funds rate remains at
or near zero for extended periods of time. Given the possibility that
negative interest rates may occur during future periods of economic
instability, in 2020 several money market fund sponsors issued investor
education materials about the effects of negative interest rates.\240\
Fund sponsors also published analyses of potential actions that
government and retail money market funds could take in order to
maintain a stable share price if the gross yield on their investments
turns negative.\241\
---------------------------------------------------------------------------

\238\ See, e.g., Minutes of the Federal Open Market Committee:
October 29-30, 2019, available at ``https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20191030.pdf.
\239\ See, e.g., ``What tools does the Fed have left? Part 1:
Negative interest rates,'' Ben S. Bernanke (March 18, 2016),
available at https://www.brookings.edu/blog/ben-bernanke/2016/03/18/what-tools-does-the-fed-have-left-part-1-negative-interest-rates/
(``Overall, as a tool of monetary policy, negative interest rates
appear to have both modest benefits and manageable costs'').
\240\ See, e.g., ``Negative interest rates: What you need to
know'' Wells Fargo Letter Asset Management (July 2020), available at
https://www.wellsfargoassetmanagement.com/assets/public/pdf/insights/investing/negative-interest-rates-what-you-need-to-know.pdf; ``Everything You Needed to Know About Negative Rates to
Impress Your Boss'' State Street Letter Global Advisors (June 2020),
available at https://www.ssga.com/library-content/pdfs/cash/inst-cash-negative-interest-rate-piece.pdf.
\241\ See, e.g., ``Negative Rates: Could it happen in the US?''
Invesco (March 31, 2020), available at https://www.Invesco.com/us-rest/contentdetail?contentId=798d6439a0331710VgnVCM1000006e36b50aRCRD&audienceType=Institutional; ``Negative interest rates: What you need to
know'' Wells Fargo Asset Management (July 2020), available at
https://www.wellsfargoassetmanagement.com/assets/public/pdf/insights/investing/negative-interest-rates-what-you-need-to-know.pdf.
---------------------------------------------------------------------------

Rule 2a-7, in its current form, does not explicitly address how
money market funds must operate when interest rates are negative.
However, rule 2a-7 states that government and retail money market funds
may seek to maintain a stable share price by using amortized cost and/
or penny-rounding accounting methods. A fund may only take this
approach so long as the fund's board of directors believes that the
stable share price fairly reflects the fund's market-based net asset
value per share.\242\ Accordingly, if negative interest rates turn a
stable NAV fund's gross yield negative, the board may reasonably
believe the stable share price does not fairly reflect the market-based
price per share, as the fund would be unable to generate sufficient
income to support a stable share price. Under these circumstances, the
fund would not be permitted to use amortized cost and/or penny-rounding
accounting methods to seek to maintain a stable share price. Instead,
the fund would need to convert to a floating share price.
---------------------------------------------------------------------------

\242\ 17 CFR 270.2a-7(c)(1)(i).
---------------------------------------------------------------------------

In addition to the pricing provision described above, rule 2a-7
also includes certain procedural standards for stable NAV funds.\243\
These standards, overseen by the fund's board of directors, include a
requirement that the fund periodically calculate the market-based value
of the portfolio (``shadow price'') and compare it to the fund's stable
share price. If the deviation between these two values exceeds \1/2\ of
1% (50 basis points), the fund's board of directors must consider what
action, if any, should be taken by the board, including whether to re-
price the fund's securities above or below the fund's $1.00 share price
(i.e., ``break the buck''). Regardless of the extent of the deviation,
rule 2a-7 imposes on the board of a money market fund a duty to
consider appropriate action whenever the board believes the extent of
any deviation may result in material dilution or other unfair results
to investors or current shareholders. We believe that, if interest
rates turn negative, the board of a stable NAV fund could reasonably
require the fund to convert to a floating share price to prevent
material dilution or other unfair results to investors or current
shareholders.
---------------------------------------------------------------------------

\243\ 17 CFR 270.2a-7(g)(1).
---------------------------------------------------------------------------

While these pricing provisions of rule 2a-7 apply specifically to
government and retail money market funds, the rule also requires these
funds and their transfer agents to have the capacity to redeem and sell
securities at prices that do not correspond to a stable price per
share.\244\ Accordingly, these funds and their service providers also
must understand how the floating share price mechanism would operate
when interest rates are negative. Government and retail money market
fund transfer agents and other service providers generally should
confirm that they have effective procedures to facilitate transactions
for the fund if it were to switch to a floating share price.
---------------------------------------------------------------------------

\244\ 17 CFR 270.2a-7(h)(11).
---------------------------------------------------------------------------

We believe the pricing provisions of rule 2a-7 provide appropriate
flexibility for a fund with a stable share price to respond to negative
interest rates. While we are not proposing changes to the rule 2a-7
pricing provisions in relation to negative interest rates, we are
proposing to expand government and retail money market funds'
obligations to confirm that they can fulfill shareholder transactions
if they convert to a floating share price. Specifically, we propose to
require a government or retail money market fund (or the fund's
principal underwriter or transfer agent on its behalf) to determine
that financial intermediaries that submit orders--including through an
agent--to purchase or redeem the fund's shares have the capacity to
redeem and sell the fund's shares at prices that do not correspond to a
stable price per share or, if this determination cannot be made, to
prohibit the relevant financial intermediaries from purchasing the
fund's shares in nominee name.\245\ Funds would have flexibility in how
they make this determination for each financial intermediary but would
be required to maintain records identifying the intermediaries the fund
has determined have the capacity to transact at non-stable share prices
and the intermediaries for which the fund was unable to make this
determination.\246\ We believe it is necessary that all parties
concerned--stable NAV money market funds, their service providers, and
their distribution network--are capable of processing transactions in a
fund's shares in the event that the fund converts to a floating NAV.
Rule 2a-7 already imposes this obligation on money market funds and
their transfer agents. Because many investors purchase shares through
financial intermediaries, however, we believe it is important that such
intermediaries are able to continue to process shareholder transactions
if a stable NAV fund converts to a floating NAV. Absent this
capability, a money market fund would not actually be able to process
transactions at a floating NAV, as currently required by rule 2a-7.
---------------------------------------------------------------------------

\245\ See proposed rule 2a-7(h)(11)(ii). This proposed
requirement would apply to each financial intermediary that submits
orders, itself or through its agent, to purchase or redeem shares
directly to the money market fund, its principal underwriter or
transfer agent, or to a registered clearing agency. The term
``financial intermediary'' has the same meaning as in 17 CFR
270.22c-2(c)(1). See proposed rule 2a-7(h)(11)(iv).
\246\ See proposed rule 2a-7(h)(11)(iii). Funds would be
required to preserve a written copy of such records for a period of
not less than six years following each identification of a financial
intermediary, the first two years in an easily accessible place.
---------------------------------------------------------------------------

The pricing provisions of rule 2a-7 have now been in place for
several years, and we believe fund sponsors are familiar with the
operational requirements to operate a money market fund with a floating
share price. This is especially true because all money market funds
other than government and retail money market funds are currently
required to operate with a floating share price. However, some fund
industry representatives proposed

[[Page 7279]]

different operational responses to negative interest rates.
Specifically, some fund sponsors discussed a reverse distribution
mechanism, whereby a government or retail money market fund would
maintain a stable share price, despite losing value, by reducing the
number of its outstanding shares. We understand that European money
market funds used a reverse distribution mechanism for a period of
time, before the European Commission determined this approach was not
consistent with the 2016 EU money market fund regulations.\247\ While
some have suggested that the reverse distribution mechanism was not
confusing to European money market fund investors, nearly all of whom
are institutional investors, we believe such a mechanism would not be
intuitive for retail investors in government and retail money market
funds. Under a reverse distribution mechanism, these investors would
observe a stable share price but a declining number of shares for their
investment in a fund that is generating a negative gross yield. We
believe that investors may be misled by such a mechanism and assume
that their investment in a fund with a stable share price is holding
its value while, in fact, the investment is losing value over
time.\248\ In contrast, we believe investors would easily understand a
decline in share prices in the event that a fund's gross yield turns
negative. Due to the potentially misleading or confusing nature of the
reverse distribution mechanism, we are proposing to amend rule 2a-7 to
prohibit money market funds from operating a reverse distribution
mechanism, routine reverse stock split, or other device that would
periodically reduce the number of the fund's outstanding shares to
maintain a stable share price.\249\
---------------------------------------------------------------------------

\247\ See ESMA Press Release, European Commission Letter on
Money Market Fund Regulation (Feb. 2, 2018), available at https://www.esma.europa.eu/press-news/esma-news/european-commission-letter-money-market-fund-regulation.
\248\ Comment Letter of Jose Joseph (Apr. 13, 2021) (``Jose
Joseph Comment Letter'') (suggesting that if money market funds
generate negative yields, ``[u]nilaterally redeeming the shares[ ]
by reverse distribution is like cheating'' and that funds should
instead inform shareholder and move to a floating NAV to be fair and
transparent).
\249\ See proposed rule 2a-7(c)(3).
---------------------------------------------------------------------------

Having described considerations under rule 2a-7 that are relevant
to negative interest rates, we seek comment on possible methods that
government or retail money market funds could use to operate if
interest rates turn negative. We also seek comment on our proposal to
prohibit money market funds from operating a reverse distribution
mechanism and our proposed provisions relating to whether a government
or retail fund's distribution network can sell and redeem the fund's
shares at non-stable prices per share.
87. Should the Commission mandate specific disclosure to investors
or to the Commission if a fund's gross yield turns negative?
88. Would a reverse distribution mechanism or similar mechanism
mislead or confuse investors? Would such a mechanism benefit investors?
Would investors more easily understand a decline in share prices (i.e.,
a floating share price), rather than a decline in the number of stable
value shares (i.e., a reverse distribution mechanism), in the event
that a fund's gross yield turns negative?
89. Should we permit a stable NAV money market fund to engage in a
routine reverse stock split, reverse distribution mechanism, or other
mechanism by which the fund maintains a stable share price, despite
losing value, by reducing the number of its outstanding shares? Should
we permit only institutional government funds to engage in such a
mechanism because institutional investors may be more likely to
appreciate that the fund is losing value notwithstanding the lack of a
change in the share price? If so, how should we define an institutional
government fund for this purpose (e.g., a government fund that does not
have policies and procedures reasonably designed to limit all
beneficial owners of the fund to natural persons; or a government fund
that has policies and procedures reasonably designed to limit all
beneficial owners to non-natural persons)? If we permit the use of such
a mechanism, how should a fund be required to communicate its operation
to investors? Should the fund be required to take steps to make sure
existing investors approve of a reverse distribution mechanism before
operating such a mechanism? If so, what should those steps be?
90. Should all stable NAV money market funds be required to respond
to negative interest rates in the same manner (i.e., should all these
funds be required to switch to a floating share price, or should each
fund be permitted to respond to negative interest rates in a different
manner)? If the rule permits funds to respond to negative interest
rates on an individualized basis, should the rule prescribe specific
options that are permissible? Would it be confusing for investors if
each money market fund used a different method for absorbing a negative
interest rate?
91. Would investors prefer a government or retail money market fund
with a negative yield to implement a floating share price or a reverse
distribution mechanism? Does the response differ depending on the type
of investor? Does the response differ depending on the type of money
market fund?
92. How likely are investors to remain invested in a money market
fund with a negative gross yield? If investors redeem shares in a money
market fund with a negative gross yield, where might they choose to
invest their money instead?
93. How likely are fund sponsors to continue to operate money
market funds in a pervasive negative interest rate environment? Are
certain fund sponsors (e.g., bank-affiliated sponsors) more likely than
others to continue to operate money market funds in a negative interest
rate environment? Are sponsors more likely to continue to operate
certain types of money market funds (e.g., prime funds) in a negative
interest rate environment?
94. As proposed, should we require a government or retail fund to
determine that financial intermediaries in its distribution network can
sell and redeem the fund's shares at non-stable prices per share?
Should we, as proposed, require a fund to prohibit a financial
intermediary from purchasing the fund's shares in nominee name on
behalf of other persons if the fund cannot make such a determination?
Are there alternative approaches we should take to make sure financial
intermediaries are able to handle a fund's potential transition from
using a stable NAV to a floating NAV?
95. As proposed, should we require a government or retail fund to
maintain and keep current records identifying the intermediaries the
fund has determined have the capacity to transact at non-stable share
prices and the intermediaries for which the fund was unable to make
this determination? Are there alternative ways of documenting this
information that we should require? Should we require funds to
periodically check against these records to make sure they are not
using an intermediary that cannot transact at non-stable share prices?
96. Should we mandate or provide additional guidance around how a
fund would determine that a financial intermediary can sell and redeem
the fund's shares at non-stable prices per share? Should we require a
fund to maintain records of these determinations?
97. Should we require a fund to report to its board of directors
the basis of its

[[Page 7280]]

determinations that a financial intermediary has the capacity to redeem
and sell securities issued by the fund at a price based on the current
net asset value, including prices that do not correspond to a stable
price per share? Should we require a fund to disclose the basis of such
determinations publicly or to the Commission?
98. Should we require government and retail funds and their
financial intermediaries to test their ability to redeem and sell
securities issued by the fund at prices that do not correspond to a
stable price per share? Should we require a fund to report the results
of those tests to its board of directors? Should we require a fund to
disclose the results of those tests to the Commission or publicly?

E. Amendments To Specify the Calculation of Weighted Average Maturity
and Weighted Average Life

We are proposing to amend rule 2a-7 to specify the calculations of
``dollar-weighted average portfolio maturity'' (``WAM'') and ``dollar-
weighted average life maturity'' (``WAL'').\250\ WAM and WAL are
calculations of the average maturities of all securities in a
portfolio, weighted by each security's percentage of net assets. These
calculations are an important determinant of risk in a portfolio, as a
longer WAM and WAL may increase a fund's exposure to interest rate
risks. We have found that funds use different approaches when
calculating WAM and WAL under the current definitions in the rule. For
instance, we understand that a majority of money market funds calculate
WAM and WAL based on the percentage of each security's market value in
the portfolio, while other money market funds base calculations on the
amortized cost of each portfolio security. This discrepancy can create
inconsistency of WAM and WAL calculations across funds, including in
data reported to the Commission and provided on fund websites.\251\
Although these inconsistencies are likely to be small, they could
confuse investors that review funds' WAM and WAL and create
inefficiencies for the Commission's monitoring of money market funds.
Accordingly, we are proposing to amend rule 2a-7 to require that money
market funds calculate WAM and WAL based on the percentage of each
security's market value in the portfolio. We are proposing to require
funds to use market value because all types of money market funds
already determine the market values of their portfolio holdings for
other purposes, while only certain money market funds use amortized
cost.\252\ Thus, we believe all money market funds can use this
calculation approach with information they already obtain. We believe
that these amendments will enhance the consistency of calculations for
funds, while allowing the Commission to better monitor and respond to
indicators of potential risk and stress in the market.
---------------------------------------------------------------------------

\250\ See proposed amendments to rule 2a-7(d)(1)(ii) and (iii).
\251\ See Items A.11 and A.12 of Form N-MFP; 17 CFR 270.2a-
7(h)(10)(i)(A).
\252\ Money market funds that use a floating NAV use market
values when determining a fund's NAV, while money market funds that
maintain a stable NAV are required to use market values to calculate
their market-based price at least daily.
---------------------------------------------------------------------------

We request comment on the proposed clarification of WAM and WAL
calculations, including the following:
99. Should we require all money market funds to calculate WAM and
WAL based on the percentage of each security's market value in the
portfolio, as proposed? Should certain types of money market funds be
excluded from this requirement or subject to a different requirement?
If so, why? For instance, should we require money market funds that
maintain a stable NAV to calculate WAM and WAL using the amortized
costs of the portfolio?
100. Are there benefits to calculating WAM and WAL based on
amortized cost of the portfolio instead of market value?
101. Are there other changes or additions that would improve the
accuracy or consistency of the calculations of WAM or WAL? Should we
provide additional guidance related to the proposed amendment?

F. Amendments to Reporting Requirements

1. Amendments to Form N-CR
Money market funds are required to file reports on Form N-CR when
certain specified events occur.\253\ Currently, a money market fund
typically is required to file Form N-CR reports if a portfolio security
defaults or experiences an event of insolvency, an affiliate provides
financial support to the fund, the fund experiences a deviation between
current net asset value per share and intended stable price per share,
liquidity fees or redemption gates are imposed or lifted, as well as
any optional disclosure made at the fund's discretion. We are proposing
to add a new requirement for a money market fund to file a report on
Form N-CR when the fund falls below a specified liquidity threshold. We
also propose to require funds to file Form N-CR reports in a structured
data language. Further, we are proposing other amendments to improve
the utility of reported information and to remove reporting
requirements related to the imposition of liquidity fees and redemption
gates under rule 2a-7.
---------------------------------------------------------------------------

\253\ See 17 CFR 270.30b1-8 (rule 30b1-8 under the Act).
---------------------------------------------------------------------------

a. Reporting of Liquidity Threshold Events
We propose to amend Form N-CR to require a fund to report when a
liquidity threshold event occurs (i.e., the 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).\254\ Currently, money market
funds are required to provide information about the size of their
weekly liquid assets and daily liquid assets on a daily basis on their
websites.\255\ We believe it is appropriate to require that a fund
report when it falls below half of its 25% daily liquid asset and 50%
weekly liquid asset minimum liquidity requirements, as this drop
represents a significant decrease in liquidity. We believe this
reporting would help investors, the Commission, and its staff monitor
significant declines in liquidity, without having to monitor each money
market fund's website.\256\ The reports also would provide more
transparency, as well as facilitate our monitoring efforts, by
providing the related facts and circumstances of any liquidity
threshold event.
---------------------------------------------------------------------------

\254\ Proposed Part E of Form N-CR.
\255\ 17 CFR 270.2a-7(h)(10)(ii)(A) and (B). Under these
provisions, a money market fund must post prominently on its website
a schedule, chart, graph, or other depiction that provides the
percentages of the fund's total assets invested in daily liquid
assets and in weekly liquid assets. This website disclosure must be
updated each business day, as of the end of the preceding business
day, and cover each business day during the preceding six months.
\256\ See JP Morgan Comment Letter (suggesting that money market
funds be required to report to the Commission when they fall below a
liquidity threshold).
---------------------------------------------------------------------------

Upon falling below either of the liquidity thresholds, the proposed
amendments would require a fund to report certain information about the
liquidity threshold event. When reporting a liquidity threshold event,
the fund's report on Form N-CR would be required to include: (1) The
initial date on which the fund falls below either the 25% weekly liquid
asset threshold or the 12.5% daily liquid asset threshold; (2) the
percentage of the fund's total assets invested in both weekly liquid
assets and daily liquid assets on the initial date of a liquidity
threshold event; and (3) a brief description of the facts and
circumstances leading to the liquidity

[[Page 7281]]

threshold event.\257\ The proposed reporting requirement would apply
when a fund falls below either threshold. Although a fund may not
necessarily fall below both thresholds, we are proposing to require
funds to disclose the percentages of both weekly liquid assets and
daily liquid assets as of the initial date that either threshold is
crossed.\258\ We believe that reporting both weekly liquid asset and
daily liquid asset levels would provide insight into a fund's short-
term and immediate liquidity profile. The brief description of facts
and circumstances would include additional details about the liquidity
threshold event, which would better inform investors, the Commission,
and our staff of events that lead to significant declines in
liquidity.\259\
---------------------------------------------------------------------------

\257\ Proposed Items E.1 through E.4 of Form N-CR.
\258\ Proposed Item E.3 of Form N-CR.
\259\ Proposed Item E.4 of Form N-CR.
---------------------------------------------------------------------------

Consistent with the timing of current Form N-CR reporting items,
the proposal would require a money market fund to file a report within
one business day after occurrence of a liquidity threshold event;
however, a fund could file an amended report providing the required
brief description of the facts and circumstances leading to the
liquidity threshold event up to four business days after such
event.\260\ We believe it may take funds up to four business days to
write and review a narrative description of the relevant facts and
circumstances, particularly where the liquidity threshold event was
caused by multiple or complex circumstances. If a fund has daily liquid
assets or weekly liquid assets continuously below the relevant
threshold for consecutive business days after reporting an initial
liquidity threshold event, the proposal would not require additional
Form N-CR reports to disclose that the same type of liquidity threshold
event continues.\261\
---------------------------------------------------------------------------

\260\ Proposed Instruction to Part E of Form N-CR.
\261\ If a fund initially falls below only one threshold and
then subsequently falls below the other threshold, the proposal
would require a second Form N-CR report. For example, if a fund
dropped below 25% weekly liquid assets on Tuesday and dropped below
12.5% daily liquid assets on Thursday, it would be required to file
two separate reports to disclose each liquidity threshold event.
Additionally, if a fund fell below either threshold and subsequently
resolved the liquidity threshold event before an initial or amended
report is filed, the fund would still be required to report the
liquidity threshold event and the facts and circumstances leading to
the liquidity threshold event.
---------------------------------------------------------------------------

We request comment on the proposed amendments to Form N-CR to
report information related to liquidity threshold events:
102. Should we require money market funds to file reports on Form
N-CR when they fall more than 50% below a minimum liquidity
requirement, as proposed? How might liquidity reporting on Form N-CR
affect money market funds' incentives to maintain weekly liquid assets
and daily liquid assets above 25% and 12.5%, respectively, of total
assets? How might this reporting affect investor behavior?
103. Should a report on Form N-CR when a fund falls more than 50%
below a liquidity threshold be filed confidentially with the Commission
(e.g., because investors can already see liquidity levels on funds'
public websites and Form N-CR reporting may increase investor
sensitivity to liquidity levels)? Or, in addition to the proposed
public reporting when a fund falls more than 50% below a liquidity
threshold, should we require funds to file confidential reports at a
different level below a minimum liquidity requirement (e.g., 25% below
a minimum)? If we require funds to report certain information
confidentially on Form N-CR, should that information be publicly
available on a delayed basis and, if so, what is an appropriate delay
(e.g., 15, 30, or 60 days)?
104. Should we use a different daily liquid asset or weekly liquid
asset level for determining when a fund must file a report on Form N-
CR? If so, what level(s) should we use? For example, would 10%, 25%, or
75% (rather than 50%) below the minimum liquidity requirements be
appropriate?
105. As proposed, should funds be required to report both their
current weekly liquid asset and daily liquid asset levels even if only
one of those thresholds is crossed?
106. Should funds be required to report each day they remain below
either the 12.5% daily liquid asset threshold or the 25% weekly liquid
asset threshold, or is just the initial date of liquidity threshold
event sufficient? Should funds be required to subsequently report when
a fund's liquidity returns above an identified threshold (e.g., to a
level at or above the minimum liquidity requirements) or is the daily
website disclosure of fund liquidity levels sufficient for this
purpose?
107. As proposed, should we require funds to report liquidity
threshold events within one business day of the relevant event? Is four
business days sufficient for funds to file an amended report that
includes a brief description of the facts and circumstances leading to
the fund falling below either threshold? Should these reporting periods
be longer or shorter?
108. Should any more, less, or other information be required in
connection with liquidity threshold events?
b. Structured Data Requirement
We are proposing to require money market funds to file reports on
Form N-CR in a structured data language.\262\ In particular, we are
proposing to require filing of Form N-CR reports in a custom eXtensible
Markup Language (``XML'') -based structured data language created
specifically for reports on Form N-CR (``N-CR-specific XML''). We
believe use of an N-CR-specific XML language would make it easier for
money market funds to prepare and submit the information required by
Form N-CR accurately, and would make the submitted information more
useful to investors and the Commission. A structured data language
would allow tools to be developed so that users can sort and filter the
available data according to specified parameters.
---------------------------------------------------------------------------

\262\ See proposed General Instruction D of Form N-CR
(specifying that reporting persons must file reports on Form N-CR
electronically on EDGAR and consult the EDGAR Filer Manual for EDGAR
filing instructions). See also 17 CFR 232.301 (requiring filers to
prepare electronic filings in the manner prescribed by the EDGAR
Filer Manual).
---------------------------------------------------------------------------

Reports on Form N-CR are currently required to be filed in HTML or
ASCII.\263\ We understand that, in order to prepare reports in HTML and
ASCII, money market funds generally need to reformat required
information from the way the information is stored for normal business
uses. In this process, money market funds typically strip out
incompatible metadata (i.e., syntax that is not part of the HTML or
ASCII specification) that their business systems use to ascribe meaning
to the stored data items and to represent the relationships among
different data items. The resulting code, when rendered in an end-
user's web browser, is comprehensible to a human reader, but it is not
suitable for automated validation or aggregation.
---------------------------------------------------------------------------

\263\ See Regulation S-T, 17 CFR 232.101(a)(1)(iv); 17 CFR
232.301; EDGAR Filer Manual (Volume II) version 59 (September 2021),
at 5-1 (requiring EDGAR filers generally to use ASCII or HTML for
their document submissions, subject to certain exceptions).
---------------------------------------------------------------------------

In recent years we have gained experience with different reporting
data languages, including with reports in an XML-based structured data
language. For example, we have used customized XML data languages for
reports filed on Form N-CEN and Form N-MFP.\264\ We

[[Page 7282]]

have found the XML-based structured data languages used for those
reports allow investors to aggregate and analyze reported data in a
much less labor-intensive manner than data filed in ASCII or HTML.
Based on our understanding of how funds currently disclose required
information in a structured data language, we believe that requiring a
Form N-CR-specific XML language would minimize reporting costs while
yielding more useful data for investors and the Commission, as
applicable. Money market funds would be able, at their option, either
to submit XML reports directly or use a web-based reporting application
developed by the Commission to generate the reports, as funds are able
to do today when submitting holdings reports on Form N-CEN.
---------------------------------------------------------------------------

\264\ See e.g., Investment Company Reporting Modernization,
Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR
81870 (Nov. 18, 2016)] (adopting Form N-CEN); 2010 Adopting Release
(adopting Form N-MFP).
---------------------------------------------------------------------------

We recognize that Form N-CR filers could bear some additional
reporting costs related to adjusting their systems to a different data
language. However, many money market funds have acquired substantial
experience with reporting on web-based applications (or directly
submitting information in a structured data language). For example,
money market funds currently file Form N-MFP on a monthly basis to
report their portfolio holdings and other information to the Commission
in a custom XML language. We believe that aligning Form N-CR's
reporting data language with the type of data language of other
required reports, including Form N-MFP, may reduce costs and introduce
additional efficiencies for money market funds already accustomed to
reporting using structured data and may reduce overall reporting costs
in the longer term. Furthermore, even if there are increased costs, we
believe that the benefits to investors and the Commission of making the
information more usable would justify these costs.
We request comment on the reporting data language we are proposing
to require for reports filed on Form N-CR, and, in particular, on the
following:
109. Should we require, as we are proposing, Form N-CR reports to
be filed in an N-CR-specific XML language? Is an N-CR-specific XML
language the appropriate type of data language for Form N-CR reports?
Why or why not? If another structured data language (e.g., Inline
eXtensible Business Reporting Language), would be more appropriate,
which one, and why?
110. Would this proposed requirement yield reported data that is
more useful to investors, compared with not requiring Form N-CR to be
filed in an N-CR-specific XML language, or requiring Form N-CR to be
filed in a structured data language other than an N-CR-specific XML
language?
111. Should any subset of funds be exempt from the proposed
structured data reporting requirement? If so, what subset and why?
112. What implementation and long term costs, if any, would be
associated with the proposed structured data reporting requirement?
c. Other Proposed Amendments
In addition to the proposed items related to liquidity threshold
events and the proposed structured data language requirement, we are
proposing a few other amendments to Form N-CR. To improve the
identifying information for the registrant and series reporting an
event on Form N-CR, we are proposing to require the registrant name,
series name, and legal entity identifiers (``LEIs'') for the registrant
and series.\265\ We also propose to add definitions of LEI, registrant,
and series to the form for clarity, and the definitions of these terms
would be the same as on Form N-MFP.\266\ Further, we are proposing to
remove the reporting events that relate to liquidity fees and
redemption gates, consistent with our proposal to remove the underlying
provisions from rule 2a-7.\267\ We also propose an amendment to Part C
of Form N-CR, which relates to the provision of financial support to
the fund. Specifically, when the support involves the purchase of a
security from the fund, we propose to require the date the fund
acquired the security, which would allow better identification of, and
context for, support that occurs within a short period of time. For
example, if the fund purchased the security a few days before the
affiliate acquired it, this could suggest that the risk profile of the
security deteriorated rapidly.
---------------------------------------------------------------------------

\265\ See Items A.2, A.4, A.5, and A.7 of proposed Form N-CR. An
LEI is a unique identifier generally associated with a single
corporate entity and is intended to provide a uniform international
standard for identifying counterparties to a transaction. Money
market funds are already required to report LEIs for a registrant
and series on Form N-CEN. See Items B.1 and C.1 of Form N-CEN.
\266\ See proposed General Instruction F of Form N-CR.
\267\ See Parts F through G of current Form N-CR.
---------------------------------------------------------------------------

We request comment on the other proposed amendments to Form N-CR:
113. Should we require reporting of registrant name, series name,
and LEIs for the registrant and series on Form N-CR, as proposed? Is
there other identifying information we should require?
114. Should we make any changes to the definitions we propose to
include in Form N-CR? Are there other terms we should define in the
form?
115. For the Form N-CR item requiring reporting of financial
support, should we require reporting of the date the fund acquired a
security, as proposed, if the support involves the purchase of a
security from the fund?
2. Amendments to Form N-MFP
Form N-MFP is the form that money market funds use to report their
portfolio holdings and other key information each month.\268\ We use
the information on Form N-MFP to monitor money market funds and support
our examination and regulatory programs. We are proposing amendments to
improve our ability to monitor money market funds. The proposed
amendments would provide certain new information about a fund's
shareholders and disposition of non-maturing portfolio investments. We
are also proposing changes to enhance the accuracy and consistency of
information funds currently report, to increase the frequency of
certain data points, and to improve identifying information for the
reporting fund.
---------------------------------------------------------------------------

\268\ See rule 30b1-7 under the Investment Company Act.
---------------------------------------------------------------------------

a. New Information Requirements
We are proposing to require additional information about the
composition and concentration of money market fund shareholders. With
respect to shareholder concentration, we are proposing that all money
market funds disclose the name and percent of ownership of each person
who owns of record or is known by the fund to own beneficially 5% or
more of the shares outstanding in the relevant class.\269\ Money market
funds currently provide substantially the same information on an annual
basis in their registration statements.\270\ We believe more frequent
information about shareholder concentration would be helpful for
monitoring a fund's potential risk of redemptions by an individual or a
small group of investors that could significantly affect the fund's
liquidity. We recognize that as a result of omnibus accounts, there are
circumstances in which multiple investors would be

[[Page 7283]]

represented as a single shareholder of record for purposes of this
disclosure.\271\ The proposal would require information about
beneficial owners known by the fund in recognition that funds may not
have information about the amount each beneficial owner holds in an
omnibus account. The proposed item would distinguish between record
owners and beneficial owners to facilitate a more nuanced understanding
of potential concentration levels. We are proposing to require funds to
use a 5% ownership threshold for this reporting requirement to align
with analysis funds already must conduct each year for purposes of
updating their registration statements.\272\
---------------------------------------------------------------------------

\269\ See proposed Item B.10 of Form N-MFP. If the fund knows
that two or more beneficial owners of the class are affiliated with
each other, the fund would treat them as a single beneficial owner
for purposes of the 5% ownership calculation and would report
information about each affiliated beneficial owner. For these
purposes, an affiliated beneficial owner would be one that directly
or indirectly controls or is controlled by another beneficial owner
or is under common control with another beneficial owner.
\270\ See Item 18 of Form N-1A.
\271\ Omnibus accounts are accounts established by
intermediaries that typically aggregate all customer activity and
holdings in a money market fund, which can result in the fund not
having information about individual beneficial owners who hold their
shares through the omnibus account.
\272\ See Item 18 of Form N-1A.
---------------------------------------------------------------------------

We also propose to require a money market fund that is not a
government money market fund or a retail money market fund to provide
information about the composition of its shareholders by type.\273\ The
proposed item would require these funds to identify the percentage of
investors within the following categories: Non-financial corporation;
pension plan; non-profit; state or municipal government entity
(excluding governmental pension plans); registered investment company;
private fund; depository institution and other banking institution;
sovereign wealth fund; broker-dealer; insurance company; and other.
This information would assist with monitoring the liquidity and
redemption risks of institutional money market funds, as different
types of investors may pose different redemption risks. We are not
proposing to require this information of government money market funds
because these funds have lower redemption and liquidity risks than
other money market funds. We are not proposing to apply this
requirement to retail funds because these funds, by definition, are
limited to retail investors.
---------------------------------------------------------------------------

\273\ See proposed Item B.11 of Form N-MFP.
---------------------------------------------------------------------------

In addition, we propose to add new Part D to Form N-MFP, which
would require information about the amount of portfolio securities a
prime money market fund sold or disposed of during the reporting
period. This information would facilitate monitoring of prime money
market funds' liquidity management, as well as their secondary market
activities in normal and stress periods. It also would improve the
availability of data about how selling activity by money market funds
relates to broader trends in short-term funding markets. The proposal
would require a prime fund to disclose the aggregate amount it sold or
disposed of for each category of investment.\274\ The categories of
investments would mirror the categories funds already use on Form N-MFP
for identifying their month-end holdings (e.g., certificate of deposit,
non-negotiable time deposit, financial or non-financial company
commercial paper, or U.S. Treasury debt).\275\ To focus the disclosure
on secondary market activity, the proposal would exclude portfolio
securities the fund held until maturity. We are proposing to require
only prime funds to provide information about securities sold or
disposed of because we believe that asset liquidation by this type of
money market fund contributed to the market stress in March 2020 and
during the 2008 financial crisis. In contrast, government funds
generally receive inflows during periods of market stress and tend to
provide liquidity to the market by investing incoming cash flow in the
repurchase agreement market and purchasing securities. Tax-exempt funds
are only a small segment of the money market fund industry and are less
likely to generate significant liquidity concerns for the broader
municipal market.
---------------------------------------------------------------------------

\274\ See Item D.1 of proposed Form N-MFP.
\275\ See Item C.6 of current Form N-MFP.
---------------------------------------------------------------------------

As described above in the proposed swing pricing requirement
section, we also propose to amend Form N-MFP to require money market
funds that are not government money market funds or retail money market
funds to report the number of times the fund applied a swing factor
over the course of the reporting period, and each swing factor applied.
In that section, we requested comment on these swing pricing-related
amendments to Form N-MFP.
We request comment on the new items we propose to add to Form N-
MFP, including:
116. Should we require all money market funds to disclose
information about shareholder concentration on Form N-MFP, as proposed?
Should certain types of funds be excluded and, if so, why? Should the
reporting threshold be ownership of at least 5% of a class's shares
outstanding, as proposed? Should the threshold be lower or higher, such
as 1%, 10%, or 15%? Instead of requiring information about shareholders
who hold a certain amount of a class's outstanding shares, should we
use a different method of obtaining information about shareholder
concentration? For example, should we require funds to report the
amount of net assets held by a specific number of the fund's largest
investors, such as the one, five, or ten largest investors?
117. As proposed, should the shareholder concentration item require
the name and percentage of ownership for each shareholder who owns of
record or beneficially 5% or more? Should we require different
information for some or all types of investors? For example, should we
not require name information for retail investors or other types of
investors? As another alternative, should we require funds to report
only the number of investors who own of record or beneficially 5% or
more, distinguishing between record owners and beneficial owners?
Additionally, should this information, as proposed, be reported on a
non-confidential basis? Is there any sensitivity to identifying
shareholder information such that it should only be reported to the
Commission on a confidential basis?
118. Do funds currently gather information about shareholder
concentration and composition on at least a monthly basis, or would the
proposal require more frequent gathering of information than current
practices? If more frequent information gathering would be required,
what are the associated advantages and disadvantages of assessing
shareholder concentration and composition more frequently? Should we
require funds to report this information on Form N-MFP less frequently
than proposed, such as annually, semiannually, or quarterly?
119. Should we require institutional prime and tax-exempt money
market funds to provide information about the composition of their
shareholders by type, as proposed? Are there any changes we should make
to the types of shareholders the form would identify? Should certain
shareholder categories be added or removed? Should we provide
additional guidance or definition for any of the categories of
shareholders? Should we also require government money market funds to
respond to this item? If so, why?
120. To what extent do money market funds know when an investor
beneficially owns 5% or more of a class's outstanding shares when those
shares are held through an omnibus account? To what extent do
institutional money market funds know the composition of their
shareholders by type? Are there any changes we should make to
facilitate money market funds' abilities to collect this information,
including for investors who invest through an omnibus account? For
example, should we preclude a money market fund from selling its
securities to

[[Page 7284]]

a financial intermediary in nominee name on behalf of others unless the
intermediary provides certain information about investors in the fund
(such as size of holding, type of investor, or other investor
characteristics)?
121. Should we require prime funds to disclose aggregate
information about the amount of portfolio securities they sold or
disposed of during the reporting period for each category of
investment, as proposed? Should we instead require details about each
instrument sold (e.g., date of sale, price, and identifying information
for each holding)? Should we instead consider requiring that prime
funds report information about the amount of portfolio securities sold
or disposed of on Form N-CR if the amount is above a specific
threshold? If so, what amount of selling activity should trigger such
reporting?
122. Should we require only some money market funds to disclose
their selling activity, as proposed? Should we alternatively require
all, or a broader subset of, money market funds to disclose this
information?
123. Are there other types of information we should require money
market funds to report on Form N-MFP to facilitate monitoring of these
funds?
b. Changes To Improve the Accuracy and Consistency of Currently
Reported Information
We are proposing several amendments to improve information about
money market funds' portfolio securities. We are proposing to specify
that, for purposes of reporting the fund's schedule of portfolio
securities in Part C of Form N-MFP, filers must provide required
information separately for the initial acquisition of a security and
any subsequent acquisitions of the security (i.e., for each lot).\276\
Currently, some funds report information separately for each lot, while
others do not. Requiring funds to report information separately for
each lot would facilitate the Commission's ability to analyze other
information we propose to require. Specifically, we are proposing an
additional item that would require funds to provide the trade date on
which the security was acquired and the yield of the security as of
that trade date.\277\ These proposed amendments, collectively, would
assist the Commission in understanding how long a fund has held a given
position and the maturity of the position when it was first acquired.
This information is important to understand a money market fund's
portfolio turnover during normal market conditions and to monitor a
potentially higher level of asset disposition during periods of market
stress.
---------------------------------------------------------------------------

\276\ See introductory language to Part C of proposed Form N-
MFP.
\277\ See Item C.6 on proposed Form N-MFP. Because the proposed
amendments separately request the yield at the time of acquisition,
we are proposing to remove language in Item C.2 requiring filers to
include the coupon, if applicable, in response to that item.
---------------------------------------------------------------------------

