Document ID: SEC-2022-0196-0001
Agency: sec
Document Type: Proposed Rule
Title: Money Market Fund Reforms
Posted Date: 2022-02-08T05:00Z

[Federal Register Volume 87, Number 26 (Tuesday, February 8, 2022)]
[Proposed Rules]
[Pages 7248-7356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-27532]

[[Page 7247]]

Vol. 87

Tuesday,

No. 26

February 8, 2022

Part II

 Securities and Exchange Commission

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17 CFR Parts 270 and 274

 Money Market Fund Reforms; Proposed Rule

  Federal Register / Vol. 87 , No. 26 / Tuesday, February 8, 2022 / 
Proposed Rules  

[[Page 7248]]

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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.

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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,\1\ Form N-1A 
under the Investment Company Act and the Securities Act,\2\ and Forms 
N-MFP and N-CR under the Investment Company Act.
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    \1\ 15 U.S.C. 80a et seq.
    \2\ 15 U.S.C. 77a et seq.
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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

[[Page 7249]]

    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.\3\ 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.
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    \3\ Money market funds are also sometimes called ``money market 
mutual funds'' or ``money funds.''
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    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.\4\ 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.\5\
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    \4\ See infra Section I.B (discussing these events in more 
detail).
    \5\ 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.
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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.\6\ 
``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.\7\ 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.\8\ 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.\9\
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    \6\ 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.
    \7\ 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.''
    \8\ In this release, we also use the term ``non-government money 
market fund'' to refer to prime and tax-exempt money market funds.
    \9\ 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)).
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    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.\10\ 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.'' 
\11\ Institutional prime and institutional tax-exempt money market 
funds, however, are required to use a

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``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.\12\
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    \10\ 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.
    \11\ These funds must compare their stable share price to the 
market-based value per share of their portfolios at least daily.
    \12\ 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).
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    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.\13\ 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).\14\ 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.\15\ The vast majority of tax-exempt money market 
fund assets are held by retail funds.
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    \13\ 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.
    \14\ Id.
    \15\ Some asset managers establish privately offered money 
market funds to manage cash balances of other affiliated funds and 
accounts.
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    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.\16\ For 
example, during 2007-2008, some prime money market funds were exposed 
to substantial losses from certain of their holdings.\17\ At that time, 
one money market fund ``broke the buck'' and suspended redemptions, and 
many fund sponsors provided financial support to their funds.\18\ 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.\19\
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    \16\ See 1983 Adopting Release, supra footnote 10; see also 
infra footnote 20.
    \17\ For a more detailed account of these events, see Money 
Market Fund Reform, Investment Company Act Release No. 28807 (June 
30, 2009) [74 FR 32688 (July 8, 2009)], at section I.D.
    \18\ See id. at paragraphs accompanying nn.41 and 44. At this 
time, all money market funds generally were permitted to maintain 
stable prices per share.
    \19\ The Treasury Department's Temporary Guarantee Program for 
Money Market Funds temporarily guaranteed certain investments in 
money market funds that participated in the program. The Federal 
Reserve Board's Asset-Backed Commercial Paper Money Market Mutual 
Fund Liquidity Facility extended credit to U.S. banks and bank 
holding companies to finance their purchases of high-quality asset-
backed commercial paper from money market funds. See Press Release, 
Treasury Department, Treasury Announces Guaranty Program for Money 
Market Funds (Sept. 19, 2008), available at https://www.treasury.gov/press-center/press-releases/Pages/hp1161.aspx; 
Press Release, Federal Reserve Board, Federal Reserve Board 
Announces Two Enhancements to its Programs to Provide Liquidity to 
Markets (Sept. 19, 2008), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20080919a.htm.
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    After the events of the 2008 financial crisis, the SEC adopted a 
number of amendments to its money market fund regulations in 2010 and 
2014.\20\ In 2010, the Commission adopted amendments to rule 2a-7 that, 
among other things, for the first time required that money market funds 
maintain liquidity buffers in the form of specified levels of daily and 
weekly liquid assets.\21\ The amendments required that taxable money 
market funds have at least 10% of their assets in cash, U.S. Treasury 
securities, or securities that convert into cash (e.g., mature) within 
one day (``daily liquid assets''), and that all money market funds have 
at least 30% of assets in cash, U.S. Treasury securities, certain other 
government securities with remaining maturities of 60 days or less, or 
securities that convert into cash within one week (``weekly liquid 
assets'').\22\ These liquidity buffers provide a source of internal 
liquidity and are intended to help funds withstand high redemptions 
during times of market illiquidity. The 2010 amendments also increased 
transparency about a money market fund's holdings by introducing 
monthly Form N-MFP reporting requirements and website posting 
requirements. In addition, the Commission further limited the maturity 
of a fund's portfolio, including by shortening the permitted weighted 
average portfolio maturity and introducing a separate weighted average 
life to limit the portion of a fund's portfolio held in longer-term 
adjustable rate securities.
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    \20\ Money Market Fund Reform, Investment Company Act Release 
No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (``2010 
Adopting Release''); 2014 Adopting Release, supra footnote 12.
    \21\ 2010 Adopting Release, supra footnote 20. See rule 17 CFR 
270.2a-7(c)(5)(ii) and (iii).
    \22\ See 17 CFR 270.2a-7(a)(8) (rule 2a-7(a)(8)) (defining 
``daily liquid assets'') and 17 CFR 270.2a-7(a)(28) (rule 2a-
7(a)(28)) (defining ``weekly liquid assets'').
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    In 2014, the Commission further amended the rules that govern money 
market funds. In these amendments the Commission provided the boards of 
directors of non-government money market funds with new tools to stem 
heavy redemptions by giving them discretion to impose a liquidity fee 
or temporary suspension of redemptions (i.e., a gate) if a fund's 
weekly liquid assets fall below 30%. These amendments also require all 
non-government money market funds to impose a liquidity fee if the 
fund's weekly liquid assets fall below 10%, unless the fund's board 
determines that imposing such a fee is not in the best interests of the 
fund. Additionally, in 2014 the Commission removed the valuation 
exemption that permitted institutional non-government money market 
funds to maintain a stable NAV, and required those funds to transact at 
a floating NAV. The amendments provided guidance related to amortized 
cost valuation, as well as introduced requirements for strengthened 
diversification of money market funds' portfolios and enhanced stress 
testing. The Commission also introduced a requirement that money market 
funds report certain significant events on Form N-CR and made other 
amendments to improve transparency, including additional website 
posting requirements and amendments to Form N-MFP.
    Following the 2014 amendments, government money market funds grew 
substantially, while prime money market funds diminished in size, as 
shown in the chart below.\23\
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    \23\ While the Commission adopted the amendments in 2014, the 
compliance date for the floating NAV requirement for institutional 
prime and institutional tax-exempt funds and for the fee and gate 
provisions for all prime and tax-exempt funds was October 14, 2016.
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BILLING CODE 8011-01-P

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[GRAPHIC] [TIFF OMITTED] TP08FE22.002

    The chart below depicts the distribution between retail and 
institutional net assets in both prime and tax-exempt funds beginning 
in October 2016.\24\
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    \24\ The 2014 amendments introduced a regulatory definition of a 
retail money market fund and implemented it in October 2016. Data on 
institutional and retail prime and tax-exempt money market funds 
prior to this time may not be fully comparable with current data 
and, thus, Chart 2 covers a period beginning in October 2016.
[GRAPHIC] [TIFF OMITTED] TP08FE22.003

    Finally, Table 1 below depicts the key requirements currently 
applicable to each type of money market fund.

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[GRAPHIC] [TIFF OMITTED] TP08FE22.004

BILLING CODE 8011-01-C

B. March 2020 Market Events

    In March 2020, growing economic concerns about the impact of the 
COVID-19 pandemic led investors to reallocate their assets into cash 
and short-term government securities.\25\ These heavy asset flows 
placed stress on short-term funding markets.\26\ For instance, 
commercial paper and certificates of deposit markets in which prime 
money market funds and other participants invest became ``frozen'' in 
March 2020, making it more difficult to sell these instruments, which 
have limited secondary trading even in normal times.\27\ Institutional 
investors, in particular, sought highly liquid investments, including 
government money market funds.\28\ In contrast, institutional prime and 
tax-exempt money market funds experienced outflows beginning the week 
of March 9, 2020, which accelerated the following week.\29\ Outflows 
from retail prime and tax-exempt funds began the week of March 16, a 
week after outflows in institutional funds began. Outflows from some 
publicly offered institutional prime funds as a percentage of fund size 
exceeded those in the September 2008 crisis, although the outflows in 
dollar amounts were much smaller in March 2020, due in part to the 
significant reductions in the size of prime money market funds that 
occurred between September 2008 and March 2020.
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    \25\ See SEC Staff Report on U.S. Credit Markets 
Interconnectedness and the Effects of the COVID-19 Economic Shock 
(Oct. 2020) (``SEC Staff Interconnectedness Report'') at 2, 
available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf.
    \26\ Notably, this market stress in March 2020, including its 
impact on money market funds, was more of a liquidity event than in 
2008. In 2008 there were heightened concerns regarding the credit 
quality of some money market funds' underlying holdings.
    \27\ See SEC Staff Interconnectedness Report, supra footnote 25, 
at 23.
    \28\ More specifically, government money market funds had record 
inflows of $838 billion in March 2020 and an additional $347 billion 
of inflows in April 2020. See id. at 25.
    \29\ Id.
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    During the two-week period of March 11 to 24, publicly offered 
institutional prime funds had a 30% redemption rate (about $100 
billion), which included outflows of approximately 20% of assets during 
the week of March 20 alone.\30\ The largest weekly redemption rate from 
a single publicly offered institutional prime fund during this period 
was around 55%, and the largest daily outflow was about 26%. In 
contrast, privately offered institutional prime funds had redemptions 
of 3% of assets during the week of March 20, and lost approximately 6% 
of their total assets ($17 billion) from March 9 through 20.
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    \30\ This discussion of the size of outflows in March 2020 is 
based on the Report of the President's Working Group on Financial 
Markets, Overview of Recent Events and Potential Reform Options for 
Money Market Funds, infra footnote 39, and our additional analysis.
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    Retail money market funds had lower levels of outflows than 
publicly offered institutional funds. Retail prime funds had outflows 
of approximately 11% of their total assets ($48 billion) in the last 
three weeks of March 2020. Outflows from tax-exempt money market funds, 
which are mostly retail funds, were approximately 8% of their total 
assets ($12 billion) from March 12 through 25.
    As prime money market funds experienced heavy redemptions, their 
holdings of weekly liquid assets generally declined. However, these 
declines were not commensurate with the level of redemptions. Available 
data suggests that managers were actively managing their portfolios to 
avoid having weekly liquid assets below 30% of their total assets by, 
in some cases, selling other portfolio securities to meet redemptions. 
Available evidence, supported by many comment letters in response to 
the Commission's request for comment discussed below, suggested that 
funds' incentives to maintain weekly liquid assets above the 30% 
threshold were directly tied to investors' concerns about the 
possibility of redemption gates and liquidity fees under our rules if a 
fund drops below that threshold.\31\ Based on Form N-MFP

