The SEC recently released its latest quarterly "Private Funds Statistics" report, which summarizes Form PF reporting and includes some data on "Liquidity Funds," or pools which are similar to but not money market funds. The publication shows overall Liquidity fund assets were lower in the latest reported quarter (Q3'21) to $302 billion (down from $319 billion in Q2'21 and down from $323 billion in Q3'20). The SEC's "Introduction" tells us, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings. Form PF information provided in this report is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers. This report reflects data from Fourth Calendar Quarter 2019 through Third Calendar Quarter 2021 as reported by Form PF filers." (Note: Crane Data believes the largest portion of these liquidity fund assets are securities lending reinvestment pools.)

The tables in the SEC's "Private Funds Statistics: Third Calendar Quarter 2021," with the most recent data available, show 77 Liquidity Funds (most of which are "Section 3 Liquidity Funds," which are Liquidity Funds from advisers with over $1 billion total in cash), up 1 from last quarter and up 8 from a year ago. (There are 57 Section 3 Liquidity Funds out of the 76 Liquidity Funds.) The SEC receives Form PF reports from 37 Liquidity Fund advisers (24 of which are Section 3 Liquidity Fund advisers), the same number as last quarter and down one from a year ago.

The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $302 billion, down $17 billion from Q2'21 and down $21 billion from a year ago (Q3'20). Of this total, $300 billion is in Section 3 (large manager) Liquidity Funds. The SEC's table on "Aggregate Private Fund Gross Asset Value" shows total Liquidity Fund assets at $310 billion, down $20 billion from Q2'21 and down $19 billion from a year ago (Q3'20). Of this total, $308 billion in is Section 3 (large manager) Liquidity Funds.

A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $101 billion is held by Other (33.8%), $50 billion is held by Unknown Non-U.S. Investors (16.7%), $50 billion is held by Private Funds (16.5%), $27 billion is held by SEC-Registered Investment Companies (8.9%), $7 billion in held by Pension Plans (2.4%), $9 billion is held by Insurance Companies (3.2%), $3 billion is held by Non-Profits (1.1%) and $1 billion is held by State/Muni Govt. Pension Plans (0.4%).

The tables also show that 68.6% of Section 3 Liquidity Funds have a liquidation period of one day, $278 billion of these funds may suspend redemptions, and $245 billion of these funds may have gates. WAMs average a short 42 days (49 days when weighted by assets), WALs are 59 days (65 days when asset-weighted), and 7-Day Gross Yields average 0.20% (0.10% asset-weighted). Daily Liquid Assets average about 50% (46% asset-weighted) while Weekly Liquid Assets average about 60% (60% asset-weighted).

Overall, these portfolios appear shorter with a heavier Treasury exposure than money market funds in general; almost half of them (42.1%) are fully compliant with Rule 2a-7. When calculating NAVs, 77.2% are "Stable" and 22.8% are "Floating." For more, see our Jan. 27 News, "SEC Proposes Amendments to Form PF Large Liquidity Fund Reporting," and see the SEC's recent proposal "Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews."

In other news, law firm Dechert LLP also submitted an entry to the SEC's "Comments on Money Market Fund Reform" page. They explain, "We appreciate the opportunity to respond to the request by the U.S. Securities and Exchange Commission for comments regarding the above-referenced release. In the Proposing Release, the SEC proposed amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, which governs money market funds, and related amendments to Form N-MFP, Form N-CR and Form N-1A. The Proposed Amendments would, among other things: (i) remove liquidity fee and redemption gate provisions from Rule 2a-7; (ii) impose a new swing pricing regime for non-government institutional money funds (i.e., institutional prime and institutional tax-exempt money funds); (iii) substantially raise minimum liquidity levels for all money funds; and (iv) amend certain reporting and disclosure requirements in Form N-MFP, Form N-CR and Form N-1A."

Dechert continues, "In addition, the SEC indicated in the Proposing Release that, in a negative interest rate environment, it may be inappropriate for a stable net asset value ('NAV') money fund with a gross negative yield to continue to seek to maintain a stable NAV. Relatedly, the Proposed Amendments would: (i) require a stable NAV money fund to determine that its financial intermediaries can continue to process its share transactions in the event that the fund converts to a floating NAV and (ii) prohibit a stable NAV money fund from seeking to maintain a stable NAV per share by reducing the number of its shares outstanding (including through a 'reverse distribution mechanism')."