Form N-MFP requires filers to report particular information about
funds' repurchase agreements. We are proposing to amend the form to
require additional information about repurchase agreement transactions
and to standardize how filers report certain information. Specifically,
the amendments would require that filers identify (1) the name of the
counterparty in a repurchase agreement; (2) whether a repurchase
agreement is centrally cleared and the name of the central clearing
counterparty, if applicable; (3) if a repurchase agreement was settled
on a triparty platform; and (4) the CUSIP of the securities involved in
the repurchase agreement. Currently, Form N-MFP simply asks for the
name of the issuer. For repurchase agreements, filers sometimes report
the name of the counterparty to the repurchase agreement, the name of
the clearing house (in the case of centrally cleared repurchase
agreements), or both in response to this item. In addition, the
amendments would recognize changes that have occurred in the market for
repurchase agreements since the form was last amended, such as the
introduction of centrally cleared (or ``sponsored'') repurchase
agreements. These proposed amendments would improve the Commission's
monitoring of money market fund activity in various segments of the
market for repurchase agreements, including potentially increased or
decreased activity during periods of market stress, which may affect
availability of funding for borrowers.
We are also proposing to include ``cash'' as a category of
investment that most closely represents the collateral in repurchase
agreements.\278\ This amendment is designed to recognize that cash is
sometimes used as collateral for repurchase agreements, and we expect
that the addition would reduce inaccurate disclosure suggesting that a
repurchase agreement is under-collateralized. Moreover, we are
proposing to remove the ability for funds to aggregate certain required
information if multiple securities of an issuer are subject to the
repurchase agreement.\279\ Removing this provision would provide more
complete information about securities subject to a repurchase
agreement.
---------------------------------------------------------------------------

\278\ See Item C.9.k of Form N-MFP (currently listing as
categories of investments that most closely represents the
collateral: Asset-backed securities; agency collateralized mortgage
obligations; agency debentures and agency strips; agency mortgage-
backed securities; private label collateralized mortgage
obligations; corporate debt securities; equities; money market; U.S.
Treasuries (including strips); and other instruments).
\279\ See Item C.8 of Form N-MFP.
---------------------------------------------------------------------------

Form N-MFP currently requires filers to indicate the category of
money market fund.\280\ These categories include ``Treasury,''
``Government/Agency,'' and ``Exempt Government,'' among others. We
understand that these categories for government money market funds have
contributed to confusion and inconsistent approaches to categorization.
We are proposing to remove these three category designations and to
replace them with one ``Government'' category.\281\ To differentiate
between Treasury funds and other government funds, the proposal
includes a new subsection that requires government money market funds
to indicate whether they typically invest at least 80% of the value of
their assets in U.S. Treasury obligations or repurchase agreements
collateralized by U.S. Treasury obligations.\282\ We believe that these
amendments would provide more clarity for filers and supply the
Commission with more accurate identification of different types of
government money market funds.
---------------------------------------------------------------------------

\280\ Item A.10 of Form N-MFP.
\281\ See proposed Item A.10 of Form N-MFP. We also propose to
add definitions for ``government money market fund'' and ``retail
money market fund'' in the form, which would be consistent with the
definitions of these terms in rule 2a-7. Including these definitions
in the form would clarify the meaning of references to these terms
in this item and elsewhere in the form. See General Instruction E of
proposed Form N-MFP. Because under this approach the definition of
``retail money market fund'' would be clear for purposes of the
form, we also propose to amend Item A.10.a to use this defined term,
rather than refer to exempt retail money market funds. See proposed
Item A.10.a of Form N-MFP.
\282\ See proposed Item A.10.b of Form N-MFP. The 80% investment
standard is based on 17 CFR 270.35d-1 (rule 35d-1 under the
Investment Company Act), which requires a money market fund that
includes ``Treasury'' in its name to adopt a policy to invest, under
normal circumstances, at least 80% of its assets in the particular
type of investment the fund's name suggests.
---------------------------------------------------------------------------

We are proposing a new item in Form N-MFP that would require filers
to indicate whether the fund is established as a cash management
vehicle for affiliated funds and accounts.\283\ This item would make it
easier and more efficient to identify privately offered institutional
money market funds. Our proposal also includes an amendment to

[[Page 7285]]

enhance consistency of reporting of whether a fund seeks to maintain a
stable price per share.\284\ Currently, the form provides that if a
fund seeks to maintain a stable price per share, it must state the
price it seeks to maintain. However, if a fund does not respond to this
item, it is unclear whether the fund did so in error or simply does not
seek to maintain a stable price per share. The proposed amendment would
require a fund to respond ``yes'' or ``no'' to whether it seeks to
maintain a stable price per share so as to avoid any ambiguity.
---------------------------------------------------------------------------

\283\ See proposed Item A.21 of Form N-MFP.
\284\ See proposed Item A.18 of Form N-MFP (proposing to require
a fund to respond ``yes'' or ``no'' to whether it seeks to maintain
a stable price per share).
---------------------------------------------------------------------------

Currently, funds are required to provide the name of any person who
paid for or waived all or part of the fund's operating expenses or
management fees during the reporting period and describe the amount and
nature of the fee and expense waiver or reimbursement. These
disclosures are difficult to use, as they are provided in a format that
is not structured.\285\ Moreover, the identification of the person who
paid for or waived the fund's expenses or fees is not significantly
beneficial to the Commission's monitoring and assessment of fund risks.
While we continue to believe that shareholders should have access to
this information, we believe that it is unnecessary to include in Form
N-MFP since disclosure related to fees and expenses is available in
funds' financial statements. Accordingly, we are proposing to require
funds to report only the amount of any fee waiver or expense
reimbursement during the reporting period.\286\ This proposed change
would make it easier for the Commission and investors to analyze
efficiently the reported data.
---------------------------------------------------------------------------

\285\ Item B.8 of Form N-MFP.
\286\ See proposed Item B.9 of Form N-MFP.
---------------------------------------------------------------------------

For each portfolio security, a fund is required to indicate on Form
N-MFP the category of instrument, using a list of categories designated
in the form.\287\ We are proposing to include a new category that
distinguishes between U.S. Government agency notes that are coupon-
paying and those that are no-coupon discount notes.\288\ We believe
that including this distinction would allow us to better understand
whether an agency security should be categorized as a weekly liquid
asset, as only agency discount notes with less than 60 days to maturity
can be considered weekly liquid assets under the rule. We are also
proposing a conforming change to the list of investment categories that
a fund must use for purposes of disclosing information about its
holdings on its website.\289\
---------------------------------------------------------------------------

\287\ Item C.6 of Form N-MFP.
\288\ See proposed amendments to Item C.7 of Form N-MFP.
\289\ See proposed rule 2a-7(h)(10)(i)(B)(2).
---------------------------------------------------------------------------

We request comment on the proposed amendments to improve the
accuracy and consistency of currently reported information on Form N-
MFP, including the following:
124. Is the proposed requirement that funds provide required
information separately for the initial acquisition of a security and
any subsequent acquisitions of the security appropriate? Why or why
not? Should we require funds to report the acquisition date and yield
as of the acquisition date for each lot, as proposed? Are there better
ways for us to assess how long a fund has held a position and its
portfolio turnover? If so, how?
125. Should we, as proposed, require additional information about
the counterparty to the repurchase agreement and information about
whether a repurchase agreement is centrally cleared or a triparty
agreement? Are there other ways we could acquire this information?
126. As proposed, should we require the CUSIP of the collateral
subject to the repurchase agreement and add a category for cash
collateral? As proposed, should we remove the provision that allows
funds to aggregate information about multiple securities of an issuer
that are subject to a repurchase agreement? To what extent do funds
currently rely on this provision? What are the potential effects of our
proposal to remove this provision? Is there any additional information
related to repurchase agreement transactions that we should require?
127. Should Form N-MFP require registrants to provide Financial
Instrument Global Identifier for securities, if available? Should Form
N-MFP permit registrants to report the Financial Instrument Global
Identifier in lieu of a CUSIP number on Form N-MFP? Why or why not?
128. Are our proposed amendments to consolidate how funds would
identify different types of government money market funds effective? Is
our proposed approach to identifying funds that should be classified as
Treasury funds appropriate?
129. Is our proposed item to identify money market funds
established as cash management vehicles for affiliates or other related
entities sufficiently clear? Are there any changes we should make to
that item? Is there a more effective way of identifying these funds?
Would this question be more appropriate on a different form instead of
Form N-MFP, for example, Form N-CEN?
130. Should we simplify disclosure of any fee waiver or expense
reimbursement during the reporting period, as proposed? What scope of
arrangements do funds currently report as fee waivers or expense
reimbursements on Form N-MFP? For example, do they include offsets or
credits (e.g., custodian credits)? Do funds need additional clarity or
guidance on the types of arrangements to report? Instead of our
proposed approach, should we retain information about the person
waiving the fee or reimbursing the expense and a description of the fee
waiver or expense reimbursement? For example, to better structure the
item, should we require filers to identify the type of waiver or
reimbursement on Form N-MFP (e.g., management fees, 12b-1 fees)? Why or
why not? Should we require filers to provide a reason for the waiver or
reimbursement? For instance, should the item require that filers
designate whether such actions were taken to maintain a particular
expense ratio or a minimum level of yield? Why or why not?
131. As proposed, should we require funds to distinguish between
U.S. Government agency notes that are coupon-paying and those that are
no-coupon discount notes when categorizing their portfolio securities
on Form N-MFP? Would this information be helpful for identifying
securities that qualify as weekly liquid assets? Should we also require
funds to distinguish between these two categories for purposes of
disclosing portfolio securities on their websites, as proposed?
132. Are there other changes or additions that would improve the
accuracy and consistency of the required reported information on Form
N-MFP?
c. More Frequent Data Points
Under current rule 2a-7, a money market fund must prominently
disclose on its website, as of the end of each business day during the
preceding six months, the fund's percentage of total assets invested in
daily liquid assets and in weekly liquid assets, as well as the fund's
net asset value per share (including for each class of shares) and net
shareholder flow.\290\ Currently, in monthly reports on Form N-MFP, a
money market fund must provide the

[[Page 7286]]

same general information for each Friday during the month
reported.\291\ Based on the Commission's experience with using current
Form N-MFP data to analyze the events of March 2020 and other periods,
we are proposing to amend Form N-MFP to require a money market fund to
provide in its monthly report this liquidity, net asset value, and flow
data for each business day of the month, rather than on a weekly basis.
---------------------------------------------------------------------------

\290\ 17 CFR 270.2a-7(h)(10)(ii).
\291\ Items A.13, A.20, B.5, and B.6 of Form N-MFP.
---------------------------------------------------------------------------

We are proposing to require daily liquidity, net asset value, and
flow data in monthly reports to allow Commission staff to better and
more precisely monitor risks and trends in these areas in an efficient
and more precise manner without requiring frequent visits to the
websites of many different funds, and to provide industry-wide daily
data in a central repository as a resource for investors and
others.\292\ The weekly data currently reported on Form N-MFP provides
only a snapshot of the liquidity, net asset value, and flow data for
any given month, and is therefore incomplete and less useful for
purposes of analysis and monitoring than data for each business day in
that month. In addition, most of the data on Form N-MFP is reported as
of the end of the month, making it difficult to analyze the weekly data
in a comprehensive manner. This is because the weekly data points
generally relate to different days than the monthly data points.
Although data vendors provide some daily data based on information
gathered from funds' websites, the staff has found this data could be
incomplete at times, and therefore may not be appropriate for purposes
of staff monitoring and analyses. As money market funds generally are
already required to report on their websites the same data that we
propose requiring be reported on Form N-MFP, we believe this change
would impose minimal burden on money market funds. Consistent with the
website information funds already provide, the reported daily data
points would be calculated as of the end of each business day.
---------------------------------------------------------------------------

\292\ To enhance consistency in reporting practices, we propose
to specify that filers report gross subscriptions and gross
redemptions as of the trade date (rather than as of the settlement
date). This proposed change is intended to ensure that funds are
reporting the information in the same manner. We also propose to
clarify that filers that are master-feeder funds should report the
required shareholder flow data at the feeder fund level only. See
Item B.7 of proposed Form N-MFP. In addition, as discussed above, we
are also proposing to amend the net asset value per share
disclosures to require that an institutional prime or institutional
tax-exempt fund should provide the net asset value per share as
adjusted by a swing factor, if applicable. See supra Section II.B.4.
---------------------------------------------------------------------------

We are also proposing to increase the frequency with which funds
report certain yield information. Currently, funds must report 7-day
gross yields (at the series level) and 7-day net yields (at the share
class level) as of the end of the reporting period. We propose to
require funds to report this information each business day. We believe
the higher-frequency reporting would assist in the timely monitoring
and assessment of fund risks, particularly during periods of market
stress.
We request comment on our proposal to require daily liquidity, net
asset value, flow, and yield data in monthly Form N-MFP reports,
including on the following:
133. Should we, as proposed, require liquidity, net asset value,
and flow data to be reported as of the close of business on each
business day of each month? Would funds incur significantly higher
costs than under the current weekly data reporting requirement? Please
describe the associated costs.
134. Would our new proposed requirements help us better identify
certain risk characteristics that the form currently does not capture?
135. Are there other ways to monitor risks and trends in fund
liquidity, valuation, and shareholder flow in a more efficient and
precise manner without requiring frequent visits to the websites of
many different funds?
136. When reporting required flow information on Form N-MFP, money
market funds must include dividend reinvestments in the gross
subscriptions figure.\293\ After last amending Form N-MFP, the
Commission adopted Form N-PORT, which requires other types of
registered management investment companies to report shares sold in
connection with reinvestments of dividends and distributions
separately.\294\ Should we similarly require money market funds to
report dividend reinvestments and distributions separately? Would using
an approach that is similar to Form N-PORT benefit fund complexes by
allowing them to use consistent systems across different types of
mutual funds for purposes of reporting flow information and allow the
Commission and investors to better identify whether the fund is
receiving new subscriptions? Or would such a change burden fund
complexes and require systems changes, without significantly enhancing
the current data because dividend reinvestments by money market fund
investors are less substantial than for other fund types?
---------------------------------------------------------------------------

\293\ See Item B.6 of current Form N-MFP.
\294\ See Item B.6 of Form N-PORT.
---------------------------------------------------------------------------

137. Should we, as proposed, require money market funds to report
7-day yield information each business day? What are the advantages and
disadvantages of requiring higher-frequency reporting of yield
information? Should we instead require funds to report this information
for each Friday of the month and for month-end, or on a different time
cycle?
d. Other Amendments
Form N-MFP currently provides that a filer must disclose the
registrant's LEI, if available, and does not require the LEI of the
series.\295\ Filers also provide the name of the registrant and series
in metadata associated with the form, but filers do not report these
names on the form itself. We are proposing to require funds to identify
the name and LEI for both the fund registrant and the series.\296\
Requiring reporting of registrant and series names on the form is meant
to make the form easier for investors to use. The change to require
LEIs for the registrant and series aligns Form N-MFP with Forms N-CEN
and N-PORT, which require LEI reporting for the registrant and series.
---------------------------------------------------------------------------

\295\ See Item 3 of current Form N-MFP.
\296\ See Items 2, 4, 5, and 6 of proposed Form N-MFP. We also
propose that funds disclose the full name of the class of series, as
the current form only includes the EDGAR class identifier.
---------------------------------------------------------------------------

Currently, funds must report the LEI that corresponds to a
portfolio security, if the LEI is available. We propose to clarify that
funds should respond to an item request with ``N/A'' if the information
is not applicable (e.g., a company does not have an LEI).\297\ We also
propose to amend the definition of LEI in the form to remove language
providing that, in the case of a financial institution that does not
have an assigned LEI, a fund should instead disclose the RSSD ID
assigned by the National Information Center of the Board of Governors
of the Federal Reserve System, if any.\298\ Rather than classify an
RSSD ID as an LEI under these circumstances, we propose to add RSSD ID
as an additional category of ``other identifiers'' that a fund can use
for relevant portfolio securities.\299\

[[Page 7287]]

These changes are designed to improve consistency and comparability of
information funds report about the securities they hold.
---------------------------------------------------------------------------

\297\ See General Instruction A of proposed Form N-MFP.
\298\ See General Instruction F of proposed Form N-MFP for a
revised definition of LEI.
\299\ See Item C.5 of proposed Form N-MFP; General Instruction F
of proposed Form N-MFP (adding a definition of RSSD ID). The revised
definition of LEI would differ from the definitions of this term in
Forms N-CEN, N-PORT, and PF, which allow an RSSD ID for a financial
institution to be treated as an LEI if the institution has not been
assigned an LEI. However, we do not believe that the different
definitions of LEI among these forms would result in confusion or
burdens. Form N-MFP would continue to allow a fund to report an RSSD
ID for a financial institution when an LEI is not available, similar
to the other forms, but it would make it easier to distinguish
between the two types of identifiers.
---------------------------------------------------------------------------

We request comment on our other proposed amendments to Form N-MFP,
including the following:
138. Should we require funds to provide both the name and LEI for
the registrant and the series and the full name of the class of the
series, as proposed? Is there other identifying information about the
registrant, series, or class that would be helpful?
139. As proposed, should we amend the definition of LEI in the form
and provide a separate item for providing an RSSD ID as a securities
identifier, as applicable?
140. Are there other definitions we should amend, include, or
exclude from the form? Please explain.

G. Compliance Date

We propose to provide a transition period after the effective date
of the amendments to give affected funds sufficient time to comply with
the proposed changes and associated disclosure and reporting
requirements, as described below. Based on our experience, we believe
the proposed compliance dates would provide an appropriate amount of
time for funds to comply with the proposed rule if adopted.
Twelve-Month Compliance Date. We propose that 12 months
after the effective date of the amendments, any money market fund that
is not a government money market fund or a retail money market fund
must comply with the proposed swing pricing requirement in rule 2a-7,
if adopted, as well as the swing pricing disclosures applicable to
these money market funds in the proposed amendments, if adopted, to
Forms N-MFP and N-1A.\300\ We also propose to provide 12 months after
the effective date for government and retail funds to determine, should
the rule be adopted, that financial intermediaries have the capacity to
redeem and sell at a price based on the current net asset value per
share pursuant to rule 22c-1 or prohibit the financial intermediary
from purchasing in nominee name on behalf of other persons, securities
issued by the fund.\301\
---------------------------------------------------------------------------

\300\ See proposed rule 2a-7(c); proposed amendments to Items 4
and 6 of Form N-1A; proposed amendments to Item A.22 of Form N-MFP.
\301\ See proposed rule 2a-7(h)(ii).
---------------------------------------------------------------------------

Six-Month Compliance Date. The proposed compliance period
for all other aspects of the proposal is six months after the effective
date of the amendments, if adopted, and includes the following:
[cir] The proposed increased daily minimum asset and weekly minimum
asset requirements; and
[cir] The amendments to Forms N-CR and N-MFP, except the swing
pricing-related disclosure on Form N-MFP.
Effective Date for Amendments Related to Liquidity Fees
and Redemption Gates. Removal of the liquidity fee and redemption gate
provisions in rule 2a-7, as well as removal of associated disclosure
requirements in Form N-1A and N-CR, would be effective, if adopted,
when the final rule is effective.
We request comment on the proposed compliance dates, and
specifically on the following items:
141. Are the proposed compliance dates appropriate? If not, why
not? Is a longer or shorter period necessary to allow affected funds to
comply with one or more of these particular amendments? If so, what
would be a recommended compliance date?
142. Should removal of the fee and gate provisions be effective
when the final rules become effective, as proposed? Alternatively,
should these provisions not be effective until the compliance period
ends for the increased liquidity requirements or the swing pricing
requirement?

III. Economic Analysis

A. Introduction

The Commission is mindful of the economic effects, including the
costs and benefits, of the proposed amendments. Section 2(c) of the Act
provides that when the Commission is engaging in rulemaking under the
Act and is required to consider or determine whether an action is
consistent with the public interest, the Commission shall also consider
whether the action will promote efficiency, competition, and capital
formation, in addition to the protection of investors. The analysis
below addresses the likely economic effects of the proposed amendments,
including the anticipated and estimated benefits and costs of the
amendments and their likely effects on efficiency, competition, and
capital formation. The Commission also discusses the potential economic
effects of certain alternatives to the approaches taken in this
proposal.
Money market funds serve as intermediaries between investors
seeking to allocate capital and issuers seeking to raise capital.
Specifically, money market funds pool a diversified portfolio of short-
term debt instruments (such as government and municipal debt,
repurchase agreements, commercial paper, certificates of deposit, and
other short-term debt instruments), and sell shares to end investors,
who use money market funds to manage liquidity needs. Money market
funds play an important role in investors' asset allocation and
liquidity management; serve as a source of wholesale funding liquidity
in the financial system; and rely on capital subject to daily and
intraday redemptions to invest in short-term debt instruments.\302\
---------------------------------------------------------------------------

\302\ See Section III.B.3 for an analysis of portfolio holdings
of different types of money market funds.
---------------------------------------------------------------------------

As discussed in detail in the sections that follow, the proposal
seeks to address liquidity externalities in money market funds.
Specifically, redeeming investors impose negative liquidity
externalities on investors remaining in the fund (``fund dilution''),
which may amplify a first mover advantage in redemptions. For example,
when early redemptions force a money market fund to draw down on liquid
assets, they reduce overall fund liquidity available for future
redemptions. The proposed removal of the tie between weekly liquid
assets and redemption gates and the proposed elimination of redemption
gates under rule 2a-7 are intended to reduce incentives of investors to
redeem early to avoid losing liquidity during a potential gating
period. The proposed increases in minimum liquidity requirements are
designed to support funds' ability to meet redemptions from cash or
securities convertible to cash even in market conditions in which money
market funds cannot rely on a secondary or dealer market to provide
liquidity, which may reduce transaction costs associated with
redemptions and corresponding dilution borne by remaining investors. In
addition, the proposed swing pricing requirement for institutional
prime and institutional tax exempt money market funds is intended to
require redeeming investors to absorb the liquidity costs they impose
on the fund and thereby reduce unfairness to and the dilution of
shareholders remaining in the fund.
By reducing liquidity externalities in money market funds, the
proposal may dampen the risk of runs on money market funds. The
possibility that funds may impose gates or fees after crossing a
threshold may give rise to additional

[[Page 7288]]

run risk. As discussed in Section I.B, in March 2020, when some money
market funds approached the 30% weekly liquid asset threshold that
would permit a fund to impose a gate or a fee, investors became more
likely to redeem from those funds. Loss of access to liquidity by
investors during the gating period can magnify the incentive to run
before the gate is imposed.
The proposal may mitigate liquidity externalities and run risk in
money market funds in three ways. First, the proposal would remove the
tie between weekly liquid asset thresholds and the possibility that
gates or fees will be imposed, which incentivized runs on money market
funds and altered portfolio management behavior of money market funds
in 2020, based on available evidence. Second, increases in minimum
liquidity requirements may improve the ability of funds to meet
redemptions, reducing the risk of runs on funds with low liquidity.
Third, the proposed swing pricing requirement may partly reduce run
risk by reducing the first-mover advantage related to dilution
costs.\303\
---------------------------------------------------------------------------

\303\ Factors other than dilution costs--such as falling asset
prices and potential differences between a fund's net asset value
and execution prices--may also contribute to runs. These and other
considerations are discussed in greater detail in Section III.B.2
below.
---------------------------------------------------------------------------

Money market fund managers' risk-taking incentives may lead them to
hold liquidity levels that may be insufficient to meet redemptions in
times of stress \304\ for at least three reasons. First, some investors
may seek to maximize returns,\305\ assets with higher liquidity risks
deliver higher returns,\306\ and fund managers' compensation may be
related to fund size and performance.\307\ Second, large scale
redemptions akin to those experienced by some funds in March 2020 are
rare, and estimating the risk of such rare and large scale redemptions
is inherently difficult. Third, money market funds do not internalize
liquidity externalities that money market fund liquidity management
practices may impose on market participants transacting in the same
asset classes. While the proposal would not fundamentally change these
incentives of money market funds or fund managers, it would require
funds to hold a greater share of highly liquid assets. This may reduce
the ability of money market funds to invest in less liquid assets in
order to reach for yield, reducing the probability that money market
funds are unable to meet redemptions with liquid assets and have to
sell less liquid holdings at a large haircut. Moreover, future times of
stress may involve larger redemptions that would force money market
funds to sell less liquid assets to meet redemptions. Thus, the
proposal may lower the risk that money market funds do not have enough
liquidity to meet redemptions and consequently relying on government
backstops or sponsor support.
---------------------------------------------------------------------------

\304\ A large finance literature examines the interplay between
maturity transformation, systemic risk, and leverage. See, e.g.,
Fahri, Emmanuel and Jean Tirole. 2012. ``Collective Moral Hazard,
Maturity Mismatch, and Systemic Bailouts''. American Economic Review
102(1): 60-93. See also Acharya, Viral, and S Viswanathan. 2011.
``Leverage, Moral Hazard, and Liquidity.'' Journal of Finance 66(1):
99-138. Other papers have examined the effects of government
backstops on money market funds. See, e.g., Strahan, Philip, and
Basak Tanyeri. 2015. ``Once Burned, Twice Shy: Money Market Fund
Responses to a Systemic Liquidity Shock.'' Journal of Financial and
Quantitative Analysis 50(1-2): 119-144. See also Kim, Hugh Hoikwang.
2020. ``Information Spillover of Bailouts.'' Journal of Financial
Intermediation 43.
\305\ In a somewhat parallel open end fund context, fund inflows
are highly sensitive to fund yields, which can incentivize a reach
for yield. See, e.g., Choi, Jaewon, and Mathias Kronlund. 2018.
``Reaching for Yield in Corporate Bond Mutual Funds.'' The Review of
Financial Studies. 31(5): 1930-1965. See also Kacperczyk, Marcin,
and Philipp Schnabl. 2013. ``How Safe are Money Market Funds?'' The
Quarterly Journal of Economics, 138(3): 1073-1122. See also
Fulkerson, Jon, Bradford Jordan, and Timothy Riley. 2013. ``Return
Chasing in Bond Funds.'' Journal of Fixed Income, 22(4): 90-103.
\306\ See, e.g., Lee, Kuan-Hui. 2011. ``The World Price of
Liquidity Risk.'' Journal of Financial Economics 99(1): 136-161. See
also Acharya, Viral, and Lasse Pedersen. 2005. ``Asset Pricing with
Liquidity Risk.'' Journal of Financial Economics, 77(2): 375-410.
See also Pastor, Lubos, and Robert Stambaugh. 2003. ``Liquidity Risk
and Expected Stock Returns.'' Journal of Political Economy 111(3):
642-685.
\307\ See, e.g., Ma, Linlin, Yuehua Tang, and Juan-Pedro Gomez.
2019. ``Portfolio Manager Compensation in the U.S. Mutual Fund
Industry.'' Journal of Finance 74(2): 587-638.
---------------------------------------------------------------------------

Many of the benefits and costs discussed below are difficult to
quantify. For example, we lack data to quantify the number of funds
that had to sell less liquid holdings during March 2020; how funds may
adjust the liquidity of their portfolios in response to the proposed
liquidity thresholds; the extent to which investors may reduce their
holdings in money market funds as a result of the proposed swing
pricing requirement; the extent to which investors may move capital
from institutional prime to government money market funds; and the
reductions in dilution costs to investors as a result of the proposed
amendments (which will depend on investor redemption activity and the
liquidity risk of underlying fund assets). Form N-MFP data is not
sufficiently granular to allow such quantification and many of these
effects will depend on how affected funds and investors may react to
the proposed amendments. While we have attempted to quantify economic
effects where possible, much of the discussion of economic effects is
qualitative in nature. We seek comment on all aspects of the economic
analysis, especially any data or information that would enable a
quantification of the proposal's economic effects.

B. Economic Baseline

1. Affected Entities
a. Money Market Funds
The proposed amendments would directly affect money market funds
registered with the Commission. From Form N-MFP data, there are a total
of 318 funds with approximately $5 trillion in total net assets that
may be affected by various aspects of the proposal. Table 3 and Table 4
below estimate the number and total net assets of funds by fund type as
of the end of July 2021. Prime money market funds account for
approximately 17% of the total net assets in the industry, whereas
municipal money market funds account for approximately 2%.

[[Page 7289]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.006

[GRAPHIC] [TIFF OMITTED] TP08FE22.007

As discussed above, the swing pricing proposal may
disproportionately affect funds that strike their NAV at the midpoint
price, rather than at the bid price of the securities. One commenter
indicated that it and many other U.S. fund complexes value the
securities held in money market and bond funds for purposes of
computing fund NAVs at the bid price.\308\ We lack data to quantify how
many institutional prime and institutional tax-exempt funds currently
strike their NAV at the midpoint and, to the best of our knowledge, no
such data is publicly available. We solicit comment and any data that
would enable such quantification.
---------------------------------------------------------------------------

\308\ See Fidelity Comment Letter to the Financial Stability
Board, available at https://www.fsb.org/wp-content/uploads/Fidelity.pdf.
---------------------------------------------------------------------------

b. Other Affected Entities
As discussed above, the proposed swing pricing requirement would
indirectly affect a large group of intermediaries. Specifically, swing
pricing would require certain money market funds to receive more timely
flow information before they can strike the NAV and settle trades. As
discussed in greater detail below, this may affect all market
participants sending orders to relevant money market funds, including
broker-dealers, registered investment advisers, retirement plan
recordkeepers and administrators, banks, other registered investment
companies, and transfer agents that receive flows directly.
In addition, the proposed requirement that stable NAV money market
funds determine that intermediaries submitting orders to purchase or
redeem the fund's shares have the ability to process transactions at
non-stable prices would also affect intermediaries sending flows to
these money market funds. As discussed in section II.D, rule 2a-7
already imposes the obligation on money market funds and their transfer
agents to have the capacity to redeem and sell securities at prices
that do not correspond to a stable price per share.
2. Certain Economic Features of Money Market Funds
Several features of money market funds can create an incentive for
their shareholders to redeem shares heavily in periods of market
stress. We discuss these factors below, as well as the adverse impacts
that can result from such heavy redemptions in money market funds.
a. Money Market Fund Investors
As discussed elsewhere,\309\ investors in money market funds have
varying investment goals and tolerances for risk. Many investors use
money market funds for principal preservation and as a cash management
tool. Such investors may be loss averse for many reasons, including
general risk tolerance, legal or investment policy restrictions, or
short-term cash needs. These overarching considerations may create
incentives for money market fund investors to redeem--incentives that
may persist regardless of market conditions and even if the other
dilution related incentives discussed below are addressed by the
proposal.
---------------------------------------------------------------------------

\309\ See, e.g., 2014 Adopting Release, supra footnote 12, at
47740.
---------------------------------------------------------------------------

The desire to avoid loss may cause investors to redeem from certain
money market funds in times of stress. For example, as discussed
elsewhere, heavy redemptions from prime money market funds and
subscriptions in government money market funds during the 2008
financial crisis pointed to a flight to quality, given that most of the
assets

[[Page 7290]]

held by government money market funds have a lower default risk than
the assets of prime money market funds.\310\ As discussed above, during
peak market stress in March 2020, investor redemptions may have been
driven by liquidity considerations, among other things.
---------------------------------------------------------------------------

\310\ See id.
---------------------------------------------------------------------------

In addition, as long as investors consider their money market
investments as relatively liquid and low risk, the possibility that a
fund may impose gates or fees when a fund's weekly liquid assets fall
below 30% under rule 2a-7 may contribute to the risk of triggering
runs, particularly from institutional investors that commonly monitor
their funds' weekly liquid asset levels.\311\ As discussed above, some
research suggests that, during peak market volatility in March 2020,
institutional prime money market fund outflows accelerated as funds'
weekly liquid assets went closer to the 30% threshold.\312\ In order to
avoid approaching or breaching the 30% weekly liquid asset threshold
for the possible imposition of redemption gates, money market fund
managers may also choose to sell less liquid portfolio securities
during times of stress.\313\
---------------------------------------------------------------------------

\311\ See, e.g., Comment Letter of the Systemic Risk Council
(Apr. 12, 2021) (``Systemic Risk Council Comment Letter''); SIFMA
AMG Comment Letter; Fidelity Comment Letter.
\312\ See, e.g., Li et al., supra footnote 31. See also ICI MMF
Report, supra footnote 45.
\313\ Some commenters indicated that, on aggregate, prime money
market funds pulled back little from commercial paper markets as
they were largely unable to resell commercial paper and CDs to
issuing banks and such securities lack a liquid secondary market.
See, e.g., ICI MMF Report, supra footnote 45.
---------------------------------------------------------------------------

b. Liquidity Externalities and Dilution Costs
Money market fund investors can incur dilution costs. Specifically,
the value of shares held by investors staying in the fund may be
diluted if other fund investors transact at a NAV that does not fully
reflect the ex post realized costs of the fund's trading induced by
fund flows. Shareholders in floating NAV and stable NAV funds may bear
dilution costs in different forms. In floating NAV funds, dilution is
reflected in the fund's NAV, which directly affects the yields of
shareholders remaining in the fund. In stable NAV funds, dilution costs
can accrue until the fund's shadow price declines below $0.995, which
may result in the fund breaking the buck and re-pricing its shares
below $1.00. Fund sponsors can also choose to absorb some or all of the
dilution costs for reputational reasons, but are not obligated to do
so.
Several factors can contribute to the dilution of investors'
interests in money market funds. First, trading costs can lead to
dilution. To effect net redemptions or subscriptions, a fund incurs
trading costs. If these costs are realized prior to NAV strike, they
are distributed across both transacting and non-transacting investors.
However, if these costs are realized after NAV strike, they are borne
solely by non-transacting shareholders that remain in the fund. For low
levels of net redemptions or subscriptions, the difference between the
two scenarios for non-transacting shareholders is low; however, for
large net redemptions, the difference in dilution costs borne by non-
transacting shareholders can be stark.
Using a stylized example, Figure 2 compares the dilution attributed
to trading costs that occurs when a fund trades to meet redemptions
after NAV is struck (as is currently the case in the U.S.) with the
dilution attributed to trading costs that occurs if a fund is able to
trade to accommodate investor redemptions/subscriptions prior to the
NAV strike (dotted straight line). This stylized example assumes that a
fund holds a single asset whose value is constant, but liquidating the
asset incurs a spread/haircut of 10%. Importantly, the haircut
assumption in this stylized example is used purely for illustrative
purposes; haircuts on assets in money market funds tend to be much
smaller. However, this example demonstrates that larger redemptions can
contribute nonlinearly to higher dilution for remaining shareholders
when a fund trades after the NAV is struck compared to a scenario in
which the fund trades before the NAV is struck.\314\
---------------------------------------------------------------------------

\314\ To the degree that some funds may determine their NAV
using holdings as of the prior trading day, such practices may also
exacerbate dilution. In Figure 2, if funds strike their NAV using
current trading day holdings, the dotted line would not be
decreasing.

---------------------------------------------------------------------------

[[Page 7291]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.008

Second, stale prices could contribute to dilution, especially
during times of market stress. Some assets that money market funds hold
may become illiquid and stop trading during times of market stress. In
such events, the only available prices for these assets are prices
realized during pre-stress market conditions, i.e., stale prices. If a
floating NAV fund's NAV on a given date is based on stale prices, net
redemptions at that NAV can dilute non-transacting fund shareholders
when assets are eventually sold at prices that reflect their true
value. Since funds with a stable NAV have a fixed share price at $1,
stale prices only affect the shadow price per share and the probability
that a fund breaks the buck and potentially leads to sponsor support.
The stale pricing phenomenon has been documented in fixed income funds
\315\ and not specifically in money market funds. However, money market
funds hold significant amounts of commercial paper, certificates of
deposit, and other assets that do not have an active and robust
secondary market, making them similarly opaque and difficult to
accurately price, especially during times of market stress.
---------------------------------------------------------------------------

\315\ See, e.g., Choi, Jaewon, Mathias Kronlund, and Ji Yeol Oh.
2021. ``Sitting Bucks: Stale Pricing in Fixed Income Funds.''
Journal of Financial Economics, forthcoming.
---------------------------------------------------------------------------

Knowing that these and other factors \316\ may contribute to
dilution, money market fund investors may have an incentive to redeem
quickly in times of stress to avoid realizing potential dilution, an
effect exacerbated if they believe other investors will redeem.\317\
Some research in a parallel open end fund setting suggests that
liquidity externalities may create a ``first-mover advantage'' that may
lead to cascading anticipatory redemptions akin to traditional bank
runs.\318\ There is a dearth of academic research about the degree to
which dilution costs alone may trigger money market fund runs. In
addition, theoretical models of such first-mover advantage typically
rely on some exogenous mechanism to generate initial redemptions from
funds.\319\ While stale NAV and trading costs can create incentives for
early redemptions, redemptions may also occur for reasons that are not
strategic, such as a desire to rebalance portfolios under stressed
market conditions.
---------------------------------------------------------------------------

\316\ For example, market risk may contribute to dilution costs.
If a fund redeems investors at a given NAV, but must raise funds to
meet those redemptions on a subsequent trading day during which the
value of the fund's holdings declines significantly, non-transacting
shareholders will be diluted. Conversely, non-transacting money
market fund investors can benefit if assets are sold at a price
higher than NAV. While the value of the fund's holdings can go both
up and down, such market risk amplifies the risk fund shareholders
would otherwise experience. However, since true market prices may be
very difficult to forecast, the degree to which such dilution
contributes to the first mover advantage is unclear.
\317\ Similar effects have been shown to create run dynamics in
banking contexts. See, e.g., Diamond, Douglas and Philip Dybvig.
1983. ``Bank Runs, Deposit Insurance, and Liquidity.'' Journal of
Political Economy 91(3): 401-419.
\318\ This research generally models an exogenous response to
negative fund returns and not trading costs. However, these results
may extend to trading costs to the degree that cost based dilution
may reduce subsequent fund returns, which would trigger runs in
these models. See e.g., Chen, Qi, Itay Goldstein, and Wei Jiang.
2010. ``Payoff Complementarities and Financial Fragility: Evidence
from Mutual Fund Outflows.'' Journal of Financial Economics 97(2):
239-262. See also Goldstein, Itay, Hao Jiang, and David Ng. 2017.
``Investor Flows and Fragility in Corporate Bond Funds.'' Journal of
Financial Economics 126(3): 592-613. See also Morris, Stephen,
Ilhyock Shim, and Hyun Song Shin. 2017. ``Redemption Risk and Cash
Hoarding by Asset Managers.'' Journal of Monetary Economics 89: 71-
87. See also Zeng, Yao. 2017. ``A Dynamic Theory of Mutual Fund Runs
and Liquidity Management.'' Working Paper. See also Ma, Yiming,
Kairong Xiao, and Yao Zeng. 2021. ``Mutual Fund Liquidity
Transformation and Reverse Flight to Liquidity.'' Working Paper. See
also Ma, Yiming, Kairong Xiao, and Yao Zeng. 2021. ``Bank Debt
versus Mutual Fund Equity in Liquidity Provision.'' Working Paper.
\319\ For example, one model assumes that investors redeem from
funds following poor performance. See Chen, Qi, Itay Goldstein, and
Wei Jiang. 2010. ``Payoff Complementarities and Financial Fragility:
Evidence from Mutual Fund Outflows.'' Journal of Financial Economics
97(2): 239-262.
---------------------------------------------------------------------------

Regardless of the reason for a fund experiencing net redemptions on
any given day, such redemptions impose a cost on investors remaining in
the fund in the absence of measures to take trading costs into account.
In addition, since money market funds can trade portfolio holdings to
meet redemptions or subscriptions, money market fund liquidity
management can both dampen and magnify disruptions in underlying
securities markets.