[[Page 7253]]

data providing the size of each fund's weekly liquid assets as of the 
end of each week, between March 13 and March 20, the weekly liquid 
assets of most money market funds changed by less than 5%. In 
particular, institutional prime money market funds that were closer to 
the 30% weekly liquid asset threshold tended to increase their weekly 
liquid assets, while those with higher weekly liquid assets tended to 
decrease their weekly liquid assets.\32\ One institutional prime fund's 
weekly liquid assets fell below the 30% minimum threshold set forth in 
rule 2a-7.\33\ To support liquidity of fund portfolios, two fund 
sponsors provided support to three institutional prime funds by 
purchasing commercial paper and certificates of deposit the funds 
held.\34\
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    \31\ See, e.g., Comment Letter of State Street Global Advisors 
(Apr. 12, 2021) (``State Street Comment Letter''); Comment Letter of 
Schwab Asset Management Solutions (Apr. 12, 2021) (``Schwab Comment 
Letter''); Comment Letter of the Investment Company Institute (Apr. 
12, 2021) (``ICI Comment Letter I''); Comment Letter of Wells Fargo 
Funds Management, LLC (Apr. 12, 2021) (``Wells Fargo Comment 
Letter''); Comment Letter of J.P. Morgan Asset Management (Apr. 12, 
2021) (``JP Morgan Comment Letter''). See also, e.g., Li, Lei, Yi 
Li, Marco Machiavelli, and Alex Xing Zhou, ``Runs and Interventions 
in the Time of COVID-19: Evidence from Money Funds,'' working paper 
(2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3607593 (``Li et al.'').
    \32\ Based on our analysis, two-thirds of retail prime money 
market funds and about half of institutional prime money market 
funds increased their weekly liquid assets slightly during this 
period.
    \33\ The one money market fund that fell below the 30% threshold 
did not impose a gate or fees.
    \34\ As reported by these money market funds in their filings on 
Form N-CR.
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    On March 18, 2020, the Federal Reserve, with the approval of the 
Department of the Treasury, broadened its program of support for the 
flow of credit to households and businesses by taking steps to enhance 
the liquidity and functioning of money markets with the establishment 
of the Money Market Mutual Fund Liquidity Facility (``MMLF''). The MMLF 
provided loans to financial institutions on advantageous terms to 
purchase securities from money market funds that were raising 
liquidity, thereby helping enhance overall market functioning and 
credit provisions to the broader economy.\35\ MMLF utilization reached 
a peak of just over $50 billion in early April 2020, or about 5% of net 
assets in prime and tax-exempt money market funds at the time.\36\ 
Along with other Federal Reserve actions and programs to support the 
short-term funding markets, the MMLF had the effect of significantly 
slowing outflows from prime and tax-exempt money market funds.\37\ The 
MMLF ceased providing loans in March 2021.\38\
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    \35\ Information about the MMLF is available on the Federal 
Reserve's website at https://www.federalreserve.gov/monetarypolicy/mmlf.htm. The Federal Reserve Bank of Boston operated the MMLF.
    \36\ See PWG Report, infra footnote 39, at 17. Institutional and 
retail prime and tax-exempt money market funds were eligible to 
participate in the MMLF. See also Federal Reserve Bank of New York 
Staff Reports, no. 980, The Money Market Mutual Fund Liquidity 
Facility (Sept. 2021) at text accompanying nn. 19 and 22, available 
at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr980.pdf (providing an analysis of prime funds' 
participation in the MMLF and stating that through its life, the 
MMLF extended loans to nine banks, which purchased securities from 
30 institutional prime funds and 17 retail prime funds).
    \37\ See, e.g., ``Federal Reserve Issues FOMC Statement'' (Mar. 
15, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm; ``Federal Reserve Actions to 
Support the Flow of Credit to Households and Businesses'' (Mar. 15, 
2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm; ``Federal Reserve Board 
Announces Establishment of a Commercial Paper Funding Facility 
(CPFF) to Support the Flow of Credit to Households and Businesses'' 
(Mar. 17, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317a.htm; ``Federal Reserve 
Board Announces Establishment of a Primary Dealer Credit Facility 
(PDCF) to Support the Credit Needs of Households and Businesses'' 
(Mar. 17, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317b.htm; ``Federal Reserve 
Board Broadens Program of Support for the Flow of Credit to 
Households and Businesses by Establishing a Money Market Mutual Fund 
Liquidity Facility (MMLF)'' (Mar. 18, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200318a.htm.
    \38\ See supra footnote 35.
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Report of the President's Working Group on Financial Markets and the 
Commission's Request for Comment
    The President's Working Group on Financial Markets (``PWG'') issued 
a report discussing these events and several potential money market 
fund reform options in December 2020 (the ``PWG Report'').\39\ The 
Commission issued a request for comment (the ``Request for Comment'') 
on the various reform options discussed in the PWG Report, and the 
comment period closed in April 2021.\40\ We received numerous comments 
in response to the Request for Comment, which are discussed throughout 
this release. Several of the reforms we are proposing in this release 
were included as potential reform options in the PWG Report.\41\
---------------------------------------------------------------------------

    \39\ See Report of the President's Working Group on Financial 
Markets, Overview of Recent Events and Potential Reform Options for 
Money Market Funds (Dec. 2020), available at https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf.
    \40\ Request for Comment on Potential Money Market Fund Reform 
Measures in President's Working Group Report, Investment Company Act 
Release No. 34188 (Feb. 4, 2021) [86 FR 8938 (Feb. 10, 2021)]. 
Comment letters received in response to the Request for Comment are 
available at: https://www.sec.gov/comments/s7-01-21/s70121.htm.
    \41\ After considering comments on the Commission's request for 
comment, we are not proposing other reform options discussed in the 
PWG Report. These other reform options included: (i) Reform of the 
conditions for imposing redemption gates; (ii) minimum balance at 
risk; (iii) countercyclical weekly liquid asset requirements; (iv) 
floating NAVs for all prime and tax-exempt money market funds; (v) 
capital buffer requirements; (vi) requiring liquidity exchange bank 
(``LEB'') membership; and (vii) new requirements governing sponsor 
support. The Commission has considered several of these reform 
options in the past, including minimum balance at risk, floating 
NAVs for a broader range of funds, capital buffers, and LEB 
membership. See 2014 Adopting Release, supra footnote 12, at section 
III.L. After considering comments, we believe the package of reforms 
we are proposing is appropriately tailored to achieve our regulatory 
goals. See infra Section III.D (discussing the reform alternatives 
in the PWG Report that we are not proposing).
---------------------------------------------------------------------------

Reasons for Investors' Redemption Behavior
    We considered several factors that may have driven investors' 
redemptions during this period of market stress, including the 
potential for the imposition of fees and gates as funds neared the 30% 
weekly liquid asset threshold, declining NAVs, risk reduction, and 
general concerns about the economic impact of the COVID-19 pandemic. 
Evidence suggests that concerns about the potential for fees or gates 
contributed to some investors' redemption decisions. For example, one 
research paper indicated that institutional prime money market fund 
outflows accelerated as funds' weekly liquid assets went closer to the 
30% threshold.\42\ Another paper found that smaller institutional 
investors redeemed more intensely from prime money market funds with 
lower liquidity levels, whereas large institutional investors redeemed 
heavily from prime money market funds regardless of fund liquidity 
level.\43\ Weekly Form N-MFP data analyzed in Table 2 shows that most 
of the largest asset outflows from institutional prime funds in the 
third week of March 2020 were from those funds with weekly liquid 
assets below 41%. The five institutional prime money market funds with 
the lowest weekly liquid assets accounted for roughly 40% of the dollar 
change in assets among all such money market funds. Although Table 2 
shows that money market funds with weekly liquid assets closer to the 
30% threshold had a higher percent of outflows during the week ending 
March 20, 2020, some prime funds with higher levels of weekly liquid 
assets also experienced large outflows.\44\ While Table 2 is based on 
weekly data provided on Form N-MFP, a research report found that
---------------------------------------------------------------------------

    \42\ See Li et al., supra footnote 31.
    \43\ See BIS Quarterly Review: International banking and 
financial market developments, Bank for International Settlements 
(Mar. 2021), available at https://www.bis.org/publ/qtrpdf/r_qt2103.pdf.
    \44\ For example, two institutional prime money market funds 
with outflows greater than 40% had weekly liquid assets of 46% and 
48%.

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[[Page 7254]]

weekly liquid assets dropped during the third week of March 2020, but 
started to recover by the end of the week.\45\
---------------------------------------------------------------------------

    \45\ For example, on March 16 there were two institutional prime 
money market funds with weekly liquid assets less than 35%, six on 
March 18, and three on March 20. See ICI Report, Experiences of US 
Money Market Funds During the Covid-19 Crisis (Nov. 2020) (``ICI MMF 
Report''), available at https://www.ici.org/pdf/20_rpt_covid3.pdf.
---------------------------------------------------------------------------

    Beyond concerns about the potential imposition of fees or gates, 
general declines in liquidity levels may have been a concern for 
investors because the declines can signify that a fund may be less 
equipped to handle redemptions in the near-term. While declining 
liquidity on its own likely contributed to some investors' redemption 
decisions, a few commenters provided information from investor surveys 
suggesting that the potential for gates, and to a somewhat lesser 
extent the potential of liquidity fees, was a more common concern among 
investors.\46\
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    \46\ See infra footnote 73 (discussing these surveys).
    [GRAPHIC] [TIFF OMITTED] TP08FE22.005
    
    We also considered the possibility that declining market-based 
prices for retail and institutional non-government funds contributed to 
investors' redemptions in March 2020. For retail funds that maintain a 
stable NAV, declining market-based prices can contribute to investor 
concerns that these funds may ``break the buck'' (i.e., have market-
based prices below $0.9950) and re-price their shares below $1.00. Most 
retail prime and tax-exempt money market funds experienced declining 
market-based prices in March 2020. However, only one retail tax-exempt 
fund reported a market-based price below $0.9975, and that fund 
subsequently received sponsor support in the form of a capital 
contribution to reduce the deviation between the fund's market-based 
price and its stable price per share.\47\ Moreover, retail prime and 
tax-exempt money market funds with lower market-based prices did not 
experience larger outflows than other retail prime and tax-exempt money 
market funds, so these funds' flows in March 2020 appear to have been 
unrelated to market-based prices. Like retail funds, most institutional 
prime and tax-exempt money market funds experienced declines in their 
market-based prices in March 2020. However, none of the market-based 
prices dropped below $0.9975. Staff analysis and an external study did 
not find a

[[Page 7255]]

correlation between market prices and institutional prime fund 
redemptions during this time.\48\
---------------------------------------------------------------------------

    \47\ PWG Report, supra footnote 39, at 15.
    \48\ See Baklanova, Kuznits, and Tatum, ``Prime MMFs at the 
Onset of the Pandemic: Asset Flows, Liquidity Buffers, and NAVs,'' 
SEC Staff Analysis (Apr. 15, 2021) (``Prime MMFs at the Onset of the 
Pandemic Report'') at 5, available at https://www.sec.gov/files/prime-mmfs-at-onset-of-pandemic.pdf. Any statements therein 
represent the views of the staff of the Division of Investment 
Management. These statements are not a rule, regulation, or 
statement of the U.S. Securities and Exchange Commission. The 
Commission has neither approved nor disapproved their content. Such 
statements, like all staff statements, have no legal force or 
effect: They do not alter or amend applicable law, and they create 
no new or additional obligations for any person. See also Li et al., 
supra footnote 31.
---------------------------------------------------------------------------

    We also considered the potential relationship between a money 
market fund's portfolio holdings and investors' redemption behavior. 
Investor redemption behavior differed based on the overall nature of a 
money market fund's portfolio, given that government money market funds 
had significant inflows and prime money market funds had large 
outflows. However, unlike the events of 2008, redemptions from prime 
money market funds did not appear to be correlated to a fund's 
particular holdings. For instance, prime money market funds with the 
largest holdings of commercial paper and certificates of deposit did 
not experience greater redemptions than other prime funds, even though 
the commercial paper and certificates of deposit markets were 
experiencing greater strains in March 2020 than other markets in which 
money market funds invest.\49\
---------------------------------------------------------------------------

    \49\ The five institutional prime money market funds with the 
highest concentration of commercial paper and certificates of 
deposit accounted for roughly 3% of the dollar change in assets 
among all institutional prime money market funds. These five funds 
each held between 71% and 83% of their assets in commercial paper 
and certificates of deposit. In aggregate, these five funds held $31 
billion in assets on March 13, 2020, and experienced a combined 
outflow of $3 billion, or roughly 10% of their total assets, during 
the week of March 20, 2020.
---------------------------------------------------------------------------

    Beyond factors that relate to the regulatory framework for money 
market funds, there are other factors that may have had a relationship 
to investors' redemption incentives in March 2020. As some commenters 
suggested, general uncertainty of a global health crisis and fears of 
possible business disruptions and economic downturns in the real 
economy as people stayed at home resulted in investors becoming 
increasingly risk averse and seeking to preserve or increase 
liquidity.\50\ Some commenters also asserted that some institutional 
investor redemptions were ordinary course redemptions that otherwise 
would have occurred, irrespective of the pandemic and market stress, to 
meet near-term cash needs, including for operating cash, to make 
quarterly corporate tax payments, or to meet payroll expenses.\51\
---------------------------------------------------------------------------

    \50\ See, e.g., ICI Comment Letter I; JP Morgan Comment Letter; 
Comment Letter of the Vanguard Group, Inc. (Apr. 12, 2021) 
(``Vanguard Comment Letter''); Comment Letter of Federated Hermes, 
Inc. (Apr. 12, 2021) (``Federated Hermes Comment Letter I'').
    \51\ See, e.g., Comment Letter of Invesco (Apr. 12, 2021) 
(``Invesco Comment Letter'') (stating that prime money market funds 
experienced increased redemptions leading up to the quarterly 
corporate tax deadline); Federated Hermes Comment Letter I (citing a 
Carfang Group survey in which 50% of surveyed corporate treasurers 
who redeemed from institutional prime funds in March 2020 stated 
that they were doing so to meet operating cash needs); Comment 
Letter of the Securities Industry and Financial Markets Association 
Asset Management Group (Apr. 12, 2021) (``SIFMA AMG Comment 
Letter'') (stating that tax return filings for partnerships and S-
corporations were due on March 16, 2020, and many businesses had 
biweekly or semimonthly payroll expenses around the same time).
---------------------------------------------------------------------------