They write, "We oppose a mandatory swing pricing regime for non-government institutional money funds for the following reasons: Swing Pricing Poses Significant Operational Challenges. We believe that swing pricing would pose significant operational challenges that would fundamentally alter the utility of these funds for investors and further exacerbate the trend of outflows that these funds have recently experienced. Swing Pricing Was Previously Rejected as Inappropriate for Money Funds. When adopting the voluntary swing pricing regime for open-end investment companies in Rule 22c-1 under the 1940 Act, the SEC stated that swing pricing would be inappropriate for money funds due to their unique minimum liquid investment requirements and their investors' sensitivity to volatility of principal. We believe these concerns remain relevant. Swing Pricing May Have Unintended Dilutive Costs. We believe that swing pricing as set forth in the Proposed Amendments may itself result in dilution for these money funds, inasmuch as share purchase transactions at a money fund's NAV that has been adjusted downward by swing pricing would give rise to dilutive costs that are not clearly allocated away from the fund by the Proposed Amendments. We believe these concerns have not been sufficiently addressed by the SEC."

Dechert states, "We believe these concerns remain relevant for money funds and their investors. We acknowledge that the SEC is proposing to remove the liquidity fee provisions from Rule 2a-7. However, the SEC could decide in the final rule that a type of liquidity fee may be a more appropriate liquidity risk management tool for money funds than swing pricing, as it appeared to believe at the time of adopting Rule 22c-1. We urge the SEC to carefully consider money funds' unique liquidity profiles and their shareholders' sensitivity to principal volatility before adopting the proposed swing pricing regime."

They say, "We urge the Commission to consider the effect of the Proposing Release on unregistered money funds that currently conform to the requirements of Rule 12d1-1 under the 1940 Act. These unregistered money funds serve as valuable cash management vehicles for many registered investment companies. Through Rule 12d1-1, the SEC has provided registered investment companies with the ability to invest in unregistered money funds that comply with Rule 2a-7. However, we believe the swing pricing requirement is inappropriate for these unregistered money funds because these funds do not face the same perceived concerns as other non-government institutional money funds due to the nature of their primary shareholder base of registered investment companies. Accordingly, we ask that the Commission specify in the final rule that the swing pricing requirement, if adopted, is not applicable to unregistered money funds that serve as cash management vehicles for registered investment companies."

Dechert adds, "The SEC proposed to require a government or retail money fund (or the fund's principal underwriter or transfer agent on its behalf) to determine that financial intermediaries that submit orders 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 (i.e., if the fund converts to a floating NAV). If this determination cannot be made, the fund must prohibit such an intermediary from purchasing the fund's shares in nominee name.... We oppose the proposed requirement for stable NAV money funds to determine that each financial intermediary has the capacity to redeem and sell securities issued by a fund if the fund converts to a floating NAV."

They comment, "We note that implementing this requirement would be extremely expensive for many financial intermediaries, while the benefits are speculative. It is our understanding that certain financial intermediary platforms, most notably sweep platforms that operate on a 'dollar in, dollar out' infrastructure, currently cannot accommodate transacting in stable NAV money fund shares at a price other than $1.00 per share. These platforms are designed to process extremely large volumes of transactions that automatically 'sweep' cash in and out of money funds. We understand that overhauling the infrastructure used in sweep platforms to accommodate a floating NAV would impose a significant cost on financial intermediaries. Under current Rule 2a-7, if a stable NAV money fund decides to convert to a floating NAV, some financial intermediaries may submit redemption orders for shares during the period that the fund is floating its NAV rather than incur the costs associated with overhauling such systems. Such intermediaries could reinvest in these funds if and when the fund converts back to a stable NAV."

Finally, they tell the SEC, "We oppose the proposed prohibition on the use of an RDM or reverse stock split. As noted above, the SEC indicated in the Proposing Release that it may be inappropriate for a stable NAV money fund that experiences gross negative yields to use amortized cost and/or penny-rounding accounting methods to maintain its stable share price, and a fund's board could determine under such circumstances to convert the fund to a floating share price. We do not agree that converting to a floating NAV is the only allowable response to a negative yield environment under the rule (although a fund's board of directors could certainly choose to float a fund’s NAV)."

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