[[Page 7292]]

3. Money Market Fund Activities and Price Volatility
a. Portfolio Composition and Interplay With Short-Term Funding Markets
As described in the introduction, portfolio composition of money
market funds is determined by fund type. Figure 3 and Figure 4 show
portfolio holdings of prime and tax-exempt money market funds since
2016.\320\ Prime money market funds mostly hold certificates of deposit
and time deposits, which average 33% of their portfolio holdings. The
second largest category is financial commercial paper, which averages
18% of fund portfolio holdings. These categories of holdings decreased
as portfolio shares after March 2020 as prime money market funds
increased their Treasury holdings. Tax-exempt money market funds mostly
hold variable rate demand notes, which average 50% with a slight
downward trend over time. The second largest category is tender options
bonds, which average 23%, with a slight upward trend over time. Figure
5 shows differences in portfolio holdings of commercial paper of retail
and institutional prime money market funds: Generally retail money
market funds have somewhat higher holdings of commercial paper compared
to institutional funds. For instance, retail prime money market funds
held on average 21% of financial commercial paper compared to 17% for
institutional prime money market funds.
---------------------------------------------------------------------------

\320\ The 2014 money market fund reforms were implemented in
2016. For the purposes of this economic analysis, the Commission's
baseline reflects rules currently in effect as well as how money
market fund practices and portfolios evolved in the aftermath of the
2014 final rule.
\321\ The numbers on the x axis are months and years. CDs/Time
Deposits are certificates of deposit or time deposits. Financial CP
is commercial paper of issuers in the financial industry. Treasury
Debt/Repos are U.S. Treasury obligations or repurchase agreements
collateralized by U.S. Treasury securities. Government Agency Debt/
Repos are debt securities of Federal agencies and instrumentalities,
as well as repurchase agreements collateralized by government agency
securities. ABCP is asset-backed commercial paper. Non/Financial CP
is commercial paper of issuers not in the financial industry. In a
repurchase agreement, one party sells an asset, usually a Treasury
security or other fixed income security, to another party with an
agreement to repurchase the asset at a later date at a slightly
higher price. Repo contracts are a common form of short-term
financing. In a repo, the party selling the security is similar to
the lender in a securities lending agreement; the party purchasing
the security is similar to a borrower in cash collateralized
securities lending. In both cases, the transaction is facilitated by
cash transfers from the purchaser (borrower) to the seller (lender).
In a securities loan, the cash is in the form of collateral while in
a repo transaction the cash is payment for the security. In both
cases, the purchaser or borrower becomes the legal owner of the
security. To unwind the repurchase agreement or securities loan,
cash transfers back to the purchaser in terms of the repurchase cost
for a repo or in the form of returned collateral in a securities
loan. Repos and securities loans differ in that repos typically are
primarily used for short-term financing while securities loans
typically are used to gain access to the security itself. Also loans
generally allow the lender to recall the security on demand while
repos do not. Additionally, the cash received by the seller of a
repo is often not re-invested but is used to finance the operations
of a company whereas the cash received in a securities loan is
generally re-invested in low risk fixed income securities for the
life of the loan. See, e.g., Gorton, Gary and Andrew Metrick. 2012.
``Securitized Banking and the Run on Repo,'' Journal of Financial
Economics 104.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP08FE22.009

[[Page 7293]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.010

[GRAPHIC] [TIFF OMITTED] TP08FE22.011

While money market funds are only one type of participant among
many in short-term funding markets, money market fund activity may
influence short-term funding markets. A wave of redemptions can force
money market funds to liquidate portfolio holdings at reduced prices,
if they have insufficient cash on hand from maturing daily and weekly
liquid assets or cash from subscriptions, which can contribute to
stress in underlying short-term funding markets. As a result, money
market fund liquidity has the potential to impact underlying securities
issuers' ability to raise capital in short-term markets during stress
periods. Figure 6 shows trends in holdings of commercial paper by money
market funds.

[[Page 7294]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.012

b. NAV and Price Volatility
After the 2014 rule 2a-7 amendments, only one money market fund had
its market NAV drop below $.9975 in 2020; \322\ however, in a few
instances, fund sponsors provided financial support by purchasing
securities from affiliated institutional prime money market funds to
prevent these funds from dropping below the 30% weekly liquid asset
threshold.\323\
---------------------------------------------------------------------------

\322\ All money market funds have a market NAV, which is a four
digit price that is calculated using available market prices and/or
fair value market pricing models of the portfolio securities. In
contrast, retail and government money market funds also have a
stable NAV, which is a two digit price usually set at $1.00 that
does not fluctuate and is calculated using amortized cost
accounting.
\323\ See, e.g., ICI Comment Letter I; Wells Fargo Comment
Letter.
---------------------------------------------------------------------------

To reduce volatility in their market NAVs, money market funds
invest in short-term, high-credit-quality, well diversified debt
securities pursuant to rule 2a-7. Although the limits on maturity and
credit risk of money market fund holdings under rule 2a-7 reduce risks
a money market fund may face, they do not eliminate those risks. Risks
that remain may cause the fund's market NAV to deviate from $1. Changes
in interest rates or a security's credit rating, for example, could put
temporary downward pressure on an asset's price before it matures at
par. In addition, if any securities were sold or matured for less than
the amortized cost, then any deviation between the fund's market price
and $1 would become permanent. Finally, an issuer may default on
payments of principal or interest, generating losses for funds holding
the issuer's securities. If the loss is large enough, a stable NAV fund
could break the buck while a floating NAV fund could see a decline in
its share price.
We have examined the distribution of market NAVs before and after
the compliance date of the 2014 amendments (October 2016).\324\ Figure
7 quantifies the trends in the distribution of money market fund market
NAVs before and after the 2014 rule amendments went into effect and in
the run up to the 2020 market stress. The distribution of money market
fund market NAVs, as a whole, changed little over time. However, as can
be seen from Figure 8 and Figure 9, the distribution of prime money
market fund's market NAVs tightened around the compliance date with the
2014 amendments.
---------------------------------------------------------------------------

\324\ This analysis relies on Form N-MFP submissions between
November 2010 and November 2020 for all money market funds. From
these filings, portfolio holdings and fund characteristics,
including fund NAV prices from Item B.5, are extracted for each
fund. Item B.5 requires filers to report the net asset value per
share as of the close of business on each Friday of the month. To
avoid duplication, master funds are removed from the sample:
Although feeder funds generally have the same characteristics as
their master fund, feeder funds have different investor redemption
patterns, which can affect the fund's market price. As a result,
Form N-MFP filers generally provide market prices for the feeder
funds and leave the market prices for master funds blank or zero.

---------------------------------------------------------------------------

[[Page 7295]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.013

[GRAPHIC] [TIFF OMITTED] TP08FE22.014

[[Page 7296]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.015

The dispersion of market NAVs across all retail prime money market
funds each month in Figure 9 is larger than the dispersion of market
NAVs of their institutional counterparts.\325\ This result is
consistent with the possibility that, following the 2014 amendments,
advisers to institutional prime and institutional municipal funds were
under increased pressure to keep their weekly liquid assets high and
their floating NAV near $1.0000, possibly because sophisticated
institutional investors are more likely to track the standard
deviations and redeem shares in a crisis.\326\ In other words, the
baseline daily disclosure of the market prices may allow institutional
investors to monitor NAV fluctuations, and may influence the liquidity
risk management of money market funds.
---------------------------------------------------------------------------

\325\ For example, between October 2016 and February 2020 the
mean market NAV was $1.0001 with a standard deviation of $0.0003 for
retail prime funds and for institutional prime funds the mean market
NAV was $1.0001 with a standard deviation of $0.0002.
\326\ See, e.g., Response to Questions Posed by Commissioners
Aguilar, Paredes, and Gallagher, Page 10, available at https://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf.
---------------------------------------------------------------------------

Figure 10 and Figure 11 show the distribution of weekly retail and
institutional prime money market fund market NAVs during the COVID-19
pandemic, respectively. On average, retail prime money market fund
market NAVs dropped from $1.0002 to $0.9994 or 8 bps as a result of the
market dislocation. Similarly, the average institutional prime money
market fund market NAV dropped from $1.0003 to $0.9994 or 9 bps as a
result of the market dislocation. The lowest market NAV for retail
prime dropped from $0.9994 to $0.9980 or 14 bps. In contrast,
institutional prime money market fund lowest market NAV dropped from
$0.9999 to $0.9976 or 23 bps. No prime money market fund market NAV
dropped below $0.9975. To the degree that the only available prices for
some affected money market fund holdings during March 2020 stress may
have been realized during pre-stress market conditions, these NAV
fluctuations may underestimate the degree of asset volatility in these
funds.

[[Page 7297]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.016

[GRAPHIC] [TIFF OMITTED] TP08FE22.017

Holdings of retail and institutional money market funds may
contribute to NAV volatility of these funds. Figure 12 shows
differences in the holdings of Treasuries, commercial paper, and
certificates of deposit of retail prime and institutional prime money
market funds.

[[Page 7298]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.018

c. Liquidity Management
The above portfolio differences between retail and institutional
money market funds are also observed in the amount of the daily liquid
assets and weekly liquid assets in prime fund portfolios, with retail
fund daily and weekly liquid assets being lower than those of
institutional funds. Figure 13 reports daily and weekly liquid asset
percentages for prime funds.
[GRAPHIC] [TIFF OMITTED] TP08FE22.019

BILLING CODE 8011-01-C
During peak volatility in March 2020, some funds experienced a
reduction in their daily and weekly liquid asset values as they drew
down on their liquid assets to meet large redemptions. Specifically, a
high of 6 institutional prime funds on March 18 had weekly liquid
assets below 35%, and one of the institutional prime money market funds
had weekly liquid assets below 30%.\327\ The largest fund outflow was a
weekly decrease of 55% in assets under management, and the fund's
weekly liquid assets declined from 38.8% to 32.2% over three
consecutive days.
---------------------------------------------------------------------------

\327\ See ICI MMF Report, supra footnote 45. ICI also reports
that one of the institutional prime money market funds had weekly
liquid assets of less than 30% on March 18, 2020. Currently, rule
2a-7 requires that a money market fund comply with the daily and
weekly liquid asset standards at the time each security is acquired
(rule 2a-7(d)(4)(ii) and (iii)).
---------------------------------------------------------------------------

C. Costs and Benefits of the Proposed Amendments

1. Removal of the Tie Between the Weekly Liquid Asset Threshold and
Liquidity Fees and Redemption Gates
a. Benefits
The proposal would remove the tie between money market funds'
weekly liquid assets and the possible imposition of fees and redemption
gates, as well as eliminate gate provisions from rule 2a-7. These
amendments may benefit money market funds and their investors by
reducing the risk of runs on money market funds, especially during
times of liquidity stress.
As discussed in the introduction, money market funds use a pool of
assets subject to daily redemptions to invest in short-term debt
instruments that are not perfectly liquid, which renders them
susceptible to a first mover advantage in investor redemptions akin to
bank runs.\328\ Moreover, money market fund

[[Page 7299]]

redemptions can impose liquidity externalities on shareholders
remaining in the fund, as discussed in Section III.B.2. The possibility
of a redemption fee or gate can magnify those incentives and
externalities. Specifically, under the current baseline, money market
funds may impose redemption fees or gates if their weekly liquid assets
are below 30% of their total assets. Thus, as funds approach the 30%
threshold, investors seeking to avoid a redemption gate or fee are
incentivized to redeem before other redemptions further deplete a
fund's liquid assets. The proposal is expected to reduce such
incentives to redeem.
---------------------------------------------------------------------------

\328\ See, e.g., Schmidt, Lawrence, Allan Timmermann, and Russ
Wermers. 2016. ``Runs on money market mutual funds.'' American
Economic Review, 106(9): 2625-57. Run dynamics in funds have been
explored in a large body of finance research, including, for
example: Zeng, Yao. 2017. ``A dynamic theory of mutual fund runs and
liquidity management.'' Available at SSRN 2907718; Chen, Qi, Itay
Goldstein, and Wei Jiang. 2010. ``Payoff complementarities and
financial fragility: Evidence from mutual fund outflows.'' Journal
of Financial Economics, 97(2): 239-262.
---------------------------------------------------------------------------

As a result, the proposed removal of the tie between weekly liquid
assets and the potential imposition of liquidity fees or redemption
gates may better enable funds to use their daily and weekly liquid
assets to meet redemptions in times of stress without giving rise to
risk of runs.\329\ This benefit may be strongest for money market funds
that have weekly liquid assets close to the minimum threshold during
times of liquidity stress, as they are currently most susceptible to
runs. Moreover, money market fund investors would no longer face the
possibility of the imposition of gates outside of liquidations,
enhancing the attractiveness of money market funds as a highly liquid
investment product.
---------------------------------------------------------------------------

\329\ See, e.g., SIFMA AMG Comment Letter; State Street Comment
Letter.
---------------------------------------------------------------------------

This amendment may also benefit money market fund investors. As
discussed above, the weekly liquid asset triggers for the possible
imposition of redemption fees or gates create incentives for investors
to redeem first, at the expense of investors remaining in the fund who
experience further dilution during the gating period. The proposed
removal of the weekly liquid asset trigger as well as the elimination
of redemption gates outside of liquidation may reduce the liquidity
costs borne by investors remaining in the fund. This aspect of the
proposal may increase the attractiveness of money market funds as a low
risk cash management tool and sweep investor account to risk averse
investors.
b. Costs
As discussed in Section II.A, the proposal would not only remove
the tie between fund weekly liquid assets and the possibility of gating
and fees, but would also eliminate gate and fee provisions from rule
2a-7. As a result, money market funds would only be able to impose
gates in the event of liquidation. To the degree that the ability to
impose redemption gates or fees under rule 2a-7 may be a useful
redemption management tool during times of stress, the proposed
amendment may reduce the scope of tools available to money market funds
to manage their liquidity risk in times of stress.
Four factors may mitigate this economic cost of the proposed
amendment. First, no money market fund imposed a fee or a gate under
the rule during the market stress of 2020, and investors exhibited
anticipatory redemptions when funds approached the 30% weekly liquid
threshold for the potential imposition of fees and gates. In light of
these factors, money market funds may be unlikely to impose redemption
gates outside of fund liquidation, even if we retained a redemption
gate provision in rule 2a-7. As discussed in Section II.A, the
possibility that a money market fund would impose redemption gates may
influence investment and redemption decisions, which could trigger
runs.
Second, under the proposal, institutional prime and institutional
tax-exempt money market funds would be required to impose swing
pricing, as discussed in greater detail below. NAV adjustments would
not be tied to weekly liquid assets of the fund, but to the size of net
redemptions and the liquidity costs redeeming investors are imposing on
the shareholders remaining in the fund. The proposed swing pricing
approach may be a more valuable tool for money market funds in managing
investor redemptions than redemption gates and liquidity fees under
rule 2a-7. Moreover, the proposed increases to daily and weekly
liquidity thresholds may increase fund liquidity buffers that can be
used to manage liquidity costs of redemptions.
Third, money market funds would continue to be able to suspend
redemptions under rule 22e-3 in anticipation of fund liquidation.
Specifically, money market funds would be able to suspend redemptions
if a fund's weekly liquid assets decline below 10% or, in the case of a
stable NAV money market fund, if the board determines that the
deviation between its amortized cost price per share and its market-
based NAV per share may result in material dilution or other unfair
results to investors or existing shareholders, in each case if the
board also approves liquidation of the fund.\330\ Thus, money market
funds would still have access to a form of gating during large
liquidity shocks in connection with a fund liquidation.
---------------------------------------------------------------------------

\330\ See 17 CFR 270.22e-3.
---------------------------------------------------------------------------

Fourth, as a result of the run dynamics described above, the tie
between weekly liquid assets and the potential imposition of fees and
gates may have contributed to incentives for money market fund managers
to preserve their weekly liquid assets during liquidity stress, rather
than using them to meet redemptions. Therefore, the tie between weekly
liquid assets and the possibility of fees and gates may magnify
liquidity stress because it incentivizes money market funds to sell
less liquid assets with higher liquidity costs rather than absorb
redemptions out of liquid assets. Thus, the proposed removal of fees
and gates under rule 2a-7 may reduce run risk and liquidity
externalities in money market funds.
2. Raised Liquidity Requirements
a. Benefits
The proposed amendments increasing daily and weekly liquid asset
requirements to 25% and 50% respectively may reduce run risk in money
market funds. Early redemptions can deplete a fund's daily or weekly
liquid assets, which reduces liquidity of the remainder of the fund's
portfolio and increases the risk that a fund may need to sell less
liquid assets into the market during fire sales. Thus, higher levels of
daily and weekly liquid assets in a fund may reduce trading costs and
the first mover advantage during a wave of redemptions, potentially
disincentivizing runs. When money market funds experience runs, funds
with higher daily and weekly liquid assets may experience lower
liquidity costs as they may be more likely to be able to use their
liquid assets to meet redemptions rather than be forced to sell assets
during liquidity stress.\331\ Although liquidity dynamics in open end
funds may differ from those in money market funds,\332\ some research
in that context shows that fund illiquidity can contribute to run
dynamics, as discussed in section III.B.2b. Some other work finds that
less liquid open-end bond funds suffered more severe outflows during
the COVID-19 crisis than liquid funds, and

[[Page 7300]]

that less liquid funds experienced redemptions well before more liquid
funds.\333\ Other research shows that runs were more likely in less
liquid funds for both U.S. and European institutional prime money
market funds.\334\
---------------------------------------------------------------------------

\331\ See Prime MMFs at the Onset of the Pandemic Report, supra
footnote 41, at 4. According to Form N-MFP filings, no prime money
market fund reported daily liquid assets declining below the 10%
threshold in March 2020.
\332\ For example, unlike open end funds, money market funds are
subject to daily and weekly liquid asset requirements.
\333\ See Falato, Antonio, Itay Goldstein and Ali
Horta[ccedil]su. 2021. ``Financial Fragility in the COVID-19 Crisis:
The Case of Investment Funds in Corporate Bond Markets.'' Journal of
Monetary Economics, forthcoming.
\334\ See Cipriani, Marco and Gabriele La Spada. 2020.
``Sophisticated and Unsophisticated Runs.'' FRB of New York Staff
Report No. 956. See also Anadu, Kenechukwu, Marco Cipriani, Ryan
Craver, and Gabriele La Spada. 2021. ``The Money Market Mutual Fund
Liquidity Facility.'' FRM of New York Staff Report No. 980.
---------------------------------------------------------------------------

The proposed increases to liquidity requirements may reduce the
likelihood that funds need to sell portfolio securities during periods
of market stress. This may reduce the potential effect of redemptions
from money market funds on short-term funding markets during times of
stress. Some commenters stated that redemptions from money market funds
may not have contributed to stress in short-term debt markets during
March 2020 and noted a relation between sales and the introduction of
the Money Market Liquidity Facility (MMLF).\335\ For example, one
industry group conducted a survey of members that indicated the two-
thirds of the reduction in prime money market funds' commercial paper
holdings ($23 billion) represented sales to the MMLF after that
facility was announced on March 18. The commenter suggested that
because these sales moved assets from money market funds to the Federal
Reserve's balance sheet, these sales would not have placed downward
pressure on prices.\336\ There may be varying interpretations of the
effects of fund outflows in March 2020 on the prices of assets held by
money market funds and, thus, the degree to which the proposed
liquidity requirements may reduce the transaction costs and losses
money market funds would face when selling portfolio securities into
stressed markets. Importantly, the proposed liquidity requirements
would enhance the ability of funds to meet large redemptions and reduce
the dilution of remaining fund shareholders which would protect
investors. Some commenters indicated that increases in the weekly
liquid asset threshold would not necessarily result in enhanced money
market fund liquidity because fund managers would continue to be
reluctant to use a fund's liquid assets to fulfill redemptions.\337\
Funds may choose between drawing down on daily or weekly liquid assets
and selling other assets in distressed markets to meet redemptions.
However, the proposed removal of the tie between weekly liquid assets
and the potential imposition of redemption fees and gates may reduce
the disincentives funds currently face to draw down their weekly liquid
assets during a wave of redemptions. Before the 2014 amendments, the
only consequence of a money market fund having weekly liquid assets
below the 30% threshold was that the fund could not acquire any
security other than a weekly liquid asset until its investments were
above the 30% threshold. As a result, funds were more comfortable using
their weekly liquid assets and dropping below the 30% threshold. For
example, at the peak of the Eurozone sovereign crises in the summer of
2011 the lowest reported weekly liquid asset value was approximately
5%.\338\ In combination with the proposed elimination of the tie
between weekly liquid assets and potential imposition of gates and
fees, the proposed liquidity requirements may similarly increase the
reliance of money market funds on daily and weekly liquid assets in
meeting redemptions. However, the proposal would also require prompt
notice of falling below liquidity thresholds, which may decrease these
benefits, as discussed in greater detail in Section III.C.6.
---------------------------------------------------------------------------

\335\ See, e.g., ICI Comment Letter I; ICI Comment Letter II;
Federated Hermes Comment Letter I; SIFMA AMG Comment Letter.
\336\ See, e.g., ICI Comment Letter I; ICI Comment Letter II.
\337\ See, e.g., Wells Fargo Comment Letter; JP Morgan Comment
Letter.
\338\ See, supra footnote 274, Figure 8.
---------------------------------------------------------------------------

These benefits may also be mitigated to the extent that many money
market funds may already voluntarily hold daily and weekly liquid
assets in excess of the regulatory minimum thresholds.\339\ For
example, the asset weighted average daily and weekly liquid assets for
publicly offered institutional prime money market funds between October
2016 and February 2020 was 33% and 48% respectively.\340\ After the
peak volatility in March 2020, money market funds generally increased
their daily and weekly liquidity, with the asset weighted average daily
and weekly liquid assets for publicly offered institutional prime money
market funds rising to 44% and 56% respectively between March 2020 and
November 2020. Importantly, the distribution of liquid assets is
skewed, with approximately 50% of publicly offered institutional prime
funds holding below average (44%) in daily liquid assets and 75% of
funds holding below average (less than 56%) in weekly liquid assets. As
a result, fewer prime funds may benefit from the proposed higher daily
liquid asset threshold than the proposed higher weekly liquid asset
threshold.
---------------------------------------------------------------------------

\339\ Wells Fargo Comment Letter; JP Morgan Comment Letter;
Western Asset Comment Letter (noting that reporting and transparency
requirements encourage managers to maintain liquid assets in excess
of the existing WLA threshold).
\340\ Averages were calculated by dividing the aggregate amount
of daily (weekly) liquid assets from all funds by the aggregated
amount of assets from all fund.
---------------------------------------------------------------------------

Reduced run risk in money market funds may enhance the resilience
of affected funds and reduce the risk that money market funds may rely
on government backstops. Moreover, this amendment may benefit investors
to the degree that increasing the liquidity of money market fund
portfolios would allow funds to meet large redemptions from liquidity
buffers more easily. For example, after the March 2020 market
dislocation, some prime money market funds voluntarily shifted their
portfolios by swapping out longer maturity commercial paper and
certificates of deposit for more liquid Treasuries, allowing them to
meet any future redemptions better. Raising liquidity thresholds may
have a similar benefit.
The magnitude of these economic benefits is likely to depend on the
way in which money market funds may respond to the proposed amendments.
Specifically, some affected money market funds (i.e., money market
funds with less than the proposed 25% in daily and 50% in weekly liquid
assets) may react to the proposal by increasing the maturity of the
remainder of their portfolios, potentially reducing their liquidity to
the extent that it is tied to maturity. However, under the current
rules money market funds are constrained in the maturity and weighted
average life of the assets they hold, which is intended to limit the
degree to which funds are able to risk shift their portfolios while
remaining registered as money market funds. Moreover, the liquidity
stress in 2020 was so severe that commercial paper across a variety of
maturities became illiquid.
b. Costs
The proposed amendments would impose indirect costs on money market
funds, investors, and issuers. Because less liquid assets are more
likely to yield higher returns in the form of a liquidity premium,\341\
to the degree that the

[[Page 7301]]

proposal improves the liquidity of money market fund portfolios, it
would lower expected returns of those funds to investors that are
already earning low and or zero net yields in a low interest rate
environment. Several commenters have indicated that an increase in
weekly liquid assets would likely decrease money market fund yields and
make them less desirable to investors.\342\ This may reduce the
attractiveness of money market funds to some investors. Reduced
investor demand may lead to a decrease in the size of assets under
management of affected money market funds and the wholesale funding
liquidity they provide to other market participants. Investors that
prefer to use money market funds as a cash management tool, giving them
the ability to preserve the value of their investments and receiving a
small yield, may move out of prime money market funds and into
government money market funds that deliver lower yields, but have lower
risk to the value of the investment. Moreover, to the degree that some
money market funds are only viable because investors treat them as cash
equivalents, this amendment may result in better matching of investors
to funds that meet their risk tolerance and yield expectations,
mitigating the above costs.
---------------------------------------------------------------------------

\341\ See, e.g., Lee, Kuan-Hui. 2011. ``The World Price of
Liquidity Risk.'' Journal of Financial Economics 99(1): 136-161. See
also Acharya, Viral, and Lasse Pedersen. 2005. ``Asset Pricing with
Liquidity Risk.'' Journal of Financial Economics, 77(2): 375-410.
See also Pastor, Lubos, and Robert Stambaugh. 2003. ``Liquidity Risk
and Expected Stock Returns.'' Journal of Political Economy 111(3):
642-685.
\342\ SIFMA AMG Comment Letter; Western Asset Comment Letter;
Wells Fargo Comment Letter; JP Morgan Comment Letter.
---------------------------------------------------------------------------

The proposed increase of daily and weekly liquid assets may require
as many as 15% of affected funds to increase their daily liquid assets
and 50% of affected funds to increase their weekly liquid assets, as
discussed in further detail below.\343\ The proposal would thus
increase the demand of money market funds for daily liquid assets, such
as repos, and the liquidity in overnight funding markets may then flow
through banking entities to leveraged market participants, such as
hedge funds. Thus, the proposal may reduce the liquidity risk borne by
money market funds, but may result in a concentration of risk taking
among leveraged and less regulated market participants. At the same
time, this shift could allocate risk that currently resides in money
market funds to hedge funds and other more speculative vehicles.
---------------------------------------------------------------------------

\343\ The analysis is based on March 2020 redemptions from
publicly offered institutional prime funds. The possible new
thresholds determined by stress in publicly offered institutional
prime fund portfolios are then applied to all money market funds
(except for the daily liquid asset threshold for tax-free money
market funds). As such, these figures also reflect the percentage of
retail and institutional prime funds that would be impacted by the
various liquidity thresholds. Important caveats and limitations of
this analysis are discussed in Section III.D.2.a below.
---------------------------------------------------------------------------

The proposed amendments may also impose indirect costs on issuers.
Specifically, money market funds are significant holders of commercial
paper and certificates of deposit, as described in the economic
baseline,\344\ and most of the commercial paper they hold is issued by
banks, including foreign bank organizations.\345\ Therefore, issuers of
commercial paper and certificates of deposit are likely to experience
incrementally reduced demand for their securities from money market
funds, particularly demand for debt that would fall outside of the
weekly liquid assets category. This may reduce such issuers' access to
capital and increase the cost of capital, negatively affecting capital
formation in commercial paper and certificates of deposit. Issuers may
respond to such changes by reducing their issuance of commercial paper
and certificates of deposit and increasing issuance of longer-term
debt. In a somewhat analogous setting, some research explores the
effects of the 2014 money market fund reforms, which resulted in asset
outflows from prime money market funds into government money market
funds and affected funding for large foreign banking organizations in
the U.S., on bank business models.\346\ One paper finds that banks were
able to replace some of the lost funding, but reduced arbitrage
positions that relied on unsecured funding, rather than reducing
lending.\347\ Another paper finds that money market fund reforms led to
an increase in the relative share of lending in bank assets and
concludes that reduction in unstable funding can discourage bank
investments in illiquid assets.\348\ Other research examined the
effects of decreased holdings of European bank debt by money market
funds during the Eurozone sovereign crisis in 2011. One paper found
that reduced wholesale dollar funding from money market funds during
this period led to a sharp reduction in dollar lending by Eurozone
banks relative to euro lending, which reduced the borrowing ability of
firms reliant on Eurozone banks prior to the sovereign debt
crisis.\349\
---------------------------------------------------------------------------

\344\ To the degree that some money market funds hold
significant quantities of commercial paper issued by foreign banks
seeking dollar funding, such issuer costs may have a greater effect
foreign issuers.
\345\ See ICI MMF Report, supra footnote 45.
\346\ These outflows around the October 2016 compliance date for
the 2014 reforms, for example, led to reduced money market funds
purchases of commercial paper with other entities like mutual funds
eventually picking up the shortfall and an approximately 30 basis
point spike in 90-day financial commercial paper rates for about
three months.
\347\ See, e.g., Anderson, Alyssa, Wenxin Du, Bernd Schlusche.
2019. ``Money Market Fund Reform and Arbitrage Capital.'' Working
Paper.
\348\ See Thomas Flanagan. 2020. ``Funding Stability and Bank
Liquidity.'' Working Paper.
\349\ See Ivashina, Victoria, David Scharfstein, and Jeremy
Stein, 2015. ``Dollar Funding and the Lending Behavior of Global
Banks.'' Quarterly Journal of Economics 130(3): 1241-1281.
---------------------------------------------------------------------------

These potential costs of the proposed amendment to issuers may be
mitigated by four potential factors. First, as discussed above, money
market funds may respond to a higher weekly liquid asset threshold by
increasing the maturity and liquidity risk in their non-weekly liquid
asset portfolio allocations. This effect may dampen the adverse demand
shock for commercial paper, but increase portfolio risk of affected
money market funds. However, as discussed in Section II.C. above, for
the past several years prime money market funds have maintained levels
of liquidity that are close to or that exceed the proposed thresholds,
without generally barbelling.\350\ Second, as discussed in Section
III.B.3.a), money market funds hold less than a quarter of outstanding
commercial paper, which could limit the impact of the proposal on
commercial paper issuers and markets. Third, the proposed increases to
liquidity requirements may increase some money market fund's liquidity
buffers, which may enable such funds to meet large redemptions from
liquid assets and reduce the need to sell commercial paper to meet
large redemptions during fire sales. This may enhance the stability of
commercial paper markets during times of market stress--an effect that
is also limited by the relative size of money market fund holdings of
commercial paper. Fourth, money market funds are just one group of
investors investing in commercial paper markets and hold less than a
quarter of commercial paper outstanding, as discussed above. If money
market funds pull back from commercial paper markets and commercial
paper prices decrease as a result, other investors, such as mutual
funds or insurance companies, may be attracted to commercial paper,
absorbing some of the newly available supply, as observed after the
2016 reforms.
---------------------------------------------------------------------------

\350\ See BlackRock Comment Letter (stating that they have not
seen evidence that barbelling was a problem in March 2020, or that
money market fund portfolios were generally structured with a
barbell). We similarly have not observed significant use of
barbelling strategies among money market funds.

---------------------------------------------------------------------------

[[Page 7302]]

3. Stress Testing Requirements
a. Benefits
The proposal would also alter stress testing requirements for money
market funds. Under the baseline, money market funds are required to
stress test their ability to maintain 10% weekly liquid assets under
the specified hypothetical events described in rule 2a-7 since breach
of the 10% weekly liquid asset threshold would impose a default
liquidity fee. The proposal would eliminate the default liquidity fee
triggered by the 10% threshold and the corresponding stress testing
requirement around the 10% weekly liquid asset threshold. Instead, the
proposal would require funds to determine the minimum level of
liquidity they seek to maintain during stress periods and to test
whether they are able to maintain sufficient minimum liquidity under
such specified hypothetical events, among other requirements.
Money market funds may have different optimum levels of liquidity
under times of stress. Many factors influence optimum levels of minimum
liquidity, including the type of money market fund, investor
concentration, investor composition, and historical distribution of
redemption activity under stress. This aspect of the proposal may
increase the value of stress testing as part of fund liquidity
management by allowing funds to tailor their stress testing to the
fund's relevant factors, which may enhance the ability of funds to meet
redemptions and the Commission's oversight of money market funds.
b. Costs
Proposed amendments to fund stress testing requirements may impose
direct and indirect costs. Specifically, a fund would be required to
determine the minimum level of liquidity it seeks to maintain during
stress periods, identify that liquidity level in its written stress
testing procedures, periodically test its ability to maintain such
liquidity level, and provide the fund's board with a report on the
results of the testing. As a baseline matter, funds are expected
already to identify minimum levels of liquidity they seek to maintain
during stress as part of routine liquidity management, and are required
to test their ability to maintain such liquidity levels under the
baseline liquidity thresholds. Money market funds have also established
written stress testing procedures to comply with existing stress
testing requirements and report the results of the testing to the
board. Thus, such funds may experience costs related to altering
existing stress testing procedures as the proposal would move from
bright line requirements to a principles based approach, as well as
costs related to board reporting and recordkeeping.
Moreover, to the degree that funds may not always have sufficient
incentives to manage liquidity to meet redemptions, they may choose
insufficiently low minimum levels of liquidity for stress testing,
which may reduce the value of stress testing and corresponding
reporting for board oversight of fund liquidity risk. However, funds
may have significant reputational incentives to manage liquidity
costs--incentives that have, for example, led many funds to voluntarily
provide sponsor support.
4. Swing Pricing
a. Benefits and Costs of Swing Pricing in Money Market Funds in General
As discussed in the economic baseline, money market fund investors
transacting their shares typically do not incur the costs associated
with their transaction activity. Instead, these liquidity costs may be
borne by shareholders remaining in the fund, which may contribute to a
first-mover advantage and run risk.\351\ Moreover, as discussed above,
liquidity management by money market funds imposes externalities on all
participants investing in the same asset classes. This effect may be
especially acute if there are large-scale net redemptions during times
of market stress.
---------------------------------------------------------------------------

\351\ As discussed in the economic baseline, dilution costs most
directly impact shareholders in floating NAV funds through changes
to the NAV. In stable NAV funds, dilution costs can make the fund
more likely to breach the $1 share price if dilution costs are
large. It is also important to note that sponsors can choose to
provide sponsor support to manage reputational costs.
---------------------------------------------------------------------------

The proposed amendments implementing swing pricing would require
institutional prime and institutional tax-exempt money market funds to
implement swing pricing procedures to adjust the fund's floating NAV so
as to charge redeeming shareholders for the liquidity costs they impose
on the fund when a fund experiences net redemptions. The adjusted NAV
would apply to redeemers and subscribers alike. Thus, adjusting the NAV
down when a fund is faced with net redemptions charges redeemers for
the liquidity costs of their redemptions, but also allows subscribers
to buy into the fund at the lower, adjusted NAV.\352\ Under the
proposal, the affected money market fund would recoup the full dilution
costs by charging the redeemers for both the dilution cost of
redemptions as well as the cost of allowing subscribers to buy into the
fund at the lower adjusted NAV.
---------------------------------------------------------------------------

\352\ Adjusting the NAV captures the liquidity costs that
redeemers impose on the shareholders remaining in the fund. However,
subscribers benefit from the lower NAV as well since subscribers buy
into the fund at a lower NAV. Thus, the benefits of adjusting the
NAV are shared between existing shareholders in the fund and
subscribers.
---------------------------------------------------------------------------

As discussed in greater detail in the section that follows, the
proposed swing pricing requirement would require funds to estimate
swing factors differently depending on the level of redemptions. If net
redemptions in a particular pricing period are at or below the market
impact threshold (of 4% divided by the number of pricing periods per
day), swing factors would be required to incorporate spread and other
transaction costs. If net redemptions exceed the market impact
threshold, swing factors would be required to reflect spread and other
transaction costs, as well as a good faith estimate of market impact of
net redemptions. Thus, the magnitude of the adjustments to the NAV
during normal market conditions may be small since money market funds
already hold relatively high quality and liquid investments and would
hold even higher levels of liquidity under the proposal, which may
reduce liquidity costs when meeting redemptions.
One commenter indicated that because NAV adjustments may be small
and investors are unable to observe at the time of placing their orders
whether the fund will adjust its NAV, swing pricing may not have the
intended impacts of swing pricing on investor behavior.\353\ The
proposed swing pricing requirement may increase the variability of
institutional funds' NAV, which can reduce their attractiveness to
investors. However, under the baseline, institutional funds experience
NAV volatility, as demonstrated in Section III.B, and risk averse
investors that prefer NAV stability may have already shifted to
government money market funds or bank accounts around the 2016
implementation of money market fund reforms. Moreover, even if
investors cannot observe whether the NAV will be adjusted on a
particular day, if swing pricing accurately reflects liquidity costs,
investors know that they would not be diluted if they stay in the fund,
reducing their incentives to exit in anticipation of the application of
a swing factor. Moreover, the rule is intended to address the dilution
that can occur when a money market fund experiences net redemptions and
is not intended to result in significant NAV

[[Page 7303]]

adjustments unless there is significant net redemption activity leading
to large liquidity costs.
---------------------------------------------------------------------------

\353\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

The proposed swing pricing requirement may reduce dilution of non-
redeeming shareholders in the face of net redemptions. Thus, swing
pricing may reduce any first mover advantage, fund outflows, and any
dilution resulting from these outflows.\354\ In other jurisdictions
swing pricing is used as a mechanism to protect non-transacting
shareholders from dilution attributable to trading costs, and as an
additional tool to help funds manage liquidity risks.\355\ To the
degree that swing pricing reduces dilution, swing pricing may serve to
protect investors that remain in a fund, for instance, during periods
of high net redemptions. In addition, the proposed elimination of the
ability to impose liquidity fees and gates under rule 2a-7 may increase
the benefit of swing pricing as an important tool for money market
funds to manage the liquidity costs of large-scale redemptions.
---------------------------------------------------------------------------