    In addition, our staff identified some relationships between the 
size of outflows and the type of adviser to the fund or the size of the 
fund. This revealed that publicly offered prime institutional money 
market funds managed by bank-affiliated advisers had the most outflows 
in March 2020.\52\ Money market funds complexes with lower assets under 
management in publicly offered prime institutional money market funds 
also generally had larger outflows during this time.\53\
---------------------------------------------------------------------------

    \52\ See Prime MMFs at the Onset of the Pandemic Report, supra 
footnote 48, at 3. The analysis in this report concluded that the 
largest outflows in mid-March 2020 were from the publicly offered 
prime institutional money market funds with advisers owned by 
banking firms. The funds with advisers owned by the largest U.S. 
banks designated as global systemically important banks (``G-SIBs'') 
accounted for 56% of the outflows in the third week of March, even 
though these funds managed only around 28% of net assets in publicly 
offered prime institutional money market funds.
    \53\ Id at 3.
---------------------------------------------------------------------------

Connection Between Money Market Fund Outflows and Stress in Short-Term 
Funding Markets
    In markets for private short-term debt instruments, such as 
commercial paper and certificates of deposit, conditions significantly 
deteriorated in the second week of March 2020. Spreads for commercial 
paper and certificates of deposits began widening sharply, and new 
issuances declined and shifted to shorter tenors.\54\ While there is 
limited secondary activity in these markets even in normal times, 
several industry commenters discussed particular difficulties selling 
commercial paper in March 2020.\55\ Moreover, where money market funds 
were able to sell commercial paper during this period, increased 
selling activity from institutional prime funds may have contributed to 
stress in these markets as discussed below.
---------------------------------------------------------------------------

    \54\ PWG Report, supra footnote 39, at 11.
    \55\ See infra footnote 202 and accompanying paragraph.
---------------------------------------------------------------------------

    Using Form N-MFP data, we observed that retail prime and privately 
offered institutional prime funds did not sell significantly more long-
term portfolio securities (i.e., securities that mature in more than a 
month) in March 2020 relative to their typical averages. Publicly 
offered institutional prime funds, however, increased their sales of 
long-term securities in March 2020 to 15% of total assets during this 
time period, which includes assets sold to the MMLF and sponsors, 
compared to a 4% monthly average during the period from October 2016 
through February 2020. In March 2020, these funds sold around $52 
billion in certificates of deposit and commercial paper with maturities 
greater than one month.\56\ Of this amount, approximately $4 billion 
was sold to fund sponsors, as reported on Form N-CR. Combining this 
data with data provided by an industry group's member survey and 
Federal Reserve data on the balance of the MMLF, prime money market 
funds sold an estimated $80 billion in commercial paper and 
certificates of deposit in March 2020, with approximately 5% ($4 
billion) of that total sold to sponsors, 66% ($53 billion) pledged to 
the MMLF, and 29% ($23 billion) sold in the secondary market.\57\ Thus, 
we find that prime money market funds, particularly institutional 
funds, were engaging in greater than normal selling activity in these 
markets which, when combined with similar selling from other market 
participants such as hedge funds and bond mutual funds, both 
contributed to, and were impacted by, stress in short-term funding 
markets.\58\
---------------------------------------------------------------------------

    \56\ This analysis is based on longer-term holdings that these 
funds reported on Form N-MFP in February 2020 but that they did not 
report holding in March 2020. The estimate includes $24.3 billion in 
certificates of deposit and $28.1 billion in commercial paper.
    \57\ Our analysis of available data suggests that of the $80 
billion in commercial paper and certificates of deposit sold in 
March 2020, about $70 billion had maturities greater than a month 
and about $10 billion had maturities less than a month. As of April 
1, 2020, the MMLF balance was close to $53 billion according to the 
Federal Reserve's weekly data, available at https://www.federalreserve.gov/releases/h41/20200402/. See ICI Comment 
Letter I (providing information about money market fund selling 
activity in March 2020 based on a member survey).
    \58\ See, e.g., SEC Staff Interconnectedness Report, supra 
footnote 25, at 4. At the end of February 2020, prime money market 
funds offered to the public owned about 19% of commercial paper 
outstanding. See PWG Report, supra footnote 39, at 11.

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[[Page 7256]]

    Conditions in short-term municipal debt markets also worsened 
rapidly in March 2020. Stresses in short-term municipal markets 
contributed to pricing pressures and outflows for tax-exempt money 
market funds which, in turn, contributed to increased stress in 
municipal markets.\59\ Table 2 shows that as tax-exempt money market 
funds experienced heightened redemptions in the third week of March 
2020 of 9.2%, they reduced their holdings (e.g., tender option bonds 
and variable rate demand notes) by $12.9 billion that week.
---------------------------------------------------------------------------

    \59\ See PWG Report, supra footnote 39, at 12. See also SEC 
Staff Interconnectedness Report, supra footnote 25, at 27.
---------------------------------------------------------------------------

    One commenter suggested that the overall issue in the municipal 
securities market in March 2020 was selling pressure from many market 
participants, and not selling pressure from tax-exempt money market 
funds, which make up only a small portion of the overall market.\60\ 
This commenter suggested that other market participants were raising 
cash by selling short-term municipal securities, which caused 
meaningful discounts on the market value of those securities and 
consequently placed downward pressure on market-based NAVs of tax-
exempt money market funds. The commenter also stated that longer-term 
municipal money market securities, and not variable rate demand notes, 
bore the brunt of the market stress in March 2020. Another commenter 
suggested that tax-exempt money market funds sold longer-term holdings 
in March 2020 to maintain an average weighted maturity of not more than 
60 days, rather than to maintain weekly liquid assets above 30% (given 
that these funds typically hold much higher levels of weekly liquid 
assets).\61\ Our analysis found that tax-exempt money market funds sold 
a larger amount of portfolio securities with maturities of more than a 
month in March 2020 than they typically do. Retail tax-exempt money 
market funds sold 16% of total assets of such holdings during this 
period, compared to a monthly average of 3% during the period from 
October 2016 through February 2020. Institutional tax-exempt money 
market funds increased their sales of longer-term securities from 5% of 
total assets during the period from October 2016 through February 2020 
to 24% in March 2020. Similar to what we observed with prime money 
market funds, tax-exempt funds engaged in greater than normal selling 
activity.\62\
---------------------------------------------------------------------------

    \60\ Vanguard Comment Letter.
    \61\ Comment Letter of Stephen Keen (Apr. 28, 2021). This 
commenter also disagreed with a statement in the PWG Report that a 
spike in the SIFMA index yield caused a drop in market-based NAVs of 
tax-exempt money market funds. The commenter suggested that it is 
more likely that the fund reporting a market-based NAV below $0.9775 
had already realized losses from earlier portfolio sales and sold 
longer-term holdings in response to redemptions in March, with the 
March redemptions increasing the significance of the realized 
losses.
    \62\ Although the tax-exempt money market funds held only $127 
billion in assets in the third week of March 2020, they, like other 
larger market participants, found it difficult to sell assets during 
this period of market stress.
---------------------------------------------------------------------------

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
    Under current rule 2a-7, a money market fund has the ability to 
impose liquidity fees or redemption gates (generally referred to as 
``fees and gates'') after crossing a specified liquidity threshold.\63\ 
A money market fund may impose a liquidity fee of up to 2%, or 
temporarily suspend redemptions for up to 10 business days in a 90-day 
period, if the fund's weekly liquid assets fall below 30% of its total 
assets and the fund's board of directors determines that imposing a fee 
or gate is in the fund's best interests.\64\ Additionally, a non-
government money market fund is required to impose a liquidity fee of 
1% on all redemptions if its weekly liquid assets fall below 10% of its 
total assets, unless the board of directors of the fund determines that 
imposing such a fee would not be in the best interests of the fund.\65\ 
Separately, a money market fund is required to provide daily disclosure 
of the percentage of its total assets invested in weekly liquid assets 
(as well as daily liquid assets) on its website to provide transparency 
to investors and increase market discipline.\66\
---------------------------------------------------------------------------

    \63\ Government funds are permitted, but not required, to impose 
fees and gates, as discussed below.
    \64\ If, at the end of a business day, a fund has invested 30% 
or more of its total assets in weekly liquid assets, the fund must 
cease charging the liquidity fee (up to 2%) or imposing the 
redemption gate, effective as of the beginning of the next business 
day. See 17 CFR 270.2a-7(c)(2)(i)(A) and (B), and (ii)(B).
    \65\ The board also may determine that a lower or higher fee 
would be in the best interests of the fund. See 17 CFR 270.2a-
7(c)(2)(ii)(A).
    \66\ 17 CFR 270.2a-7(h)(10)(ii); 2014 Adopting Release, supra 
footnote 12, at section III.E.9.a.
---------------------------------------------------------------------------

    Fees and gates were intended to serve as redemption restrictions 
that would provide a ``cooling off'' period to temper the effects of a 
short-term investor panic and preserve liquidity levels in times of 
market stress, as well as better allocate the costs of providing 
liquidity to redeeming investors.\67\ However, these provisions did not 
achieve these objectives during the period of market stress in March 
2020. Based on available evidence, even though no money market fund 
imposed a fee or gate, the possibility of the imposition of a fee or 
gate appears to have contributed to incentives for investors to redeem 
and for money market fund managers to maintain weekly liquid asset 
levels above the threshold, rather than use those assets to meet 
redemptions.\68\ These tools therefore appear to have potentially 
increased the risks of investor runs without providing benefits to 
money market funds as intended. As a result, and after considering 
comments, we are proposing to remove the tie between liquidity 
thresholds and fee and gate provisions and, moreover, to remove fee and 
gate provisions from rule 2a-7 entirely.\69\
---------------------------------------------------------------------------

    \67\ See 2014 Adopting Release, supra footnote 12, at section 
III.L.1.a.
    \68\ See supra Section I.B.
    \69\ We also propose to remove related disclosure and reporting 
provisions that require funds to disclose certain information about 
the possibility of fees and gates in their prospectuses and to 
report any imposition of fees or gates on Form N-CR, on the fund's 
website, and in its statement of additional information. See Items 
4(b)(1)(ii) and 16(g)(1) of current Form N-1A; Parts E, F, and G of 
current Form N-CR; 17 CFR 270.2a-7(h)(10)(v).
---------------------------------------------------------------------------

    Commenters broadly supported removal of the tie between weekly 
liquid asset thresholds and the potential imposition of fees and 
gates.\70\ Many commenters stated that this tie contributed to 
investors' incentives to redeem in March 2020 as funds' weekly liquid 
assets declined.\71\ Commenters suggested that, although the rule 
allows but does not require a fund's board to impose redemption gates 
or liquidity fees when the fund drops below the 30% weekly liquid asset 
threshold, investors viewed the 30% threshold as a bright line 
prompting redemptions.\72\

[[Page 7257]]

Some commenters also provided information suggesting that concerns 
about the potential imposition of fees or gates contributed to 
institutional investors' decisions to redeem.\73\ One commenter stated 
that these concerns, combined with investors' ability to track weekly 
liquid asset levels on a daily basis, drove investors' redemption 
behavior.\74\ A few commenters suggested that investors were more 
concerned about the potential for temporary suspensions of redemptions 
than the potential for liquidity fees.\75\ In addition, a few 
commenters stated that retail investors were less sensitive to concerns 
about potential fees or gates than institutional investors.\76\
---------------------------------------------------------------------------

