The long, hard debate over whether there should be additional reforms to money market funds to curb systemic risk – and the nature of those reforms – is one step closer to an end. After five years of debate and regulatory tug-of-war, the SEC recently issued a proposed rule that would fundamentally alter money market fund regulation and disclosure.
The proposal, at 698 pages, represents a significant undertaking, and initial public comments have been mostly positive regarding the SEC’s thorough approach and economic analysis. Although the SEC will have to weigh the many comments it will receive (due in September), the SEC has now articulated the possible reform options, providing some hope that the five year process is nearer to conclusion. After reviewing the comments, the SEC – including two new commissioners – will still need to vote to implement new rules.
The proposal includes greatly enhanced disclosures, diversification limits and additional stress-testing requirements. The SEC proposed two alternative approaches to fundamental money market fund (“MMF”) reform – a move aimed at appeasing competing industry interests and differences among the five SEC commissioners and other regulators.
As proposed, the changes will present substantial operational and business challenges for MMFs and non-registered MMF-like products that currently reference SEC rules in their legal documents. On top of the obvious business pressures caused by the current low interest rate environment and the fee subsidies that most MMF sponsors currently provide, existing and future sponsors will have to decide whether it will be economically viable to manage MMFs given the proposed regulation. While some fund groups may stop offering or advising MMFs, others will likely conclude that MMFs are a part of a full suite of fund offerings that they will need to maintain. Thus, they will need to take the necessary steps to meet the proposed rule’s requirements and work through its implementation.
This A Closer Look builds on our June piece that briefly described the MMF proposal. It provides further detail, practical considerations for MMFs, and our view of what the regulators will do next.