\354\ See, e.g., Jin, Dunhong, Marcin Kacperczyk, Buge Kahraman,
and Felix Suntheim. 2021. ``Swing Pricing and Fragility in Open-end
Mutual Funds.'' Review of Financial Studies, forthcoming.
\355\ However, swing pricing in these other jurisdictions
differs somewhat from our proposed approach. For example, swing
pricing often involves adjusting a fund's NAV in the event of net
redemptions or net subscriptions. Recommendation of the European
Systemic Risk Board (ESRB) on liquidity risk in investment funds,
European Securities and Markets Authority (November 2020); Liquidity
Management in UK Open-Ended Funds, Bank of England and the Financial
Conduct Authority (March 26, 2021); and Jin, et al., Swing Pricing
and Fragility in Open-end Mutual Funds (January 1, 2021) The Review
of Financial Studies, forthcoming, available at SSRN: https://ssrn.com/abstract=3280890 or https://dx.doi.org/10.2139/ssrn.3280890.
---------------------------------------------------------------------------

The above economic benefits of swing pricing may be reduced by
several factors. First, several commenters have suggested that swing
pricing adjustments would have been too small to affect investor
redemptions and may not have addressed the issues that occurred in
March 2020.\356\ The implementation of swing pricing in the proposal
appears to differ from that in these comment letters in that when net
redemptions exceed the market impact threshold, swing factors would be
required to reflect estimates of market impacts assuming redemptions
are met through the liquidation of a pro-rata share of total portfolio
assets. Thus, when net redemptions are large, swing factors may be
larger than estimated in these comment letters and may capture more of
the dilution costs currently borne by nontransacting shareholders.
---------------------------------------------------------------------------

\356\ See, e.g., Fidelity Comment Letter; Western Asset Comment
Letter; GARP Risk Institute Comment Letter.
---------------------------------------------------------------------------

Second, the proposed swing pricing requirement only addresses the
portion of dilution costs related to trading costs, and would not
address other sources of dilution discussed in section III.B.2. Thus,
the proposed requirement may only partly reduce the dilution costs that
redemptions impose on non-transacting investors and the related
liquidity externalities. We do not have granular data about daily money
market fund holdings that would enable us to estimate the amount of
dilution that could have been recaptured under the proposed approach in
March 2020 or the prevalence of other sources of dilution discussed in
Section III.B.2. To the best of our knowledge, such data is not
publicly available, and we solicit any comment or data that could
enable such quantification.
Third, as discussed in greater detail in Section II, the proposed
swing pricing approach would require affected funds to calculate swing
factors based on, among other things, estimates of market impacts. To
the degree that it may be difficult to value illiquid assets without an
active secondary market, particularly in times of severe liquidity
stress, funds may need to use their discretion in the estimation of
market impact factors. This may give affected funds some discretion in
the calculation of swing factors. To the extent that institutional
investors may be sensitive to NAV adjustments under the proposal, some
funds may use discretion in the calculation of swing factors to reduce
the NAV adjustments. At the same time, funds may use discretion to
apply larger NAV adjustments so as to manipulate and presumably improve
reported fund performance. Importantly, the proposed rule would require
affected funds to use good faith estimates of market impact factors.
Moreover, discretion in the calculation of swing factors may increase
noise in the NAV and may decrease comparability in returns. Investors
may find it more difficult to interpret returns if swing pricing is
applied inconsistently across funds.
The proposal would require affected funds to implement swing
pricing, rather than make it optional. While money market funds may
have reputational incentives to manage liquidity to meet redemptions,
affected funds also face collective action problems and disincentives
stemming from investor behavior. Specifically, to the degree that
institutional investors may use institutional prime and institutional
tax-exempt funds for cash management and their flows are sensitive to
NAV adjustments, funds may be disincentivized to implement swing
pricing and/or to adjust the NAV frequently. For example, even if all
institutional money market funds recognized the benefits of charging
redeeming investors for the liquidity costs of redemptions, no fund may
be incentivized to be the first to adopt such an approach as a result
of the collective action problem. By making swing pricing mandatory,
rather than optional, the proposal is intended to ensure that funds
adjust the NAV to capture the dilution costs of net redemptions and
that money market fund returns are comparable across funds. Moreover,
it may be suboptimal for an individual money market fund to implement
swing pricing routinely, as the operational costs of doing so are
immediate and certain, while the benefits are largest in relatively
rare times of liquidity stress. The proposed application of swing
pricing by all institutional prime and institutional tax-exempt funds
is intended to ensure that swing pricing is deployed in times of severe
stress by all affected funds, protecting investors from dilution costs
when they are highest, and reducing liquidity externalities that money
market funds may impose on other market participants trading the same
asset classes.
The proposed swing pricing requirement would impose certain costs,
as analyzed in Section IV. These costs may be passed along in part or
in full to institutional money market fund investors, that are already
earning low and or zero net yields in a low interest rate environment,
in the form of higher expense ratios or fees. In addition, the proposal
would require affected funds to calculate the swing factor based on
net, rather than gross redemptions. As a result, the redeeming
investors would be charged both for the direct liquidity costs of their
redemptions, as well as for the dilution cost that results from
allowing subscribers to buy into the fund at a lower adjusted NAV.
While this would result in the non-transacting shareholders recapturing
more of the dilution costs from redemptions, this aspect of the
proposal would charge redeeming investors for more than the direct
dilution cost of their redemptions, which may disincentivize
redemptions and incentivize subscriptions.
The proposal may reduce investor demand for institutional prime and
institutional tax-exempt money market funds. If the proposal reduces
investor demand in some funds, it would lead to a decrease in assets
under management of these money market funds, thereby potentially
reducing the wholesale funding liquidity they provide to other

[[Page 7304]]

market participants. The implementation of the floating NAV for
institutional money market funds in 2016 resulted in a large scale
reallocation of investor capital into stable NAV money market funds, as
discussed in Section II.A. Thus, investor demand for institutional
money market funds may depend on the low variability of their NAVs. The
proposed swing pricing requirement would increase the volatility of
affected money market fund NAVs, particularly in times of market
stress. Some commenters also suggested that swing pricing would reduce
investor interest in money market funds.\357\ A reduction in the number
of money market funds and/or the amount of money market fund assets
under management as a result of any further money market fund reforms
would have a greater negative impact on money market fund sponsors
whose fund groups consist primarily of money market funds, as opposed
to sponsors that offer a more diversified range of mutual funds or
engage in other financial activities (e.g., brokerage).
---------------------------------------------------------------------------

\357\ See, e.g., BlackRock Comment Letter; GARP Risk Institute
Comment Letter; mCD IP Comment Letter.
---------------------------------------------------------------------------

These economic costs may be mitigated by three factors. First, the
proposed swing pricing requirement is tailored to the level of net
redemptions. When net redemptions are low (at or below the market
impact factor threshold) and under normal market conditions, the
proposed swing pricing requirement is economically equivalent to
requiring funds strike the NAV at bid prices of securities (since other
transaction costs may also be low under normal conditions). As
discussed in the economic baseline, some fund complexes may already be
striking NAV at bid prices.
Second, money market funds hold assets that are more liquid and
less risky when compared to other open-end funds. Under normal market
conditions, funds may be able to apply a small swing factor that only
affects the fund's NAV to the fourth decimal place. Affected money
market funds' NAV adjustments would likely be greater during severe
stress, when redeemers impose significant costs on the remaining fund
investors.
Third, the proposed swing pricing requirement would require
redeeming investors to internalize the costs that their trading imposes
on the investors remaining in the fund, reducing the liquidity
externalities currently present in institutional prime and
institutional tax exempt money market funds. Moreover, to the degree
that some institutional investors may not be aware of the dilution risk
of affected money market funds, the proposed swing pricing requirement
may increase investor awareness of such risks. Importantly, the
proposed swing pricing requirement may enhance allocative efficiency.
As discussed above, the swing pricing requirement could cause some
investors to move their assets to government money market funds to
avoid the possibility of paying liquidity costs of redemptions.
Government money market funds may be a better match for these
investors' preferences, however, in that government money market funds
face lower liquidity costs and these investors may be unwilling to bear
any liquidity costs.
The proposed swing pricing requirement may impose costs on
investors redeeming shares in response to poor fund management or a
fund complex's emerging reputational risk. Under the proposal, all net
redemptions out of affected funds, regardless of the cause for the
redemption, would result in the NAV being adjusted by the swing factor.
While this may impose costs on efficiency--as redemptions out of poorly
managed funds are efficient and an important part of market discipline
of fund managers--this aspect of the proposal would also capture the
liquidity costs that such redemptions impose on affected funds.
Two factors may reduce the magnitude of these effects on the
incentives of fund managers. First, money market funds are subject to
requirements of rule 2a-7 and the proposal would increase minimum daily
and weekly liquid asset requirements applicable to money market funds
thereby further restricting fund managers from investing in illiquid
assets. Second, the proposal would require disclosures regarding
historical swing factors, which may make liquidity costs of redemptions
more transparent to investors and lead to affected funds competing on
swing factors they charge investors. In addition, the proposed swing
pricing requirement may pose a number of implementation challenges and
impose related costs on money market funds, third party intermediaries,
and investors.\358\ First, swing pricing would require affected money
market funds to estimate both direct and indirect trading costs on a
daily or more frequent basis, which may be particularly time consuming
and challenging during times of stress. Liquidity costs are not
normally charged separately to money market funds, but are expressed in
less favorable prices or the inability to sell assets under stress.
Moreover, money market fund holdings of many assets, such as municipal
securities, certificates of deposit and commercial paper, are not
exchange traded and many such assets do not have an active secondary
market. As a result, estimating transaction costs and market impact
factors of each component of a money market fund portfolio may be time
consuming and difficult, especially during a liquidity freeze.
Moreover, to the degree that some affected funds may engage in
interfund borrowing to meet redemptions, such costs would not be
captured by the proposed approach.
---------------------------------------------------------------------------

\358\ See, e.g., SIFMA AMG Comment Letter; JP Morgan Comment
Letter; GARP Risk Institute Comment Letter.
---------------------------------------------------------------------------

Second, the implementation of swing pricing would require affected
money market funds to receive timely information about order flows.
Some commenters indicated that swing pricing in money market funds is
currently impractical because some intermediaries may report flows with
a delay.\359\ However, as discussed in section III.B.1.a above, many
affected money market funds impose order cut-off times that ensure that
they receive orders prior to striking their NAV. Therefore, many
affected money market funds may already have the necessary information
to determine when the fund has net redemptions and a swing factor needs
to be applied. Affected money market funds that do not already have
cut-off times may introduce cut-off times for order submissions by
intermediaries, such as broker-dealers, retirement fund administrators,
investment advisers, transfer agents, and banks, bearing related costs.
Such funds may face additional operational complexity and costs to
implement a cut-off time or otherwise gather the necessary information
to determine whether it has net redemptions for each pricing period.
---------------------------------------------------------------------------

\359\ See, e.g., ICI Comment Letter I; PIMCO Comment Letter;
Fidelity Comment Letter; Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

Third, the proposed swing pricing requirement is likely to reduce
the feasibility and increase the costs of same day settlement and the
ability of affected funds to offer multiple NAV strikes per day.\360\
Specifically, affected money market funds may not have enough time to
accurately estimate flows, make pricing decisions, and strike the NAV
while meeting their existing settlement timeframes. This

[[Page 7305]]

may cause affected funds to reduce the number of NAV strikes per day or
move the last NAV strike to an earlier time, which could reduce the
attractiveness of affected money market funds for liquidity-seeking
investors. Some research finds that funds offering multiple intraday
NAVs and redemptions experienced significantly larger outflows during
times of stress when compared with single-strike funds.\361\ While this
research does not distinguish between causal impacts of multiple NAV
strikes a day on run risk and selection effects (with more liquidity
seeking investors being attracted to multiple-strike funds), it
suggests that multiple-strike funds were more prone to large investor
redemptions in March 2020. Thus, the proposed swing pricing requirement
for multiple NAV strikes per day funds may represent a tradeoff between
potential adverse effects on the ability of some affected funds to
offer intraday redemptions and slower settlement on the one hand, and
potential reductions in run risk in money market funds on the other.
---------------------------------------------------------------------------

\360\ See, e.g., ICI Comment Letter I; SIFMA AMG Comment Letter;
Western Asset Comment Letter; Federated Hermes Comment Letter I; JP
Morgan Comment Letter; Institute of International Finance Comment
Letter; CCMR Comment Letter.
\361\ See, e.g., Casavecchia, Lorenzo, Georgina Ge, Wei Li, and
Ashish Tiwari. 2021. ``Prime Time for Prime Funds: Floating NAV,
Intraday Redemptions and Liquidity Risk During Crises.'' Working
paper.
---------------------------------------------------------------------------

Fourth, the proposed swing pricing requirement may increase costs
of tax reporting. Specifically, the swing pricing requirement may
increase tax reporting burdens for investors if the requirement
prevents an investor from using the NAV method of accounting for gain
or loss on shares in a floating NAV money market fund or affects the
availability of the exemption from the wash sale rules for redemptions
of shares in these funds.
b. Benefits and Costs of Specific Aspects of the Proposed
Implementation of Swing Pricing
The proposed implementation of swing pricing to institutional prime
and tax-exempt funds is characterized by four features. First, the
swing factor must reflect spread and transaction costs, as applicable.
Second, if the institutional fund has net redemptions exceeding 4%
divided by the number of pricing periods per day, the swing factor
would also require the inclusion of estimated market impacts that net
redemption would have on the value of the fund portfolio. Swing pricing
administrators would have flexibility to include market impacts in the
swing factor if net redemptions are at or below the market impact
threshold. Third, the proposal would require funds to calculate the
swing factor under the assumption that the fund would sell all assets
in the fund portfolio proportionally to the amount of net flows to meet
net redemptions (the so-called vertical slice of the fund portfolio),
rather than absorb redemptions out of liquid assets (the so-called
horizontal slice of the fund portfolio). Fourth, the NAV adjustment
would only occur when affected funds have net redemptions and not when
they have net subscriptions. These features of the proposed swing
pricing requirement aim to more fully and in a more tailored manner
address the liquidity externalities that redeemers impose on investors
remaining in the fund and are expected to result in reductions in the
first mover advantage and run risk in institutional money market funds.
i. Benefits
Under the proposal, when net redemptions are at or below the market
impact threshold of 4% divided by the number of pricing periods per
day, the swing factor would be determined based on the spread costs and
other transaction costs (i.e., brokerage commissions, custody fees, and
any other charges, fees, and taxes associated with portfolio security
sales). As discussed above, such direct transaction costs contribute to
dilution of shareholders remaining in the fund and this aspect of the
proposal may reduce dilution costs of non-transacting investors.
Notably, adjusting the NAV by the spread costs of redemptions is
economically equivalent to striking the NAV at the bid price and, as
discussed above, some money market funds may already do so in the
regular course of business. As a result, the swing pricing requirement
for funds when net redemptions are at or below the market impact
threshold would primarily affect institutional funds that use mid-
market pricing to compute their current NAVs. In addition, when net
redemptions are at or below the market impact threshold, the proposal
would require the NAV adjustment to reflect other transaction costs,
which currently contribute to dilution of non-transacting shareholders.
Based on an analysis of historical daily redemptions out of
institutional prime and institutional tax-exempt money market funds
between December 2016 and October 2021 and discussed in greater detail
in Section III.D.4, approximately 5% of trading days \362\ may involve
such net redemptions. Approximately 3 out of the 53 (5%) institutional
funds as of October 2021 would have outflows exceeding this threshold
on an average trading day. As can be seen from that analysis, net flows
on most days are low, so funds rarely experience large net redemptions
that have significant market impact that would dilute investors.\363\
---------------------------------------------------------------------------

\362\ This analysis is based on historical daily redemptions.
Since multiple NAV-strike a day funds would apply the threshold
multiple times a day under the proposal, this analysis may under- or
over-estimate how frequently a threshold may be applied.
\363\ The threshold is based on historical data demonstrating
that the 4% threshold approximately corresponds to the 5th
percentile of daily fund flows.
---------------------------------------------------------------------------

Under the proposal, if net redemptions exceed the market impact
threshold of 4% divided by the number of pricing periods per day, the
swing factor would be required to include not only the spread costs and
other transaction costs, but also good faith estimates of the market
impact of net redemptions. To the extent funds are able to estimate/
forecast market impact costs accurately, the proposed requirement to
assess the market impact of redemptions when net redemptions exceed the
market impact threshold would result in redeeming investors bearing not
only the direct spread and transaction costs from their redemptions,
but also the impact of their redemptions on the market value of the
fund's holdings. This may allow shareholders remaining in the fund to
capture more of the dilution cost of redemptions, which includes not
only direct transaction costs and near-term price movements, but the
impact of the redemptions on the fund's portfolio as a whole. However,
the magnitude of this benefit may be reduced by the fact that the
proposal would only require market impact factor adjustments if
redemptions exceed the market impact threshold. Based on an analysis of
historical daily redemptions, approximately 5% of trading days may
involve such net redemptions.\364\
---------------------------------------------------------------------------

\364\ Id.
---------------------------------------------------------------------------

Importantly, the proposed implementation of swing pricing would
require funds to calculate the swing factor as if the fund were selling
the pro-rata share of all of the fund's holdings, rather than, for
example, assuming the fund would absorb redemptions out of daily liquid
assets. If a fund were to absorb large redemptions out of daily or
weekly liquid assets, the immediate transaction costs imposed on the
funds would be lower. However, the fund would have less remaining daily
and weekly liquidity and transacting shareholders would be diluting
remaining investors in a manner not captured by estimated transaction
costs.

[[Page 7306]]

Thus, this aspect of the proposal would make redeeming investors bear
not just the immediate costs of covering redemptions, but also the
costs of rebalancing the fund portfolio to the pre-redemption levels of
liquid asset holdings.
Finally, the proposal would apply swing pricing to net redemptions,
rather than both net redemptions and net subscriptions. Redemptions,
not subscriptions, pose the greatest run risk. This aspect of the
proposal may reduce the operational costs of implementing swing pricing
by eliminating the need for funds to perform the swing factor analysis
when they are faced with net subscriptions.
ii. Costs
The proposed implementation of swing pricing may give rise to
burdens on money market funds. As described in the economic baseline,
money market fund holdings exhibit little price volatility outside of
times of severe stress, such as during the 2008 financial crisis and
March 2020 volatility. The proposal would require funds to apply swing
pricing during pricing periods with net redemptions, which would impose
operational burdens on money market funds. However, these burdens may
be mitigated by the fact that the funds scoped into this proposed
requirement already have to perform an analysis to float the NAV \365\
and the fact that some affected money market funds may already be using
bid prices to strike the NAV.
---------------------------------------------------------------------------

\365\ See 17 CFR 270.2a-7(c)(1)(ii); 17 CFR 270.2a-4.
---------------------------------------------------------------------------

In addition, the proposed approach would require redeeming
shareholders to bear liquidity costs larger than the direct liquidity
costs they may impose on the fund. Specifically, the proposal would
require institutional funds to calculate the swing factor assuming the
fund would absorb flows by trading the pro-rata share of all of the
fund's holdings, rather than specific asset types. Given the nature of
money market fund holdings (as described in the economic baseline),
money market funds typically absorb redemptions out of daily and weekly
liquid assets. Moreover, their ability to do so may be increased by the
proposed amendments to raise the daily and weekly liquid asset
requirements. At the same time, assets other than daily and weekly
liquid assets--such as municipal securities and commercial paper that
do not mature in the near term--may become illiquid in times of stress
and may need to be held to maturity by the fund. Thus, the realized
transaction costs of most redemptions may be zero as funds absorb them
out of daily liquidity, while the true liquidity costs of redemptions
may consist of the depletion of daily and weekly liquidity during times
of stress (when rebalancing is especially expensive) rather than the
sale of illiquid assets. This aspect of the proposal, therefore, could
impose a large cost on redeemers that does not represent the actual
cost realized from their trading activity, which may reduce the
attractiveness of affected money market funds to investors. Notably,
liquidity costs paid by redeemers under the proposed swing pricing
requirement would flow back to remaining shareholders, disincentivizing
redemptions and reducing the first mover advantage during times of
stress.
Moreover, market impact factors (which are estimates of the percent
change in the price of an asset per dollar sold) and spread costs may
be difficult to estimate precisely, especially in times of stress and
when many of the assets money market funds hold lack a liquid secondary
market. These difficulties may be attenuated to the degree that funds
may be calculating market impact factors to assess trading costs and
determine optimal trading strategies; however ex ante estimates of
transaction costs and market impact factors may be more difficult than
ex post assessment of trading costs and market impacts. This aspect of
the proposal may lead money market funds to disinvest from some
securities and asset classes with less trade and quotation data for an
accurate estimate of market impact factors. While this may decrease
liquidity risk in institutional funds, this may also reduce the amount
of maturity and liquidity transformation they perform. Moreover, to the
degree that funds' estimation of market impacts and spread costs may be
imprecise, funds may charge redeeming investors an inaccurate fee that
under- or over-estimates the actual liquidity costs funds incurred by
funds after redemptions. The proposal seeks to reduce such costs by
requiring the calculation of market impact factors in swing pricing
only when net redemptions exceed 4% divided by the number of pricing
periods per day.
5. Amendments Related to Potential Negative Interest Rates
As a baseline matter, negative interest rates have not occurred in
the United States and money market funds are not currently implementing
reverse distribution mechanisms. Moreover, government and retail money
market funds and their transfer agents are already required to be able
to process transactions at a floating NAV. Thus, the proposal would
restrict how money market funds may react to possible future market
conditions resulting in negative fund yields and would effectively
expand existing requirements related to processing orders under
floating NAV conditions to all intermediaries. Government and retail
money market funds would also be required to keep records identifying
intermediaries able to process orders at a floating NAV.
The proposal is intended to create transparency for investors in
stable NAV funds in the event of negative yields. As discussed in
Section III.D., the reverse distribution mechanism, if implemented by
some funds, may mislead investors about the value of their investments.
Requiring stable NAV funds to implement a floating NAV in a negative
yield environment may better inform investors about the performance of
their investment than allowing such funds to preserve a stable NAV, but
decrease the number of investor shares.\366\ Moreover, the proposed
amendments related to fund intermediaries may facilitate a transition
of stable NAV funds to floating NAV in a negative yield environment.
Notably, these benefits would only be realized in persistently negative
yield environments.
---------------------------------------------------------------------------

\366\ Jose Joseph Comment Letter.
---------------------------------------------------------------------------

The proposed amendments may impose significant operational burdens
and costs on investors. For example, requiring retail funds to switch
from a stable NAV to a floating NAV may create accounting and tax
complexities for some retail investors.\367\ In addition, a floating
NAV requirement may be incompatible with popular cash management tools
such as check-writing and wire transfers that are currently offered for
many stable NAV money market fund accounts.\368\
---------------------------------------------------------------------------

\367\ See, e.g., ICI Comment Letter I; Federated Hermes Comment
Letter I; Madison Grady Comment Letter; Comment Letter of Carter
Ledyard Milburn (Apr. 15, 2021).
\368\ See, e.g., ICI Comment Letter I; Madison Grady Comment
Letter.
---------------------------------------------------------------------------

The proposed requirement that government and retail money market
funds determine that their intermediaries have the capacity to process
the transactions at floating NAV and the related recordkeeping
requirements would impose burdens on these funds, as estimated in
Section IV. For example, affected money market funds may have to review
their contracts with intermediaries, and some contracts may need to be
renegotiated. Funds would have flexibility in how they make this
determination for each financial intermediary, which may

[[Page 7307]]

reduce these costs for some funds. Moreover, intermediaries that are
currently unable to process transactions in stable NAV funds at a
floating NAV may need to upgrade their processing systems to be able to
continue to transact in government and retail funds. If some
intermediaries are unable or unwilling to do so, the proposed
requirement may adversely impact the size of intermediary distribution
networks of some funds, which can limit access or increase the costs of
investor access to some affected funds. However, there may be economies
of scope in intermediating orders for both stable NAV and floating NAV
funds, especially since some investors may allocate assets in both
stable NAV and floating NAV funds. To the extent that many of the same
intermediaries may process orders for floating and stable NAV money
market funds, such intermediaries may already have processing systems
adequate capable of processing transactions in stable NAV funds at a
floating NAV should such a transition occur. Nevertheless, the use of
stable NAV money market funds as sweep vehicles may present operational
difficulties for intermediaries, and the burdens of the rule may
increase the costs of and reduce the reliance on stable NAV funds for
sweep accounting.
As with other costs of the proposal, any compliance costs borne by
money market funds may be passed along to investors in the form of
higher fund expense ratios. The proposed amendments are justified
because they serve to protect investors of stable NAV funds and create
price transparency in the event of negative yields.
6. Amendments to Disclosures on Form N-CR, Form N-MFP, and Form N-1A
a. Benefits and Costs of the Proposed Prompt Notice of Liquidity
Threshold Events on Form N-CR and Board Reporting
The proposed amendments would require money market funds to file a
Form N-CR report whenever 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. Specifically, in the event of such a
liquidity threshold event, the amendments would require money market
funds to disclose: the date of the initial liquidity threshold event,
the percentage of the fund's total assets invested in both weekly
liquid assets and daily liquid assets on the day of the event, and a
brief description of the facts and circumstances leading to the event.
As a baseline matter, daily and weekly liquid assets are currently
required to be disclosed on fund websites on a daily basis. Relative to
that baseline, the proposed requirement for funds to report on Form N-
CR may enhance Commission oversight and transparency about money market
fund liquidity during times of stress by providing additional
information about the circumstances of a fund's significantly reduced
liquidity levels. The proposed amendments may also have the effect of
incentivizing funds to maintain daily and weekly liquidity above the
reporting thresholds, including in times of stress.
Publication of notices surrounding liquidity threshold events may
inform investors about reasons behind the threshold event. To the
degree that some funds' liquidity threshold events may be indicative of
persistent liquidity problems or mismanagement of liquidity risk, and
to the extent that notices may better inform investors about such
causes (relative to baseline website disclosures of liquidity levels),
publication of such notices may trigger investor redemptions out of the
most distressed funds. However, this risk may be reduced because under
the proposed swing pricing approach, redeemers would be charged the
cost of their redemptions and related dilution costs would be
recaptured by the shareholders remaining in the fund.
The proposal would also require money market funds to notify their
boards when they drop below the 12.5% daily and 25% weekly liquidity
asset thresholds, as discussed in section II.C.2. Since the proposal
would require that liquidity threshold events are reported on Form N-
CR, we preliminarily believe that funds would routinely notify the
board of such events without an explicit board notification
requirement. However, to the degree that some fund boards may not be
notified of some events subject to Form N-CR reporting, the board
notification requirement could enhance the oversight of fund boards
over liquidity management, particularly during periods of stress.
The proposed amendments to Form N-CR would impose direct compliance
costs by imposing reporting burdens discussed in Section IV. Due to
economies of scale, such costs may be more easily borne by larger fund
families. In addition, the proposed prompt notice requirement may give
rise to two sets of costs. First, the proposed requirement may lead
fund managers to manage their portfolios specifically to try to avoid a
reporting event, rather than in a way that is most efficient for fund
shareholders. Second, the proposed requirement may result in money
market fund managers spending compliance resources on amending Form N-
CR to describe the circumstances of the liquidity threshold event,
which may divert managerial resources away from managing redemptions in
times of stress. Costs borne by money market funds may be passed along
to investors in the form of higher fees and expenses. However, as
discussed above, the promptness of the notice requirement may enhance
Commission oversight and transparency to investors, incentivize funds
to closely monitor their liquidity levels, and ultimately better
protect investors.
b. Benefits and Costs of the Proposed Form N-MFP Amendments
Proposed amendments to Form N-MFP would require reporting of daily
data points on a monthly basis, of securities that prime funds have
disposed of before maturity, of the composition of institutional money
market funds' shareholders and concentration of money market fund
shareholders, and of additional information about repurchase agreement
transactions (including through the proposed removal of a provision
that allows aggregate information when multiple securities of an issuer
are subject to a repurchase agreement), among other changes.
Broadly, the proposed amendments to Form N-MFP may make the form
more usable by filers, regulators, and investors, and may increase
transparency around money market fund activities in four ways. First,
the amendments may reduce uncertainty among filers and reduce filing
errors. Second, the proposed requirement that the funds report their
liquid assets, flows, and NAV on a daily basis may reduce costs of
accessing this information relative to the baseline of routinely
accessing and downloading information across many fund websites. Third,
additional information about fund repo activities would enable
investors and the Commission to better assess fund liquidity risks and
oversee the industry. Fourth, information about shareholder
concentration and composition can help the Commission and investors
understand and evaluate potential redemption behavior and related
investor risks.
In addition, the proposal would add disclosure requirements to Form
N-MFP intended to capture information about the relevant funds' use of
swing pricing, which would include each swing factor applied during the
reporting period, the number of times a

[[Page 7308]]

fund applies a swing factor during the reporting period, and the end-
of-day NAV per share (as adjusted by a swing factor, as applicable) for
each business day of the reporting period. These amendments are
expected to benefit investors in money market funds by reducing
information asymmetries between institutional funds and investors about
these funds' swing pricing practices. Investors in these funds
experience price fluctuations and, thus, accept price risks inherent in
floating NAVs. However, swing pricing has not yet been implemented by
any U.S. open-end fund, and money market funds are currently not
permitted to use swing pricing. The purpose of the proposed disclosure
requirement is, thus, to inform investors about the manner in which
affected money market funds implement swing pricing. Such transparency
may result in greater allocative efficiency as investors with low
tolerance of liquidity risk and costs may choose to reallocate capital
to money market funds that have lower liquidity risk and costs. In
addition, to the degree that uncertainty about the proposed swing
pricing requirement may reduce the attractiveness of affected money
market funds to investors, transparency about historical swing factors
may reduce those adverse effects.
The proposed amendments to Form N-MFP would impose initial and
ongoing PRA costs, as discussed in Section IV below. We understand that
money market funds generally already maintain the information they
would be required to report on Form N-MFP pursuant to other regulatory
requirements or in the ordinary course of business. However, funds
would incur some costs in reporting the information. We continue to
note that, due to economies of scale, such costs may be more easily
borne by larger fund families, and that costs borne by money market
funds may be passed along to investors in the form of higher fees and
expenses. In addition, the proposed disclosures of each swing factor,
the number of times a swing factor was applied, and the end-of-day NAV
per share (which would reflect applicable swing pricing adjustments to
that end of day NAV) may create incentives for money market funds to
compete on this dimension. Specifically, institutional investors who
use institutional funds for cash management and prefer lower
variability in the value of their investments may move capital from
money market funds that had high historical swing factors to funds with
lower swing factors. However, while NAV swings penalize redeemers, they
benefit investors remaining in the fund, which may make funds actively
using swing pricing more attractive to longer term institutional
investors.
c. Benefits and Costs of the Proposed Amendments to Form N-1A
The proposal would require institutional money market funds to
provide swing pricing disclosures to investors, including a risk
disclosure. Specifically, the proposal would require funds required to
implement swing pricing to explain how they use swing pricing and
describe the effects of swing pricing on the fund's average annual
total returns for the applicable period(s). This aspect of the proposed
amendments to Form N-1A is expected to enhance transparency about
institutional fund's swing pricing practices. NAV adjustments under the
proposed swing pricing requirement would be a novel aspect of pricing,
influencing both the dilution risk and the returns of affected funds.
Disclosure about the effects of swing pricing on historical fund
returns is expected to help investors understand the liquidity costs of
redemptions from a particular fund, as well as the degree to which the
fund would recapture dilution of shareholders remaining in the fund.
However, the proposed amendments would impose direct reporting burdens
estimated in Section IV--costs that may be more easily borne by larger
fund complexes due to economies of scale, and costs that may be passed
along in part or in full to end investors.
The proposed amendments would also remove current disclosures
related to the imposition of liquidity fees and any suspension of
redemptions, the need for which would be obviated by the proposal to
remove fees and gates from rule 2a-7.
d. Benefits and Costs of Proposed Requirements Related to Identifying
Information on Form N-CR and Form N-MFP
The proposed amendments would also require the registrant name,
series name, related definitions, and LEIs for the registrant and
series on Form N-CR. In addition, the proposal would require money
market funds to report LEIs for the series on Form N-MFP.\369\ The LEI
is used by numerous domestic and international regulatory regimes for
identification purposes.\370\ As such, requiring these additional
disclosures could enable data users such as investors and regulators to
cross-reference the data reported on Forms N-CR with data reported on
Forms N-MFP and with data received from other sources more easily,
thereby expanding the scope of information available to such data users
in their assessments.\371\ All money market funds already have
registrant and series LEI due to baseline Form N-CEN reporting
requirements. The proposed amendments to Form N-MFP would also require
other information to better identify different types of money market
funds, such as amendments to better identify Treasury funds and funds
that are used solely by affiliates and other related parties. These
amendments would help the Commission and market participants to
identify certain categories of money market funds more efficiently.
However, the proposed requirements to improve identifying information
may give rise to direct compliance costs associated with amending
reporting on Forms N-CR and N-MFP, as discussed in Section IV.
---------------------------------------------------------------------------

\369\ Under the baseline, money market funds are already
currently required to report registrant LEIs on Form N-CEN.
\370\ Other regulators with LEI requirements include the U.S.
Federal Reserve, E.U.'s MiFid II regime, and Canada's IIROC; the LEI
is also used by private market participants for risk management and
operational efficiency purposes. See https://www.leiroc.org/lei/uses.htm.
\371\ Fees and restrictions are not imposed for the usage of or
access to LEIs.
---------------------------------------------------------------------------

In addition to the entity identification information (e.g.,
registrant name, series name, related definitions, and LEIs) discussed
above, the proposed amendments would also expand security
identification information by adding a CUSIP requirement for collateral
securities that money market funds report on Form N-MFP. CUSIP numbers
are proprietary security identifiers and their use (including storage,
assignment, and distribution) entails licensing restrictions and fees
that vary based on factors such as the number of CUSIP numbers
used.\372\ Money market funds are currently required to disclose CUSIP
numbers for each holding they report on Form N-MFP.\373\ As such, the
incremental compliance cost on money market funds associated with the
proposed CUSIP requirement, compared to the baseline, would be limited
to those costs, if any, incurred by money market funds as a result of
storing additional CUSIP numbers (to the extent money market funds do
not already store CUSIP

[[Page 7309]]

numbers for their collateral securities).\374\
---------------------------------------------------------------------------

\372\ The CUSIP system (formally known as CUSIP Global Services)
is owned by the American Bankers Association and managed by Standard
& Poor's Global Market Intelligence. See CGS History, available at
https://www.cusip.com/about/history.html, and License Fees,
available at https://www.cusip.com/services/license-fees.html.
\373\ See Item C.3 of Form N-MFP.
\374\ CUSIP license costs vary based upon, among other factors,
the quantity of CUSIP numbers to be used, on a tiered model, with
the lowest tier being up to 500 CUSIP numbers. See CGS License
Structure, available at https://www.cusip.com/services/license-fees.html#/licenseStructure. Based on our understanding of current
CUSIP licenses and usage among money market funds, we do not believe
the proposed CUSIP reporting requirement for collateral securities
is likely to impose incremental compliance costs on money market
funds by moving them into a new CUSIP license pricing tier.
---------------------------------------------------------------------------

e. Benefits and Costs of Proposed Structured Data Requirement for Form
N-CR
The proposed amendments would require money market funds to submit
reports on Form N-CR using a structured, machine-readable data
language--specifically, in an XML-based language created specifically
for Form N-CR (``N-CR-specific XML'').\375\ Currently, money market
funds submit reports on Form N-CR in HTML or ASCII, neither of which is
a structured data language.\376\ This aspect of the proposed amendments
is expected to benefit investors in money market funds by facilitating
the use and analysis, both by the public and by the Commission, of the
event-related disclosures reported by money market funds on Form N-CR,
as compared to the current baseline. The improved usability of Form N-
CR could enhance market and Commission monitoring and analysis of
reported events, thus providing greater transparency into potential
risks associated with money market funds on an individual level and a
population level.
---------------------------------------------------------------------------

\375\ This would be consistent with the approach used for other
XML-based structured data languages created by the Commission for
certain specific EDGAR Forms, including Form N-CEN and Form N-MFP.
See Current EDGAR Technical Specifications, available at https://www.sec.gov/edgar/filer-information/current-edgar-technical-specifications.
\376\ See supra footnote 247.
---------------------------------------------------------------------------

We anticipate that the incremental costs associated with requiring
money market funds to submit reports on Form N-CR in N-CR-specific XML,
compared to the baseline of submitting Form N-CR in HTML or ASCII,
would be low given that money market funds already utilize XML-based
languages to meet similar requirements in their other reporting, and
can utilize their existing capabilities for preparing and submitting
Form N-CR.\377\ Under the proposed rule, money market funds that choose
to submit Form N-CR directly in N-CR-specific XML (rather than use the
fillable web form) would incur the incremental compliance costs of
updating their existing preparation and submission processes to
incorporate the new technical schema for N-CR-specific XML.\378\
---------------------------------------------------------------------------

\377\ See supra footnote 331. In addition, money market funds
would be given the option of filing Form N-CR using a fillable web
form that will render into N-CR-specific XML in EDGAR, rather than
filing directly in N-CR-specific XML using the technical
specifications published on the Commission's website.
\378\ See infra Section IV.E.
---------------------------------------------------------------------------

7. Amendments Related to the Calculation of Weighted Average Maturity
and Weighted Average Life
The Commission is proposing amendments to rule 2a-7 to specify that
WAM and WAL must be calculated based on percentage of each security's
market value in the portfolio, rather than based on amortized cost of
each portfolio security. These amendments may enhance consistency and
comparability of disclosures by money market funds in data reported to
the Commission and provided on fund websites. A consistent definition
of WAM and WAL across funds can enhance transparency for investors
seeking to assess the risk of various money market funds and may
increase allocative efficiency. Moreover, greater comparability of WAM
and WAL across money market funds may enhance Commission oversight of
risks in money market funds. These amendments are not expected to give
rise to direct compliance costs. Specifically, we understand that all
money market funds currently determine the market values of their
portfolio holdings.\379\ Thus, the costs of these proposed amendments
may be de minimis.
---------------------------------------------------------------------------

\379\ Money market funds that use a floating NAV use market
values when determining a fund's NAV, while money market funds that
maintain a stable NAV are required to use market values to calculate
their market-based price at least daily.
---------------------------------------------------------------------------

D. Alternatives \380\
---------------------------------------------------------------------------

\380\ This discussion supplements the discussion of alternatives
in other sections of the release.
---------------------------------------------------------------------------

