Money Market Fund Reforms

Federal RegisterFeb 8, 2022

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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 (

http://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,

Form N-1A under the Investment Company Act and the Securities Act,

and Forms N-MFP and N-CR under the Investment Company Act.

15 U.S.C. 80a

et seq.

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

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.

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.

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.

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.

See infra

Section I.B (discussing these events in more detail).

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.

“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.

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.

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.

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.

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.”

In this release, we also use the term “non-government money market fund” to refer to prime and tax-exempt money market funds.

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.

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.”

Institutional prime and institutional tax-exempt money market funds, however, are required to use a

“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.

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.

These funds must compare their stable share price to the market-based value per share of their portfolios at least daily.

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.

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).

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.

The vast majority of tax-exempt money market fund assets are held by retail funds.

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.

Id.

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.

For example, during 2007-2008, some prime money market funds were exposed to substantial losses from certain of their holdings.

At that time, one money market fund “broke the buck” and suspended redemptions, and many fund sponsors provided financial support to their funds.

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.

See

1983 Adopting Release,

supra

footnote 10;

see also

JP Morgan Comment Letter; ICI Comment Letter I.

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).

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.

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.

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%.

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.

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).

Wells Fargo Comment Letter.

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.

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

portfolio holdings to meet redemptions, sometimes at a significant loss due to wider spreads given liquidity conditions in the market at that time.

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.

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).

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.

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.

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.

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.

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.

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.

See, e.g.,

Federated Hermes Comment Letter I; Comment Letter of Federated Hermes, Inc. (June 1, 2021); Wells Fargo Comment Letter.

See, e.g.,

BlackRock Comment Letter (suggesting 10%); Dreyfus Comment Letter (suggesting 15%).

JP Morgan Comment Letter; ICI Comment Letter I; Western Asset Comment Letter.

Federated Hermes Comment Letter III.

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.

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.

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.

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.

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.

See

2014 Adopting Release,

supra

footnote 13, at section III.C.2.a.

See supra

footnote 36 (noting that 17 retail prime funds participated in the MMLF).

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

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

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

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

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

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

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.

EP08FE22.000

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

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)(

) through (

). 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”).

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

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?

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

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

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

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

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 cost

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