An altered landscape for money funds

Nearly a decade after the SEC implemented a set of new regulations for money market funds, it voted for a raft of new amendments yesterday. The final tally of the commissioners was 3-2 in favor. In Federated Hermes’ opinion, the money fund industry could use the same numbers when assessing the amendments themselves: a 3-2 win/loss record.

Federated Hermes appreciates that the SEC meaningfully took into account our and the industry’s feedback on the proposals, which included referencing our comments many times in the final document. Because that tome is no less than 424 pages, we will be diligently examining it and may have further comments when a thorough review is concluded. But at first blush, we’d call the result largely good news for this broad asset class that we believe is critically important to the financial, investment and business communities.

Wins

1. The biggest positive was what didn’t show up in the SEC staff recommendations: swing pricing. There’s little question this mechanism would have had grave implications for the viability of some of the popular liquidity products. Unfortunately, the SEC enacted another method to combat what some commissioners view as a first mover problem (see Losses #1).
2. We applaud the regulator for essentially retracting one of the most egregious of the 2014 reforms by removing redemption gates and the link between the weekly liquid asset threshold and potential fees. Funds can no longer suspend redemptions and their boards now have a choice rather than a mandate to impose liquidity fees when their weekly liquid assets decrease below the threshold. But we think the threshold has been shifted in the wrong direction (see Losses #2).
3. The third constructive reform is to a situation that has not and may never happen. Although the Federal Reserve has repeatedly stated it is against lowering interest rates below zero, it is prudent to prepare for it. The concern was that the SEC in the original proposal would force retail and government money market funds to float their NAVs. Thankfully, the amendments give boards a choice between that or implementing a reverse distribution mechanism—essentially reducing the number of shares in a fund to retain a stable NAV.

Losses

1. The new regulations require institutional prime and institutional tax-exempt money market funds “to impose mandatory liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets, unless the fund’s liquidity costs are de minimis.” Just because this is less onerous than swing pricing would have been doesn’t mean it might not be harmful to investors, even if made with the best intentions of protecting shareholders when large redemptions happen. This may impose large costs on the industry and simply replaces the weekly liquid assets trigger with a net redemptions trigger. 
2. In 2014, the SEC mandated a minimum amount of liquidity that money funds must hold daily and weekly at 10% and 30%, respectively, of a fund’s total assets. We didn’t feel that was necessary then and so disagree with the decision to increase those amounts to 25% and 50%. To facilitate redemptions, prudent cash managers keep an abundance of liquidity that is reflective of their communication with clients. This won’t change how we manage money, but could have a negative impact on investor yields in certain fund types as those funds would now be required to maintain larger liquidity buffers.