1. Alternatives to the Removal of the Tie Between the Weekly Liquid
Asset Threshold and Liquidity Fees and Redemption Gates
The proposal could have replaced the 30% weekly liquid asset
threshold for the imposition of redemption gates or fees with a
different threshold. This alternative would allow money market funds to
impose gates or fees during large redemptions to reduce some of the
dilution costs during large redemptions. However, this alternative
could still trigger runs on money market funds close to the regulatory
threshold in times of liquidity stress. When funds approach any
regulatory threshold that can trigger a redemption gate or fee,
investors are incentivized to redeem ahead of others to avoid a
potential gate or fee and retain access to their capital during
liquidity stress. Thus, the existence of a transparent threshold,
rather than the size of the threshold itself, may make money market
funds vulnerable to runs. Moreover, even under the proposed removal of
redemption fees and gates under rule 2a-7, money market funds are still
able to reduce dilution costs during large redemptions under current
rule 22e-3 where a fund's weekly liquid assets drop below 10%. A fund's
board could also determine to impose redemption fees under Rule 22c-2.
The proposal could also have reduced or eliminated the transparency
of the trigger for the imposition of redemption gates and liquidity
fees. For example, the proposal could have required fund boards to
impose their own policies and procedures around factors they would take
into account before redemption gates and fees are imposed that are not
transparent to investors. As another alternative, the proposal could
have required fund managers to seek regulatory approval confidentially
before a fund is able to impose a redemption fee or gate. As yet
another alternative, the proposal could have preserved the 30% weekly
liquid asset trigger for the potential imposition of a fee or gate,
while prohibiting the public disclosure of weekly liquid assets.
These alternatives would increase uncertainty among investors about
how close a given money market fund is to imposing a redemption gate or
fee in times of severe market stress. Because the first mover advantage
is strongest when a fund is on the cusp of imposing a redemption gate
or fee (as many money market fund investors may be risk averse and the
potential imposition of redemption gates could reduce shareholders'
access to liquidity), investor uncertainty about whether a fund is
approaching a redemption gate or fee could prevent runs. The
alternatives making the imposition of redemption gates or fees
discretionary, subject to regulatory approval, or mechanical but
triggered by an unobserved level of weekly liquid assets would also
increase investor uncertainty but could disrupt run dynamics.
However, these alternatives involve drawbacks. First, while such
alternatives could interrupt runs on the funds closest to the
imposition of the redemption gate or fee, they could also trigger runs
on funds that were less illiquid and less likely to impose redemption
gates or fees. For example, a lack of transparency about which funds
are close to imposing liquidity

[[Page 7310]]

fees or gates may lead risk averse investors to redeem from money
market funds in general to preserve access to their capital during
times of liquidity stress, which can lead to runs on more liquid and
less liquid funds alike. Second, requiring money market fund managers
to receive permission from the Commission before a redemption gate or
fee is imposed may create undue delay during market stress events.\381\
Third, these alternatives would not present the same benefits from the
proposed approach, which would both reduce run incentives related to
the potential imposition of redemption gates or fees and, upon net
redemptions, require redeeming shareholders to pay for the dilution
cost they impose on the fund (under the proposed swing pricing approach
discussed below).
---------------------------------------------------------------------------

\381\ See, e.g., SIFMA AMG Comment Letter; Comment Letter of
James L Setterlund (Apr. 12, 2021) (``James Setterlund Comment
Letter'').
---------------------------------------------------------------------------

2. Alternatives to the Proposed Increases in Liquidity Requirements
a. Alternative Thresholds
The proposal could have included a variety of alternative daily and
weekly liquid asset thresholds. To quantify the potential effect of
various liquidity thresholds on the probability that money market funds
would confront liquidity stress, we modeled stress in publicly offered
institutional prime fund portfolios using the distribution of
redemptions from 42 institutional prime funds observed during the week
of March 16 to 20, 2020 (``stressed week'') at various starting levels
of daily and weekly liquid assets. The possible new thresholds
determined by stress in publicly offered institutional prime fund
portfolios were then applied to all money market funds except for the
daily liquid asset threshold for tax-free money market funds. We also
calculated from the distribution of daily and weekly liquidity asset
values what percentage of retail and institutional prime funds combined
would be impacted by the various liquidity thresholds. The analysis
below estimates the probability that a publicly offered institutional
prime fund with a given level of daily and weekly liquid assets would
deplete daily liquid assets to meet redemptions (and have to liquidate
assets under stressed market conditions) on a given day during the
stressed week.\382\ Specifically, Figure 14 below plots the probability
that a fund will run out of daily liquid assets on a given day of the
stressed week. For the proposed thresholds of weekly liquid assets at
50% and daily liquid assets at 25%, Figure 14 shows that less than 10%
of funds would deplete daily liquid assets and be unable to absorb
redemptions out of daily liquid assets on at least one of the five
stressed days. By contrast, a threshold of 15% daily liquid assets and
40% weekly liquid assets would approximately double the estimate of
funds that would deplete daily liquidity to meet redemptions on at
least one of the days of a stressed week (to approximately 20%). As
referenced above, the largest weekly and daily redemption during the
week of March 16 to 20, 2020, was approximately 55% and 25%
respectively. Thus, an approach aimed at eliminating the risk of funds
having insufficient liquid assets to absorb redemptions (using
redemption data from March 16 to20, 2020) would require funds to hold
more than 55% of weekly and at least 25% of daily liquid assets. Lower
thresholds increase the probability that some funds may deplete their
liquid assets to meet redemptions, but also reduce the adverse impacts
described above.
---------------------------------------------------------------------------

\382\ See supra footnote 206.
[GRAPHIC] [TIFF OMITTED] TP08FE22.020

Table 5 quantifies the daily probability that a publicly offered
institutional prime fund depletes daily liquid assets to meet
redemptions under four scenarios: The current baseline daily and weekly
liquid asset thresholds, thresholds based on the largest daily and
weekly redemption during the week of March 16, 2020; pre-COVID weighted
mean daily and weekly liquid assets; and post-COVID weighted mean daily
and weekly liquid assets. The baseline scenario would require no change
for money market funds; the ``biggest redemptions'' alternative would
require approximately 10% of all prime funds (including both
institutional and retail prime funds) to increase their daily liquid
assets and approximately 75% of all prime funds to increase their
weekly liquid assets. The alternative of imposing thresholds at the
``pre-COVID'' mean would require approximately 25% of all prime funds
to increase their daily and 50% of all prime funds to increase their
weekly liquid assets. Finally, the alternative

[[Page 7311]]

that would impose ``post-COVID'' average liquidity metrics on the
industry would require approximately 50% of all prime funds to increase
daily and 75% of all prime funds to increase weekly liquid assets.
[GRAPHIC] [TIFF OMITTED] TP08FE22.021

This analysis includes a number of modeling assumptions. First,
institutional prime fund redemptions were historically higher than
redemptions out of retail funds, which may bias the analysis to
overestimate the probability a retail or private institutional prime
fund runs out of liquidity on a given day. Second, the analysis assumes
that assets maturing on a given business day will be available at the
end of that day. Third, the analysis assumes no assets are sold into a
distressed market and redemptions are absorbed fully into a fund's
liquid assets. Fourth, the models do not include government agency
securities with a maturity in excess of seven days, and assume Treasury
securities have daily liquidity regardless of maturity and can be sold
without any loss. Fifth, the analysis assumes that funds would go below
the 30% weekly liquid asset threshold, continuing to meet redemptions
out of liquid assets, rather than hold on to the weekly liquid assets.
As discussed above, the removal of the trigger for the potential
imposition of redemption gates may increase the willingness of money
market funds to meet redemptions with daily and weekly liquid assets.
Sixth, these estimates are based on redemption patterns in March 2020
and the distribution of future redemptions may differ, in part, as a
result of the proposed amendments.
Therefore, the above estimates show that alternatives imposing
higher minimum daily and weekly liquidity thresholds relative to the
proposal would require funds to hold more liquid assets, reducing the
risk of fund liquidations or selloffs that may necessitate future
government backstops. However, higher minimum liquidity thresholds
would require a larger number of money market funds to reallocate their
portfolios towards lower yielding investments. In addition, higher
liquidity thresholds may lead funds to increase the risk in the
remainder of their portfolios to attract investor flows or to keep fund
yields from sliding below zero and ensure the viability of the asset
class (the latter risk may be more pronounced in very low interest rate
environments). Moreover, higher liquidity requirements may increase the
availability of funding liquidity through repos to leveraged market
participants, resulting in a higher levels of risk taking in less
transparent and less regulated sectors of the financial system. As
discussed in more detail in Section III.C.2.a, an analysis of
redemptions during market stress of March 2020 shows that, under the
proposed liquidity thresholds, the probability that a fund depletes
available weekly liquidity on at least one day during the stressed week
was only approximately 9%. Thus, the proposed liquidity thresholds may
be sufficient to meet redemptions during periods of liquidity stress.
Similarly, lower thresholds relative to the proposal would allow
funds to hold less liquid assets, increasing fund liquidity risks.
However, lower thresholds would decrease the number of money market
funds having to shift portfolios; would reduce the incentives of funds
to take larger risks in the less liquid portion of their portfolios;
and would reduce the concentration of liquidity in repos that are used
by leveraged market participants for funding liquidity. The proposed
thresholds reasonably balance these economic costs and benefits.
b. Caps on Fund Holdings of Certain Assets
As an alternative to increasing the minimum daily and weekly liquid
asset requirements, the Commission considered proposing caps on money
market fund holdings of certain assets, such as commercial paper and
certificates of deposit. Commercial paper and certificates of deposit
lack an actively traded secondary market and are difficult to value or
sell during times of liquidity stress. Limiting money market fund
holdings of such instruments may reduce run risk to the degree that the
illiquidity of all or a portion of a fund's portfolio may create
externalities from redeeming investors borne by investors remaining in
the fund, which may incentivize early redemptions.
However, this alternative relies on the assumption that commercial
paper and certificates of deposit homogeneously reduce the liquidity of
a fund's portfolio by more than other money market fund holdings across
maturities. These assumptions may not always hold for different money
market funds and over different time horizons. Moreover, to the degree
that investors prefer funds that deliver higher returns and money
market funds benefit from investor expectations of implicit government
backstops during times of liquidity stress, money market funds may
react to this alternative by changing the maturity structure of their
portfolio and reallocating into other securities with potentially
higher liquidity risk. For example, money market funds may substitute
short-term commercial paper and certificates of deposit that are
classified as daily or weekly liquid assets with longer term commercial
paper and certificates of deposit that

[[Page 7312]]

would not be classified as daily or weekly liquid assets. Finally,
because this alternative would involve defining the types of
instruments subject to the cap, issuers may be able to create new
financial instruments that are similar, and perhaps synthetically
identical, to commercial paper and certificates of deposit along risk
and return dimensions, but that would not be subject to the caps. The
proposed approach, which would increase minimum daily and weekly liquid
asset requirements, may reduce liquidity and run risk in money market
funds without such potential drawbacks, while ensuring funds have
minimum liquidity to meet large redemptions.
As another alternative, the proposal could have replaced the
minimum daily and weekly liquid asset thresholds with asset
restrictions, such as imposing a minimum threshold for holdings of
government securities \383\ and repos backed by government securities.
Under the baseline, such assets are generally categorized as daily
liquid assets. Thus, such an approach would have the effect of
replacing minimum daily and weekly liquid asset thresholds with a
single daily liquid asset threshold, and restricting the types of
assets that would qualify as daily liquid assets. This alternative
would reduce the liquidity risk of liquid assets held by money market
funds, which may help them meet redemptions without transaction costs.
However, waves of redemptions as experienced in 2008 and 2020 occur
over multiple days, suggesting that money market funds need to have
both daily and weekly liquidity to meet redemptions. Moreover, asset
restrictions imposing large minimum thresholds for holdings of
government securities would decrease not only the risk, but also the
yield of money market funds and their attractiveness to investors,
reducing the viability of the asset class in low interest rate
environments. This approach would also further concentrate money market
fund holdings in specific types of assets, which may increase the
likelihood of funds selling the same assets to meet redemptions in
times of stress.
---------------------------------------------------------------------------

\383\ See, e.g., CCMR Comment Letter.
---------------------------------------------------------------------------

Finally, under the baseline, funds falling below minimum liquid
asset thresholds may not acquire any assets other than daily or weekly
liquid assets, respectively, until funds meet those minimum thresholds.
The proposal would retain this baseline approach, while increasing the
absolute daily and weekly liquid asset thresholds. As an alternative,
the proposal could have imposed penalties on funds or fund sponsors
upon dropping below the required minimum liquidity threshold.
Similarly, the proposal could have imposed a minimum liquidity
maintenance requirement, which would require that a money market fund
maintain the minimum daily liquid asset and weekly liquid asset
thresholds at all times instead of the current requirement to maintain
the minimums immediately after the acquisition of an asset. During the
market stress in 2020, funds experiencing large redemptions were
reluctant to draw down on weekly liquid assets due to the existence of
the threshold for the potential imposition of redemption fees and
gates. Such alternatives may have a similar effect of penalizing money
market funds for using liquidity when liquidity is most scare, which
may make money market funds reluctant to use daily and weekly liquid
assets to meet large redemptions during market stress. As a result,
money market funds would be incentivized to sell less liquid assets,
such as longer maturity commercial paper, into distressed markets,
rather than risk penalties and dropping below minimum liquidity
maintenance requirements. This may increase transaction costs borne by
redeeming investors and may result in money market fund redemptions
magnifying liquidity stress in underlying securities markets.
3. Alternative Stress Testing Requirements
As an alternative to the proposed amendments to stress testing
requirements, the proposal could have modified weekly liquidity
thresholds that funds must use for stress testing. For example, the
proposal could have required money market funds to perform stress
testing using 15%, 20%, or 30% minimum weekly liquid asset thresholds.
As another example, the proposal could have required money market funds
to use specific minimum daily and weekly liquid asset thresholds. These
alternatives would reduce the discretion of fund managers to identify
their own optimal liquid asset thresholds for purposes of stress
testing. However, as discussed above, optimum levels of liquidity will
vary depending on the type of money market fund, investor
concentration, investor composition, and historical distribution of
redemption activity under stress, among other factors. The alternatives
establishing bright line thresholds for stress testing could reduce the
ability of funds to stress test against the most optimal liquid asset
thresholds, which may reduce usability of stress testing results for
board and Commission oversight.
4. Alternative Implementations of Swing Pricing
a. Alternative Thresholds for the Application of Market Impact Factors
As described in Section II.B above, the proposal would require
funds to apply different swing factor calculations depending on the
size of net redemptions. Specifically, if net redemptions are at or
below 4% of the fund's NAV divided by the number of pricing periods per
day, the swing factor would reflect spread and transaction costs of
redemptions. If net redemptions exceed 4% of the fund's NAV divided by
the number of pricing periods per day, the swing factor would include
not only spread and transaction costs, but also a good faith estimation
of market impacts of net redemptions. The proposal could have used a
different net redemption threshold for the application of market impact
factors. For example, the proposal could have required funds to
estimate market impacts if net redemptions exceed 2% or 0.5% divided by
the number of pricing periods per day. Based on an analysis in Table 6
below, these alternatives would require funds to estimate market impact
factors on 10% or 25% of trading days.\384\ Since net flows of these
funds are zero at the median, and because there are only 53
institutional funds in our sample, a 10%-ile or 25%-ile alternative
threshold would correspond to approximately 5 and 13 funds respectively
having outflows greater than the threshold on an average trading day,
relative to approximately 3 funds under the proposal. Alternatively,
the proposal could have used different redemption thresholds for the
swing factor calculation for institutional prime or institutional tax-
exempt funds.
---------------------------------------------------------------------------

\384\ This analysis is based on historical daily redemptions,
but multiple NAV-strike a day funds would apply the threshold
multiple times a day under the proposal. Thus, this analysis may
under- or over-estimate how frequently a threshold may be applied.

---------------------------------------------------------------------------

[[Page 7313]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.046

Higher (lower) net redemption thresholds for the calculation of
market impact factors would reduce (increase) the number of pricing
periods for which affected money market funds must calculate market
impact factors for portfolio securities, reducing (increasing) related
costs and operational challenges. However, higher (lower) net
redemption thresholds would also reduce (increase) the amount of
dilution from redemptions that is recaptured by money market funds and
accrue to non-transacting shareholders.
---------------------------------------------------------------------------

\385\ This table reports the results of an analysis of daily
flows reported in CraneData on 1,228 days between December 2016 and
October 2021. As of September 2021, CraneData covered 87% of the
funds and 96% of total assets under management. Flows at the class
level were aggregated to the fund level. Flows of feeder funds were
aggregated for an approximation of flows for the corresponding
master fund.
---------------------------------------------------------------------------

As can be seen from Table 6, the proposed 4% market impact
threshold would represent approximately the 5th percentile of daily
redemptions. We note that 1st and 5th percent correspond to standard
confidence levels in statistical testing, and such confidence levels
have been used in other Commission rules.\386\ Importantly, when daily
net redemptions reach 4%, most funds may experience significant market
impact if they were to sell a pro-rata share of their portfolio
holdings to meet redemptions. Thus, the proposed market impact
threshold may appropriately tailor the market impact factor requirement
to relatively rare pricing periods of extreme stress.
---------------------------------------------------------------------------

\386\ For example, rule 18f-4 requires that an open end fund's
value at risk model use a 99% confidence level. The Commission also
considered requiring a different confidence level for the value at
risk test, such as the 95% or 99% confidence levels. See, e.g., Use
of Derivatives by Registered Investment Companies and Business
Development Companies, Investment Company Act Release No. 34084
(Nov. 2, 2020) [85 FR 83162 (Dec. 21, 2020)], at 83250.
---------------------------------------------------------------------------

As another alternative, the proposal could have defined the market
impact threshold on a fund-by-fund basis, with reference to a fund's
historical flows.\387\ For example, each fund could have been required
to determine the trading days for which it had its highest flows over a
set time period, and set its market impact threshold based on the 5% of
trading days with the highest redemptions.\388\ While this alternative
could allow funds to customize their market impact thresholds to their
historical redemption flows, it may reduce the comparability of money
market fund returns for investors because swing factors, including the
associated market impact factor, influence reported fund returns.
Finally, such an alternative may create strategic incentives for fund
complexes to open and close funds depending on historical redemption
activity. For example, to the degree that the estimation of market
impact factors may be burdensome, fund families may choose to close
funds that experienced high redemptions to avoid the application of
market impact factors.
---------------------------------------------------------------------------

\387\ As another possibility, the proposal we could have allowed
funds discretion over which historical period could be chosen.
However, because money market funds may not internalize the
externalities that their liquidity management imposes on investors
in the same asset class, they may not be incentivized to use such
discretion in a way that mitigates those externalities. For example,
some affected funds may choose a historical time period that results
in market impact thresholds that are too high, so that market impact
factors are rarely applied. Moreover, because market impact
thresholds would influence NAV adjustments and reported returns, the
alternative may reduce the comparability of money market fund
returns for investors.
\388\ As another alternative, the rule could have required
policies and procedures regarding the choice of a threshold percent
level based on historical data.
---------------------------------------------------------------------------

b. Other Alternative Approaches to Market Impact Factors
The proposal could have required institutional funds to apply swing
pricing as proposed, but without any requirement to estimate market
impact factors. As a related alternative, the proposal could have made
the use of market impact factors in swing factor calculations less
prescriptive and more principled-based or optional in their entirety.
These alternatives would reduce the likelihood and frequency with which
affected money market funds would estimate market impacts, which may
reduce costs and operational challenges of doing so. However, this may
reduce the frequency and size of NAV adjustments and the benefits of
swing pricing for non-transacting shareholders.
Increased discretion may allow funds to tailor the calculation of
market impact factors to individual portfolio and asset characteristics
and prevailing market conditions. This may make swing factors a more
precise measure of liquidity costs assessed to redeeming investors.
However, because swing factor adjustments influence reported fund
returns, greater discretion over the calculation of swing factors may
reduce the comparability of money market fund returns for investors.
Moreover, because money market funds may not internalize the
externalities that their liquidity management practices may impose on
investors in the same asset class, they may not be incentivized to use
such discretion in a way that mitigates those externalities.
c. Other Alternative Implementations of Swing Pricing
Under the proposal, all institutional prime and institutional tax
exempt money-market funds would be required to apply swing pricing
during pricing periods with net redemptions. As an alternative, the
proposal could have required a fund to adopt policies and procedures
that specify how the fund would determine swing pricing thresholds and
swing factors based on a principles based approach, instead of
specifying swing factor calculations and thresholds in the rule. As
another alternative, the proposal could have made the application of
swing pricing optional. The operational costs of implementing swing
pricing are immediate and certain, while the benefits are largest in
relatively rare times of liquidity stress. Moreover, while money market
funds may have reputational incentives to manage liquidity to meet
redemptions--and fund sponsors may have chosen to provide sponsor
support in the past--institutional money market funds also face
disincentives from investor behavior and collective action problems.
Specifically, to the degree that institutional investors may use
institutional prime and institutional tax-

[[Page 7314]]

exempt funds for cash management and are sensitive to NAV adjustments,
funds may be disincentivized to swing the NAV and recapture the
dilution costs for shareholders remaining in the fund.
These alternatives may allow funds not to implement swing pricing
or to implement a swing pricing approach with higher swing thresholds
and different swing factors (for example, without estimating market
impacts). Relative to the proposal, these alternatives may allow funds
to better tailor their liquidity management and swing pricing design to
investor composition, portfolio and asset characteristics, and
prevailing market conditions. This alternative may also avoid
operational costs and challenges of swing pricing for some funds. To
the degree that the implementation of swing pricing may increase the
variability of fund NAVs which reduces the attractiveness of affected
funds to investors, these alternatives may reduce potential adverse
impacts of swing pricing on the size of the institutional money market
fund sector, the number of institutional money market funds available
to investors, and the availability of wholesale funding liquidity in
the financial system. However, affected funds may not internalize the
externalities that they impose on investors in the same asset classes
or the externalities that redeeming investors impose on investors
remaining in the fund. In addition, as a result of the collective
action problem and disincentives from investor flows, no fund may be
incentivized to be the first to implement swing pricing, even if all
institutional money market funds recognize the value of charging
redeeming investors for the liquidity costs of redemptions. Thus, these
alternatives could reduce the likelihood that funds adjust the NAV to
capture the dilution costs of net redemptions relative to the proposal
because affected funds may not internalize the externalities that they
impose on investors in the same asset class. This may reduce or
eliminate important benefits of the proposed swing pricing requirement,
including protecting non-transacting investors from dilution, reducing
first-mover advantage and run risk, and reducing liquidity
externalities money market funds may impose on market participants
transacting in the same asset classes. In addition, relative to the
proposal, these alternatives would increase fund manager discretion
over the choice of swing threshold, swing factors, and the application
of swing pricing in general. As a result, because the application of
swing pricing in general and swing factor adjustments in particular
influence reported fund returns, greater discretion over the
application of swing pricing may reduce the comparability of money
market fund returns for investors.
The proposal could have required institutional funds to adjust the
NAV only when net flows exceed a certain swing threshold (either
regulatory threshold or threshold selected by each institutional fund),
allowing funds to not adjust the NAV at all when redemptions are low.
As described in the economic baseline, money market funds generally
hold highly liquid assets, and the proposal would require money market
funds to hold even higher levels of daily and weekly liquid assets. As
a result, unless both net redemptions and price uncertainty are large,
institutional funds may be able to absorb redemptions of transacting
investors without imposing large liquidity costs on the remaining
investors. Thus, the alternative may allow institutional funds to avoid
the costs and operational burdens of calculating spread and transaction
costs when net redemptions are low.
However, alternatives that allow funds not to apply swing pricing
when net redemptions are below a swing threshold selected by the fund
may reduce the expected economic benefits of swing pricing. First, if
money market funds are able to select their own swing thresholds, they
may choose to set high swing thresholds, reducing the probability that
funds would swing the NAV under normal conditions. To the degree that
money market fund investors use institutional funds as a very low risk
or cash-like investment vehicle and are averse to any fluctuations in
the value of their money market fund holdings, these funds may seek to
only swing the NAV when redemptions are large enough that they would
have required fund liquidation. Second, in 2020 institutional money
market fund investors appeared to be highly sensitive to the
possibility that a redemption gate or fee would be imposed. To the
extent money market investors are able or attempt to forecast when
swing pricing would apply or attempt to do so, the existence of a swing
threshold may incent these investors to redeem before the swing.
Importantly, formulating a swing threshold based on redemptions in a
particular pricing period, rather than based on historical redemptions,
is likely to interrupt self-fulfilling run dynamics and eliminate
incentives for strategic redemptions around swing thresholds.
The proposal could have allowed funds to calculate the swing factor
under the assumption that the fund would absorb redemptions out of
liquid assets (the so-called horizontal slice of the fund portfolio) or
otherwise provide funds with flexibility to determine the costs based
on how they would satisfy redemptions on a given day. Money market
funds may manage their liquidity so as to be able to absorb redemptions
out of daily and weekly liquid assets, rather than having to sell a
pro-rata share of their portfolio holdings. Moreover, the proposal
would require money market funds to hold higher levels of daily and
weekly liquid assets. Assets that are not daily and weekly liquid
assets can be illiquid and generally may need to be held to maturity by
the fund. Thus, the alternative would allow funds to avoid swinging the
NAV if they are able to, for example, by absorbing redemptions out of
more liquid assets. This may reduce uncertainty for investors about the
magnitude of the potential NAV adjustment, especially when liquidity is
not scarce. However, this alternative would result in redeeming
investors not being charged for the true liquidity costs of
redemptions, which consist not only of the immediate costs of
liquidating fund assets, but also of the cost of leaving the fund more
depleted of liquidity and thus more vulnerable to future redemptions.
As another alternative, the proposal could have required that
affected money market funds calculate the swing factor based on the
fund's best estimate of the liquidity costs of redemptions. Under this
alternative, swing factors may more accurately capture the costs of
redemptions as funds would be able to tailor swing factors to their
liquidity management strategies (whether that is, for example,
liquidating pro-rata shares of portfolio holdings, absorbing
redemptions out of daily or weekly liquidity, some combination of the
two, or borrowing). However, this alternative would increase fund
discretion in the calculation of swing factors, and fund manager
incentives may not be aligned with incentives to accurately estimate
liquidity costs of redemptions. For example, larger swing factors
applied to redemptions benefit the fund and can improve reported fund
performance. At the same time, disclosures about historical swing
factors can incentivize fund managers to apply excessively low swing
factors to attract investors.
The proposal could have required institutional funds to allocate
the aggregate dollar cost of trading to gross (as opposed to net)
redemptions. Under the alternative, redeeming investors

[[Page 7315]]

would bear the dilution cost of the redemptions, but not the dilution
cost that comes from subscribers being able to buy into the fund at the
lower adjusted NAV.\389\ This approach could result in redeeming
investors paying only the liquidity costs of their orders. However,
this alternative may not fully compensate shareholders remaining in the
fund for the full dilution cost associated with redemptions.
---------------------------------------------------------------------------

\389\ Some regulatory authorities in other countries allow fund
managers to choose one of two allocation rules: A rule under which
costs are fully borne by subscribing and redeeming investors and a
rule under which costs are borne on a pro-rata basis by transacting
investors. See, e.g., ``Code of Conduct for Asset Managers Using
Swing Pricing and Variable Anti-Dilution Levies,'' 2016, available
at https://www.afg.asso.fr.
---------------------------------------------------------------------------

The proposal also could have required that institutional funds
apply swing pricing to both net redemptions and net subscriptions.
Relative to the proposal, this alternative would involve greater
benefits to non-transacting investors by not only capturing the
dilution costs of redemptions, but also the dilution costs arising out
of the need to invest net subscriptions. At the same time, waves of
subscriptions may be less likely to destabilize the money market fund
sector in a way that leads to government support. Moreover, the
alternative would increase the ongoing operational costs of swing
pricing--costs that are expected to be passed along to fund investors
that are already earning low or zero net yields in a low interest rate
environment. Finally, as discussed in Section II above, applying the
proposed swing pricing requirements to fund subscriptions would require
these funds to make certain assumptions about how they invest cash from
new subscriptions and, in some cases, these assumptions would be
inconsistent with requirements in rule 2a-7.
5. Liquidity Fees
As an alternative to the proposed swing pricing requirement, the
proposal could have required that institutional prime and institutional
tax exempt money market funds establish board-approved procedures to
impose liquidity fees that capture liquidity externalities of
redemptions. As a related alternative, the proposal could have required
institutional prime and tax-exempt money market funds to establish a
dynamic liquidity fee framework that uses the same, or similar,
parameters as swing pricing for determining when to impose a fee and
how to calculate the fee. For instance, the liquidity fee framework
could apply a fee any time the fund has net redemptions, and calculate
the amount of the fee in the same or similar way as the swing factor
under our proposed approach. Alternatively, the liquidity fee framework
could be modified in the same or similar manner as one of the swing
pricing alternatives discussed above (e.g., the fee could apply only
when net redemptions exceed a certain threshold, or the fee calculation
method could be based on how the fund expects to satisfy redemptions
instead of assuming sale of a vertical slice of the fund's portfolio).
While the PWG Report largely analyzed liquidity fees in the context
of the removal of the ties between weekly liquid asset thresholds and
the potential imposition of fees and gates, several commenters
discussed the above related liquidity fee alternatives (collectively,
the ``alternative liquidity fee approach''). For example, some
commenters recommended allowing the board to impose liquidity fees when
it determines that doing so is in the best interest of shareholders,
without reference to a specific weekly liquid asset threshold.\390\
Some commenters suggested a modified fee framework whereby money market
funds would be required to have policies and procedures that provide
the fund's board with direction on when to impose fees and how to
calculate them, in order to impose fees that reflect the cost of
liquidity.\391\ Two such commenters suggested that the Commission could
identify non-binding factors to consider (e.g., net redemptions;
portfolio specific characteristics like liquid assets, investor
concentration, and diversity of holdings; and market-based
metrics).\392\ Under these commenters' suggested approach, funds would
be required to disclose the possibility of liquidity fees to investors
but could avoid providing information that would allow investors to
preemptively redeem before fees apply.
---------------------------------------------------------------------------

\390\ See, e.g., JP Morgan Comment Letter; Federated Hermes I
Comment Letter; Federated Hermes II Comment Letter; Wells Fargo
Comment Letter; ICI I Comment Letter; Western Asset Comment Letter.
\391\ See, e.g., JP Morgan Comment Letter; ICI I Comment Letter;
Western Asset Comment Letter.
\392\ See, e.g., JP Morgan Comment Letter; ICI I Comment Letter.
---------------------------------------------------------------------------

Like the proposed swing pricing approach, the liquidity fee
alternative would require funds to recapture the liquidity costs of
redemptions to make non-redeeming investors whole. Thus, many of the
economic costs and benefits of the proposed swing pricing approach are
also expected with the liquidity fee alternative.
Specifically, like the proposed swing pricing requirement, the
liquidity fee alternative may reduce dilution of non-redeeming
shareholders in the face of net redemptions. Liquidity fees may reduce
the first mover advantage, fund outflows during market stress, and
dilution. To the degree that liquidity fees may reduce dilution, they
may protect investors that remain in the fund, for instance, during
periods of high net redemptions.
Similar to the proposal, the magnitude of liquidity fees applied by
affected funds may be quite small since money market funds hold
relatively high quality and liquid investments, which may reduce
liquidity costs when meeting redemptions. The fact that the alternative
may result in relatively small liquidity fees as well as the inability
of investors to observe at the time of placing their orders whether the
liquidity fee will be applied may interrupt self-fulfilling run
dynamics and reduce the likelihood of strategic behavior around
liquidity fees. The alternative would address the dilution that can
occur when a money market experiences net redemptions and would not
result in large liquidity fees unless there is significant net
redemption activity leading to large liquidity costs.
Some of the direct and indirect costs of the liquidity fee
alternative may be similar to those of the proposed swing pricing
requirement. First, a liquidity fee framework in which funds are more
likely to apply liquidity fees relative to the baseline may reduce
investor demand for institutional prime and institutional tax-exempt
money market funds. Reduced investor demand may lead to a decrease in
assets under management of affected money market funds, thereby
potentially reducing the wholesale funding liquidity they provide to
other market participants. If some institutional money market fund
investors are concerned about preserving their invested capital and to
the degree that the liquidity fee alternative would require redeeming
investors to bear the liquidity risk of their redemptions (a risk they
do not currently internalize), the alternative may reduce investor
demand for institutional money market funds.
Second, the liquidity fee alternative could impose costs on
investors redeeming shares in response to poor fund management or a
fund complex's emerging reputational risk. The alternative would assess
liquidity fees based on the liquidity costs of effecting redemptions
and regardless of the cause for the redemptions. Similar to the
proposed swing pricing approach, this could reduce the strength of
market discipline of poor fund management.

[[Page 7316]]

Third, liquidity fees would require affected funds to pass along
liquidity costs of redemptions onto investors. This may decrease the
need of funds to provide and investor expectation of sponsor support to
cover liquidity costs of redemptions. As a result, like the proposed
swing pricing approach, the liquidity fee alternative could magnify the
incentives of affected funds to invest in more illiquid assets, may
reduce their incentives to manage downside liquidity risk, and may
reduce fund incentives to find the cheapest way to source liquidity to
meet redemptions. In addition, fund managers may be incentivized to
apply liquidity fees frequently and to use their discretion to apply
larger liquidity fees because they improve a fund's reported returns
and benefit the fund. These factors may be partly mitigated by
reputational incentives of fund managers, to the degree that the large
and frequent application of liquidity fees may discourage liquidity
seeking investors from allocating to such funds. Fourth, the
implementation of the alternative liquidity fee approach would pose
some operational challenges and impose related costs on money market
funds, third party intermediaries, as well as investors. Similar to the
proposed swing pricing approach, the calculation of liquidity fees
would require affected money market funds to estimate spread and other
costs on days with net redemptions, which may be particularly time
consuming and challenging during times of stress. As discussed above,
many assets that money market funds hold are not exchange traded and do
not have an active secondary market. As a result, estimating spread
costs and market impact factors of each component of a money market
fund portfolio may be time consuming and difficult, especially during a
liquidity freeze.
The liquidity fee alternative also has several important
differences from the proposed swing pricing approach, and these
differences give rise to different economic benefits, costs, and
operational challenges. Specifically, the proposed swing pricing
approach would recapture dilution costs of redemptions by adjusting the
NAV of the fund as a whole depending on the volume of net redemptions,
spread and other costs, and estimates of market impacts. The liquidity
fee alternative would, instead, require funds to assess liquidity fees
on redeeming investors depending on the same or similar considerations.
As a result, the alternative liquidity fee approach may have
several benefits relative to the proposed swing pricing approach.
First, liquidity fees could be more transparent than a swing factor
adjustment to the fund's NAV, as redeeming investors would more clearly
see application of a separate fee. However, while redeeming investors
would enjoy greater transparency regarding liquidity fees, other
investors would not observe when a liquidity fee is charged. Second,
similar to the proposed swing pricing approach, liquidity fees would
mitigate dilution. However, under the proposed swing pricing approach
redeemers compensate the fund for the dilution of redemptions as well
as the dilution from subscriptions. Thus, redeemers would subsidize
subscribers in the fund--an incentive effect that may be particularly
important when liquidity is scarce and a fund is facing a wave of
redemptions. By contrast, the alternative liquidity fee approach could
charge redeeming investors fees that compensate the fund for dilution
from redemptions only. While the liquidity fee alternative would not
create a positive incentive for subscriptions, it would avoid charging
subscribers for more than the liquidity cost of their redemptions.
Third, if liquidity fees are to be assessed after the NAV is struck, it
could reduce the operational challenges and time pressures of swing
pricing and allow affected money market funds to charge the ex post
trading costs to redeeming investors. The alternative liquidity fee
approach could avoid the potentially adverse impacts of swing pricing
on settlement cycles and may be less likely to affect the number of NAV
strikes some funds currently offer each day.
Importantly, the alternative liquidity fee approach could give rise
to several sets of operational concerns and related costs. In contrast
with the proposed swing pricing approach, which is implemented through
affected funds adjusting the NAV, the alternative liquidity fee
approach would require intermediaries to assess fees to investors. As a
result, the alternative liquidity fee approach would require greater
involvement by intermediaries in applying the fees and submitting the
proceeds to the fund. While intermediaries to non-government money
market funds and other service providers should be equipped to impose
liquidity fees under the current rule, the alternative liquidity fee
approach would likely result in more frequent and varying application
of fees than the current rule contemplates. Requiring intermediaries to
apply a fee more frequently, with the potential to change in amount
from pricing period-to-pricing period, could introduce additional
operational complexity and cost. By consequence, intermediaries may
need to develop or modify policies, procedures, and systems designed to
apply fees to individual investors and submit liquidity fee proceeds to
the fund. In addition, liquidity fees may require more coordination
with a fund's service providers than swing pricing, since fees need to
be imposed on an investor-by-investor basis by each intermediary, which
may be particularly difficult with respect to omnibus accounts.
Moreover, funds may not have insight into whether an intermediary is
appropriately and fairly applying the liquidity fee to redeeming
investors and affected funds may need to develop or modify policies and
procedures reasonably designed to ensure intermediaries are
appropriately and fairly applying the fees. Finally, due to the costs
that the alternative may impose on intermediaries and distribution
networks of affected funds, the alternative liquidity fee approach may
require money market funds to alter their intermediary distribution
contracts, networks, and flow aggregation practices. We lack data to
quantify such burdens and costs and solicit comment and data that would
inform this analysis.
6. Expanding the Scope of the Floating NAV Requirements
The proposal could have expanded the floating NAV requirements to a
broader scope of money market funds. For example, the proposal could
have imposed floating NAV requirements on all prime money market funds,
but not on tax-exempt funds.\393\ As another alternative, the proposal
could have imposed floating NAV requirements on all prime and tax-
exempt money market funds.\394\ Finally, the proposal could have
required that all money market funds float their NAVs.\395\
---------------------------------------------------------------------------

\393\ See, e.g., PIMCO Comment Letter; Vanguard Comment Letter.
\394\ See, e.g., Schwab Comment Letter; Northern Trust Comment
Letter.
\395\ See, e.g., Comment Letter of the CFA Institute (Apr. 14,
2021) (``CFA Comment Letter''); Comment Letter of Better Markets,
Inc. (Apr. 12, 2021) (``Better Markets Comment Letter''); Systemic
Risk Council Comment Letter; Comment Letter of Professor David
Zaring, The Wharton School (Apr. 2, 2021) (``Prof. Zaring Comment
Letter'').
---------------------------------------------------------------------------

Expanding the scope of the floating NAV requirements beyond
institutional prime and institutional tax-exempt funds would involve
several main benefits. First, a floating NAV may increase transparency
about the risk of money market fund investments. Portfolios of money
market funds give rise to liquidity, interest rate, and credit risks--
risks that are relatively low under normal market conditions, but may
be