    \70\ See e.g., ICI Comment Letter I; SIFMA AMG Comment Letter; 
Comment Letter of Fidelity Management & Research Company LLC (Apr. 
12, 2021) (``Fidelity Comment Letter''); Comment Letter of Northern 
Trust Asset Management (Apr. 12, 2021) (``Northern Trust Comment 
Letter''); Schwab Comment Letter; Comment Letter of Professors of 
Finance, Stanford Graduate School of Business, and The University of 
Chicago Booth School of Business (Apr. 9, 2021) (``Prof. Admati et 
al. Comment Letter''); Comment Letter of Healthy Markets Association 
(Apr. 19, 2021) (``Healthy Markets Comment Letter'').
    \71\ See, e.g., ICI Comment Letter I; Vanguard Comment Letter; 
Fidelity Comment Letter; Prof. Admati et al. Comment Letter; Comment 
Letter of U.S. Chamber of Commerce Center for Capital Markets 
Competitiveness (Apr. 12, 2021) (``CCMC Comment Letter'').
    \72\ See Schwab Letter; ICI Comment Letter I; Comment Letter of 
the Investment Company Institute (May 12, 2021) (``ICI Comment 
Letter II''); JP Morgan Comment Letter; Wells Fargo Comment Letter.
    \73\ See, e.g., JP Morgan Comment Letter (discussing an informal 
survey of institutional investor clients in which respondents, on 
average, identified the potential for gates as the most important 
factor affecting their decisions to redeem among several possible 
factors the survey identified); Federated Hermes Comment Letter I 
(citing a survey of 39 treasury managers in which 49% of the 
treasurers decreased their holdings of prime money market funds in 
March 2020 and, of those treasurers, 87% mentioned the potential of 
``redemption hurdles'' as a factor in their decision to redeem).
    \74\ ICI Comment Letter I.
    \75\ See Invesco Comment Letter (stating that investors were 
less concerned about the price of their shares and more concerned 
about not having access to their shares, particularly for investors 
who were bolstering their liquidity positions ahead of what was an 
unknown situation in March 2020); ICI Comment Letter I (stating that 
investors view access to their money as paramount in stress periods 
and are less concerned with ``losing a few pennies'' through, for 
example, a fee); ICI Comment Letter II.
    \76\ See, e.g., ICI Comment Letter I (stating that retail prime 
money market funds did not exhibit the same pattern of increasing 
redemptions as a fund neared the 30% threshold, despite the fact 
that retail prime funds are subject to the same fee and gate 
provisions as institutional prime funds); Fidelity Comment Letter.
---------------------------------------------------------------------------

    Several commenters also discussed the effect of the connection 
between liquidity thresholds and fees and gates on money market fund 
managers' behavior in March 2020. These commenters stated that, rather 
than use weekly liquid assets, some managers sold longer-dated 
securities to meet redemptions to avoid falling below the 30% 
threshold.\77\ Commenters asserted that these sales led to losses for 
funds and their remaining investors, and contributed to downward 
pricing pressure on the underlying securities.\78\ A few commenters 
also suggested that the pressure for money market funds to maintain 
liquidity buffers well above the 30% threshold exacerbated market 
stress in March 2020 as most money market funds were seeking liquidity 
at the same time to maintain or build their buffers in the face of 
redemptions.\79\ Commenters also recognized that, in a few instances, 
fund sponsors provided financial support by purchasing securities from 
affiliated institutional prime money market funds to prevent these 
funds from dropping below the 30% weekly liquid asset threshold.\80\ 
One commenter stated that, prior to the 2014 reforms that created the 
connection between liquidity thresholds and fees and gates, money 
market funds regularly used their liquidity buffers and had weekly 
liquid assets below the 30% threshold without adverse consequences.\81\
---------------------------------------------------------------------------

    \77\ See, e.g., State Street Comment Letter; ICI Comment Letter 
I; JP Morgan Comment Letter.
    \78\ See, e.g., JP Morgan Comment Letter.
    \79\ See Schwab Comment Letter; State Street Comment Letter 
(stating that the commenter observed that institutional prime money 
market funds held, on average, weekly liquid assets of approximately 
45% during March 2020).
    \80\ See, e.g., ICI Comment Letter I; Wells Fargo Comment 
Letter.
    \81\ ICI Comment Letter I (stating that for the more than 6 
years the 30% weekly liquid asset threshold was in effect but not 
connected to fee and gate provisions, 68% of prime money market 
funds and 10% of tax-exempt money market funds dropped below the 30% 
threshold at least once, and at least one prime money market fund 
was below this threshold in nearly each week during this period).
---------------------------------------------------------------------------

    We recognize that the current fee and gate provisions did not have 
their intended effect in March 2020 and, instead, appear to have 
contributed to some of the stress that some money market funds and 
short-term funding markets faced during that period. Some investors may 
have feared that if they were not the first to exit their fund, there 
was a risk that they could be subject to gates or fees, and this 
anticipatory, risk-mitigating perspective potentially further 
accelerated redemptions. As discussed above, our analysis and external 
research are consistent with commenters' views on investor behavior and 
found that prime and tax-exempt money market funds whose weekly liquid 
assets approached the 30% threshold had, on average, larger outflows in 
percentage terms than other prime and tax-exempt money market 
funds.\82\
---------------------------------------------------------------------------

    \82\ See supra Section I.B (discussing our analysis and external 
papers).
---------------------------------------------------------------------------

2. Removal of Redemption Gates From Rule 2a-7
    We are proposing to remove the ability of a money market fund to 
impose redemption gates under rule 2a-7, as suggested by some 
commenters.\83\ For example, a few commenters suggested that gates be 
eliminated from rule 2a-7 entirely, or that funds be permitted to 
suspend redemptions only under extraordinary circumstances, such as in 
anticipation of a fund liquidation in accordance with rule 22e-3.\84\ 
One of these commenters suggested that, given the strong investor 
aversion to gates and the likelihood that liquidation would be a 
consequence of any board determination to impose a gate, the current 
gate provisions contemplated for fund liquidations in existing rule 
22e-3 may be sufficient.\85\ Based on the experience in March 2020, we 
are concerned that redemption gates may not be an effective tool for 
money market funds to stem heavy redemptions in times of stress due to 
money market fund investors'--who typically invest in money market 
funds for cash management purposes--general sensitivity to being unable 
to access their investments for a period of time and tendency to redeem 
from such funds preemptively if they fear a gate may be imposed. Under 
the proposal, a money market fund would continue to be able to suspend 
redemptions to facilitate an orderly liquidation of the fund under rule 
22e-3. Rule 22e-3 generally allows a money market fund to suspend 
redemptions if, among other conditions, (1) the fund, at the end of a 
business day, has invested less than 10% of its total assets in weekly 
liquid assets or, in the case of a government or retail money market 
fund, the fund's price per share has deviated from its stable price 
(i.e., it has ``broken the buck'') or the fund's board determines that 
such a deviation is likely to occur, and (2) the fund's board has 
approved the fund's liquidation. We continue to believe that the 
ability to suspend redemptions in these circumstances can help address 
the significant run risk and potential harm to shareholders.
---------------------------------------------------------------------------

    \83\ See Vanguard Comment Letter; Comment Letter of Western 
Asset Management Company, LLC (Apr. 12, 2021) (``Western Asset 
Comment Letter''); see also JP Morgan Comment Letter; ICI Comment 
Letter I.
    \84\ 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).
    \85\ 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.\86\

[[Page 7258]]

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.\87\ 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%.\88\ 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.
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    \86\ 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).
    \87\ Wells Fargo Comment Letter.
    \88\ 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'').
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    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.\89\ 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

[[Page 7259]]

portfolio holdings to meet redemptions, sometimes at a significant loss 
due to wider spreads given liquidity conditions in the market at that 
time.\90\ 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.
---------------------------------------------------------------------------

    \89\ 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).
    \90\ 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.\91\ 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.\92\ 
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.\93\ 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.\94\ 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.\95\ 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.\96\
---------------------------------------------------------------------------

    \91\ See, e.g., Federated Hermes Comment Letter I; Comment 
Letter of Federated Hermes, Inc. (June 1, 2021); Wells Fargo Comment 
Letter.
    \92\ See, e.g., BlackRock Comment Letter (suggesting 10%); 
Dreyfus Comment Letter (suggesting 15%).
    \93\ JP Morgan Comment Letter; ICI Comment Letter I; Western 
Asset Comment Letter.
    \94\ Federated Hermes Comment Letter III.
    \95\ 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.
    \96\ 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.\97\ 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.\98\ 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.\99\ 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.
---------------------------------------------------------------------------

    \97\ See 2014 Adopting Release, supra footnote 13, at section 
III.C.2.a.
    \98\ See supra footnote 36 (noting that 17 retail prime funds 
participated in the MMLF).
    \99\ 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

[[Page 7260]]

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

[[Page 7261]]

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\
---------------------------------------------------------------------------

    \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

[[Page 7262]]

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\
---------------------------------------------------------------------------

    \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.
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    \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.
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    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\
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    \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).
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    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\
---------------------------------------------------------------------------

    \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).
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    \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.

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[[Page 7263]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.000

    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

[[Page 7264]]

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)(1) through (3). 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'').

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[[Page 7265]]

    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

[[Page 7266]]

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?

[[Page 7267]]

    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

[[Page 7268]]

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\
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    \153\ We also request comment on such liquidity fee alternatives 
in Section II.A.3.
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    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

[[Page 7269]]

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\
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    \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.
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    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.
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    \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).
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    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.
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    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\
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    \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).
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    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

[[Page 7270]]

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 costs the fund would incur to sell a vertical slice 
of its portfolio?
    50. Do commenters agree with our assessment that institutional 
prime and institutional tax-exempt money market funds could still offer 
same-day settlement if they are required to implement swing pricing? If 
not, how would swing pricing affect the ability of institutional money 
market funds to settle transactions on a T+0 basis? If these funds 
instead settle transactions on a T+1 basis, how might this affect 
investors?
    51. How might swing pricing affect the ability of institutional 
money market funds to offer multiple NAV strikes per day? How many 
institutional money market funds will reduce the number of times they 
strike their NAV if we adopt swing pricing as proposed? How might 
investors be affected if these funds are no longer able to offer 
multiple NAV strikes, or as many NAV strikes, per day?
    52. Should we require all money market funds, including stable NAV 
money market funds, to adopt a floating NAV and to implement swing 
pricing?
    53. Will investors seek alternative cash management investment 
options that are not subject to fluctuation in value at times of market 
stress to avoid the additional NAV variability that results from swing 
pricing? If so, which alternatives are investors most likely to use?
    54. Are institutional prime and tax-exempt money market funds used 
in cash sweep arrangements?
    55. What other operational changes would be required for funds to 
implement our swing pricing requirement as proposed?
3. Tax and Accounting Implications
    When the Commission adopted the floating NAV requirement for all 
prime and tax-exempt money market funds sold to institutional investors 
in 2014, the Treasury Department amended its regulations to clarify 
money market funds' reporting obligations.\165\ The Commission, the 
Treasury Department, and the IRS recognized the difficulties and costs 
associated with requiring floating NAV money market funds to comply 
with then-existing tax reporting requirements, and the amended Treasury 
regulations permit shareholders of floating NAV money market funds to 
use the ``NAV method'' to report gains and losses.\166\ This method 
allows investors to aggregate gains and losses for the calendar year on 
their tax returns, rather than reporting individual transactions. The 
Treasury Department and the IRS also clarified that the ``wash sale'' 
rule does not apply to redemptions in floating NAV money market 
funds.\167\ The Commission staff will continue discussions with the 
staff of the Treasury Department and IRS regarding the tax consequences 
of the proposed swing pricing requirement, including any implications 
for an investor's use of the NAV method of accounting for gain or loss 
on shares in a floating NAV money market fund or the exemption from the 
wash sale rules for redemptions of shares in these funds. We recognize 
that if the proposed swing pricing requirement modifies the method of 
accounting for gains or losses in relevant money market fund shares, or 
has other tax implications, the tax reporting effects of the proposed 
swing pricing requirement could increase burdens for investors.
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    \165\ Treas. Reg. Sec.  1.446-7.
    \166\ Treas. Reg. Sec.  1.446-7.
    \167\ See Rev. Proc. 2014-45 (2014-34 IRB 388) and Method of 
Accounting for Gains and Losses on Shares in Money Market Funds; 
Broker Returns With Respect to Sales of Shares in Money Market 
Funds, RIN 1545-BM04 (June 15, 2016) [81 FR 44508 (July 8, 2016)] at 
44511. Very generally, the wash sale rule prevents taxpayers from 
taking an immediate loss from the sale of securities if 
substantially identical securities are purchased within six months 
of the sale.
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    From an accounting perspective, when institutional money market 
funds were required to adopt a floating NAV, the Commission stated its 
belief that an investment in a money market fund with a floating NAV 
would meet the definition of a ``cash equivalent'' for accounting 
purposes.\168\ One commenter expressed concern that a swing pricing 
requirement could result in money market funds no longer qualifying as 
cash equivalents.\169\ For the same reasons discussed in connection 
with the 2014 reforms, we believe the adoption of swing pricing would 
not preclude shareholders from classifying their investments in money 
market funds as cash equivalents. Under normal circumstances, we 
believe an investment in a money market fund that applies swing pricing 
under our proposed rule would qualify as a ``cash equivalent'' for 
purposes of U.S. GAAP.\170\ Under normal circumstances, we anticipate 
that fluctuations in the amount of cash received upon redemption from a 
fund that applies swing pricing would likely be small and would be 
consistent with the concept of a ``known'' amount of cash. However, as 
already exists today and, as noted by the Commission in 2014, events 
may occur that give rise to credit and liquidity issues for money 
market funds. If such events occur, shareholders would need to reassess 
if their investments in that money market fund continue to meet the 
definition of a cash equivalent.\171\ This is already the case absent 
swing pricing, but we recognize that swing pricing may result in larger 
fluctuations in a fund's share price during such periods of stress.
---------------------------------------------------------------------------

