SEC Serves Up MMF-Reform Buffet
The SEC today at long last issued a unanimously-approved proposal to reform money-market funds, voting 5-0 to approve a 698-page proposal for comment over the next ninety days.  FedFin will carefully review this proposal and shortly provide clients with an in-depth assessment of it.  On preliminary review, we expect it will not satisfy the FRB and, perhaps, others in FSOC who pushed for a tougher approach last year when the Treasury-led panel strong-armed the SEC to revisit the issue (see FSM Report MMF9).  The FRB and FSOC want a capital buffer in addition to a floating net asset value (NAV) and, perhaps, other reforms.  The SEC proposal, however, offers two options:  a floating NAV for prime MMFs and/or fees and “liquidity gates” to address MMF runs sparked by institutional investors.  As detailed in this report, the Commission was split on whether the final rule should adopt both proposals – which raises additional issues on which comment is sought – or issue stand-alone NAV or liquidity rules.  If a combined rule is released in final form without another round of comment, the SEC standard could be subject to litigation the Commission has sought now to forestall with the extensive economic analysis that accompanied this NPR.  The scope of the many questions also raised in the proposal could also provide an opportunity for legal challenges from those in the MMF industry strongly opposed to any change beyond relatively low liquidity gates.

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