[[Page 7317]]

magnified during market stress. To the degree that investors in stable
NAV funds are currently treating them as if they were holding U.S.
dollars due to a lack of transparency about risks of such funds,
expanding the scope of the floating NAV requirements may enhance
investor protections and enable investors to make more informed
investment decisions. Some commenters stated that expanding a floating
NAV requirement could enhance transparency about the underlying
performance of credit-sensitive assets within prime money market
funds.\396\ Another commenter indicated that a floating NAV provides
investors with more accurate information about the fund's financial
condition, enhances transparency about the risks of the fund's
portfolio holdings, and is consistent with the valuation of investment
funds generally.\397\ Yet another commenter suggested that a floating
NAV can provide more flexibility and resilience than a stable NAV, but
tax-exempt money market funds could continue to support a stable NAV as
long as the Commission tightened portfolio restrictions on such
funds.\398\
---------------------------------------------------------------------------

\396\ See, e.g., PIMCO Comment Letter.
\397\ See, e.g., CFA Comment Letter.
\398\ Id. (noting that tax-exempt money market funds invest in
entities that often have the taxing power to support their debt, may
not be able to discharge their debt obligations through bankruptcy,
and issue notes that offer contractual liquidity).
---------------------------------------------------------------------------

Second, these alternatives could reduce run risk in affected stable
NAV funds. Specifically, floating the NAV may reduce the first mover
advantage in redemptions, partly mitigating investor incentives to run.
Some commenters supported the benefits of a floating NAV requirement in
discouraging herd redemption behavior across all prime money market
funds,\399\ and suggested that a floating NAV may reduce the advantages
of sophisticated investors that redeem quickly under stressed
conditions.\400\ We are also aware of research that examined fund
outflows outside the U.S. and found reduced outflows in floating NAV
funds.\401\
---------------------------------------------------------------------------

\399\ See, e.g., PIMCO Comment Letter.
\400\ See, e.g., Better Markets Comment Letter.
\401\ See, e.g., Witmer, Jonathan. 2016. ``Does the Buck Stop
Here? A Comparison of Withdrawals from Money Market Mutual Funds
with Floating and Constant Share Prices.'' Journal of Banking and
Finance 66: 126-142.
---------------------------------------------------------------------------

As a caveat, to the degree that heavy redemptions in floating NAV
funds reduce available liquidity and credit quality of remaining fund
holdings, investors may still be incentivized to redeem early, albeit
at a NAV below $1. In this sense, floating the NAV may reduce, but not
eliminate incentives for early redemptions during market selloffs that
are present in securities markets and open-end funds more generally.
Some commenters stated that floating the NAV of stable NAV funds would
do little to reduce redemption activity during periods of market
stress, particularly given that institutional prime funds experienced
heavy redemptions in March 2020 despite having a floating NAV.\402\
Another commenter opposed a floating NAV requirement, suggesting that
it likely would not address run risk but may give the appearance of
discouraging runs.\403\ Some academic research \404\ shows that
floating the NAV in the US has not eliminated run risk in the
redemption decisions of investors in institutional funds. However, that
research does not distinguish between causal impacts of a floating NAV
requirement and investor selection effects. Specifically, the paper
does not rule out the possibility that investors that need liquidity
the most invest in floating NAV and multi-strike funds and that such
investors are also most likely to redeem in times of liquidity stress.
Yet another paper models the problem theoretically and finds that a
stable NAV can reduce risk taking by money market funds in low interest
rate environments because it can create default risk and the need to
have a buffer of safe assets, reducing risky investment when risk-free
rates fall.\405\
---------------------------------------------------------------------------

\402\ SIFMA AMG Comment Letter; ICI Comment Letter I; Western
Asset Comment Letter; Fidelity Comment Letter; Federated Hermes
Comment Letter I; JP Morgan Comment Letter; BlackRock Comment
Letter; Americans for Financial Reform Comment Letter; Comment
Letter of Madison E. Grady (Apr. 14, 2021) (``Madison Grady Comment
Letter'').
\403\ Comment Letter of Professor Jeffrey N. Gordon, Columbia
Law School (Feb. 26, 2021) (noting that money market funds should
not be treated similarly to other mutual funds because MMF investors
typically redeem en masse during periods of liquidity stress and
money market fund investments tend to be concentrated in the credit
issuances of financial firms).
\404\ See, Casavecchia, Lorenzo, Georgina Ge, Wei Li, and Ashish
Tiwari. 2021. ``Prime Time for Prime Funds: Floating NAV, Intraday
Redemptions and Liquidity Risk During Crises.'' Working paper.
\405\ See La Spada, Gabriele. 2018. ``Competition, Reach for
Yield, and Money Market Funds.'' Journal of Financial Economics
129(1): 87-110.
---------------------------------------------------------------------------

Third, floating the NAV of a broader range of money market funds
could more accurately capture their role in asset transformation and
corresponding risks. As quantified in Section III.B.3.a, retail prime
and retail tax exempt funds have some risky portfolio holdings.
Specifically, some of the underlying holdings of retail money market
funds are similar to those of institutional prime funds, which
experienced significant stress in 2020. One commenter \406\ supported
floating the NAV for government money market funds, citing redemption
pressure and run risks associated with U.S. debt ceiling negotiations
and potential credit rating downgrades of U.S. Government securities
and suggesting that all money market fund investors should be aware
that all such funds can, and do, fluctuate in value. Expanding the
floating NAV requirements to all money market funds would result in a
consistent regulatory treatment of money market funds. Moreover, it may
enhance the allocative efficiency in the money market fund industry and
may enhance competition between floating NAV and stable NAV funds. For
example, some commenters indicated that the disparate treatment of
floating NAV and stable NAV funds led to a significant migration of
institutional investments from prime and tax-exempt money market funds
to government money market funds.\407\ An alternative that would expand
the scope of the floating NAV requirement to all money market funds may
lead to outflows from government money market funds back into prime and
tax-exempt sectors.
---------------------------------------------------------------------------

\406\ See, e.g., Better Markets Comment Letter.
\407\ See, e.g., CFA Comment Letter.
---------------------------------------------------------------------------

Floating NAV alternatives would give rise to three groups of costs.
First, such alternatives may reduce the attractiveness of affected
money market funds to investors and may result in significant
reductions in the size of the money market fund sector.\408\ The
Commission understands that retail investors use money market funds as
a safe, cash-like product. To that extent, floating the NAV of some or
all stable NAV funds may lead investors of stable NAV funds to
reallocate capital into cash accounts subject to deposit
insurance.\409\ In a somewhat parallel setting, in the aftermath of the
2016 implementation of the floating NAV requirement for institutional
prime and institutional tax-exempt funds, approximately $1 trillion
left newly floating NAV funds and flowed into government money market
funds, matched by corresponding outflows from floating NAV products.
About 90% of these outflows came from the larger institutional prime
funds, while the remaining 10% came from the smaller institutional tax-
exempt funds. Thus, many investors may flee to safety in times of
stress and may be unlikely to

[[Page 7318]]

remain invested in money market funds affected by the floating NAV
alternative. Some commenters stated that a floating NAV requirement
would, indeed, diminish the appeal of money market funds relative to
other cash management vehicles.\410\ Importantly, such reallocation
effects are not necessarily suboptimal per se, if it is a result of
greater investor awareness of the risks of money market fund
investments.
---------------------------------------------------------------------------

\408\ See, e.g., SIFMA AMG Comment Letter; Western Asset Comment
Letter; Federated Hermes Comment Letter I (noting that some
investors may choose to move assets to banks or to less regulated
and less transparent products such as private funds).
\409\ See, e.g., Schwab Comment Letter.
\410\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter I;
Federated Hermes Comment Letter I; JP Morgan Comment Letter; Comment
Letter of the National Association of State Treasurers and
Government Finance Officers Association (Apr. 12, 2021) (``NAST and
GFOA Comment Letter''); Comment Letter of the State Financial
Officers Foundation and Ron Crane (Apr. 26, 2021) (``SFOF and Crane
Comment Letter''); Madison Grady Comment Letter.
---------------------------------------------------------------------------

Second, if the floating NAV alternatives resulted in a decrease in
the size of the money market fund industry, they would adversely impact
the availability of wholesale funding liquidity and access to capital
for issuers. Prior research suggests that increasingly constrained
balance sheets of regulated financial institutions after the financial
crisis reduced both their involvement in arbitrage activities and their
willingness to provide leverage to other arbitrageurs, leading to
growing mispricings across markets.\411\ Given this baseline, a
reduction of wholesale funding liquidity available to arbitrageurs may
magnify mispricings across securities markets. However, under the
alternative, wholesale funding costs would more accurately reflect true
costs of funding liquidity, since the alternative would reduce the
distortions arising out of implicit government guarantees of money
market funds. Similarly, a reduction in the size of affected money
market funds or the money market fund industry as a whole would
increase the costs of or decrease access to capital for issuers in
short-term funding markets.\412\ However, the current reliance of some
issuers on short-term financing from money market funds that is
susceptible to refinancing and run risks may be sustainable, in part,
due to perceived government backstops of money market funds and lack of
transparency to investors about the risks inherent in money market fund
investments. While the alternative would impose potentially significant
costs on issuers, it would do so by reducing cross-subsidization of
money market funds and increasing transparency about risks of money
market fund investments.
---------------------------------------------------------------------------

\411\ See, e.g., Boyarchenko, Nina, Thomas Eisenbach, Pooja
Gupta, Or Shachar, and Peter Van Tassel. 2020. ``Bank-Intermediated
Arbitrage.'' Federal Reserve Bank of New York Staff Report No. 854.
\412\ SIFMA AMG Comment Letter; ICI I; Federated Hermes Comment
Letter I; JP Morgan Comment Letter; NAST and GFOA Comment Letter
(describing increased borrowing costs for municipalities upon the
implementation of floating NAVs for institutional funds); SFOF and
Crane Comment Letter; Madison Grady Comment Letter.
---------------------------------------------------------------------------

Third, the floating NAV alternative would involve significant
operational, accounting, and tax challenges. Specifically, the
Commission is concerned that switching retail funds from stable NAV to
floating NAV may create accounting and tax complexities for some retail
investors.\413\ A floating NAV requirement may be incompatible with
popular cash management tools such as check-writing and wire transfers
that are currently offered for many stable NAV money market fund
accounts.\414\ In addition, a floating NAV alternative would involve
many of the same implementation burdens on broker-dealers, retirement
plan administrators, and other intermediaries \415\ as the proposed
amendment requiring that stable NAV funds determine that their
intermediaries are capable of transacting at non-stable prices.
---------------------------------------------------------------------------

\413\ See, e.g., ICI Comment Letter I; Federated Hermes Comment
Letter I; Madison Grady Comment Letter; Comment Letter of Carter
Ledyard Milburn (Apr. 15, 2021).
\414\ See, e.g., ICI Comment Letter I; Madison Grady Comment
Letter.
\415\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter I;
Federated Hermes Comment Letter I; Western Asset Comment Letter; JP
Morgan Comment Letter; Dreyfus Comment Letter; BlackRock Comment
Letter.
---------------------------------------------------------------------------

Importantly, the floating NAV alternative would not address three
key market failures in money market funds. First, floating the NAV may
reduce, but does not eliminate, the first mover advantage and
corresponding run incentives during selloffs. As discussed above,
floating NAV funds experienced a significant amount of redemptions in
2020. During past episodes of stress in money market funds (in 2008 and
2020), retail investor redemptions were far more limited than
redemptions out of institutional prime money market funds. Moreover, as
referenced above, in 2020 capital flowed into government money market
funds as investors fled to safety. Future redemption dynamics in stable
NAV funds may evolve as a function of investor type, risk tolerance,
investment horizons, liquidity needs, and sophistication, among others.
However, modest historical redemptions out of stable NAV funds may
suggest that they are currently less susceptible to run risk, reducing
the value of floating NAV alternatives for such funds.
Second, floating NAV alternatives would not alter economic
incentives of stable NAV fund managers to reduce risk taking. For
example, floating the NAV would not incentivize stable NAV fund
managers to hold enough liquid assets and to have low enough credit
risk to meet redemptions in times of stress; nor would it constrain
portfolio composition. Insofar as investor flows remain sensitive to
fund performance, and fund managers are compensated for performance,
money market funds may have incentives to take greater risks to deliver
higher returns. The proposed liquidity requirement amendments, while
not altering incentives of fund managers, may meaningfully constrain
money market fund portfolio composition and risk taking.
Third, floating NAV alternatives may not influence the liquidity
risk of affected money market funds as directly as the proposal. At
their core, money market funds transform capital subject to daily
redemptions into short-term debt instruments that carry liquidity and
credit risk. Some research suggests that floating the NAV would not
reduce, and may even increase risk taking incentives.\416\ However, as
can be seen from Section III.B.3.b, the distribution of market NAV
fluctuations among prime money market funds decreased around the
compliance date with the 2014 amendments. In contrast, the proposed
increases to daily and weekly liquidity requirements may directly
reduce the amount of liquidity risk in money market fund portfolios.
---------------------------------------------------------------------------

\416\ See, e.g., La Spada, Gabriele. 2018. ``Competition, Reach
for Yield, and Money Market Funds.'' Journal of Financial Economics
129(1): 87-110.
---------------------------------------------------------------------------

7. Countercyclical Weekly Liquid Asset Requirement
The PWG Report raised an alternative countercyclical weekly liquid
asset requirement approach. For instance, during periods of market
stress, the minimum weekly liquid asset threshold could decrease, for
example, by 50%. The proposal could have specified the definitions of
market stress that would trigger a change in weekly liquid asset
thresholds. Alternatively, the proposal could have specified that
decreases in weekly liquid asset thresholds would be triggered by
Commission administrative order or notice.\417\
---------------------------------------------------------------------------

\417\ See ABA Comment Letter.
---------------------------------------------------------------------------

Such alternatives could help clarify that money market funds'
liquidity buffers are meant for use in times of stress and may provide
assurance to investors that funds may utilize their liquidity reserves
to absorb redemptions.\418\ To the degree that these

[[Page 7319]]

alternatives may increase the willingness of affected funds to absorb
redemptions out of daily or weekly liquidity during times of stress,
the alternatives may reduce liquidity costs borne by fund investors and
may reduce incentives to redeem.
---------------------------------------------------------------------------

\418\ See BlackRock Comment Letter; ABA Comment Letter; mCD IP
Comment Letter; CFA Comment Letter.
---------------------------------------------------------------------------

However, an analysis of investor redemptions out of institutional
prime and institutional tax exempt funds during market stress of 2020
points to a high level of sensitivity of redemptions to threshold
effects. Thus, any decrease in regulatory minimum thresholds may create
investor concerns about liquidity stress in money market funds and
trigger an increase in investor redemptions. Moreover, under the
current baseline, rule 2a-7 does not prohibit a fund from operating
with weekly liquid assets below the regulatory minimum. The proposed
elimination of the tie between liquidity thresholds and fees and gates
under rule 2a-7may more efficiently incentivize funds to use their
liquidity buffers in times of stress, while removing threshold effects
around weekly liquidity levels.\419\
---------------------------------------------------------------------------

\419\ See JP Morgan Comment Letter (expressing the view that the
introduction of fees and gates in the 2014 reform effectively
nullified the intent of the 2010 reform's requirement that money
market funds maintain a 30% WLA minimum in order to ensure that a
fund could meet shareholder redemptions even when market conditions
have deteriorated).
---------------------------------------------------------------------------

Moreover, alternatives involving Commission orders or notices
triggering decreases in weekly liquidity thresholds may impede or slow
fund liquidity management decisions during times of market stress. In
addition, Commission action to reduce liquidity requirements may be
read as a signal of broader stress in money market funds and may
accelerate investor redemptions under stress.\420\
---------------------------------------------------------------------------

\420\ See Western Asset Comment Letter; Fidelity Comment Letter;
JP Morgan Comment Letter; SIFMA AMG Comment Letter (noting that
``[t]o the extent the Commission does consider countercyclical
weekly liquid asset requirements, SIFMA AMG urges the Commission to
further consider how the Commission could construct a
countercyclical requirement that would apply on an automatic basis,
versus requiring Commission action'').
---------------------------------------------------------------------------

8. Alternatives to the Amendments Related to Potential Negative
Interest Rates
As an alternative to the proposed amendments related to potential
negative interest rates, the proposal could have allowed stable NAV
funds to use the reverse distribution mechanism in lieu of requiring
stable NAV funds to float the NAV in the event of persistent negative
interest rates. This alternative would be consistent with the practice
of European money market funds, which used a reverse distribution
mechanism for a period of time, before the European Commission
determined this approach was not consistent with the 2016 EU money
market fund regulations. As another alternative, the proposal could
have mandated that in the event of persistent negative interest rates,
all stable NAV funds must use the reverse distribution mechanism.
Alternatives allowing (requiring) stable NAV funds to use a reverse
distribution mechanism in the event of negative fund yields would
reduce (eliminate) NAV fluctuations in a negative yield environment,
which may enhance (preserve) the use of stable NAV funds for sweep
accounting. Such alternatives may, thus, increase demand for government
and retail money market funds, with positive effects on the
availability of wholesale funding liquidity and capital formation. The
alternatives would avoid disruptions to distribution networks of stable
NAV funds if some of their intermediaries would be unable or unwilling
to upgrade systems to process transactions at a floating NAV.
However, such alternatives may decrease price transparency to
investors in stable NAV funds and may give rise to investor protection
concerns. As discussed in Section II, under a reverse distribution
mechanism, investors would observe a stable share price but a declining
number of shares for their investment when a fund generates a negative
gross yield. This may decrease the transparency and salience of
negative fund yields to investors, particularly for less sophisticated
retail investors. One commenter indicated that investors may observe a
stable share price and assume that their investment in a fund with a
stable share price is holding its value while the investment is
actually losing value over time.\421\ While disclosures could partly
mitigate such informational asymmetries, we believe that reverse
distribution mechanisms may mislead or confuse investors about the
value and performance of their investments, particularly for retail
money market fund investors.
---------------------------------------------------------------------------

\421\ Jose Joseph Comment Letter (suggesting that if money
market funds generate negative yields, ``[u]nilaterally redeeming
the shares[] by reverse distribution is like cheating'' and that
funds should instead inform shareholder and move to a floating NAV
to be fair and transparent).
---------------------------------------------------------------------------

9. Alternatives to the Amendments Related to Processing Orders Under
Floating NAV Conditions for All Intermediaries
The proposal also could have not expanded existing requirements
related to processing orders under floating NAV conditions to all
intermediaries. Under this approach, stable NAV money market funds
would not be required to keep records identifying which intermediaries
they were able to identify as being able to process orders at a
floating NAV. This alternative would avoid the costs of the proposed
amendments related to intermediaries being required to upgrade systems
if they are unable to process transactions in stable NAV funds at a
floating NAV. However, beyond negative interest rates, there are other
scenarios in which stable NAV money market funds may need to be able to
float their NAVs, such as if they break the buck due to credit events
or other market stress. Thus, this alternative could result in some
intermediaries of stable NAV money market funds being unable to process
certain transactions during severe stress, which could adversely affect
the ability of investors to access their investments and further
magnify stress in money market funds and short-term funding markets.
Therefore, expanding the floating NAV processing conditions to all
intermediaries, as proposed, would be appropriate even if we were to
permit or require stable NAV funds to use a reverse distribution
method.
10. Alternatives to the Amendments Related to WAL/WAM Calculation
The proposal would amend rule 2a-7 to require that WAM and WAL are
calculated based on the percentage of each security's market value in
the portfolio. The Commission could have instead proposed to base the
calculation on amortized cost of each portfolio security. Similar to
the proposal, such an alternative would also enhance consistency and
comparability of disclosures by money market funds in data reported to
the Commission and provided on fund websites. Thus, the alternative
would achieve the same benefits as the proposal in terms of enhancing
transparency for investors and enhancing the ability of the Commission
to assess the risk of various money market funds and increasing
allocative efficiency.
However, relative to the proposal, the alternative may give rise to
higher compliance costs. While all money market funds are required to
determine the market values of portfolio holdings, no such requirements
exist for amortized costs of portfolio securities. Thus, funds that do
not currently estimate amortized costs would be required to do so for
the WAL and WAM calculation. Moreover, amortized cost may be a poor
proxy of a security's value if market conditions change

[[Page 7320]]

drastically due to, for example, liquidity or credit stress, and if the
fund is unable to hold the security until maturity. This may distort
WAL and WAM calculations during market dislocations--when comparable
and accurate information about fund risks may be most important for
investment decisions.
11. Sponsor Support
Dilution occurs because shareholders remaining in the fund
effectively buy back shares at NAV from redeeming investors. The assets
underlying those shares are eventually sold at a price that may differ
from that NAV for the reasons described in the economic baseline,
causing dilution in some cases. The proposal could have required money
market fund sponsors to provide explicit sponsor support to cover
dilution costs. For stable NAV funds, this alternative would mean
purchasing assets so that their value remains $1 per share. For
floating NAV funds, this would require a sponsor to pay redeeming
shareholders the NAV, transfer the corresponding pro-rata assets to
their balance sheet, sell the assets, and cover the difference between
the value of those assets and the redemption NAV from their own
capital.
The proposal only considers the mitigation of one of the factors
that contributes to dilution (trading costs), but does not
significantly change current incentives around the liquidity mismatch
between money market fund assets and liabilities. In contrast, this
alternative may significantly change incentives around the liquidity
mismatch between money market fund assets and liabilities.
Specifically, this alternative would give fund sponsors a more direct
incentive to manage the amount of dilution risk they impose on a fund
via their choice of fund investments.
Directly exposing the sponsor, rather than money market fund
investors, to the dilution risk associated with the difference between
NAV and the ultimate liquidation value of the fund's underlying
securities could have several benefits. First, money market funds would
have a stronger incentive to overcome any operational impediments that
expose them to unnecessary risk. For example, funds might be
incentivized to invest in developing more accurate valuation models of
opaque assets so they can hedge their exposure to the difference
between NAV and asset liquidation prices. Second, the amount of
required operating capital to process redemptions/subscriptions would
be higher for money market funds that held relatively less liquid
securities, and money market funds would have to charge higher fees to
raise that capital. Such fees would effectively externalize the costs
of investing in less liquid assets via money market funds. As those
fees increase, money market funds that hold less liquid assets might
become less desirable to investors, and money market fund investors
might select into other structures, such as closed-end funds, that are
a more natural fit with illiquid assets. These benefits may be reduced
to the degree that the sponsor support requirement may incentivize
money market funds to take additional risks to recoup the sponsor's
costs or may incentivize fund managers to increase risk taking due to
the backstop of the sponsor support.\422\
---------------------------------------------------------------------------

\422\ See JP Morgan Comment Letter; ICI Comment Letter I.
---------------------------------------------------------------------------

Such an alternative approach may significantly disrupt the money
market fund industry. First, it would make sponsoring money market
funds a more capital intensive business, which might reduce or create
barriers to entry into the money market fund industry, disadvantage
smaller funds and fund complexes, and increase concentration.\423\
Second, it could cause fund sponsors to opt, instead, for other open-
end funds, ETFs, or closed-end funds as vehicles for certain less
liquid assets. Third, it may reduce the attractiveness of money market
funds to investors as it may reduce fund yields and the number of
available money market funds.\424\ The alternative, may thus,
significantly reduce the number of fund sponsors offering money market
funds and the number of money market funds available to investors.
Importantly, we recognize that some aspects of the proposal--such as
the proposed swing pricing amendments, the proposed increases to
liquidity requirements, and the proposed amendments related to negative
interest rates--may reduce the attractiveness of affected money market
funds for investors and the size of the money market fund sector. These
adverse effects may flow through to institutions, such as banks, and to
leveraged participants, such hedge funds, that rely on banks for
liquidity and capital formation.
---------------------------------------------------------------------------

\423\ See, e.g., Western Asset Comment Letter; Fidelity Comment
Letter; State Street Comment Letter; BlackRock Comment Letter; JP
Morgan Comment Letter (stating that bank-affiliated sponsors would
likely be required to hold capital against any potential support
obligation).
\424\ See Western Asset Comment Letter; Federated Hermes I
Comment Letter.
---------------------------------------------------------------------------

The effects of the sponsor support alternative on investors may be
mixed. On the one hand, sponsor support may increase the ability of
investors to redeem their shares in full without bearing liquidity
costs. On the other hand, sponsor support could lead some investors to
believe that their investments carry no risk and may make investors
less discerning in their choice of money market fund allocations.\425\
Moreover, sponsor support reduces investor risk only to the degree that
fund sponsors are well capitalized and easily capable of providing
sponsor support. Uncertainty surrounding the ability of the sponsor to
provide support to the money market fund could trigger a wave of
shareholder redemptions, particularly during stressed conditions.\426\
---------------------------------------------------------------------------

\425\ See Federated Hermes I Comment Letter; ICI I Comment
Letter; Carter, Ledyard, Milburn Comment Letter.
\426\ Federated Hermes I Comment Letter.
---------------------------------------------------------------------------

12. Disclosures
a. Eliminating Website Disclosure of Fund Liquidity Levels
The proposal could have eliminated the requirement that money
market funds post their daily and weekly liquid assets on their
websites. As discussed above, the Commission understands that the
public nature of fund liquid asset disclosures, in combination with the
regulatory thresholds for the potential imposition of redemption fees
and gates, may have triggered a run on institutional money market funds
and made other funds reluctant to use liquid assets to absorb
redemptions if it meant approaching or falling below regulatory
thresholds. The proposal would partly mitigate run incentives
surrounding disclosures of daily liquid assets, by removing the tie
between liquid assets and the potential imposition of fees and gates,
but also increasing minimum daily and weekly liquidity requirements and
imposing a requirement to promptly report liquidity threshold events.
Moreover, money market funds play an important asset transformation
role and inherently carry liquidity risks. The Commission believes that
public disclosures of money market fund liquidity convey important
information to investors about the liquidity risks of their
investments.
b. Alternatives to the Proposed Form N-MFP Amendments
We could have proposed Form N-MFP amendments without including some
or all of the proposed new collections of information. For example, the
proposal could have amended Form

[[Page 7321]]

N-MFP without requiring new disclosures related to repurchase agreement
transactions or related to investor concentration and composition.
While these alternatives may have reduced compliance burdens compared
to the proposal, compliance with disclosure requirements may involve
significant fixed costs. As a result, the elimination of one or several
items from the proposed amendments may not lead to a proportional
reduction in compliance burdens. Moreover, information about repurchase
agreement transactions, fund liquidity management, investor
concentration and composition, and sales of securities into the market
would provide important benefits of transparency for investors and
would enhance Commission oversight.
The proposal would require the disclosure of every swing factor
applied in the reporting period by date. Alternatively, the proposal
could have required the disclosure of less information about when the
fund swings the NAV. For example, the proposal could have required
disclosure of the lowest, median, and highest swing factor a fund
applied in a given reporting period. Alternatives proposing less
information about fund swing pricing practices and eliminating current
website disclosures of daily fund flows would reduce the scope of the
economic benefits and costs of the proposed amendments described above.
To the degree that disclosures of swing factors may make swing factors
more salient to investors and may lead funds to compete on swing
factors, alternatives proposing less disclosure about swing factors can
reduce those effects. Moreover, to the degree that granular disclosure
about historical swing factors can incentivize or inform strategic
redemption behavior, alternatives involving less disclosure about swing
factors can reduce those effects.
c. Alternatives to the Proposed Form N-CR Amendments
The proposal could have required money market funds to make notices
concerning liquidity threshold events public with a delay (e.g., 15,
30, or 60 days). The proposal alternatively could have required that
some or all information about the liquidity threshold event be kept
confidential upon filing. Under the baseline, such funds are required
to report daily and weekly liquid assets daily on fund websites. To the
degree that the publication of such notices gives investors additional
information about fund liquidity management and can trigger investor
redemptions out of funds with low levels of weekly and daily liquid
assets, the alternatives may reduce the risk of redemptions around
liquidity thresholds and the increase the willingness of funds to
absorb redemptions out of their weekly liquidity relative to the
proposal. However, relative to the proposal, the alternatives would
reduce the availability of a central source that investors could use to
identify when money market funds fall more than 50% below liquidity
requirements. The delayed reporting alternative also would reduce the
amount of information available to investors surrounding the context
for the liquidity threshold events as notices are likely to clarify
reasons for the threshold event. Thus, the alternative would reduce
transparency for investors around liquidity management of affected
money market funds, which may reduce allocative efficiency. Notably, a
delay in publication of the notices may increase staleness of the
information in the notices.
In addition, the proposal could have amended Form N-CR to include
some of the proposed new collections of information on Form N-MFP. For
example, the proposal could have amended Form N-CR to include
information about sales of securities into the market of prime funds
that exceed a particular size. This alternative would enhance the
timeliness of such reporting. Thus, the alternative may enhance
transparency about fund liquidity management for investors, which may
enhance informational and allocative efficiency and Commission
oversight. However, the alternative would increase direct reporting
burdens related to the filing of Form N-CR--costs that may flow through
in part or in full to end investors in the form of fund expenses.
Moreover, timely reporting of prime funds' sales of portfolio
securities may signal fund liquidity stress to investors even where
funds may be able to maintain their daily and weekly liquidity levels.
This may influence investor decisions to redeem out of reporting funds;
thus, relative to the proposal, the alternative may place heavier
redemption pressure on reporting funds.
With respect to the proposed structured data requirement for Form
N-CR, the proposal could have required Form N-CR to be submitted in the
Inline eXtensible Business Reporting Language (Inline XBRL), rather
than the proposed N-CR-specific XML. As with N-CR-specific XML, Inline
XBRL is a structured data language and would provide similar benefits
to investors (e.g., facilitating analysis of the event-related
disclosures reported by money market funds on Form N-CR and thereby
providing more transparency into potential risks associated with money
market funds). From a filer compliance perspective, money market funds
have experience complying with Inline XBRL compliance requirements,
because they are required to tag prospectus risk/return summary
disclosures on Form N-1A in Inline XBRL. This existing experience would
counter the incremental implementation cost of complying with an Inline
XBRL requirement under the alternative.\427\
---------------------------------------------------------------------------

\427\ For example, registered open-end management investment
companies (including money market funds) must tag their Form N-1A
prospectus risk/return summary disclosures in Inline XBRL. See
Instruction C.3.g to Form N-1A; 17 CFR 232.405(b)(2).
---------------------------------------------------------------------------

However, unlike N-CR-specific XML, which the Commission would
create specifically for Form N-CR submissions on EDGAR, Inline XBRL is
an existing data language that is maintained by a public standards
setting body, and it is used for different disclosures across various
Commission filings (and for uses outside of regulatory disclosures).
Due to the number of individual transactions that might be reported as
Form N-CR data and the constrained nature of the content of Form N-CR
and the absence of a clear need for the N-CR disclosures to be used
outside the Form N-CR context, the alternative to include an Inline
XBRL requirement might result in formatting for human readability of
tabular data within a web browser that provides no additional
analytical insight. This would likely include more complexity than is
called for by the disclosures on Form N-CR, thus potentially making the
disclosures more burdensome to use for analysis and possibly muting the
benefits to investors of a structured data requirement, compared to the
proposed N-CR-specific XML requirement.
d. Alternatives to the Proposed Amendments to Form N-1A
The proposal could have required more information relative to the
proposal about how affected money market funds implement swing pricing.
Alternatively, the proposal could have required the disclosure of less
information than proposed about when the fund swings the NAV. Expanding
disclosure requirements relative to the proposal would help better
inform investors about swing pricing practices of different funds and
could help liquidity seeking investors make more efficient capital
allocation decisions. Similarly, alternatives proposing less

[[Page 7322]]

information about fund swing pricing practices and eliminating current
website disclosures of daily fund flows would reduce the scope of the
economic benefits and costs of the proposed amendments described above.
The proposed disclosures may inform investors about swing pricing
that may be applied to their redemptions, while not being so granular
as to incentivize strategic investor behavior. Importantly, the
proposed swing pricing approach would involve fewer incentives for
strategic behavior and runs, compared to the baseline redemption gates
with a transparent liquidity trigger for two reasons. First, under the
proposed swing pricing approach, strategic early redemptions are more
likely to cause the fund to swing. Second, swinging the NAV benefits
investors staying in the fund by recapturing the dilution costs that
redeeming investors impose on the fund.
13. Capital Buffers
The PWG Report also discussed the alternative capital buffer
requirement. For example, the proposal could have required that money
market funds maintain a NAV buffer, or a specified amount of additional
assets available to absorb daily fluctuations in the value of the
fund's portfolio securities.\428\ For example, one option would require
that stable NAV money market funds have a risk-based NAV buffer of up
to 1% to absorb day-to-day fluctuations in the value of the funds'
portfolio securities. Floating NAV money market funds could reserve
their NAV buffers to absorb fund losses under rare circumstances only,
such as when a fund suffers a large drop in NAV or is closed. The
required minimum size of a fund's NAV buffer could be determined based
on the composition of the money market fund's portfolio, with specified
buffer requirements for daily liquid assets, other weekly liquid
assets, and all other assets.
---------------------------------------------------------------------------

\428\ See, e.g., Lewis, Craig. April 6, 2015. ``Money Market
Fund Capital Buffers,'' available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2687687; See also Hanson, Samuel G., David S.
Scharfstein, and Adi Sunderam. May 2014. ``An Evaluation of Money
Market Fund Reform Proposals,'' available at https://www.imf.org/external/np/seminars/eng/2013/mmi/pdf/Scharfstein-Hanson-Sunderam.pdf.
---------------------------------------------------------------------------

Some commenters on the PWG Report expressed support of capital
buffers, indicating that such a provision could provide some protection
from losses, including the default of a major asset or certain market
fluctuations, but would not by itself prevent all investor runs.\429\
Another commenter stated that a capital buffer could enable money
market funds to sustain broad losses without resorting to fire sales
that further depress share values, and would also increase investor
confidence about a fund's ability to withstand periods of market
turmoil.\430\ Similarly, some commenters supported capital buffers as a
source of strength if redemptions or declining asset values began to
affect a fund.\431\ One commenter stated that a capital buffer is
preferable to sponsor support or potential government backstops because
investors would understand the scale and operation of the buffer in
advance of its deployment.\432\ One commenter stated that a capital
buffer should be required if money market funds are provided access to
Federal Reserve liquidity backstops.\433\
---------------------------------------------------------------------------

\429\ See, e.g., CFA Comment Letter; Systemic Risk Council
Comment Letter.
\430\ See, e.g., Better Markets Comment Letter (calculating that
a sufficient buffer would need to be larger than the 3.9% of losses
that money market funds have incurred in the past).
\431\ See, e.g., Prof. Zaring Comment Letter; Comment Letter of
Fermat Capital Management, LLC (Mar. 2, 2021).
\432\ See, e.g., Better Markets Comment Letter.
\433\ See, e.g., Systemic Risk Council Comment Letter.
---------------------------------------------------------------------------

The alternative may have four primary benefits. First, it could
preserve the stable share price of money market funds with stable NAV
and could reduce NAV variability in floating NAV money market funds.
Money market funds that are supported by a NAV buffer would be more
resilient to redemptions and liquidity stress in their portfolios than
money market funds without a buffer. This may reduce shareholders'
incentive to redeem shares quickly in response to small losses or
concerns about the liquidity of the money market fund portfolio,
particularly during periods of severe liquidity stress.
Second, a NAV buffer would require money market funds to provide
explicit capital support rather than the implicit and uncertain support
that is permitted under the current regulatory baseline. This would
require funds to internalize some of the cost of the discretionary
capital support sometimes provided to money market funds and to define
in advance how losses will be allocated. In addition, a NAV buffer
could reduce fund managers' incentives to take risk beyond what is
desired by fund shareholders because investing in less risky securities
reduces the probability of buffer depletion.
Third, a NAV buffer may also provide counter-cyclical capital to
the money market fund industry. Once a buffer is funded it remains in
place regardless of redemption activity. With a buffer, redemptions
increase the relative size of the buffer because the same dollar buffer
now supports fewer assets. The NAV buffer strengthens the ability of
the fund to absorb further losses, reducing investors' incentive to
redeem shares.
Fourth, by reducing the NAV variability in money market funds, a
NAV buffer may facilitate and protect capital formation in short-term
financing markets during periods of modest stress. To the degree that
funds may avoid trading when markets are stressed, they may contribute
to further illiquidity in short-term funding markets. A NAV buffer
could enable funds to absorb small losses and thus could reduce this
tendency. Thus, by adding resiliency to money market funds and
enhancing their ability to absorb losses, a NAV buffer may benefit
capital formation in the long term. A more stable money market fund
industry may produce more stable short-term funding markets, which
could provide more reliability as to the demand for short-term credit
to the economy.
The alternative may involve both direct and indirect costs. In
terms of direct costs, capital buffer requirements may be challenging
to design and administer.\434\ From the standpoint of design of capital
buffers, calibrating the appropriate size of the buffer as well as
establishing the parameters for when a floating NAV fund should use its
NAV buffer could present operational and implementation difficulties
and, if not done effectively, could contribute to self-fulfilling runs
on funds experiencing large redemptions. From the standpoint of
administering capital buffers, floating NAV funds would need to
establish policies and procedures around the use of buffers,
replenishing capital buffers when they are depleted and raising
requisite financing, regulatory reporting, and investor disclosures
about buffers, among other things. Depending on how a capital buffer is
structured (e.g., as sponsor provided capital or as a subordinated
share class requiring shareholder approval), there may be other
administrative, accounting, tax, and legal challenges and costs for
fund sponsors and investors.
---------------------------------------------------------------------------

\434\ See, e.g., CCMC Comment Letter; Schwab Comment Letter;
Northern Trust Comment Letter; Western Asset Comment Letter;
Fidelity Comment Letter; State Street Comment Letter; GARP Risk
Institute Comment Letter.
---------------------------------------------------------------------------

The alternative may also involve three sets of indirect costs.
First, the alternative would result in opportunity costs associated
with maintaining a NAV buffer.\435\ Those contributing to

[[Page 7323]]

the buffer would deploy valuable scarce resources to maintain a NAV
buffer rather than being able to use the funds elsewhere. Estimates of
these opportunity costs are not possible because the relevant data is
not currently available to the Commission. Second, entities providing
capital for the NAV buffer, such as the fund sponsor, would expect to
be paid a return that sets the market value of the buffer equal to the
amount of the capital contribution. Since a NAV buffer is designed to
absorb the same amount of risk regardless of its size, the promised
yield, or cost of the buffer, increases with the relative amount of
risk it is expected to absorb (also known as a leverage effect).\436\
Third, money market funds with buffers may avoid holding riskier short-
term debt securities (like commercial paper) and instead hold a higher
amount of low yielding investments like cash, Treasury securities, or
Treasury repos. This could lead money market funds to hold more
conservative portfolios than investors may prefer, given tradeoffs
between principal stability, liquidity, and yield. Moreover, the costs
of establishing and maintaining a capital buffer would decrease returns
to fund investors.\437\ The increased costs and decreased returns of a
capital buffer requirement may decrease the size of the money market
fund sector, which would affect short-term funding markets, and could
lead to increased industry concentration.\438\ Moreover, this may alter
competition in the money market fund industry as capital buffer
requirements may be easier to comply with for bank-sponsored funds,
funds that are members of large fund families, and funds that have a
large parent.
---------------------------------------------------------------------------