    \168\ 2014 Adopting Release, supra footnote 12, at section VI 
(amending the ``Codification of Financial Reporting Policies'' 
announced in Financial Reporting Release No. 1 (Apr. 15, 1982)).
    \169\ JP Morgan Comment Letter.
    \170\ See FASB Accounting Standards Codification Master 
Glossary, available at https://asc.fasb.org/glossary.
    \171\ See 2014 Adopting Release, supra footnote 12, at paragraph 
accompanying n.428.
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    Consistent with the approach the Commission established for mutual 
fund swing pricing, the proposed swing pricing requirement for 
institutional money market funds would affect certain aspects of 
financial reporting, as these funds would need to distinguish between 
the GAAP NAV per share and the transactional price adjustment to the 
NAV per share resulting from swing pricing (``swung price'').\172\ The 
GAAP NAV per share is the amount of net assets attributable to each 
share of capital stock outstanding at the close of the period, and the 
swung price (if the NAV per share is adjusted due to swing pricing at 
period end) would represent the transactional price on the last day of 
the period, which is the NAV per share on the day with an adjustment by 
the swing factor.\173\ Money market funds would disclose the GAAP NAV 
per share (which will reflect the effects of swing pricing throughout 
the reporting period, if applicable) on the statement of assets and 
liabilities. This allows users of the financial statements to 
understand the actual amount of net assets attributable to the fund's

[[Page 7271]]

remaining shareholders at period end.\174\ A money market fund using 
swing pricing would, however, include the impact of swing pricing in 
its financial highlights, and the per share impact of amounts retained 
by the fund due to swing pricing should be included in the fund's 
disclosures of per share operating performance.\175\ Swing pricing also 
affects disclosure of capital share transactions included in a fund's 
statement of changes in net assets.\176\ Finally, a money market fund 
using swing pricing would be required to disclose in a footnote to its 
financial statements: (1) The general methods used in determining 
whether the fund's NAV per share will be adjusted due to swing pricing; 
(2) whether the fund's NAV per share has been adjusted by swing pricing 
during the period; and (3) a general description of the effects of 
swing pricing on the fund's financial statements.\177\
---------------------------------------------------------------------------

    \172\ See Swing Pricing Adopting Release, supra footnote 102, at 
section II.A.3.g.
    \173\ See 17 CFR 210.6-04.19 and FASB ASC 946-10-20 (discussing 
the concept of the GAAP NAV); Swing Pricing Adopting Release, supra 
footnote 102, at section II.A.3.g.
    \174\ See Swing Pricing Adopting Release, supra footnote 102, at 
section II.A.3.g.
    \175\ See Item 13 of Form N-1A (requiring disclosure of the 
swung price per share, if applicable, as a separate line item below 
the ending GAAP NAV per share on the financial highlights); FASB ASC 
946-205-50-7 (requiring specific per share information to be 
presented in the financial highlights for registered investment 
companies, including disclosure of the per share amount of purchase 
premiums, redemption fees, or other capital items).
    \176\ See 17 CFR 210.6-09.4(b). This rule requires funds to 
disclose the number of shares and dollar amounts received for shares 
sold and paid for shares redeemed. For funds that implement swing 
pricing, Regulation S-X would require the dollar amount disclosed to 
be based on the NAVs used to process investor subscriptions and 
redemptions, including those processed using swung prices during the 
reporting period.
    \177\ See rule 6-03(n) of Regulation S-X.
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    We request comment on the tax and accounting implications of our 
proposed swing pricing requirement, including:
    56. Would swing pricing impose additional complications with 
respect to the tax treatment of floating NAV money market fund 
investments? If so, how could we address such complications?
    57. Would the implementation of swing pricing for institutional 
money market funds affect the treatment of shares of such funds as 
``cash equivalents'' for accounting purposes? Would a cap on the swing 
factor, such as a 2% cap, reduce uncertainty about the treatment of 
institutional money market fund shares as ``cash equivalents''?
    58. Should the financial reporting effects of swing pricing differ 
for money market funds, as opposed to other types of mutual funds?
    59. Are there other tax or accounting implications of institutional 
money market funds using swing pricing that we should address?
4. Disclosure
    Form N-1A is used by open-end funds, including money market funds 
and ETFs, to register under the Investment Company Act and to register 
offerings of their securities under the Securities Act. Form N-1A 
currently requires a fund to describe its procedures for pricing fund 
shares, including an explanation that the price of fund shares is based 
on the fund's NAV and a description of the method used to value fund 
shares.\178\ In 2016, when the Commission adopted the swing pricing 
rule for open-end funds that are not money market funds or ETFs, it 
adopted amendments to Item 6 of Form N-1A to enhance disclosure of an 
open-end fund's swing pricing procedures.\179\ Under our proposal, 
institutional money market funds would be required to implement swing 
pricing policies and procedures and therefore would be required to 
comply with the swing pricing-related requirements of Form N-1A, 
described in greater detail below.
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    \178\ See Item 11(a)(1) of Form N-1A.
    \179\ See Swing Pricing Adopting Release, supra footnote 102, at 
section II.B.1.
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    Money market funds subject to a swing pricing requirement under our 
proposal also would be required to respond to the existing swing 
pricing-related items on Form N-1A that were not historically 
applicable to these funds. Specifically, the form requires a fund to 
include a general description of the effects of swing pricing on the 
fund's annual total returns as a footnote to its risk/return bar chart 
and table.\180\ Form N-1A also requires a fund that uses swing pricing 
to explain the fund's use of swing pricing, including its meaning, the 
circumstances under which the fund will use it, and the effects of 
swing pricing on the fund and investors.\181\ While Form N-1A requires 
other funds that use swing pricing to disclose a fund's swing factor 
upper limit, we are proposing to exclude money market funds from this 
requirement because our proposal does not require these funds to 
establish a swing factor upper limit.\182\
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    \180\ Items 4(b)(2)(ii) and (iv) of Form N-1A.
    \181\ Item 6(d) of current Form N-1A.
    \182\ Item 6(d) of proposed Form N-1A.
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    Money market funds use Form N-MFP to report key information to the 
Commission each month. As part of our swing pricing framework for money 
market funds, we propose to amend Form N-MFP to require money market 
funds that are not government funds or retail funds to use their 
adjusted NAV, as applicable, for purposes of reporting the series- and 
class-level NAV per share.\183\ We also propose to require these funds 
to report the number of times the fund applied a swing factor over the 
course of the reporting period, and each swing factor applied.\184\ 
Together, these reporting requirements would help the Commission 
monitor the size of the adjustments funds are making during normal and 
stressed market conditions, as well as the frequency at which funds 
apply swing factor adjustments.
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    \183\ See Items A.20 and B.5 of current Form N-MFP; Items A.20 
and B.6 of proposed Form N-MFP. As discussed below, we are also 
proposing to amend these current reporting requirements to require 
funds to provide series- and class-level NAVs per share as of the 
close of each business day, rather than as of the close of business 
on each Friday during the month reported. See infra Section 
II.F.2.c.
    \184\ See Item A.22 of proposed Form N-MFP.
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    Under current rule 2a-7, money market funds are required to provide 
on their websites the money market fund's net asset value per share as 
of the end of each business day during the preceding six months. This 
disclosure must be updated each business day as of the end of the 
preceding business day.\185\ We are proposing to amend this provision 
to require money market funds that are not government funds or retail 
funds to depict their adjusted NAV, taking into account the application 
of a swing factor.\186\ We believe that, when a fund applies swing 
pricing, the adjusted NAV is more useful for investors because it 
represents the price at which transactions in the fund's shares 
occurred.
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    \185\ 17 CFR 270.2a-7(h)(10)(iii).
    \186\ See proposed rule 2a-7(h)(10)(iii).
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    We request comment on swing pricing disclosure requirements as 
applicable to money market funds, including:
    60. Are the existing swing pricing-related disclosure obligations 
on Form N-1A appropriate for money market funds? In addition to the 
question regarding the swing factor's upper limit, are there other 
existing obligations that should not be applied to money market funds?
    61. Would more information be useful to shareholders or other 
market participants? If so, what additional information should we 
require to be disclosed on Form N-1A, Form N-MFP, or elsewhere (e.g., 
fund websites or other marketing materials)? When should we require 
such disclosure?
    62. Should we require institutional funds to report the number of 
times the fund applied a swing factor and each swing factor applied, as 
proposed? Should we require the median, highest, and lowest (non-zero) 
swing factor applied for each reporting period on Form N-MFP, rather 
than requiring

[[Page 7272]]

disclosure of each swing factor applied? Should we require these funds 
to provide additional information about swing pricing in their monthly 
reports on Form N-MFP, such as the swing pricing administrator's 
determination to use a lower market impact threshold (if applicable)? 
Should we separately require funds to disclose information about market 
impact factors, such as how many times a market impact factor was 
included in the swing factor each month and the size of those market 
impact factors (e.g., either the size of any market impact factor 
applied, or the median, highest, and lowest (non-zero) amount)?
    63. As proposed, should we require an institutional fund to use its 
adjusted NAV, as applicable, for purposes of current requirements to 
disclose a fund's NAV on its website and the series- and class-level 
NAV disclosure requirements on Form N-MFP? Should we require an 
institutional fund to indicate, for each NAV reported, whether a swing 
factor was applied (i.e., whether the NAV was ``adjusted'')? As an 
alternative to reporting the adjusted NAV, should we provide that the 
website and Form N-MFP NAV disclosures should not include a swing 
factor adjustment? If so, why would the unadjusted NAV be more useful 
for these purposes? Alternatively, should we require an institutional 
fund to disclose both its adjusted NAV and its unadjusted NAV on the 
fund's website or on Form N-MFP? What are the advantages and 
disadvantages of requiring funds to disclose both figures?
    64. Requirements to disclose NAVs per share on fund websites and on 
Form N-MFP require NAVs per share as of the close of business on a 
given day, while some funds may have multiple pricing periods and 
multiple NAVs each day. Should we require a fund to disclose its NAV 
per share for each pricing period, instead of the end-of-day NAV per 
share only? Would this additional transparency be helpful for 
investors, or would it make NAV disclosure less useful for investors by 
increasing the number of data points without significantly improving 
the value of the data?
    65. Will daily website disclosure of fund flows and the adjusted 
NAV facilitate gaming of swing pricing or preemptive runs by investors 
that wish to redeem in advance of a fund imposing a swing factor on a 
particular day? If so, how? Are there changes we should make to reduce 
the potential for gaming?

