Compliance July 12, 2023

SEC Changes Liquidity Fee, Gate Structure for MMFs

MMFs must be significantly more liquid in 2024 under new rule updates adopted this week.

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The Securities and Exchange Commission adopted rule updates during a hearing on Wednesday which amend liquidity management requirements for money market funds governed by the Investment Company Act of 1940.

The new rule requires MMFs to keep 25% of their assets in daily liquid assets, up from 10%, and at least 50% in weekly liquid assets, up from 30%.

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Jamie Gershkow, a partner in Stradley Ronon, explains that MMFs which fall below these limits cannot acquire new assets until they satisfy these requirements.

A new liquidity fee will also be imposed on certain redemptions from institutional prime and tax-exempt MMFs. If daily net outflows exceed 5% of the fund’s value, then the fund must impose a liquidity fee on new redemptions. Gershkow explains that this fee must be a good faith estimate of the costs associated with continuing to satisfy redemptions. Imposing the fee is mandatory and intended to mitigate panic sales that could dilute a fund’s value for the remaining investors.

Gershkow explains that the SEC is targeting prime and tax-exempt MMFs because these funds were especially strained by outflows at the beginning of the pandemic.

The rule was motivated primarily by large outflows from MMFs in early 2020 during the beginning of the pandemic. William Birdthistle, the director of the SEC’s Division of Investment Management, explained that investors moved from MMFs to cash and Treasurys and the Federal Reserve had to establish an emergency liquidity program whereby it loaned money to MMFs at favorable rates so they could meet their redemptions.

The amendments also remove some elements of a 2014 rule which was also designed to improve MMF liquidity management. Under the 2014 rule, when a fund’s daily or weekly liquid assets fell below the regulatory thresholds, those funds were enabled to impose fees or “gates,” meaning a pause in redemptions. The new rules disconnected fees and gates from a specific liquidity threshold.

Jessica Wachter, the director of the SEC’s division of economic and risk analysis, explained during Wednesday’s hearing that the older rules had created perverse incentives: When investors anticipated a gate or fee being triggered, they actually began to sell more aggressively to ensure their access to cash. The 2014 rule therefore aggravated panic selling when it was intended to mitigate it.

The new final rule, which passed by a 3-2 vote, dropped a controversial swing pricing mechanism from the original 2021 proposal. The MMF swing pricing proposal is distinct from the proposal to implement swing pricing on mutual funds with a floating NAV, which is still pending.

Gershkow says mutual funds and MMFs are different products, so the SEC’s decision to abandon swing pricing for MMFs does not automatically mean it will be discarded from the mutual fund liquidity management proposal.

The Investment Company Institute gave mixed feedback in a statement: “The SEC has missed the mark by forcing money market funds to adopt an expensive and complex mandatory fee on investors. There is no precedent for such a fee framework.”

The statement continued, “The removal of the tie between minimum liquidity thresholds and fees and gates is a positive step—one we have long supported. We also supported a reasonable increase in daily and weekly liquid asset requirements, although the Commission has adopted an excessive threshold. We do applaud the Commission’s recognition that swing pricing is not an appropriate regulatory tool.”

The rule updates will take effect one year after its entry into the federal register, estimated to be August 2024.

Compliance July 12, 2023

Insurance Group Calls On White House to Support More Retirement, Annuity Legislation

The IRI wrote to the Biden administration in the hopes it will back retirement legislation that paves the way for more guaranteed income products and seeks CIT use in 403(b) plans.

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The Insured Retirement Institute wrote to the administration of President Joe Biden on Wednesday, calling for additional retirement legislation that includes furthering the use of guaranteed income annuities and allows the use of collective investment trusts in nonprofit 403(b) plans.

In the letter addressed to the White House, the Washington-based institute championed the sweeping SECURE 2.0 Act of 2022 passed last year while calling for the passage of additional retirement policies previously brought before Congress.

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“There is still more that needs to be done to soothe the anxiety that middle-class workers and retirees across America express about their ability to accumulate sufficient savings that will provide them with a sustainable income to last throughout their retirement years,” IRI President and CEO Wayne Chopus wrote in the letter.

The move follows the IRI’s announcement in February that it would focus its advocacy efforts on removing barriers to including guaranteed lifetime income annuities in retirement plans as qualified default investment alternatives. With that announcement, the institute published 28 legislative goals as its 2023 Federal Retirement Security Blueprint.

In Tuesday’s letter, the IRI highlighted four acts previously brought before Congress:

  • The Lifetime Income for Employees Act of 2023, which would allow retirement plan sponsors to use lifetime income solutions for a portion of contributions made by participants who have not made retirement plan investment selections. These lifetime income solutions have delayed liquidity features and can provide better returns as qualified default investment alternatives, the IRI wrote.
  • The Retirement Fairness for Charities and Educational Institutions Act of 2023 would amend federal securities law to provide 403(b) retirement plan participants with equal access to cost-efficient investment options that use CIT and unregistered insurance company separate accounts, including protected lifetime income solutions. This would level the playing field among private sector, public sector and nonprofit 403(b) retirement plans, allowing employees of charities, schools and universities access to lower-cost investment options, the IRI argued.
  • The General Account Products Clarification Act of 2022 would ensure legal certainty for insurers offering stable value and principal preservation funds. These products protect retirement account balances from loss and provide steady income, the IRI wrote.
  • The Automatic Retirement Plan Act would address retirement insecurity by requiring all but the smallest of employers to offer automatic retirement savings plans. Employees would be enrolled by default but could opt out. The bill would also require that participants with account balances of $200,000 or more be given the choice to receive up to 50% of their vested balance in the form of a protected, guaranteed lifetime income product, the IRI noted. The act aims to increase coverage for minority communities, as nearly 64% of Latino workers, 53% of Black workers and 45% of Asian American workers lack access to an employer-provided retirement plan.

In addition to further legislation, the IRI’s letter noted a potential obstacle to SECURE 2.0 provisions and other legislation: a new Department of Labor proposal, expected in August.

The proposal, as referenced by IRI, seeks to further expand the federal and state framework regulating the standard of conduct for financial professionals who provide personalized advice about investments and insurance to retail consumers. A similar DOL rule was vacated by a federal appeals court in 2018, the IRI noted. It argued that “there is no evidence indicating that the current regulatory framework fails to protect retirement savers effectively.”

“The forthcoming regulation has the potential to significantly impact access to affordable professional financial advice, particularly for Black and Latino workers and retirees,” the Institute wrote. “Moreover, it may further widen the existing wealth gap.”

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