\435\ Some commenters noted that it would take a substantial
amount of time to raise a capital buffer by retaining fund earnings.
See e.g., ICI Comment Letter I; Federated Hermes Comment Letter I
(noting also that the issuance of a subordinated class of shares
would go against the principles of the Investment Company Act that
limit the use of leverage and the issuance of multiple classes of
shares). One commenter proposed that a capital buffer be financed
through the issuance of subordinated shares that would absorb losses
before ordinary shareholders. See Prof. Hanson et al. Comment Letter
(proposing a share class of approximately 3-4% of assets, with an
estimated reduction in yield to ordinary shareholders of
approximately 0.05%). Another commenter supported the development of
contingent financing facilities to be provided by non-bank private
investors. See Fermat Capital Comment Letter. Other commenters
stated that the addition of a subordinated class of shares would add
complexity to the industry and disproportionately affect smaller
funds and new entrants. See also State Street Comment Letter
(stating ``we understand this proposal was considered during
previous rounds of reform, but it was the SEC itself that questioned
whether this would be a meaningful or effective solution'').
\436\ The leverage effect reflects the concept that higher
leverage levels induce an equity holder to demand higher returns to
compensate for the higher risk levels.
\437\ See, e.g., SIFMA AMG Comment Letter; CCMC Comment Letter;
Northern Trust Comment Letter; Fidelity Comment Letter; Federated
Hermes I Comment Letter; CCMR Comment Letter.
\438\ See, e.g., SIFMA AMG Comment Letter; ICI I Comment Letter
(stating that requiring advisers to take a first-loss position would
be a radical departure from the current role that fund advisers play
under the federal securities laws); Western Asset Comment Letter;
Fidelity Comment Letter; JP Morgan Comment Letter; Institute of
International Finance Comment Letter; BlackRock Comment Letter; GARP
Risk Institute Comment Letter; CCMR Comment Letter.
---------------------------------------------------------------------------

Importantly, capital buffers may not have prevented the liquidity
stresses that arose in March 2020.\439\ A NAV buffer does not protect
shareholders completely from the possibility of heightened rapid
redemption activity during periods of market stress, particularly in
periods where the buffer is at risk of depletion, such as during March
2020. As the buffer becomes impaired (or if shareholders believe the
fund may suffer a loss that exceeds the size of its NAV buffer),
shareholders have an incentive to redeem shares quickly because, once
the buffer fails, and shareholders will experience sudden losses. At
the same time, capital buffers could lead some investors to believe
that their investments carry no risk, which may influence investor
allocations and adversely impact allocative efficiency. Moreover,
capital buffers may not have the same benefits for investment products
such as money market funds, where the investor bears the risk of loss,
as they do for banks.
---------------------------------------------------------------------------

\439\ See, e.g., SIFMA AMG Comment Letter; Northern Trust
Comment Letter; Fidelity Comment Letter; State Street Comment
Letter; CCMR Comment Letter (stating that capital buffers are
intended to reduce credit risk for investors, but the redemptions
from money market funds in March 2020 were not driven by credit
risk). See also Americans for Financial Reform Comment Letter
(expressing some support for a capital buffer but stating that a
capital buffer alone would not appear sufficient to absorb losses
associated with the investor redemptions in March 2020).
---------------------------------------------------------------------------

14. Minimum Balance at Risk
Another alternative discussed in the PWG Report is minimum balance
at risk. Specifically, the proposal could have required that a portion
of each shareholder's recent balance in a money market fund be
available for redemption only with a time delay. Under the alternative,
all shareholders could redeem most of their holdings immediately
without being restricted by the minimum balance at risk. This
alternative also could include a requirement to put a portion of
redeeming investors' holdback shares first in line to absorb losses
that occur during the holdback period. A floating NAV fund could be
required to use a minimum balance at risk mechanism to allocate losses
only under certain rare circumstances, such as when the fund has a
large drop in NAV or is closed.
Such an alternative could provide some benefits to money market
funds. First, it would force redeeming shareholders to pay for the cost
of liquidity during periods of severe market stress when liquidity is
particularly costly. Such a requirement could create an incentive
against shareholders participating in a run on a fund facing potential
losses of certain sizes because shareholders will incur greater losses
if they redeem.\440\
---------------------------------------------------------------------------

\440\ See, e.g., Americans for Financial Reform Comment Letter;
CFA Comment Letter; Robert Rutkowski Comment Letter (support as an
alternative to swing pricing).
---------------------------------------------------------------------------

Second, it would allocate liquidity costs to investors demanding
liquidity when the fund itself is under severe stress. This would be
accomplished primarily by making redeeming shareholders bear first
losses when the fund first depletes its buffer and then the fund's
value falls below its stable share price within 30 days after their
redemption. Redeeming shareholders subject to the holdback are the ones
whose redemptions may have contributed to fund losses if securities are
sold at fire sale prices to satisfy those redemptions. If the fund
sells assets to meet redemptions, the costs of doing so would be
incurred while the redeeming investor is still in the fund because of
the delay in redeeming holdback shares.
Third, the alternative would provide the fund with a period of time
to obtain cash to satisfy the holdback portion of a shareholder's
redemption. This may give the fund time for distressed securities to
recover when, for example, the market has acquired additional
information about the ability of the issuer to make payment upon
maturity. The alternative would provide time for potential losses in
fund portfolios to be avoided since distressed securities could trade
at a heavy discount in the market but may ultimately pay in full at
maturity.
Implementing minimum balance at risk could involve operational
challenges and direct implementation costs. The alternative would
involve costs to convert existing shares or issue new holdback and
subordinated holdback shares, changes to systems that would allow
record-keepers to account for and track the minimum balance at risk and
allocation of unrestricted, holdback or subordinated holdback shares in
shareholder accounts, and systems to calculate and reset average
account balances and

[[Page 7324]]

restrict redemptions of applicable shares.\441\ These costs could vary
significantly among funds depending on a variety of factors. In
addition, funds subject to a minimum balance at risk may have to amend
or adopt new governing documents to issue different classes of shares
with different rights: Unrestricted shares, holdback shares, and
subordinated holdback shares. The costs to amend governing documents
would vary based on the jurisdiction in which the fund is organized and
the amendment processes enumerated in the fund's governing documents,
including whether board or shareholder approval is necessary. The costs
of obtaining shareholder approval, amending governing documents, or
changing domicile would depend on a number of factors, including the
size and the number of shareholders of the fund.
---------------------------------------------------------------------------

\441\ See, e.g., SIFMA AMG Comment Letter; Western Asset Comment
Letter; Fidelity Comment Letter; ICI Comment Letter I; JP Morgan
Comment Letter; BlackRock Comment Letter.
---------------------------------------------------------------------------

In addition, this alternative would give rise to a number of
indirect costs. First, the alternative may have different and unequal
effects on investors in stable NAV and floating NAV money market funds.
During the holdback period, investors in a stable NAV fund would only
experience losses if the fund breaks the buck. Investors in a floating
NAV fund, however, are always exposed to changes in the fund's NAV and
would continue to be exposed to such risk for any shares held back.
These differential effects could reduce investor demand for floating
NAV money market funds.
Second, under the MBR alternative, there would still be an
incentive to redeem in times of fund and market stress. The alternative
could force shareholders that redeem more than a certain percent of
their assets to pay for any losses, if incurred, on the entire
portfolio on a ratable basis. The contingent nature of the way losses
are distributed among shareholders forces early redeeming investors to
bear the losses they are trying to avoid. Money market funds may choose
to meet redemptions by selling assets that are the most liquid and have
the smallest capital losses. Once a fund exhausts its supply of liquid
assets, it may sell less liquid assets to meet redemption requests,
possibly at a loss. If in fact assets are sold at a loss, the value of
the fund's shares could be impaired, motivating shareholders to be the
first to leave.
Third, minimum balance at risk may reduce the utility of money
market funds for investors.\442\ Many current investors who value
liquidity in money market funds may shift their investment to other
short-term investments that offer higher yields or fewer restrictions
on redemptions.\443\ A reduction in the number of money market funds
and/or the amount of money market fund assets under management as a
result of any further money market fund reforms would have a greater
negative impact on money market fund sponsors whose fund groups consist
primarily of money market funds, than on sponsors that offer a more
diversified range of mutual funds or engage in other financial
activities (e.g., brokerage). Given that one of the largest money
market funds' commercial paper exposures is to issuances by financial
institutions, a reduction in the demand of money market instruments may
have an impact on the ability of financial institutions to issue
commercial paper.
---------------------------------------------------------------------------

\442\ See, e.g., SIFMA AMG Comment Letter; Western Asset Comment
Letter; Fidelity Comment Letter; ICI I Comment Letter; Federated
Hermes I Comment Letter; Healthy Markets Association Comment Letter.
\443\ See, e.g., SIFMA AMG Comment Letter; Western Asset Comment
Letter; Fidelity Comment Letter; ICI I Comment Letter; JP Morgan
Comment Letter; State Street Comment Letter; Healthy Markets
Association Comment Letter; mCD IP Comment Letter.
---------------------------------------------------------------------------

Fourth, the alternative may not have addressed the liquidity
stresses that occurred in March 2020.\444\ The minimum balance at risk
alternative generally impairs the liquidity of money market fund
investments. To the degree that many investor redemptions in March 2020
were driven by exogenous liquidity needs (arising out of the Covid-19
pandemic), investors would still have strong incentives to redeem
assets they could in order access liquidity.
---------------------------------------------------------------------------

\444\ See, e.g., CCMC Comment Letter; SIFMA AMG Comment Letter;
ICI I Comment Letter; Fidelity Comment Letter.
---------------------------------------------------------------------------

15. Liquidity Exchange Bank Membership
The PWG Report also discussed an alternative requiring prime and
tax-exempt money market funds to be members of a private liquidity
exchange bank (``LEB''). The LEB would be a chartered bank that would
provide a liquidity backstop during periods of market stress. Money
market fund members and their sponsors would capitalize the LEB through
initial contributions and ongoing commitment fees, for example. During
times of market stress, the LEB would purchase eligible assets from
money market funds that need cash, up to a maximum amount per fund. The
intent of the LEB would be to diminish investors' incentive to redeem
in times of market stress while having the benefit of pooling liquidity
resources rather than requiring each money market fund to hold higher
levels of liquidity separately.
This alternative, as well as broader industry-wide insurance
programs, could mitigate the risk of liquidity runs in money market
funds and their detrimental impacts on investors and capital
formation.\445\ The alternative could replace money market funds'
historical reliance on discretionary sponsor support, which has covered
capital losses in money market funds in the past but, as discussed
above, also contributes to these funds' vulnerability to liquidity
runs. One commenter suggested that some sort of collective emergency
insurance fund would be helpful to reduce the moral hazard of funds
that may be reliant on future Federal Reserve facilities in times of
market stress.\446\
---------------------------------------------------------------------------

\445\ See, e.g., James Setterlund Comment Letter; Prof. Zaring
Comment Letter; Systemic Risk Council Comment Letter.
\446\ See James Setterlund Comment Letter.
---------------------------------------------------------------------------

Several commenters on the PWG Report opposed an LEB option for
money market funds.\447\ These commenters expressed concern that the
establishment and continued funding of an LEB for prime and tax-exempt
money market funds would be operationally complex and impractical.\448\
Further, commenters suggested that a significant amount of capital
would be necessary to create a meaningful liquidity backstop for money
market funds and that such costs would be burdensome for sponsors and
investors. Commenters suggested that if LEB membership were required,
prime and tax-exempt money market funds could no longer exist in a
manner that is attractive to investors due to increased fees and, as a
result, advisers would simply stop sponsoring such products.\449\ One
commenter pointed out that even a well-capitalized LEB

[[Page 7325]]

would struggle to absorb an adequate level of assets during the March
2020 downturn.\450\
---------------------------------------------------------------------------

\447\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter I;
Fidelity Comment Letter; Western Asset Comment Letter.
\448\ See ICI Comment Letter I (stating that ``[o]ver ten years
ago, ICI, with assistance from its members, outside counsel, and
consultants, spent about 18 months developing a preliminary
framework for a private liquidity facility, including how it could
be structured, capitalized, governed, and operated. There were many
drawbacks, limitations, and challenges to creating such a facility
that we described in our framework and that are noted in the PWG
Report. Each of these impediments remains today''); see also State
Street Comment Letter (stating ``we understand this proposal was
considered during previous rounds of reform, but it was the SEC
itself that questioned whether this would be a meaningful or
effective solution'').
\449\ SIFMA AMG Comment Letter; ICI Comment Letter I; Western
Asset Comment Letter.
\450\ JP Morgan Comment Letter.
---------------------------------------------------------------------------

Moreover, some commenters also expressed concern that an LEB that
does not have sufficient liquidity would risk a run by causing investor
alarm, similar to how redemption behavior increased in March 2020 when
a fund's level of weekly liquid assets neared 30%.\451\ Some commenters
also suggested that the establishment of a chartered LEB would
introduce complex banking regulatory issues and inherent conflicts of
interest.\452\ Further, commenters expressed that any reform that
involves pooling liquidity resources that are shared by all members
could create moral hazard concerns by forcing more responsible funds
that invest in safer assets to bear the costs of supporting less
responsible funds.\453\ Lastly, commenters suggested that to be viable,
the LEB would need access to the Federal Reserve discount window.\454\
---------------------------------------------------------------------------

\451\ SIFMA AMG Comment Letter; Fidelity Comment Letter.
\452\ SIFMA AMG Comment Letter; Fidelity Comment Letter;
Institute of International Finance Comment Letter (noting that
``[t]he Federal Reserve's Section 23A restrictions on affiliate
transactions would impose significant constraints on LEB support to
MMFs absent a clear exemption.''); see also mCP (stating that
``unless an exemption from a normal bank regulations were granted,
that would put the LEB in clear breach of the Liquidity Coverage
Ratio . . .'').
\453\ SIFMA AMG Comment Letter; Fidelity Comment Letter; Western
Asset Comment Letter.
\454\ See, e.g., JP Morgan Comment Letter; Fidelity Comment
Letter; SIFMA AMG Comment Letter; Institute of International Finance
Comment Letter. As the Commission recognized in 2014, ``access to
the discount window would raise complicated policy considerations
and likely would require legislation. In addition, such a facility
would not protect money market funds from capital losses triggered
by credit events as the facility would purchase securities at the
prevailing market price.'' See 2014 Adopting Release, supra footnote
12, at paragraph accompanying n.2118. We believe that an LEB without
such additional loss protection may not sufficiently prevent
widespread liquidity induced runs on money market funds similar to
those experienced in March 2020.
---------------------------------------------------------------------------

This alternative may not significantly reduce the contagion effects
from heavy redemptions at money market funds without undue costs.
Membership in the LEB has the potential to create moral hazard and
encourage excessive risk-taking by money market funds, given the
difficulties and costs involved in creating effective risk-based
pricing for insurance and additional regulatory structure to offset
this incentive. If the alternative actually increases moral hazard and
decreases corresponding market discipline, it may in fact increase
rather than decrease money market funds' susceptibility to liquidity
runs. These incentives may be countered by imposing a very costly
regulatory structure and risk-based pricing system; however, related
costs are likely to be passed along to investors and may reduce the
attractiveness of money market funds relative to bank products and
other cash management tools. Finally, it may be difficult to create
private insurance at an appropriate cost and of sufficient capacity for
a several trillion-dollar industry that tends to have highly correlated
tail risk.

E. Effects on Efficiency, Competition, and Capital Formation

The proposed amendments are intended to reduce run risk, mitigate
the liquidity externalities transacting investors impose on non-
transacting investors, and enhance the resilience of money market
funds. To the degree that the proposal would increase the resilience of
money market funds, it may enhance the availability of wholesale
funding liquidity to market participants and enhance their ability to
raise capital, particularly during severe stress. The proposed
amendments may also reduce the probability that runs would result in
future government interventions, inform investors about liquidity risks
of their money market fund investments, and enhance the ability of
investors to optimize their portfolio allocations.
The proposal may enhance the efficiency of liquidity provision.
Specifically, money market funds and issuers of short-term debt that
money market funds hold benefit from perceived government backstops and
the safety and soundness of the financial system. When the liquidity of
underlying assets in money market fund portfolios is impaired,
investors benefit from selling money market fund shares before or
instead of selling assets that funds hold. Thus, in times of market
stress, liquidity demand may be directed to money market funds even
though the relative cost of liquidity in money market funds may be
greater, resulting in inefficient provision of liquidity. While the
proposal would not result in money market funds fully internalizing the
costs of investing in illiquid assets, to the degree that the proposal
would reduce the need for future implicit government backstops in times
of stress, the proposal may result in more efficient provision of
liquidity.
The proposed disclosure requirements are expected to enhance
informational efficiency. To the degree that some investors may
currently be uninformed about liquidity risks of money market fund
investments, the proposed swing pricing and disclosure requirements may
increase transparency about liquidity costs transacting investors
impose on remaining fund investors and liquidity risks in money market
funds. While many investors may use money market funds as cash
equivalents, money market funds use capital subject to daily or
intraday redemptions to invest in portfolios of risky assets. This
gives rise to liquidity risk and liquidity externalities between
transacting and non-transacting investors, as discussed throughout the
release. The possibility that a fund's NAV may swing as a result of net
redemptions, as well as the proposed disclosure requirements may help
inform investors about the liquidity risks inherent in money market
funds and liquidity costs of redemptions, particularly during times of
stress. To the degree that greater transparency about liquidity risk of
money market funds may lead some risk averse investors to use other
instruments, such as banking products, in lieu of money market funds
for cash management, allocative efficiency may increase.
The proposal may have two groups of competitive effects. First,
proposed increases in liquidity requirements may affect competition
among prime money market funds. As discussed in detail in Section
III.C.2, many affected funds already have liquidity levels that would
meet or exceed the proposed minimum daily and weekly liquid asset
thresholds. However, other funds would have to rebalance their
portfolios to come into compliance with the proposed amendments, which
may reduce the yields they are able to offer investors. The proposed
amendments may, thus improve the competitive standing of funds that
currently have higher levels of daily and weekly liquidity relative to
funds that currently do not and may, thus, be able to offer higher
yields to investors.
Second, the proposed amendments may influence the competitive
standing of prime money market funds relative to government money
market funds. The proposed elimination of gates and fees and swing
pricing may reduce the risk of runs on prime money market funds and may
protect the value of investments of non-transacting shareholders.
However, swing pricing may increase the variability of prime money
market funds net asset values, while higher liquidity requirements may
reduce the yields they are able to offer to investors. This may reduce
their attractiveness to investors and may result in a greater
reallocation of capital from prime to government funds, bank deposit
accounts, insurance company

[[Page 7326]]

separate accounts, and other types of liquid vehicles.
The proposed increases in minimum liquidity thresholds may reduce
access to and increase costs of raising capital for some issuers of
short-term debt, thereby potentially negatively affecting capital
formation. Moreover, to the degree that raising liquidity thresholds
may reduce money market fund yields and to the extent that swing
pricing may increase uncertainty about investors' redemption costs, the
proposal may reduce the viability of prime money market funds as an
asset class. This reallocation need not be inefficient since government
money market funds or banking products may be more suitable for cash
management by liquidity risk averse investors. Moreover, banking
entities insured by the FDIC pay deposit insurance assessments, whereas
money market funds do not internalize any portion of government
interventions or externalities they impose on other investors in the
same asset classes.
Nevertheless, potential decreases in the size of the prime money
market fund sector may have adverse follow-on effects on capital
formation and the availability of wholesale funding liquidity to
issuers and institutions seeking to arbitrage mispricings across
markets. Issuers may respond to such changes by shifting their
commercial paper and certificate of deposit issuance toward longer
maturity instruments, which may reduce their exposure to rollover risk.
These aspects of the proposal may be borne disproportionately by
global or foreign banking organizations that rely on money market funds
for dollar funding. Specifically, academic research has explored the
effects of outflows from prime money market funds into government money
market funds around the 2014 money market fund reforms on business
models and lending activities of foreign banking organizations in the
U.S. To the degree that the proposed amendments would result in further
outflows from prime money market funds, banking organizations reliant
on unsecured funding from money market funds may reduce arbitrage
positions and investments in illiquid assets, rather than reducing
lending.\455\ However, reduced wholesale dollar funding from money
market funds may also lead to a reduction in capital formation through
dollar lending by affected banks, which may reduce the dollar borrowing
ability of firms reliant on affected banks.\456\
---------------------------------------------------------------------------

\455\ See, e.g., Anderson, Alyssa, Wenxin Du, Bernd Schlusche.
2019. ``Money Market Fund Reform and Arbitrage Capital.'' Working
Paper. See also Thomas Flanagan. 2020. ``Funding Stability and Bank
Liquidity.'' Working Paper.
\456\ See, e.g., Ivashina, Victoria, David Scharfstein, and
Jeremy Stein, 2015. ``Dollar Funding and the Lending Behavior of
Global Banks.'' Quarterly Journal of Economics 130(3): 1241-1281.
---------------------------------------------------------------------------

Amendments related to potential negative interest rates may
increase informational and allocative efficiency. In the event gross
fund yields turn negative, the proposal would prohibit the use of
reverse share distribution mechanisms, and would require stable NAV
funds to float the NAV. This may enhance transparency of fund yields to
investors, which may enhance informational and allocative efficiency in
stable NAV funds. However, to the degree that stable NAV fund investors
may use such accounts for sweep accounting or for cash management,
floating the NAV under such circumstances may increase price
variability of and decrease investor interest in affected retail or
government money market funds. As a result, investors may move their
capital to bank accounts or other cash alternatives, which may reduce
the size of the retail and government money market fund sector. Since
money market funds play an essential role in the provision of wholesale
funding liquidity and since negative interest rates may be most likely
during severe macroeconomic stress, the proposal may lead to a negative
shock to wholesale funding liquidity and capital formation during peak
macroeconomic stress.
The proposed requirement that money market funds determine that
their intermediaries have the capacity to process the transactions at
floating NAV and the related recordkeeping requirements may affect
competition among funds and intermediaries. Specifically,
intermediaries that are currently unable to process stable NAV fund
shares at floating NAV prices would have to update their transaction
processing systems or lose the ability to process transactions with
stable NAV money market funds. Such costs are more easily borne by
larger intermediary complexes, which are also more likely to be
processing both stable and floating NAV fund transactions and be
already equipped for the potential transition. This may place smaller
intermediaries processing transactions in stable NAV funds at a
competitive disadvantage relative to larger intermediaries. In
addition, funds heavily reliant for their distribution on smaller
intermediaries that are not currently equipped to process transactions
at a floating NAV may experience more significant disruptions to their
distribution networks. Such funds are more likely to bear higher
compliance costs of the proposal and may lose investor capital to other
funds that rely on larger intermediaries that are already in compliance
with the proposed amendments. Notably, such reallocation need not be
inefficient if larger intermediaries have superior processing systems
and, due to economies of scale and scope, are able to process
transactions for a variety of funds under different market conditions.
However, it may place funds reliant on less technologically advanced
intermediaries for their distribution at a competitive disadvantage
relative to funds using better equipped intermediaries. It may also
disadvantage smaller fund complexes generally as they may have fewer
economies of scale and scope.
The proposed amendments related to the methods of calculation of
WAM and WAL may increase consistency and comparability of disclosures
by money market funds in data reported to the Commission and provided
on fund websites. The amendments, therefore, may reduce informational
asymmetries between funds and fund investors about interest rate and
liquidity risk exposures across fund portfolios. To the degree that
consistency and comparability of WAM and WAL information may inform
investors and may influence their capital allocation decisions, the
proposed amendments may improve allocative efficiency. The proposed
amendments related to the calculation of WAM and WAL are not expected
to affect competition and capital formation.

F. Request for Comment

We request comment on all aspects of the economic analysis of the
proposed amendments. To the extent possible, we request that commenters
provide supporting data and analysis with respect to the benefits,
costs, and effects on competition, efficiency, and capital formation of
adopting the proposed amendments or any reasonable alternatives. In
particular, we ask commenters to consider the following questions:
143. What additional qualitative or quantitative information should
be considered as part of the baseline for the economic analysis of
these amendments? What fraction of institutional prime and
institutional tax-exempt funds currently strike their NAV at the bid
price of securities?
144. Are the costs and benefits of proposed amendments accurately
characterized? If not, why not? Should any of the costs or benefits be
modified? What, if any, other costs or benefits

[[Page 7327]]

should be taken into account? If possible, please offer ways of
estimating these costs and benefits. What additional considerations can
be used to estimate the costs and benefits of the proposed amendments?
145. Are the costs and benefits of proposed swing pricing
amendments accurately characterized? If not, why not? How many
institutional prime and institutional tax exempt money market funds
already impose order cut-off times? Are the costs of funds doing so
accurately characterized? What, if any, other costs or benefits should
be taken into account? If possible, please offer ways of estimating
these costs and benefits.
146. Are the costs and benefits of proposed amendments related to
potential negative interest rates accurately characterized? If not, why
not? Should any of the costs or benefits be modified? What, if any,
other costs or benefits should be taken into account? If possible,
please offer ways of estimating these costs and benefits. What
additional considerations can be used to estimate the costs and
benefits of the proposed amendments?
147. Are the effects on competition, efficiency, and capital
formation arising from the proposed amendments accurately
characterized? If not, why not?
148. Are the economic effects of the above alternatives accurately
characterized? If not, why not? Should any of the costs or benefits be
modified? What, if any, other costs or benefits should be taken into
account?
149. Are the economic effects of the dynamic liquidity fee
alternative to the proposed swing pricing requirement accurately
characterized? If not, why not? Should any of the costs or benefits be
modified? What, if any, other costs or benefits should be taken into
account?
150. Are the economic effects of the alternative approaches to
implementing swing pricing adequately characterized? If not, why not?
Should any of the costs or benefits be modified? What, if any, other
costs or benefits should be taken into account?
151. Are the economic effects of the sponsor support alternative
accurately characterized? If not, why not? Should any of the costs or
benefits be modified? What, if any, other costs or benefits should be
taken into account?
152. Are the economic effects of the minimum balance at risk
alternative accurately characterized? If not, why not? Should any of
the costs or benefits be modified? What, if any, other costs or
benefits should be taken into account?
153. Are the economic effects of the Inline XBRL alternative for
Form N-CR accurately characterized? If not, why not? Should any of the
costs or benefits be modified? What, if any, other costs or benefits
should be taken into account?
154. Are there other reasonable alternatives to the proposed
amendments that should be considered? What are the costs, benefits, and
effects on competition, efficiency, and capital formation of any other
alternatives?
155. Are there data sources or data sets that can help refine the
estimates of the costs and benefits associated with the proposed
amendments? If so, please identify them.

IV. Paperwork Reduction Act

A. Introduction

The proposed amendments to rule 2a-7 rule 31a-2, and Forms N-1A, N-
CR, and N-MFP contain ``collection of information'' requirements within
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\457\ We
are submitting the proposed collections of information to the Office of
Management and Budget (``OMB'') for review in accordance with the
PRA.\458\ The titles for the existing collections of information are:
(1) ``Rule 2a-7 under the Investment Company Act of 1940, Money market
funds'' (OMB Control No. 3235-0268); (2) ``Rule 31a-2: Records to be
preserved by registered investment companies, certain majority-owned
subsidiaries thereof, and other persons having transactions with
registered investment companies'' (OMB Control No. 3235-0179; (3)
``Form N-1A under the Securities Act of 1933 and under the Investment
Company Act of 1940, registration statement of open-end management
investment companies'' (OMB Control No. 3235-0307); (4) ``Rule 30b1-8
under the Investment Company Act of 1940, current report for money
market funds and Form N-CR, current report, money market fund material
events'' (OMB Control No. 3235-0705); and (5) ``Rule 30b1-7 under the
Investment Company Act of 1940, monthly report for money market funds,
and Form N-MFP, monthly schedule of portfolio holdings of money market
funds'' (OMB Control No. 3235-0657).
---------------------------------------------------------------------------

\457\ 44 U.S.C. 3501-3520.
\458\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid OMB control number. We discuss below the collection of
information burdens associated with proposed amendments to rules 2a-7
and 31a-2 as well as to Forms N-1A, N-CR, and N-MFP.

B. Rule 2a-7

Certain provisions of our proposed rule would affect the baseline
collection of information requirements of rule 2a-7 Several of the
amendments create new collection of information requirements or modify
existing ones. These amendments include: (1) Removal of fee and gate
provisions from rule 2a-7 and the associated board determinations of
whether to impose a fee or gate; (2) new provisions requiring
institutional prime and institutional tax-exempt money market funds to
establish and implement swing pricing policies and procedures and
deliver a board report no less frequently than annually; and (3) new
provisions requiring government and retail money market funds to
maintain and keep current records identifying the financial
intermediaries the fund has determined have the capacity to transact at
non-stable prices per share and the intermediaries for which the fund
was unable to make this determination. The retention period with
respect to the swing pricing policies and procedures, board reports,
and financial intermediary determinations is six years, the first two
years in an easily accessible place.
The respondents to these collections of information will be money
market funds. We estimate that there are 318 money market funds subject
to rule 2a-7, although the proposed new collections of information
would each apply to certain subsets of money market funds, as reflected
in the below table.\459\ The new collections of information are
mandatory for the identified types of money market funds that rely on
rule 2a-7. The proposed amendments are designed to enable Commission
staff in its examinations of money market funds to determine compliance
with the rule. To the extent the Commission receives confidential
information pursuant to the collections of information, such
information will be kept confidential, subject to the provisions of
applicable law.\460\
---------------------------------------------------------------------------

\459\ Based on Form N-MFP filings, there were 318 money market
funds as of July 2021.
\460\ See, e.g., 5 U.S.C. 552. Exemption 4 of the Freedom of
Information Act provides an exemption for trade secrets and
commercial or financial information obtained from a person and
privileged or confidential. Exemption 8 of the Freedom of
Information Act provides an exemption for matters that are contained
in or related to examination, operating, or condition reports
prepared by, or on behalf of, or for the use of an agency
responsible for the regulation or supervision of financial
institutions.
---------------------------------------------------------------------------

In our most recent Paperwork Reduction Act submission for rule 2a-
7, we estimated the annual aggregate compliance burden to comply with
the collection of information requirement of

[[Page 7328]]

rule 2a-7 is 337,328 burden hours with an internal cost burden of
$92,875,630 and an external cost burden estimate of $38,100,454.\461\
---------------------------------------------------------------------------

\461\ The most recent rule 2a-7 PRA submission was approved in
2019 (OMB Control No. 3235-0268).
---------------------------------------------------------------------------

The table below summarizes our PRA initial and ongoing annual
burden estimates associated with the proposed amendments to rule 2a-7.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP08FE22.022

[[Page 7329]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.023

BILLING CODE 8011-01-C

C. Rule 31a-2

Section 31(a)(1) of the Investment Company Act requires registered
investment companies and certain others to maintain and preserve
records as prescribed by Commission rules. Rule 31a-1 specifies the
books and records that must be maintained. Rule 31a-2 specifies the
time periods that entities must retain certain books and records,
including those required to be maintained under rule 31a-1. The
retention of records, as required by rule 31a-2, is necessary to ensure
access by Commission staff to material business and financial
information about funds and certain related entities. This information
will be used by the Commission staff to evaluate fund compliance with
the Investment Company Act and regulations thereunder. We are proposing
that certain money market funds retain books and records containing
schedules evidencing and supporting each computation of an adjustment
to net asset value of their shares based on swing pricing policies and
procedures established and implemented pursuant to proposed rule 2a-
7(c)(2). The respondents to these collections of information will be
money market funds. The new collections of information are mandatory
for the money market funds subject to rule 2a-7(c)(2). We estimate that
there are 53 institutional prime and institutional tax-exempt money
market funds that would be subject to the proposed collection of
information requirements related to swing pricing. To the extent the
Commission receives confidential information pursuant to the
collections of information, such information will be kept confidential,
subject to the provisions of applicable law.\462\
---------------------------------------------------------------------------

\462\ See id.
---------------------------------------------------------------------------

In our most recent Paperwork Reduction Act submission for rule 31a-
2, we estimated the annual aggregate compliance burden to comply with
the collection of information requirement of rule 31a-2 is 696,464
burden hours with an internal cost burden of $54,672,424 and an
external cost burden estimate of $115,372,485.\463\
---------------------------------------------------------------------------

\463\ The most recent rule 31a-2 PRA submission was approved in
2020 (OMB Control No. 3235-0179).
---------------------------------------------------------------------------

The table below summarizes our PRA annual burden estimates
associated with the proposed amendments to rule 31a-2.

[[Page 7330]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.024

D. Form N-MFP

The proposed amendments to Form N-MFP would include additional data
collection and certain technical improvements that will assist our
monitoring and analysis of money market funds. We are proposing to
increase the frequency of certain data points from weekly to daily,
collect new information about securities that have been disposed of
before maturity, collect new information about the composition and
concentration of money market funds' shareholders, collect additional
information and remove the ability for funds to aggregate certain
required information about repurchase agreement transactions, as well
as certain other information about the fund's portfolio securities
(e.g., the acquisition date for a security). We are also proposing
amendments to improve identifying information about the fund, including
changes to better identify different categories of government money
market funds, changes to identify privately offered funds that are used
for internal cash management purposes, and amendments to provide the
name and other identifying information for the registrant, series, and
class. The proposed amendments to Form N-MFP also include several
changes to clarify current instructions or items.
The information collection requirements on Form N-MFP are designed
to assist the Commission in analyzing the portfolio holdings of money
market funds, and thereby augment our understanding of the risk
characteristics of individual money market funds and money market funds
as a group and industry trends. The proposed amendments enhance our
oversight of money market funds and our ability to respond to market
events. Preparing a report on Form N-MFP is mandatory for money market
funds that rely on rule 2a-7, and responses to the information
collections will not be kept confidential.
The respondents to these collections of information will be money
market funds. The Commission estimates there are 318 money market funds
that report information on Form N-MFP although certain components of
the proposed new collections of information would apply to certain
subsets of money market funds, as reflected in the below table. We
estimate that 35% of money market funds (or 111 money market funds)
license a software solution and file reports on Form N-MFP in house. We
estimate that the remaining 65% of money market funds (or 207 money
market funds) retain the services of a third party to provide data
aggregation and validation services as part of the preparation and
filing of reports on Form N-MFP on the fund's behalf. We understand
that the required data in the proposed amendments to Form N-MFP
generally are already maintained by money market funds pursuant to
other regulatory requirements or in the ordinary course of business.
Accordingly, for the purposes of our analysis, we do not believe that
the proposed amendments add significant burden hours for filers of Form
N-MFP.
In our most recent Paperwork Reduction Act submission for Form N-
MFP, we estimated the annual aggregate compliance burden to comply with
the collection of information requirement of Form N-MFP is 64,667
burden hours with an internal cost burden of $6,754,832 and an external
cost burden estimate of $8,682,037.\464\
---------------------------------------------------------------------------

\464\ This estimate is based on the last time the PRA submission
for the rule's information collection was approved in 2019 (OMB
Control No. 3235-0657).
---------------------------------------------------------------------------

The table below summarizes our PRA initial and ongoing annual
burden estimates associated with the proposed amendments to Form N-MFP.
BILLING CODE 8011-01-P

[[Page 7331]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.025

E. Form N-CR

The proposed amendments to Form N-CR would include the removal of
the disclosure items related to fund suspensions of redemptions and
liquidity fees. The proposal would require a fund to file a report when
its investments are more than 50% below the minimum weekly liquid asset
or daily liquid asset requirements. In addition, the proposal would
require money market funds to file Form N-CR reports in a custom XML
data language. The information collection requirements are designed to
assist Commission staff in its oversight of money market funds and its
ability to respond to market events. We estimate that there are 318
money market funds subject to Form N-CR reporting requirements, but a
fund is required to file a report on Form N-CR only when a reportable
event occurs.\465\ Compliance with the disclosure requirements of Form
N-CR is mandatory for money market funds that rely on rule 2a-7, and
the responses to the disclosure requirements will not be kept
confidential.
---------------------------------------------------------------------------

\465\ Based on Form N-MFP filings, there were 318 money market
funds as of July 2021.
---------------------------------------------------------------------------

In our most recent Paperwork Reduction Act submission for Form N-
CR, we estimated that we would receive, in the aggregate, an average of
6 reports filed on Form N-CR per year. We also estimated the annual
aggregate compliance burden to comply with the collection of
information requirement of Form N-CR is 51 burden hours with an
internal cost burden of $19,839, and an external cost burden estimate
of $6,111.\466\
---------------------------------------------------------------------------

\466\ The most recent Form N-CR PRA submission was approved in
2021 (OMB Control No. 3235-0705).
---------------------------------------------------------------------------

The table below summarizes our PRA initial and ongoing annual
burden estimates associated with the proposed amendments to Form N-CR.
Our most recent Paperwork Reduction Act submission for Form N-CR based
the burden estimates on the number of Form N-CR reports filed between
2018 and 2020, and no funds filed reports related to liquidity fees or
suspensions of redemptions during that period (or at any other time).
As a result, we do not believe that removing the items related to
liquidity fees and suspensions of redemptions would affect the current
burden estimates.

[[Page 7332]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.026

F. Form N-1A

The proposed amendments to Form N-1A would include a requirement
for any money market fund that is not a government money market fund or
a retail money market fund to provide swing pricing disclosures to
investors, including an explanation of the fund's use of swing pricing
and a general description of the effects of swing pricing on the fund's
average annual total returns for the applicable period(s). The proposed
amendments would additionally include a proposal to remove the current
disclosures related to the imposition of liquidity fees and any
suspension of redemptions. Compliance with the disclosure requirements
of Form N-1A is mandatory for money market funds that rely on rule 2a-
7, and the responses to the disclosure requirements will not be kept
confidential.
The purpose of the information collection requirements on Form N-1A
are to meet the filing and disclosure requirements of the Securities
Act and the Investment Company Act and to enable funds to provide
investors with information necessary to evaluate an investment in the
fund. The proposed amendments to Form N-1A are designed to provide
investors with information about a fund's swing pricing policies and
procedures and how swing pricing may affect an investor, which
investors can use to inform their investment decisions.
The respondents to these collections of information will be money
market funds. The Commission estimates there are 318 money market funds
that are subject to Form N-1A, although the proposed new collections of
information would apply to certain subsets of money market funds. The
Commission estimates there are 53 money market funds that will provide
swing pricing-related disclosures on Form N-1A. We estimate that 129
money market funds will remove the current disclosures related to the
imposition of liquidity fees and any suspension of redemptions. Given
the removal of the prior disclosure requirements, we do not believe
that the proposed amendments add significant burden hours for filers of
Form N-1A.
In our most recent Paperwork Reduction Act submission for Form N-
1A, we estimated the annual aggregate burden to comply with the
collection of information requirement of Form N-1A is 1,672,077 burden
hours with an internal cost burden of $474,392,078, and an external
cost burden estimate of $132,940,008.\467\
---------------------------------------------------------------------------

\467\ The most recent Form N-1A PRA submission was approved in
2019 (OMB Control No. 3235-0307).
---------------------------------------------------------------------------

The table below summarizes our PRA initial and ongoing annual
burden estimates associated with the proposed amendments to Form N-1A.