C. Amendments to Portfolio Liquidity Requirements

1. Increase of the Minimum Daily and Weekly Liquidity Requirements
    Currently, rule 2a-7 requires that a money market fund, immediately 
after acquisition of an asset, hold at least 10% of its total assets in 
daily liquid assets and at least 30% of its total assets in weekly 
liquid assets.\187\ Assets that make up daily liquid assets and weekly 
liquid assets are cash or securities that can readily be converted to 
cash within one business day or five business days, respectively.\188\ 
These requirements are designed to support funds' ability to meet 
redemptions from cash or securities convertible to cash even in market 
conditions in which money market funds cannot rely on a secondary or 
dealer market to provide liquidity.\189\
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    \187\ See 17 CFR 270.2a-7(d)(4)(ii) and (iii) (rule 2a-
7(d)(4)(ii) and (iii)); see also supra footnote 22 and accompanying 
paragraph. Tax-exempt money market funds are not subject to the 
daily liquid asset requirements due to the nature of the markets for 
tax-exempt securities and the limited supply of securities with 
daily demand features. See 2010 Adopting Release, supra footnote 20, 
at n.243 and accompanying text.
    \188\ Daily liquid assets are: Cash; direct obligations of the 
U.S. Government; certain securities that will mature (or be payable 
through a demand feature) within one business day; or amounts 
unconditionally due within one business day from pending portfolio 
security sales. See rule 2a-7(a)(8). Weekly liquid assets are: Cash; 
direct obligations of the U.S. Government; agency discount notes 
with remaining maturities of 60 days or less; certain securities 
that will mature (or be payable through a demand feature) within 
five business days; or amounts unconditionally due within five 
business days from pending security sales. See rule 2a-7(a)(28).
    \189\ See 2010 Adopting Release, supra footnote 20, at n.213 and 
accompanying and following text.
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    In March 2020, significant outflows from prime funds caused general 
reductions in these funds' daily liquid assets and weekly liquid 
assets. Although only one institutional prime fund reported weekly 
liquid assets below the 30% threshold, it is likely that other funds 
would have breached daily liquid asset or weekly liquid asset 
thresholds at the time if they had used daily liquid assets or weekly 
liquid assets to meet redemptions. As previously discussed, because the 
fee and gate provisions in rule 2a-7 incentivized funds to maintain 
weekly liquid assets above 30%, many funds took other actions (e.g., 
selling longer-term assets or receiving financial support) to meet 
redemptions and remain above the minimum liquidity threshold. Some 
funds experienced redemption levels that would have depleted required 
levels of daily liquid assets or weekly liquid assets, if they had been 
used. For example, the largest weekly outflow in March 2020 was around 
55%, and the largest daily outflow was about 26% (both well above the 
respective weekly liquid asset and daily liquid asset thresholds of 30% 
and 10%).\190\ Further, since the fee and gate provisions in rule 2a-7 
incentivized funds to maintain weekly liquid assets above the current 
threshold, the proposed removal of the fee and gate provisions from 
rule 2a-7 could have the effect of reducing fund liquidity levels by 
eliminating such incentives. Accordingly, we are proposing to increase 
daily and weekly liquid asset requirements to 25% and 50%, 
respectively.\191\ We believe that these increased thresholds will 
provide a more substantial buffer that would better equip money market 
funds to manage significant and rapid investor redemptions, like those 
experienced in March 2020, while maintaining funds' flexibility to 
invest in diverse assets during normal market conditions.
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    \190\ See supra section I.B; see also Prime MMFs at the Onset of 
the Pandemic Report, supra footnote 41, at 2-3. According to Form N-
MFP filings, no prime money market fund reported daily liquid assets 
declining below the 10% threshold in March 2020.
    \191\ See proposed rule 2a-7(d)(4)(ii) and (iii).
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    Several commenters supported increasing the minimum liquidity 
requirements, believing that such increases could make money market 
funds more resilient during times of market stress.\192\ Several 
commenters acknowledged that historically, most prime money market 
funds have maintained liquidity levels well above the regulatory 
minimums in normal market conditions.\193\ Some commenters asserted 
that raising the thresholds to the levels that most funds already 
maintain would provide a more sufficient liquidity buffer.\194\ One 
commenter suggested that requiring sufficiently higher weekly liquid 
asset levels would provide investors with confidence that funds hold 
adequate liquidity during periods of market uncertainty, thereby 
reducing the

[[Page 7273]]

likelihood of a run.\195\ This commenter stated that an increased 
weekly liquid assets requirement, along with the removal of the tie to 
fees and gates, would most effectively address the structural 
vulnerabilities in money market funds that were exposed in March 2020. 
Some commenters suggested that the Commission analyze and monitor 
market data to ensure that any new thresholds promote the goal of 
improving the resilience of money market funds during times of market 
stress while preserving the benefits that investors have come to expect 
from money market funds.\196\
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    \192\ See e.g., ICI Comment Letter I; Comment letter of Samuel 
G. Hanson, David S. Scharfstein, Adi Sunderam, Harvard Business 
School (Apr. 12, 2021) (``Prof. Hanson et al. Comment Letter''); 
Dreyfus Comment Letter (suggesting increasing the weekly liquid 
asset minimum to 35%); Fidelity Comment Letter (supporting higher 
liquidity requirements for institutional prime money market funds 
specifically).
    \193\ Dreyfus Comment Letter; SIFMA AMG Comment Letter; Western 
Asset Comment Letter; ICI Comment Letter I (stating that 
``institutional prime money market funds on average held 44 percent 
of their assets in weekly liquid assets, and retail prime money 
market funds held on average 41 percent of their assets in weekly 
liquid assets'').
    \194\ Dreyfus Comment Letter; ICI Comment Letter I.
    \195\ Fidelity Comment Letter.
    \196\ ICI Comment Letter I; Fidelity Comment Letter.
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    Other commenters opposed any increase in the minimum liquidity 
management requirements.\197\ These commenters argued that such a 
change would likely decrease the yield of prime money market funds. 
They asserted that such a decrease in yield might reduce the spread 
between prime and government money market funds, which could ultimately 
decrease investor demand for prime money market funds. Further, some 
commenters stated that most fund managers have shown discipline in 
maintaining liquidity in excess of the existing thresholds.\198\ Some 
of these commenters asserted that this practice will continue such that 
increasing the minimum regulatory requirements would result in funds 
holding even greater amounts of daily and weekly liquid assets at 
levels that may be higher than is necessary or appropriate.\199\ One 
commenter asserted that such an increase could have the unintended 
effect of encouraging ``barbelling,'' in which fund managers compensate 
for the impact on expected yield by increasing the maturity risk of 
their remaining assets, potentially making the fund's portfolio more 
susceptible to volatility overall.\200\ Lastly, one commenter stated 
that an increase in the minimum liquidity management requirements is 
likely to have marginal impact because the redemption behavior in March 
2020 was motivated by a concern that money market funds would implement 
fees and gates. This commenter asserted that if fees and gates are no 
longer tied to weekly liquid asset thresholds, increasing the liquidity 
requirements is unlikely to have a material impact on investor 
behavior.\201\
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    \197\ See e.g., Western Asset Comment Letter; Wells Fargo 
Comment Letter; JP Morgan Comment Letter; SIFMA AMG Comment Letter 
(recommending that, if the Commission does increase the weekly 
liquid asset threshold, it do so incrementally to observe the 
effects of an increased threshold on portfolio management and 
investor demand for money market funds).
    \198\ Wells Fargo Comment Letter; JP Morgan Comment Letter; 
Western Asset Comment Letter (noting that reporting and transparency 
requirements encourage managers to maintain liquid assets in excess 
of the existing weekly liquid asset threshold).
    \199\ SIFMA AMG Comment Letter; Western Asset Comment Letter.
    \200\ Western Asset Comment Letter.
    \201\ SIFMA AMG Comment Letter.
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    We believe it is important for money market funds to have a strong 
source of available liquidity to meet daily redemption requests, 
particularly in times of stress, when liquidity in the secondary market 
can be less reliable for many instruments in which they invest. For 
example, many industry commenters discussed difficulties selling 
commercial paper in March 2020.\202\ One commenter explained that, in 
the commercial paper market, market participants who want to sell 
commercial paper frequently must ask the bank from whom they purchased 
the paper to bid it back in the secondary markets, and banks typically 
are unwilling to bid commercial paper from issuers if they are not a 
named dealer on the issuer's program.\203\ The commenter asserted that 
in March 2020, banks declined to bid for commercial paper even where 
the bank sold the commercial paper or was a named dealer in the 
issuer's program. The proposed increased liquidity requirements are 
designed to provide a stronger liquidity buffer for funds to meet 
redemptions even during periods of market stress when secondary markets 
may be illiquid.
---------------------------------------------------------------------------

    \202\ See, e.g., Western Asset Comment Letter; Invesco Comment 
Letter; BlackRock Comment Letter; ICI Comment Letter I; State Street 
Comment Letter.
    \203\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

    Moreover, we disagree with the assertion from some commenters that 
higher liquidity thresholds would likely decrease the demand for prime 
money market funds or encourage riskier portfolio construction and 
``barbelling.'' As discussed below, for the past several years, prime 
money market funds have maintained levels of liquidity that are close 
to or that exceed the proposed thresholds, without generally 
barbelling.\204\ This demonstrates that funds have the ability to 
operate with the proposed minimum liquidity levels while continuing to 
serve as an efficient and diversified cash management tool for 
investors. In addition, while we acknowledge that requirements to 
provide daily liquid asset and weekly liquid asset levels on funds 
websites and on Form N-MFP may encourage funds to hold liquidity 
buffers above the regulatory minimums, as some commenters suggested, 
this would not be required by our rules nor would it be necessarily an 
expected outcome. For example, funds may be more likely to operate as 
they did prior to the adoption of fee and gates provision in rule 2a-7, 
where they generally maintained liquidity levels slightly above the 
regulatory thresholds and dropped below those thresholds as 
needed.\205\
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    \204\ See BlackRock Comment Letter (stating that it has not seen 
evidence that barbelling was a problem in March 2020, or that money 
market fund portfolios were generally structured with a barbell). We 
similarly have not found significant use of barbelling strategies 
among money market funds.
    \205\ See infra Section II.C.2 (proposing to maintain the 
existing regulatory requirement that if a money market fund's 
portfolio does not meet the minimum daily liquid asset or weekly 
liquid asset threshold, the fund may not acquire any assets other 
than daily liquid assets or weekly liquid assets, respectively, 
until it meets these minimum thresholds).
---------------------------------------------------------------------------

    To aid in the determination of new daily liquid asset and weekly 
liquid asset thresholds, we created hypothetical portfolios and stress 
tested them using the redemption patterns of institutional prime funds 
from March 16 to 20, 2020, when prime money market funds experienced 
their heaviest outflows.\206\ Our analysis calculated the probability 
that a fund would have breached its liquid asset limits under various 
daily liquid asset and weekly liquid asset combinations during this 
period. The analysis estimates that if a fund held only the required 
minimum liquidity thresholds of 10% daily liquid assets and 30% weekly 
liquid assets, the fund would have a 32% chance of exhausting its 
available liquidity and needing to sell less liquid assets on at least 
one day during the five-day period. The analysis further reflects that 
a fund that held 25% daily liquid assets and 50% weekly liquid assets 
during the same period would have a 9% chance of running out of liquid 
assets to meet redemptions on at least one day. At these liquidity 
thresholds, a fund would have a near 2% chance of running out of 
available liquidity on days 1, 2, and 5, and about a 5% chance of 
exhausting available liquidity on days 3 and 4. The analysis also 
assessed higher liquidity

[[Page 7274]]

levels, such as 50% daily liquid assets and 60% weekly liquid assets. 
At these levels, a fund would not have exhausted its available liquid 
assets on any day during the five-day period.
---------------------------------------------------------------------------

    \206\ Each hypothetical portfolio was created using a specific 
daily liquid asset and weekly liquid asset value (and, for the 
weekly liquid asset value, the hypothetical portfolio used one of 20 
separate distribution bins of assets maturing within 2 to 5 business 
days, which were created to match the actual distribution observed 
on Form N-MFP). The analysis yielded 840 possible outcomes for each 
daily liquid asset and weekly liquid asset combination that were 
used to calculate the probability that a fund would run out of 
available liquidity on days 1, 2, 3, 4, and/or 5, representing March 
16 to 20, 2020. Because a fund could run out on one or multiple 
days, our analysis also calculated the probability available 
liquidity would run out on at least one of the days.
---------------------------------------------------------------------------

    Based on this analysis and other considerations discussed in this 
section, we are proposing to increase the minimum liquidity 
requirements to 25% daily liquid assets and 50% weekly liquid 
assets.\207\ While these proposed liquidity levels do not reduce a 
fund's liquidity risk to zero, we believe that, based on the analysis 
above, the proposed thresholds would be sufficiently high to allow most 
money market funds to manage their liquidity risk in a market crisis. 
Moreover, the proposed increase in funds' required daily and weekly 
liquid assets would be paired with the proposed removal of liquidity 
fees and redemption gates from rule 2a-7. These two proposed changes, 
together, should reduce incentives for managers to avoid using 
liquidity buffers and therefore allow them to use the increased amounts 
of required daily and weekly liquid assets to meet redemptions without 
the concern that using the assets could lead to runs to avoid a fee or 
gate. We also believe that the proposed liquidity buffers are 
sufficiently high to allow funds to use their available liquidity as 
needed, without raising investor concerns that the fund will rapidly 
run out of weekly liquid assets or daily liquid assets merely because 
its liquidity has dropped below the proposed 25% or 50% thresholds.
---------------------------------------------------------------------------

    \207\ See proposed rule 2a-7(d)(4).
---------------------------------------------------------------------------

