U.S. Securities & Exchange Commission Chair Gary Gensler spoke last week at the Investment Company Institute's "2024 Leadership Summit." The Q&A, entitled, "The Regulatory Landscape: A Conversation with SEC Chair Gary Gensler," discussed Prime Institutional money market funds and recent regulatory changes briefly. ICI's Eric Pan comments, "Money market funds. So that is a rule that you had mentioned. It is one of the rules that you have finalized. You introduced a mandatory liquidity fee. [But] I remember at the time of the adoption [you hadn't proposed this]." Gensler replies, "But we did profile liquidity fees in the proposal as an alternative. It may well be that you just didn't remember that, but we did do that.... Well, [it] may well be that you ... didn't comment on it or something, but it was definitely [in there]. We did get some comments on it, and we heard from a lot of people not to do swing pricing. [So] we went with one of the alternatives that was in the proposal."
Pan comments, "Let me respond on behalf of the ICI, which says that a mandatory liquidity fee may have appeared in the original proposal as an alternative, but there was no description as to what that fee would look like or how such a fee would operate. As a result, we did not feel like it was part of the core proposal, nor was there adequate information in the proposal for us to provide meaningful comment. It has proven to be a tremendously complex, complicated mechanism, and it would have benefited from an opportunity for people to tell the SEC there may have been a better way of doing this fee if this is what the Commission wanted to do."
He tells us, "So I feel the need just to explain our position there. But with that said, at the time, I believe it was Commissioner Pierce who really suggested that there was going to be an effect [from] this.... [It was] going to eliminate the institutional prime money market fund. We are still [a ways away from] October as the implementation deadline, but already various firms have announced that they are exiting the business."
Pan asks, "So, two questions. One is, does that surprise you that institutional prime money market funds are shrinking? And the second is, if that wasn't the intention, because I think at the time of the Open Meeting the response to Commissioner Pierce from the staff was they were not planning to do that, don't you think that the re-proposal of the mandatory liquidity fee would have been beneficial?"
Gensler answers, "I'm very proud of the work we did, so I'm standing by that Eric. I think that the risk in the money market fund field was more accentuated in this one area. So, anybody listening at home or in public, you are, in the public might have a money market fund that's backed by U.S. governments. That's called a Government Money Market Fund. But there are some called Prime that have investments also in other, short-term money markets, commercial paper, certificates of deposits and so forth."
He explains, "I would note that commercial paper specific deposits don't have much of a secondary market in normal times. But in stress times, it's hard to find anybody to buy that paper. It's unsecured paper and it's in the middle of a crisis and it's not Government paper. So in the middle of stress periods [like the] 2008 financial crisis, in 2020, in the midst of the onset of Covid, there was particular stress."
Gensler adds, "Now you put on the other side the investors, institutions, large, generally sophisticated corporate treasuries, and other institutions. They understand that risk, and they start pulling out of those funds a little faster. So it's that set of risks that puts pressure on the system and stress times. So institutional, where the investors are more likely to run, and prime where you had underlying assets that [during] stress time generally has very poor or no liquidity. So. I think the system's safer and will be even safer after October with these changes."
Pan then asks, "So, if Institutional Prime goes away or becomes smaller, I say to you, that's not a bad result?" Gensler responds, "Look, policy is about trade-offs. But I think it's not a good thing to have a $6.5 trillion money market complex that is reliant on the U.S. Federal Reserve, or broad government action in times of stress, the way that we saw in, '08, in 2020. So, both in '08 and in 2020, it became a very real consideration for policymakers at the Federal Reserve, the U.S. Treasury Department, so forth, as to, how to support that complex."
He states, "My Dad had a little business. He had 30 employees. My Dad and Mom never went to college, but if he couldn't make payroll on a Friday, the City of Baltimore was never going to support him, provide liquidity or bail them out. And I think you want the money market complex to kind of be like my Dad's business and not ... say, well, actually, this whole complex should be just regulated by the Federal Reserve or something and it should have like bank like capital. `It's a collective investment vehicle under the '40 Act, where redemptions need to be able to be met without diluting the rest of the shareholders."
Pan queries, "I would love to talk to you about that, `but I just want to again ask: is the reduction of the prime institutional market a feature or a bug?" Gensler replies, "I think all of these considerations are captured and talked about in the role in the economic analysis at the time. But I would say that the risk of Institutional Prime was one on our minds as policymakers [considered] the law."