[[Page 7333]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.027

BILLING CODE 8011-01-C

V. Initial Regulatory Flexibility Analysis

Section 3(a) of the Regulatory Flexibility Act of 1980 \468\
(``RFA'') requires the Commission to undertake an initial regulatory
flexibility analysis (``IRFA'') of the proposed rule amendments on
small entities unless the Commission certifies that the rule, if
adopted, would not have a significant economic impact on a substantial
number of small entities.\469\ Pursuant to 5 U.S.C. 605(b), the
Commission hereby certifies that the proposed amendments to rule 2a-7,
rule 31a-2, and Forms N-MFP and N-CR under the Investment Company Act,
and Form N-1A under the Investment Company Act and the Securities Act,
would not, if adopted, have a significant economic impact on a
substantial number of small entities.
---------------------------------------------------------------------------

\468\ 5 U.S.C. 603(a).
\469\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

We are proposing amendments to rule 2a-7 under the exemptive and
rulemaking authority set forth in sections 6(c), 8(b), 22(c), and 38(a)
of the Investment Company Act of 1940 [15 U.S.C. 80a-6(c), 80a-8(b),
80a-22(c), 80a-37(a)]. The proposed amendments would remove the
liquidity fee and redemption gate provisions in rule 2a-7 under the
Act. The proposed amendments would further require institutional prime
and tax-exempt money market funds to implement swing pricing policies
and procedures to require redeeming investors to bear the costs of
their decision to redeem. The proposed amendments to rule 2a-7 would
increase the daily liquid asset and weekly liquid asset minimum
liquidity requirements to 25% and 50%, respectively, to provide a more
substantial buffer in the event of rapid redemptions. The proposed
amendments would provide guidance and amend rule 2a-7 to address how
money market funds with stable net asset values should handle a
negative interest rate environment. Finally, the proposed amendments
would specify the calculation method for weighted average maturity and
weighted average life.
We are proposing amendments to rule 31a-2 under the authority set
forth in section 31(a) of the Investment Company Act [15 U.S.C. 80a-
30(a)]. The proposed amendments would require certain money market
funds to maintain records related to swing pricing. In addition, we are
proposing amendments to Forms N-MFP and N-CR under the Investment
Company Act under the authority set forth in sections 8(b), 30(b),
31(a), and 38 of the Investment Company Act [15 U.S.C. 80a-8(b), 80a-
29(b), 80a-30(a), 80a-37]. We propose amendments to Form N-1A under the
Investment Company Act and the Securities Act, under the authority set
forth in sections 5, 6, 7, 10, and 19(a) of the Securities Act [15
U.S.C. 77e, 77f, 77g, 77j, and 77s(a)] and sections 8, 24(a), 24(g),
30, and 38 of the Investment Company Act [15 U.S.C. 80a-8, 80a-24(a),
80a-24(g), 80a-29, and 80a-37]. These proposed amendments would update
the reporting requirements on Forms N-MFP and N-CR to improve the
availability of information about money market funds, as well as make
certain conforming changes to Form N-1A to reflect our proposed changes
to the regulatory framework for these funds.
Based on information in filings submitted to the Commission, we
believe that only one money market fund is a small entity.\470\ For
this reason, the Commission believes the proposed amendments to rule
2a-7, rule 31a-2, Forms N-MFP, N-CR, and N-1A, would not, if adopted,
have a significant economic impact on a substantial number of small
entities.
---------------------------------------------------------------------------

\470\ Under the Investment Company Act, an investment company is
considered a small business or small organization if it, together
with other investment companies in the same group of related
investment companies, has net assets of $50 million or less as of
the end of its most recent fiscal year. See 17 CFR 270.0-10.
---------------------------------------------------------------------------

We encourage written comments regarding this certification. We
solicit comment as to whether the proposed amendments to rule 2a-7,
rule 31a-2, Forms N-MFP, N-CR, and N-1A could have an effect on small
entities that has not been considered. We request that commenters
describe the nature of any impact on small entities and provide
empirical data to support the extent of such impact.

VI. Consideration of Impact on the Economy

For purposes of the Small Business Regulatory Enforcement Fairness
Act of

[[Page 7334]]

1996, or ``SBREFA,'' \471\ we must advise OMB whether a proposed
regulation constitutes a ``major'' rule. Under SBREFA, a rule is
considered ``major'' where, if adopted, it results in or is likely to
result in (1) an annual effect on the economy of $100 million or more;
(2) a major increase in costs or prices for consumers or individual
industries; or (3) significant adverse effects on competition,
investment or innovation.
---------------------------------------------------------------------------

\471\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------

We request comment on the potential impact of the proposed rule on
the economy on an annual basis. Commenters are requested to provide
empirical data and other factual support for their views to the extent
possible.

VII. Statutory Authority

The Commission is proposing amendments to rule 2a-7 of the Act
under the exemptive and rulemaking authority set forth in sections
6(c), 8(b), 22(c), and 38(a) of the Investment Company Act of 1940 [15
U.S.C. 80a-6(c), 80a-8(b), 80a-22(c), 80a-37(a)]. The Commission is
proposing amendments to rule 31a-2 under the Act pursuant to the
authority set forth in section 31(a) of the Investment Company Act [15
U.S.C. 80a-30(a)]. The Commission is proposing amendments to Form N-1A
pursuant to the authority set forth in sections 5, 6, 7, 10, and 19(a)
of the Securities Act [15 U.S.C. 77e, 77f, 77g, 77j, and 77s(a)] and
sections 8, 24(a), 24(g), 30, and 38 of the Investment Company Act [15
U.S.C. 80a-8, 80a-24(a), 80a-24(g), 80a-29, and 80a-37]. The Commission
is proposing amendments to Form N-MFP pursuant to the authority set
forth in sections 8(b), 30(b), 31(a), and 38(a) of the Investment
Company Act [15 U.S.C. 80a-8(b), 80a-29(b), 80a-30(a), and 80a-37(a)].
The Commission is proposing amendments to Form N-CR pursuant to the
authority set forth in sections 8(b), 30(b), 31(a), and 38(a) of the
Investment Company Act [15 U.S.C. 80a-8(b), 80a-29(b), 80a-30(a), and
80a-37(a)].

List of Subjects in 17 CFR Parts 270 and 274

Investment companies, Reporting and recordkeeping requirements,
Securities.

Text of Rule and Form Amendments

For the reasons set out in the preamble, the Commission proposes to
amend title 17, chapter II, of the Code of Federal Regulations as
follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
1. The general authority citation for part 270 continues to read as
follows:

Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39,
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless
otherwise noted.
* * * * *
0
2. Amend section 270.2a-7 by:
0
a. Revising paragraphs (c)(1)(ii) and (c)(2);
0
b. Adding paragraph (c)(3); and
0
c. Revising paragraphs (d)(1)(ii) and (iii), (d)(4)(ii) and (iii),
(g)(8)(i), (g)(8)(ii)(A), (h)(8), (h)(10) introductory text,
(h)(10)(i)(B)(2), (h)(10)(iii) through (v), (h)(11), and (j).
The revisions and addition read as follows:

Sec. 270.2a-7 Money market funds

* * * * *
(c) * * *
(1) * * *
(ii) Any money market fund that is not a government money market
fund or a retail money market fund must compute its price per share for
purposes of distribution, redemption and repurchase by rounding the
fund's current net asset value per share (including any adjustment to
that price under paragraph (c)(2) of this section) to a minimum of the
fourth decimal place in the case of a fund with a $1.0000 share price
or an equivalent or more precise level of accuracy for money market
funds with a different share price (e.g., $10.000 per share, or $100.00
per share).
(2) Swing pricing.
(i) Swing pricing requirement. Notwithstanding Sec. 270.22c-1, any
money market fund that is not a government money market fund or a
retail money market fund must establish and implement swing pricing
policies and procedures as described in paragraph (2)(ii) of this
section.
(ii) The fund's swing pricing policies and procedures must:
(A) Provide that the fund must adjust its current net asset value
per share by a swing factor if the fund has net redemptions for the
pricing period. In determining whether the fund has net redemptions for
a pricing period and the amount of net redemptions, the swing pricing
administrator is permitted to make such determination based on receipt
of sufficient investor flow information for the pricing period to allow
the fund to reasonably estimate whether it has net redemptions and the
amount of net redemptions. This investor flow information may consist
of individual, aggregated, or netted orders, and may include reasonable
estimates where necessary.
(B) Specify the process for determining the swing factor, in
accordance with paragraph (c)(2)(iii) of this section.
(iii) In determining the swing factor, the swing pricing
administrator must make good faith estimates, supported by data, of the
costs the fund would incur if it sold a pro rata amount of each
security in its portfolio to satisfy the amount of net redemptions for
the pricing period.
(A) If the fund has net redemptions for the pricing period, the
good faith estimates must include, for each security in the fund's
portfolio:
(1) Spread costs, such that the fund is valuing each security at
its bid price;
(2) Brokerage commissions, custody fees, and any other charges,
fees, and taxes associated with portfolio security sales; and
(B) If the amount of the fund's net redemptions for the pricing
period exceeds the market impact threshold, the good faith estimates
also must include, for each security in the fund's portfolio, market
impacts, which a fund must determine by:
(1) Establishing a market impact factor for each security, which is
an estimate of the percentage change 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; and
(2) Multiplying the market impact factor for each security by the
dollar amount of the security that would be sold if the fund sold a pro
rata amount of each security in its portfolio to meet the net
redemptions for the pricing period.
(C) The swing pricing administrator may estimate costs and market
impact factors for each type of security with the same or substantially
similar characteristics and apply those estimates to all securities of
that type rather than analyze each security separately.
(iv) The fund's board of directors, including a majority of
directors who are not interested persons of the fund must:
(A) Approve the fund's swing pricing policies and procedures;
(B) Designate the swing pricing administrator. The administration
of swing pricing must be reasonably segregated from portfolio
management of the fund and may not include portfolio managers;
(C) Review, no less frequently than annually, a written report
prepared by

[[Page 7335]]

the swing pricing administrator that describes:
(1) Its review of the adequacy of the fund's swing pricing policies
and procedures and the effectiveness of their implementation, including
their effectiveness at eliminating or reducing any liquidity costs
associated with satisfying shareholder redemptions;
(2) Any material changes to the fund's swing pricing policies and
procedures since the date of the last report; and
(3) Its review and assessment of the fund's swing factors and
market impact threshold, considering the requirements of paragraphs
(c)(2)(ii)(B) and (c)(2)(iii) of this section, including the
information and data supporting the determination of the swing factors
and the swing pricing administrator's determination to use a smaller
market impact threshold, if applicable.
(v) Any fund (a ``feeder fund'') that invests, pursuant to section
12(d)(1)(E) of the Act (15 U.S.C. 80a-12(d)(1)(E), in another fund (a
``master fund'') may not use swing pricing to adjust the feeder fund's
net asset value per share; however, a master fund subject to this
paragraph (c)(2) must use swing pricing to adjust the master fund's net
asset value per share, pursuant to the requirements in this paragraph
(c)(2).
(vi) For purposes of this paragraph (c)(2):
(A) Investor flow information means information about the fund
investors' purchase and redemption activity for the pricing period.
(B) Market impact threshold means an amount of net redemptions for
a pricing period that equals the value of four percent of the fund's
net asset value 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.
(C) Pricing period means 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 net asset value under Sec. 270.22c-1,
notwithstanding any adjustment to that price that paragraph (c)(2) of
this section may require.
(D) Swing factor means the amount, expressed as a percentage of the
fund's net asset value and determined pursuant to the fund's swing
pricing policies and procedures, by which a fund adjusts its net asset
value per share.
(E) Swing pricing administrator means the fund's investment
adviser, officer, or officers responsible for administering the swing
pricing policies and procedures. The swing pricing administrator may
consist of a group of persons.
(3) Prohibited activities. A money market fund may not reduce the
number of its shares outstanding to seek to maintain a stable net asset
value per share or stable price per share.
(d) * * *
(1) * * *
(i) * * *
(ii) Maintain a dollar-weighted average portfolio maturity
(``WAM'') that exceeds 60 calendar days, with the dollar-weighted
average based on the percentage of each security's market value in the
portfolio; or
(iii) Maintain a dollar-weighted average portfolio maturity that
exceeds 120 calendar days, determined without reference to the
exceptions in paragraph (i) of this section regarding interest rate
readjustments (``WAL'') and with the dollar-weighted average based on
the percentage of each security's market value in the portfolio.
* * * * *
(4) * * *
(ii) Minimum daily liquidity requirement. The money market fund may
not acquire any security other than a daily liquid asset if,
immediately after the acquisition, the fund would have invested less
than twenty-five percent of its total assets in daily liquid assets.
This provision does not apply to tax exempt funds.
(iii) Minimum weekly liquidity requirement. The money market fund
may not acquire any security other than a weekly liquid asset if,
immediately after the acquisition, the fund would have invested less
than fifty percent of its total assets in weekly liquid assets.
* * * * *
(f) * * *
(4) Notice to the board of directors.
(i) The money market fund must notify its board of directors within
one business day following the occurrence of:
(A) The money market fund investing less than twelve and a half
percent of its total assets in daily liquid assets; or
(B) The money market fund investing less than twenty-five percent
of its total assets in weekly liquid assets.
(ii) Following an event described in paragraphs (f)(4)(i) or (ii)
of this section, the money market fund must provide its board of
directors with a brief description of the facts and circumstances
leading to such event within four business days after occurrence of the
event.
(g) * * *
(8) * * *
(i) General. The periodic stress testing, at such intervals as the
board of directors determines appropriate and reasonable in light of
current market conditions, of the money market fund's ability to
maintain sufficient minimum liquidity, and the fund's ability to
minimize principal volatility (and, in the case of a money market fund
using the amortized cost method of valuation or penny rounding method
of pricing as provided in paragraph (c)(1) of this section, the fund's
ability to maintain the stable price per share established by the board
of directors for the purpose of distribution, redemption and
repurchase), based upon specified hypothetical events that include, but
are not limited to:
* * * * *
(ii) * * *
(A) The date(s) on which the testing was performed and an
assessment of the money market fund's ability to maintain sufficient
minimum liquidity and to minimize principal volatility (and, in the
case of a money market fund using the amortized cost method of
valuation or penny rounding method of pricing as provided in paragraph
(c)(1) of this section to maintain the stable price per share
established by the board of directors); and
* * * * *
(h) * * *
* * * * *
(8) Reports. For a period of not less than six years (the first two
years in an easily accessible place), written copies of the swing
pricing reports required under paragraph (c)(2)(iv)(C) and the stress
testing reports required under paragraph (g)(8)(ii) of this section
must be maintained and preserved.
* * * * *
(10) Website disclosure of portfolio holdings and other fund
information. The money market fund must post prominently on its website
the following information:
(i) * * *
(B) * * *
(2) Category of investment (indicate the category that identifies
the instrument from among the following: U.S. Treasury Debt; U.S.
Government Agency Debt, if categorized as coupon-paying notes; U.S.
Government Agency Debt, if categorized as no-coupon discount notes;
Non-U.S. Sovereign, Sub-Sovereign and Supra-National debt; Certificate
of Deposit; Non-Negotiable Time Deposit; Variable Rate Demand Note;
Other Municipal Security; Asset Backed Commercial Paper; Other Asset
Backed Securities; U.S. Treasury Repurchase Agreement, if
collateralized only by U.S. Treasuries (including Strips) and cash;
U.S. Government Agency Repurchase Agreement, collateralized only by
U.S. Government Agency securities, U.S. Treasuries, and

[[Page 7336]]

cash; Other Repurchase Agreement, if any collateral falls outside
Treasury, Government Agency and cash; Insurance Company Funding
Agreement; Investment Company; Financial Company Commercial Paper; Non-
Financial Company Commercial Paper; and Other Instrument. If Other
Instrument, include a brief description);
* * * * *
(iii) A schedule, chart, graph, or other depiction showing the
money market fund's net asset value per share (which the fund must
calculate based on current market factors before applying the amortized
cost or penny-rounding method, if used, and which must incorporate the
application of a swing factor under paragraph (c)(2) of this section,
if applied), rounded to the fourth decimal place in the case of funds
with a $1.0000 share price or an equivalent level of accuracy for funds
with a different share price (e.g., $10.000 per share), as of the end
of each business day during the preceding six months, which must be
updated each business day as of the end of the preceding business day.
(iv) A link to a website of the Securities and Exchange Commission
where a user may obtain the most recent 12 months of publicly available
information filed by the money market fund pursuant to Sec. 270.30b1-
7.
(v) For a period of not less than one year, beginning no later than
the same business day on which the money market fund files an initial
report on Form N-CR (Sec. 274.222 of this chapter) in response to the
occurrence of any event specified in Part C of Form N-CR, the same
information that the money market fund is required to report to the
Commission on Part C (Items C.1, C.2, C.3, C.4, C.5, C.6, and C.7) of
Form N-CR concerning such event, along with the following statement:
``The Fund was required to disclose additional information about this
event on Form N-CR and to file this form with the Securities and
Exchange Commission. Any Form N-CR filing submitted by the Fund is
available on the EDGAR Database on the Securities and Exchange
Commission's internet site at https://www.sec.gov.''
(11) Processing of transactions.
(i) A government money market fund and a retail money market fund
(or its transfer agent) must have the capacity to redeem and sell
securities issued by the fund at a price based on the current net asset
value per share pursuant to Sec. 270.22c-1. Such capacity must include
the ability to redeem and sell securities at prices that do not
correspond to a stable price per share.
(ii) With respect to each financial intermediary that submits
orders, itself or through its agent, to purchase or redeem shares
directly to the government money market fund or retail money market
fund, its principal underwriter or transfer agent, or to a registered
clearing agency, the fund (or on the fund's behalf, the principal
underwriter or transfer agent) must either:
(A) Determine that the financial intermediary has the capacity to
redeem and sell securities issued by the fund at a price based on the
current net asset value per share pursuant to Sec. 270.22c-1. Such
capacity must include prices that do not correspond to a stable price
per share; or
(B) Prohibit the financial intermediary from purchasing in nominee
name on behalf of other persons, securities issued by the fund.
(iii) A government money market fund and a retail money market fund
must maintain and keep current records identifying the financial
intermediaries the fund has determined have the capacity described in
paragraph (h)(11)(ii)(A) of this section and the financial
intermediaries for which the fund was unable to make this
determination. A fund must preserve a written copy of such records for
a period of not less than six years following each identification of a
financial intermediary (the first two years in an easily accessible
place).
(iv) For purposes of this paragraph (h)(11), the term ``financial
intermediary'' has the same meaning as in Sec. 270.22c-2(c)(1).
* * * * *
(j) Delegation. The money market fund's board of directors may
delegate to the fund's investment adviser or officers the
responsibility to make any determination required to be made by the
board of directors under this section other than the determinations
required by paragraphs (c)(1) (board findings), (c)(2) (swing pricing
requirement), (f)(1) (adverse events), (g)(1) and (2) (amortized cost
and penny rounding procedures), and (g)(8) (stress testing procedures)
of this section.
0
3. Amend Sec. 270.31a-2 by revising paragraph (a)(2) to read as
follows:

Sec. 270.31a-2 Records to be preserved by registered investment
companies, certain majority-owned subsidiaries thereof, and other
persons having transactions with registered investment companies.

(a) * * *
(2) Preserve for a period not less than six years from the end of
the fiscal year in which any transactions occurred, the first two years
in an easily accessible place, all books and records required to be
made pursuant to paragraphs (b)(5) through (12) of Sec. 270.31a-1 and
all vouchers, memoranda, correspondence, checkbooks, bank statements,
cancelled checks, cash reconciliations, cancelled stock certificates,
and all schedules evidencing and supporting each computation of net
asset value of the investment company shares, including schedules
evidencing and supporting each computation of an adjustment to net
asset value of the investment company shares based on swing pricing
policies and procedures established and implemented pursuant to Sec.
270.22c-1(a)(3) or Sec. 270.2a-7(c)(2), and other documents required
to be maintained pursuant to Sec. 270.31a-1(a) and not enumerated in
Sec. 270.31a-1(b).
* * * * *

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
4. The general authority citation for part 274 continues to read as
follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and Pub. L. 111-203,
sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *
0
5. Amend Form N-1A (referenced in Sec. Sec. 239.15A and 274.11A) by
revising Instruction 2(b) to Item 3, Item 4(b)(1)(ii), Item 6(d), and
Item 16(g).

Note: The text of Form N-1A does not, and these amendments will
not, appear in the Code of Federal Regulations.

Form N-1A

* * * * *

Item 3. Risk/Return Summary: Fee Table

* * * * *

Instructions

* * * * *
2. Shareholder Fees
(a) * * *
(b) ``Redemption Fee'' includes a fee charged for any redemption of
the Fund's shares, but does not include a deferred sales charge (load)
imposed upon redemption.
* * * * *

Item 4. Risk/Return Summary: Investments, Risks, and Performance

* * * * *
(b) Principal Risks of Investing in the Fund.
(1) Narrative Risk Disclosure.
(i) * * *
(ii)(A) If the Fund is a Money Market Fund that is not a government
Money

[[Page 7337]]

Market Fund, as defined in Sec. 270.2a-7(a)(16), or a retail Money
Market Fund, as defined in Sec. 270.2a-7(a)(25), include the following
statement:
You could lose money by investing in the Fund. Because the share
price of the Fund will fluctuate, when you sell your shares they may be
worth more or less than what you originally paid for them. Also, the
Fund may adjust the price of its shares to reflect the Fund's liquidity
costs from net sales of the Fund's shares. If you sell on a day when
net sales occur, you may receive less for your shares than the value of
the fund's net assets that day. An investment in the Fund is not a bank
account and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. The Fund's
sponsor is not required to reimburse the fund for losses, and you
should not expect that the sponsor will provide financial support to
the Fund at any time, including during periods of market stress.
(B) If the Fund is a Money Market Fund that is a government Money
Market Fund, as defined in Sec. 270.2a-7(a)(16), or a retail Money
Market Fund, as defined in Sec. 270.2a-7(a)(25), include the following
statement:
You could lose money by investing in the Fund. Although the Fund
seeks to preserve the value of your investment at $1.00 per share, it
cannot guarantee it will do so, particularly during periods of market
stress. An investment in the Fund is not a bank account and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency. The Fund's sponsor is not required to
reimburse the fund for losses, and you should not expect that the
sponsor will provide financial support to the Fund at any time,
including during periods of market stress.
Instruction. If an affiliated person, promoter, or principal
underwriter of the Fund, or an affiliated person of such a person, has
contractually committed to provide financial support to the Fund, and
the term of the agreement will extend for at least one year following
the effective date of the Fund's registration statement, the statement
specified in Item 4(b)(1)(ii)(A) or Item 4(b)(1)(ii)(B) may omit the
last sentence (``The Fund's sponsor has no legal obligation to provide
financial support to the Fund, and you should not expect that the
sponsor will provide financial support to the Fund at any time,
including during periods of market stress.''). For purposes of this
Instruction, the term ``financial support'' includes any capital
contribution, purchase of a security from the Fund in reliance on Sec.
270.17a-9, purchase of any defaulted or devalued security at par,
execution of letter of credit or letter of indemnity, capital support
agreement (whether or not the Fund ultimately received support),
performance guarantee, or any other similar action reasonably intended
to increase or stabilize the value or liquidity of the fund's
portfolio; however, the term ``financial support'' excludes any routine
waiver of fees or reimbursement of fund expenses, routine inter-fund
lending, routine inter-fund purchases of fund shares, or any action
that would qualify as financial support as defined above, that the
board of directors has otherwise determined not to be reasonably
intended to increase or stabilize the value or liquidity of the fund's
portfolio.
* * * * *

Item 6. Purchase and Sale of Fund Shares

* * * * *
(d) If the Fund uses swing pricing, explain the Fund's use of swing
pricing; including what swing pricing is, the circumstances under which
the Fund will use it, and the effects of swing pricing on the Fund and
investors, and provide the upper limit the Fund has set on the swing
factor (except a Money Market Fund that uses swing pricing does not
need to disclose a swing factor upper limit). With respect to any
portion of a Fund's assets that is invested in one or more open-end
management investment companies that are registered under the
Investment Company Act, the Fund shall include a statement that the
Fund's net asset value is calculated based upon the net asset values of
the registered open-end management companies in which the Fund invests,
and, if applicable, state that the prospectuses for those companies
explain the circumstances under which they will use swing pricing and
the effects of using swing pricing.
* * * * *

Item 16. Description of the Fund and Its Investments and Risks

* * * * *
(g) Money Market Fund Material Events. If the Fund is a Money
Market Fund, disclose, as applicable, any occasion during the last 10
years on which an affiliated person, promoter, or principal underwriter
of the Fund, or an affiliated person of such a person, provided any
form of financial support to the Fund, including a description of the
nature of support, person providing support, brief description of the
relationship between the person providing support and the Fund, date
support provided, amount of support, security supported (if
applicable), and the value of security supported on date support was
initiated (if applicable).

Instructions

1. * * *
2. If during the last 10 years, the Fund has participated in one or
more mergers with another investment company (a ``merging investment
company''), provide the information required by Item 16(g) with respect
to any merging investment company as well as with respect to the Fund;
for purposes of this Instruction, the term ``merger'' means a merger,
consolidation, or purchase or sale of substantially all of the assets
between the Fund and a merging investment company. If the person or
entity that previously provided financial support to a merging
investment company is not currently an affiliated person, promoter, or
principal underwriter of the Fund, the Fund need not provide the
information required by Item 16(g) with respect to that merging
investment company.
3. The disclosure required by Item 16(g) should incorporate, as
appropriate, any information that the Fund is required to report to the
Commission on Items C.1, C.2, C.3, C.4, C.5, C.6, and C.7 of Form N-CR
[17 CFR 274.222].
4. The disclosure required by Item 16(g) should conclude with the
following statement: ``The Fund was required to disclose additional
information about this event [or ``these events,'' as appropriate] on
Form N-CR and to file this form with the Securities and Exchange
Commission. Any Form N-CR filing submitted by the Fund is available on
the EDGAR Database on the Securities and Exchange Commission's internet
site at https://www.sec.gov.''
* * * * *
0
6. Form N-MFP (referenced in Sec. 274.201) is revised to read as
follows:

Note: The text of Form N-MFP does not, and these amendments
will not, appear in the Code of Federal Regulations.

BILLING CODE 8011-01-P

[[Page 7338]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.028

[[Page 7339]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.029

[[Page 7340]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.030

[[Page 7341]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.031

[[Page 7342]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.032

[[Page 7343]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.033

[[Page 7344]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.034

[[Page 7345]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.035

[[Page 7346]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.036

[[Page 7347]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.037

[[Page 7348]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.038

[[Page 7349]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.039

[[Page 7350]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.040

[[Page 7351]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.041

[[Page 7352]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.042

[[Page 7353]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.043

[[Page 7354]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.044

[GRAPHIC] [TIFF OMITTED] TP08FE22.045

BILLING CODE 8011-01-C

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form N-MFP

Monthly Schedule of Portfolio Holdings of Money Market Funds

Form N-MFP is to be used by registered open-end management
investment companies, or series thereof, that are regulated as money
market funds pursuant to rule 2a-7 under the Investment Company Act of
1940 (``Act'') (17 CFR 270.2a-7) (``money market funds''), to file
reports with the Commission pursuant to rule 30b1-7 under the Act (17
CFR 270.30b1-7). The Commission may use the information provided on
Form N-MFP in its regulatory, disclosure review, inspection, and
policymaking roles.

General Instructions

A. Rule as To Use of Form N-MFP

Form N-MFP is the public reporting form that is to be used for
monthly reports of money market funds required by section 30(b) of the
Act and rule 30b1-7 under the Act (17 CFR 270.30b1-7). A money market
fund must report information about the fund and its portfolio holdings
as of the last business day or any subsequent calendar day of the
preceding month. The Form N-MFP must be filed with the Commission no
later than the fifth business day of each month, but may be filed any
time beginning on the first business day of the month. Each money
market fund, or series of a money market fund, is required to file a
separate form. If the money market fund does not have any classes, the
fund must provide the information required by Part B for the series. A
money market fund is not required to respond to an item that is wholly
inapplicable. If an item requests information that is not

[[Page 7355]]

applicable (for example, a company does not have an LEI), respond N/A.
A money market fund may file an amendment to a previously filed
Form N-MFP at any time, including an amendment to correct a mistake or
error in a previously filed form. A fund that files an amendment to a
previously filed form must provide information in response to all items
of Form N-MFP, regardless of why the amendment is filed.

B. Application of General Rules and Regulations

The General Rules and Regulations under the Act contain certain
general requirements that are applicable to reporting on any form under
the Act. These general requirements should be carefully read and
observed in the preparation and filing of reports on this form, except
that any provision in the form or in these instructions shall be
controlling.

C. Filing of Form N-MFP

A money market fund must file Form N-MFP in accordance with rule
232.13 of Regulation S-T. Form N-MFP must be filed electronically using
the Commission's EDGAR system.

D. Paperwork Reduction Act Information

A registrant is not required to respond to the collection of
information contained in Form N-MFP unless the Form displays a
currently valid Office of Management and Budget (``OMB'') control
number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing
the burden to the Secretary, Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549-1090.
The OMB has reviewed this collection of information under the
clearance requirements of 44 U.S.C. 3507.

E. Definitions

References to sections and rules in this Form N-MFP are to the
Investment Company Act of 1940 [15 U.S.C. 80a] (the ``Investment
Company Act''), unless otherwise indicated. Terms used in this Form N-
MFP have the same meaning as in the Investment Company Act or related
rules, unless otherwise indicated.
As used in this Form N-MFP, the terms set out below have the
following meanings:
``Cash'' means demand deposits in depository institutions and cash
holdings in custodial accounts.
``Class'' means a class of shares issued by a Multiple Class Fund
that represents interests in the same portfolio of securities under
rule 18f-3 [17 CFR 270.18f-3] or under an order exempting the Multiple
Class Fund from sections 18(f), 18(g), and 18(i) [15 U.S.C. 80a-18(f),
18(g), and 18(i)].
``Fund'' means the Registrant or a separate Series of the
Registrant. When an item of Form N-MFP specifically applies to a
Registrant or a Series, those terms will be used.
``Government Money Market Fund'' means a money market fund as
defined in 17 CFR 270.2a-7(a)(14).
``LEI'' means, with respect to any company, the ``legal entity
identifier'' assigned by or on behalf of an internationally recognized
standards setting body and required for reporting purposes by the U.S.
Department of the Treasury's Office of Financial Research or a
financial regulator.
``Master-Feeder Fund'' means a two-tiered arrangement in which one
or more Funds (or registered or unregistered pooled investment
vehicles) (each a ``Feeder Fund'') holds shares of a single Fund (the
``Master Fund'') in accordance with section 12(d)(1)(E) [15 U.S.C. 80a-
12(d)(1)(E)].
``Money Market Fund'' means a registered open-end management
investment company, or series thereof, that is regulated as a money
market fund pursuant to rule 2a-7 (17 CFR 270.2a-7) under the
Investment Company Act of 1940.
``Retail Money Market Fund'' means a money market fund as defined
in 17 CFR 270.2a-7(a)(21).
``RSSD ID'' means the identifier assigned by the National
Information Center of the Board of Governors of the Federal Reserve
System, if any.
``Securities Act'' means the Securities Act of 1933 [15 U.S.C. 77a-
aa].
``Series'' means shares offered by a Registrant that represent
undivided interests in a portfolio of investments and that are
preferred over all other series of shares for assets specifically
allocated to that series in accordance with rule 18f-2(a) [17 CFR
270.18f-2(a)].
``Swing Factor'' means a swing factor as defined in 17 CFR 270.2a-
70(c)(2)(vi)(D).
``Value'' has the meaning de[filig]ned in section 2(a)(41) of the
Act (15 U.S.C. 80a-2(a)(41)).
0
7. Amend Form N-CR (referenced in Sec. 274.222) by:
0
a. Revising the General Instructions in Sections A, C, D, and F and
revising Parts A and C;
0
b. Removing Parts E, F, and G and replacing them with new Part E; and
0
c. Redesignating Part H to Part F.
The revisions read as follows:

Note: The text of Form N-CR does not, and these amendments will
not, appear in the Code of Federal Regulations.

Form N-CR

* * * * *

General Instructions

A. Rule as To Use of Form N-CR

Form N-CR is the public reporting form that is to be used for
current reports of money market funds required by section 30(b) of the
Act and rule 30b1-8 under the Act. A money market fund must file a
report on Form N-CR upon the occurrence of any one or more of the
events specified in Parts B-F of this form. Unless otherwise specified,
a report is to be filed within one business day after occurrence of the
event. A report will be made public immediately upon filing. If the
event occurs on a Saturday, Sunday, or holiday on which the Commission
is not open for business, then the report is to be filed on the first
business day thereafter.
* * * * *

C. Information To Be Included in Report Filed on Form N-CR

Upon the occurrence of any one or more of the events specified in
Parts B-F of Form N-CR, a money market fund must file a report on Form
N-CR that includes information in response to each of the items in Part
A of the form, as well as each of the items in the applicable Parts B-F
of the form.

D. Filing of Form N-CR

A money market fund must file Form N-CR in accordance with rule
232.13 of Regulation S-T. Reports on Form N-CR must be filed
electronically using the Commission's Electronic Data Gathering,
Analysis, and Retrieval (``EDGAR'') system in accordance with
Regulation S-T. Consult the EDGAR Filer Manual and Appendices for EDGAR
filing instructions.
* * * * *

F. Definitions

References to sections and rules in this Form N-CR are to the
Investment Company Act (15 U.S.C. 80a), unless otherwise indicated.
Terms used in this Form N-CR have the same meaning as in the Investment
Company Act or rule 2a-7 under the Investment Company Act, unless
otherwise indicated.
In addition, the following definitions apply:
``Fund'' means the registrant or a separate series of the
registrant.
``LEI'' means, with respect to any company, the ``legal entity
identifier'' as assigned by a utility endorsed by the

[[Page 7356]]

Global LEI Regulatory Oversight Committee or accredited by the Global
LEI Foundation.
``Registrant'' means the investment company filing this report or
on whose behalf the report is filed.
``Series'' means shared offered by a Registrant that represent
undivided interests in a portfolio of investments and that are
preferred over all other series of shares for assets specifically
allocated to that series in accordance with rule 18f-2(a) (17 CFR
270.18f-2(a)).
* * * * *

Part A: General Information

Item A.1 Report for [mm/dd/yyyy].
Item A.2 Name of registrant.
Item A.3 CIK Number of registrant.
Item A.4 LEI of registrant.
Item A.5 Name of series.
Item A.6 EDGAR Series Identifier.
Item A.7 LEI of series.
Item A.8 Securities Act File Number.
Item A.9 Provide the name, email address, and telephone number of the
person authorized to receive information and respond to questions about
this Form N-CR.
* * * * *

Part C: Provision of Financial Support to Fund

If an affiliated person, promoter, or principal underwriter of the
fund, or an affiliated person of such a person, provides any form of
financial support to the fund (including any (i) capital contribution,
(ii) purchase of a security from the fund in reliance on Sec. 270.17a-
9, (iii) purchase of any defaulted or devalued security at par, (iv)
execution of letter of credit or letter of indemnity, (v) capital
support agreement (whether or not the fund ultimately received
support), (vi) performance guarantee, or (vii) any other similar action
reasonably intended to increase or stabilize the value or liquidity of
the fund's portfolio; excluding, however, any (i) routine waiver of
fees or reimbursement of fund expenses, (ii) routine inter-fund lending
(iii) routine inter-fund purchases of fund shares, or (iv) any action
that would qualify as financial support as defined above, that the
board of directors has otherwise determined not to be reasonably
intended to increase or stabilize the value or liquidity of the fund's
portfolio), disclose the following information:

Item C.1 Description of nature of support.
Item C.2 Person providing support.
Item C.3 Brief description of relationship between the person providing
support and the fund.
Item C.4 Date support provided.
Item C.5 Amount of support.
Item C.6 Security supported (if applicable). Disclose the name of the
issuer, the title of the issue (including coupon or yield, if
applicable), at least two identifiers, if available (e.g., CUSIP, ISIN,
CIK, LEI), and the date the fund acquired the security.
Item C.7 Value of security supported on date support was initiated (if
applicable).
Item C.8 Brief description of reason for support.
Item C.9 Term of support.
Item C.10 Brief description of any contractual restrictions relating to
support.

Instruction. If an affiliated person, promoter, or principal
underwriter of the fund, or an affiliated person of such a person,
purchases a security from the fund in reliance on Sec. 270.17a-9, the
fund must provide the purchase price of the security in responding to
Item C.6.
A report responding to Items C.1 through C.7 is to be filed within
one business day after occurrence of an event contemplated in this Part
C. An amended report responding to Items C.8 through C.10 is to be
filed within four business days after occurrence of an event
contemplated in this Part C.
* * * * *

Part E: Liquidity Threshold Events

If a fund has invested less than: (i) 25% of its total assets in
weekly liquid assets or (ii) 12.5% of its total assets in daily liquid
assets, disclose the following information:

Item E.1 Initial date on which the fund invested less than 25% of its
total assets in weekly liquid assets, if applicable.
Item E.2 Initial date on which the fund invested less than 12.5% of its
total assets in daily liquid assets, if applicable.
Item E.3 Percentage of the fund's total assets invested in both weekly
liquid assets and daily liquid assets as of any dates reported in Items
E.1 or E.2.
Item E.4 Brief description of the facts and circumstances leading to
the fund investing less than 25% of its total assets in weekly liquid
assets or less than 12.5% of its total assets in daily liquid assets,
as applicable.

Instruction. A report responding to Items E.1, E.2, and E.3 is to
be filed within one business day after occurrence of an event
contemplated in this Part E. An amended report responding to Item E.4
is to be filed within four business days after occurrence of an event
contemplated in this Part E.

Part F: Optional Disclosure

If a fund chooses, at its option, to disclose any other events or
information not otherwise required by this form, it may do so under
this Item F.1.

Item F.1 Optional disclosure.

Instruction. Item F.1 is intended to provide a fund with additional
flexibility, if it so chooses, to disclose any other events or
information not otherwise required by this form, or to supplement or
clarify any of the disclosures required elsewhere in this form. Part F
does not impose on funds any affirmative obligation. A fund may file a
report on Form N-CR responding to Part F at any time.
* * * * *

By the Commission.

Dated: December 15, 2021.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021-27532 Filed 2-7-22; 8:45 am]
BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.