    The proposed liquidity buffers of 25% daily liquid assets and 50% 
weekly liquid assets are generally consistent with the average 
liquidity levels prime money market funds have maintained over the past 
several years. According to analysis of Form N-MFP data from October 
2016 to February 2020, the average amount of daily liquid assets and 
weekly liquid assets for prime money market funds was 31% and 49%, 
respectively. The same analysis also showed that approximately 20% of 
prime money market funds had daily liquid assets above 40% and weekly 
liquid assets above 60% over the same period. We recognize that at the 
higher levels of liquidity that funds typically have maintained, if 
money market funds had used their liquidity buffers in March 2020, many 
would have been able to fulfill redemptions requests without selling 
longer-term portfolio securities or receiving sponsor support. However, 
we understand that rule 2a-7's fee and gate provisions have been a 
significant motivating factor for funds to maintain liquidity buffers 
well above the current regulatory minimums. If we adopt the proposed 
removal of the tie between the potential imposition of fees and gates 
and a fund's liquidity, we are concerned that funds may subsequently 
reduce their liquidity levels and not be equipped to handle future 
stress. As we saw in March 2020, markets can become illiquid very 
rapidly in response to events that fund managers may not anticipate. 
The failure of a single fund to anticipate such conditions may lead to 
a run affecting all or many funds. We think it would be ill-advised to 
rely solely on the ability of managers to anticipate liquidity needs, 
which may arise from events the money market fund manager cannot 
anticipate or control. Thus, we are proposing modified liquidity 
requirements that are more in line with the typical levels of liquidity 
that funds have held over the past several years. If adopted, these 
increased liquidity requirements should limit the potential effect on 
fund liquidity that may otherwise arise from removing the fee and gate 
provisions from rule 2a-7. With the exception of tax-exempt money 
market funds, which will continue to be exempt from the daily liquid 
asset requirements, our proposal does not establish different liquidity 
thresholds by type of fund.\208\ Although outflows in March 2020 were 
more acute in institutional prime money market funds than in retail 
prime money market funds, we do not know that redemption patterns would 
be the same in future periods of market turmoil, particularly without 
official sector intervention to support short-term funding 
markets.\209\ In addition, 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.\210\ Moreover, retail prime 
money market funds invest in markets that are prone to illiquidity in 
stress periods, and increased liquidity requirements would provide 
protections so that these funds can meet redemptions in times of stress 
without additional tools such as liquidity fees, redemption gates, or 
swing pricing. We believe that a uniform approach encourages sufficient 
liquidity levels across all money market funds, thereby reducing the 
potential incentive for investors to flee from funds that might 
otherwise be perceived as holding insufficient liquidity during market 
stress events.
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    \208\ See supra footnote 187 (discussing the current exception 
tax-exempt funds have from the required daily liquid asset 
investment minimum).
    \209\ As an example, if retail investors are merely slower to 
act initially in periods of market stress, retail prime and tax-
exempt funds may need higher liquidity levels to meet ongoing 
redemptions if a stress period is not relatively brief.
    \210\ Based on analysis of Form N-MFP data, retail prime money 
market funds maintained average daily liquid assets of 24% and 
average weekly liquid assets of 42% during the period of October 
2016 through February 2020. In contrast, institutional prime fund 
averages during this period were 37% and 54%, respectively.
---------------------------------------------------------------------------

    The PWG Report and the Commission's associated Request for Comment 
considered the creation of a new liquidity requirement category, such 
as a biweekly liquid asset requirement.\211\ Commenters expressed 
general opposition to a new liquidity category for money market 
funds.\212\ Commenters suggested that such a category would increase 
regulatory complexity and overcomplicate the regulatory framework 
without additional benefit.\213\ Commenters also expressed skepticism 
that issuers would underwrite assets with a two-week maturity, as there 
is a very limited issuance market for assets in the biweekly maturity 
category.\214\ After considering these comments, we are not proposing 
to introduce a new category of liquidity requirements. We believe that 
a new category, such as a requirement for biweekly assets, would be an 
extension of the weekly liquid asset threshold without significant 
benefits. This is because we expect that money market funds would 
likely meet a biweekly requirement in the same way that they meet the 
weekly liquid asset thresholds, by letting longer-dated securities roll 
down in maturity.\215\ We believe it would be more efficient to 
increase the weekly liquid asset requirement directly, as proposed, 
than to increase it indirectly by adopting a new biweekly liquid asset 
requirement.
---------------------------------------------------------------------------

    \211\ See PWG Report at 26.
    \212\ See, e.g., ICI Comment Letter I; SIFMA AMG Comment Letter; 
Federated Hermes Comment Letter I; Wells Fargo Comment Letter; 
BlackRock Comment Letter.
    \213\ ICI Comment Letter I; SIFMA AMG Comment Letter; Wells 
Fargo Comment Letter; JP Morgan Comment Letter (asserting that 
``[money market funds] typically already hold assets with a well 
distributed range of maturities, with longer-dated positions 
constantly rolling down towards maturity'').
    \214\ SIFMA AMG Comment Letter; JP Morgan Comment Letter; ICI 
Comment Letter I (noting that commercial paper, for example, is not 
currently issued with 14-day maturities).
    \215\ ICI Comment Letter I.
---------------------------------------------------------------------------

    Another commenter recommended more substantial asset restrictions 
for prime money market funds, such as a requirement that prime money 
market funds hold 25-50% of their weekly liquid assets in short-term 
U.S.

[[Page 7275]]

Government securities, including U.S. Government agency 
securities.\216\ This commenter suggested that enhancing the quality, 
not only the quantity, of a prime money market fund's liquid assets 
would enhance investor confidence that such funds can withstand market 
stress. We do not believe that this type of requirement would have a 
significant effect, as most prime money market funds already hold a 
significant percentage of their weekly liquid assets in Treasuries and 
government agency securities.\217\ We continue to believe that 
grounding our definitions of liquid assets in terms of maturity, rather 
than type of security, is the best framework to determine a fund's 
available liquidity for purposes of rule 2a-7. Instead of requiring 
funds to hold a separate threshold of particular securities within the 
daily and weekly liquid asset basket, as the commenter suggested, we 
believe that increasing the minimum liquidity threshold, paired with 
removing fees and gates from rule 2a-7, would be a more efficient 
manner of enhancing funds' access to liquidity and thus their ability 
to withstand market stress.
---------------------------------------------------------------------------

    \216\ CCMR Comment Letter.
    \217\ See Baklanova, Kuznits, and Tatum, How Do Prime MMFs 
Manage Their Liquidity Buffers (July 21, 2021), available at https://www.sec.gov/files/how-do-prime-mmfs-manage-liquidity-buffers.pdf 
(finding that investments in Treasuries and government agency 
securities account, on average, for approximately 35% of prime 
funds' weekly liquid assets).
---------------------------------------------------------------------------

    We request comment on our proposal to increase the minimum 
liquidity requirements to 25% daily liquid assets and 50% weekly liquid 
assets, including the following:
    66. Would our proposal to increase the minimum liquidity 
requirements make money market funds more resilient during times of 
market stress? Would a lower or higher threshold of daily or weekly 
liquid assets better allow most money market funds' to meet potential 
redemptions without selling less liquid asset in periods of market 
stress? Should we instead propose to raise the minimum daily liquid 
asset threshold to 20%, 30%, or 35% and/or the minimum weekly liquid 
asset threshold to 40%, 55%, or 60%, for example? Why or why not?
    67. Would our proposal to remove fee and gate provisions from rule 
2a-7 encourage funds to maintain lower levels of liquidity during 
normal market conditions? If so, do our proposed increased minimum 
liquidity requirements limit the potential effect on fund liquidity 
that may otherwise arise from our proposal to remove fee and gate 
provisions from rule 2a-7? Should the proposed minimum liquidity 
thresholds be higher or lower to accommodate such effect? Why or why 
not?
    68. To what extent would our proposed amendments reduce money 
market fund liquidity risk?
    69. What, if any, impacts would our proposed amendments have on 
yields of prime money market funds? What would be the effect on yields 
of lower or higher minimum liquidity requirements? Would increased or 
decreased yields effect the desirability of prime money market funds 
for retail and/or institutional investors? Would the proposed 
amendments decrease the availability of prime money market funds?
    70. How would the proposal affect funds' current incentives to 
maintain liquidity buffers well above the regulatory minimums? Would 
funds be more likely to hold daily liquid asset and weekly liquid asset 
amounts that are closer to the regulatory minimums? Absent our proposed 
increase to the minimum liquidity requirements, would the existing 
requirement for funds to disclose liquidity information on a daily 
basis on their websites provide sufficient incentive for funds to 
maintain liquidity buffers well above the current regulatory minimums?
    71. Would our proposal increase the propensity for prime money 
market funds to ``barbell'' or invest in potentially risker and longer-
term assets outside of the portion of the fund's portfolio that 
qualifies as daily liquid assets or weekly liquid assets? Why or why 
not?
    72. Should the proposal alter the current framework for which type 
of money market funds are subject to the minimum liquidity 
requirements? For example, should the requirements distinguish between 
prime money market funds and government money market funds? Should 
institutional money market funds and retail money market funds be 
subject to the same minimum liquidity requirements, as proposed? Does 
the fact that institutional money market funds experienced more 
significant outflows than retail money market funds during recent 
stress events reflect that institutional money market funds should be 
subject to a different minimum liquidity requirement than retail money 
market funds? Why or why not?
    73. Should the proposed minimum liquidity requirements vary based 
on external market factors? For example, would a countercyclical 
minimum liquidity threshold, in which the minimum liquidity thresholds 
decline when net redemptions are large or when the Commission provides 
temporary relief from the higher liquidity threshold, better 
incentivize money market funds to use liquidity during times of 
significant outflows? \218\ If so, what specific factors should trigger 
or inform a countercyclical minimum liquidity threshold?
---------------------------------------------------------------------------

    \218\ The PWG Report discussed a countercyclical liquidity 
buffer as a potential reform option. Most commenters opposed this 
option and expressed concern that it may create a new trigger event 
that could accelerate redemptions. See SIFMA AMG Comment Letter; 
Western Asset Comment Letter; JP Morgan Comment Letter; Fidelity 
Comment letter; Dreyfus Comment Letter. A few commenters supported 
this option. See ABA Comment Letter; mCD IP Comment Letter.
---------------------------------------------------------------------------

    74. Would the increased liquidity thresholds, along with other 
changes we are proposing, affect investors' interest in monitoring 
funds' liquidity levels or potential sensitivity to declines below the 
liquidity thresholds? Are there any changes we should make to reduce 
potential investor sensitivity to a fund dropping below a liquidity 
threshold? For example, should we remove, or reduce the frequency of, 
website liquidity disclosure?
    75. Should the Commission consider revising the definition of daily 
liquid assets and/or weekly liquid assets in any way? For instance, 
should we amend the definition of weekly liquid assets to limit the 
amount of non-government securities that can qualify as weekly liquid 
assets? Alternatively, would explicitly limiting the amount of 
investment in commercial paper and certificates of deposit for prime 
money market funds alleviate stresses in the short-term funding market 
during market downturns? Why or why not?
    76. Should the Commission propose a new category of liquidity 
requirements to rule 2a-7? Would a new category of liquidity 
requirements with slightly longer maturities than the current 
requirements (e.g., biweekly liquid assets) significantly enhance 
funds' near-term portfolio liquidity during periods of stress in the 
short-term funding markets? What would be the positive and negative 
effects of a new category of liquidity requirements with slightly 
longer maturities?
2. Consequences for Falling Below Minimum Daily and Weekly Liquidity 
Requirements
    Currently, rule 2a-7 requires that a money market fund comply with 
the daily liquid asset and weekly liquid asset standards at the time 
each security is acquired.\219\ A money market fund's

[[Page 7276]]

portfolio that does not meet the minimum liquidity standards has not 
failed to satisfy the daily liquid asset and weekly liquid asset 
conditions of rule 2a-7; the fund simply may not acquire any assets 
other than daily liquid assets or weekly liquid assets, respectively, 
until it meets these minimum thresholds. We are proposing to maintain 
this approach with respect to the increased minimum liquidity 
thresholds.
---------------------------------------------------------------------------

    \219\ Rule 2a-7(d)(4)(ii) and (iii). Compliance with the minimum 
liquidity requirement is determined at security acquisition, because 
we believe that a money market fund should not have to dispose of 
less liquid securities (and potentially realize an immediate loss) 
if the fund fell below the minimum liquidity requirements as a 
result of investor redemptions.
---------------------------------------------------------------------------

    Commenters generally supported maintaining the current rule's 
regulatory requirements when a fund's liquidity drops below the daily 
or weekly liquidity threshold instead of including some type of 
automatic penalty that would apply either to the fund or to the fund 
sponsor under these circumstances, which was an option the PWG Report 
discussed.\220\ Some commenters noted that the Investment Company Act 
and the rules thereunder do not otherwise impose automatic penalties on 
funds or fund sponsors.\221\ A commenter also noted that imposing a 
penalty on the fund sponsor might further disincentivize managers from 
using their existing liquidity in times of market stress.\222\ Several 
commenters suggested that the reforms could require a money market fund 
to overcorrect (e.g., invest only in liquid assets until its weekly 
liquid assets exceed a specified percentage above the regulatory 
minimum) if it fell below the minimum liquidity threshold.\223\ One of 
these commenters further suggested that a fund be prohibited from 
purchasing any non-overnight instruments until it reaches the required 
liquidity minimum threshold.\224\
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    \220\ ICI Comment Letter I; SIFMA AMG Comment Letter; Fidelity 
Comment Letter.
    \221\ SIFMA AMG Comment Letter; Fidelity Comment Letter.
    \222\ Fidelity Comment Letter.
    \223\ SIFMA AMG Comment Letter; Fidelity Comment Letter; JP 
Morgan Comment Letter; Dreyfus Comment Letter.
    \224\ SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    As we saw in March 2020, markets can become illiquid very rapidly 
in response to events that money market fund managers may not 
anticipate. This demonstrates that it is important that fund managers 
have the ability to sell their most liquid assets to meet investor 
redemptions to avoid selling less liquid assets into a declining 
market, which would likely have negative effects on the fund and its 
remaining shareholders. Accordingly, we believe that any regulatory 
amendments should allow funds to deploy their excess liquidity during 
times of market stress, when such liquidity is typically needed most. 
Imposing a new regulatory penalty when a fund drops below a minimum 
liquidity threshold, or requiring the fund to ``overcorrect'' in that 
case, could have the unintended effect of incentivizing some fund 
managers to sell less liquid assets into a declining market rather than 
use their excess liquidity during market stress events out of fear of 
approaching or falling below the regulatory threshold.\225\ We 
therefore are proposing to maintain the existing regulatory requirement 
that if a money market fund's portfolio does not meet the minimum daily 
liquid asset or weekly liquid asset threshold, the fund may not acquire 
any assets other than daily liquid assets or weekly liquid assets, 
respectively, until it meets these minimum thresholds.
---------------------------------------------------------------------------

    \225\ To some extent, this could be similar to the effect we 
observed in March 2020 of the tie between the weekly liquid asset 
threshold and the potential imposition of liquidity fees or 
redemption gates, when some fund managers sold less liquid assets to 
avoid dropping below the regulatory threshold.
---------------------------------------------------------------------------

    Moreover, the proposed rule would require a fund to notify its 
board of directors when the fund has invested less than 25% of its 
total assets in weekly liquid assets or less than 12.5% of its total 
assets in daily liquid assets (a ``liquidity threshold event'').\226\ 
The proposal would require a fund to notify the board within one 
business day of the liquidity threshold event.\227\ The proposed rule 
would also require the fund to provide the board with a brief 
description of the facts and circumstances that led to the liquidity 
threshold event within four business days after its occurrence.\228\ 
Some commenters supported requiring a fund to notify its board 
following the fund falling below a liquidity threshold.\229\
---------------------------------------------------------------------------

    \226\ See proposed rule 2a-7(f)(4)(i).
    \227\ Id.
    \228\ See proposed rule 2a-7(f)(4)(ii).
    \229\ JP Morgan Comment Letter; SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    The liquidity levels that trigger a liquidity threshold event 
reflect that a fund's liquidity has decreased by more than 50% below at 
least one of the proposed minimum daily and weekly liquid asset 
requirements. This provision is designed to facilitate appropriate 
board notification, monitoring, and engagement when a fund's liquidity 
levels decrease significantly below the minimum liquidity 
requirements.\230\ We understand that many funds today provide regular 
reports to fund boards regarding fund liquidity, often in connection 
with quarterly board meetings. We believe that the proposed board 
notification requirement would provide the board with timely 
information in a context that would better facilitate the board's 
understanding and monitoring of significant declines in the fund's 
liquidity levels.
---------------------------------------------------------------------------

    \230\ Similar to these proposed board notification requirements, 
we are proposing that funds file reports on Form N-CR upon a 
liquidity threshold event. See infra Section II.F.1.a.
---------------------------------------------------------------------------

    We request comment on the proposed regulatory requirements for 
falling below the minimum liquidity thresholds, including the 
following:
    77. Should the Commission impose penalties on funds or fund 
sponsors when a fund falls below a required minimum liquidity 
requirement? For example, should we require funds to ``over-correct'' 
to a higher liquidity level after dropping below a minimum requirement? 
If so, how long should a fund be required to maintain a higher level of 
liquidity after the over-correction?
    78. Should rule 2a-7 impose a minimum liquidity maintenance 
requirement, i.e., require that a money market fund maintain the 
minimum daily liquid asset and weekly liquid asset thresholds at all 
times? What are the advantages and disadvantages of this approach?
    79. Are the proposed requirements for the fund to notify its board 
upon a liquidity threshold event appropriate? Would the proposed 
requirement help boards monitor significant declines in fund liquidity 
levels? Do funds currently notify the board when they fall below a 
certain liquidity level?
    80. Should the liquidity levels that trigger a liquidity threshold 
event be 50% of the minimum liquidity requirements, as proposed? Would 
a lower or higher percentage be more appropriate (e.g., 10%, 25%, or 
75% below the minimum liquidity requirements)? Alternatively, should 
the rule require funds to notify the board if the fund falls below the 
minimum liquidity requirements (i.e., below 25% daily liquid assets or 
50% weekly liquid assets)?
    81. Should the rule also require the fund to provide a subsequent 
notification to its board when the fund's liquidity returns above an 
identified threshold (e.g., the fund's liquidity is at or above the 25% 
daily liquid asset requirement and 50% weekly liquid asset 
requirement)?
    82. Is one business day sufficient time to allow a fund to notify 
its board following a liquidity threshold event? Is four business days 
sufficient time to allow a fund to provide its board with

[[Page 7277]]

a brief description of the facts and circumstances that led to a 
liquidity threshold event? Should the rule provide more or less time 
for either or both of these notifications? Should the rule require 
either or both of these notifications to the fund's board to be 
written?
    83. Are the proposed requirements for the fund to notify the board 
of the facts and circumstances that led to a liquidity threshold event 
appropriate? Would the fund provide these details without the rule's 
requirements (either on its own or after board inquiry)? Should the 
rule require other specific information in this notification? If so, 
what information and why? For example, should the rule require a fund 
to provide a reasonable estimate for when the fund will come back into 
compliance with the minimum liquidity requirements?
    84. Should we instead require board notification if a fund has 
dropped below a particular liquidity level for a specified period 
(e.g., if the fund has dropped below the minimum liquidity 
requirements, or some lower amount, for at least 3, 5, or 10 
consecutive business days)? Should a liquidity threshold event for 
purposes of the board notification requirement align with liquidity 
threshold events that funds would be required to report on Form N-CR, 
such that any changes to the scope of the proposed Form N-CR reporting 
requirement would also apply to the board notification requirement?
3. Proposed Amendments to Liquidity Metrics in Stress Testing
    Each money market fund is currently required to engage in periodic 
stress testing under rule 2a-7 and report the results of such testing 
to its board.\231\ Currently, one aspect of periodic stress testing 
involves the fund's ability to have invested at least 10% of its total 
net assets in weekly liquid assets under specified hypothetical events 
described in rule 2a-7. The Commission chose the 10% threshold because 
dropping below this threshold triggers a default liquidity fee, absent 
board action, and thus, has consequences for a fund and its 
shareholders.\232\ Because our proposal would no longer provide for 
default liquidity fees if a fund has weekly liquid assets below 10%, 
and our proposal would increase the weekly liquid asset minimum from 
30% to 50%, we no longer believe that the rule should require funds to 
test their ability to maintain 10% weekly liquid assets under the 
specified hypothetical events described in rule 2a-7. Instead, we are 
proposing to require funds to test whether they are able to maintain 
sufficient minimum liquidity under such specified hypothetical 
events.\233\ As a result, each fund would be required to determine the 
minimum level of liquidity it seeks to maintain during stress periods, 
identify that liquidity level in its written stress testing procedures, 
periodically test its ability to maintain such liquidity, and provide 
the fund's board with a report on the results of the testing.
---------------------------------------------------------------------------

    \231\ See 17 CFR 270.2a-7(g)(8).
    \232\ See 2014 Adopting Release, supra footnote 12, at Section 
III.J.2.
    \233\ See proposed rule 2a-7(g)(8)(i) and (g)(8)(ii)(A).
---------------------------------------------------------------------------

    For purposes of stress testing, we are proposing to permit each 
fund to determine the level of liquidity that it considers sufficient, 
instead of continuing to provide a bright-line threshold that all funds 
must use uniformly. We believe the proposed approach may improve the 
utility of stress test results because they would reflect whether the 
fund is able to maintain the level of liquidity it considers 
sufficient, which may differ among funds for a variety of reasons 
(e.g., type of money market fund or characteristics of investors, such 
as investor concentration or composition that may contribute to large 
redemptions).
    We request comment on the proposed amendments to stress testing 
requirements, including the following;
    85. As proposed, should we remove the 10% weekly liquid asset 
metric from current stress testing requirements and instead require 
funds to determine the sufficient minimum liquidity level to test?
    86. Should we instead identify a different liquidity threshold 
funds must test (e.g., 15%, 20%, or 30% weekly liquid assets)? Under 
this approach, should we require stress testing to consider both weekly 
liquid assets and daily liquid assets? If so, what threshold should we 
use for daily liquid assets (e.g., 5%, 10%, or 15%)?

D. Amendments Related to Potential Negative Interest Rates

    Twice during the past 15 years, the Federal Reserve established the 
lower bound of the target range for the federal funds rate at 0% to 
spur borrowing and other economic activity in the face of economic 
crises. In 2008, a crisis that originated in the financial sector 
quickly spread to the rest of the U.S. economy, prompting the Federal 
Reserve to establish a target federal funds rate of 0-0.25% for the 
first time.\234\ The Federal Reserve raised the target range for the 
federal funds rate in 2015, but the rise in rates from 2015 to 2018 was 
relatively short lived.\235\ In early 2020, another crisis occurred, 
amid growing economic concerns related to the COVID-19 pandemic and an 
overall flight by investors to liquidity and quality. Once again, the 
Federal Reserve lowered the target range for the federal funds rate to 
0-0.25%.\236\ In this pervasive low interest rate environment, it is 
very difficult for investors to generate substantial returns from 
investments in U.S. Treasury securities and other high quality 
government debt securities. This is true for money market funds, and 
particularly true for government money market funds, which must invest 
99.5% or more of their assets in cash, government securities, and/or 
repurchase agreements that are collateralized fully.\237\ Government 
and retail money market funds (or ``stable NAV funds'') can still 
maintain a non-negative stable share price while investing in 
instruments that yield a low but positive interest rate; however, if 
interest rates turn negative and the gross yield of a fund's portfolio 
turns negative, it would be challenging or impossible for the fund to 
maintain a non-negative stable share price. The fund would begin to 
lose money.
---------------------------------------------------------------------------

    \234\ Statement of the Federal Open Markets Committee, December 
16, 2008, available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20081216b.htm.
    \235\ See Board of Governors of the Federal Reserve System, 
``Open Market Operations,'' available at https://www.federalreserve.gov/monetarypolicy/openmarket.htm.
    \236\ Statement of the Federal Open Markets Committee, March 15, 
2020, available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm.
    \237\ 17 CFR 270.2a-7(a)(14). The term ``government security,'' 
as defined in the Act, means any security issued or guaranteed as to 
principal or interest by the United States, or by a person 
controlled or supervised by and acting as an instrumentality of the 
Government of the United States pursuant to authority granted by the 
Congress of the United States; or any certificate of deposit for any 
of the foregoing. 15 U.S.C. 80a-2(a)(16).
---------------------------------------------------------------------------

    Despite keeping the lower bound of the federal funds rate target at 
zero for many years, some policymakers at the Federal Reserve have at 
times expressed the view that negative interest rates do not appear to 
be an attractive monetary policy tool in the United States.\238\ 
However, other regulators and academics, including prior Federal 
Reserve leaders, have suggested policymakers could consider negative 
interest rates as a potential tool to counteract future economic

[[Page 7278]]

slowdowns.\239\ In addition, even if the Federal Reserve does not lower 
the target federal funds rate below zero, market interest rates may 
still move into negative territory if the federal funds rate remains at 
or near zero for extended periods of time. Given the possibility that 
negative interest rates may occur during future periods of economic 
instability, in 2020 several money market fund sponsors issued investor 
education materials about the effects of negative interest rates.\240\ 
Fund sponsors also published analyses of potential actions that 
government and retail money market funds could take in order to 
maintain a stable share price if the gross yield on their investments 
turns negative.\241\
---------------------------------------------------------------------------

    \238\ See, e.g., Minutes of the Federal Open Market Committee: 
October 29-30, 2019, available at ``https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20191030.pdf.
    \239\ See, e.g., ``What tools does the Fed have left? Part 1: 
Negative interest rates,'' Ben S. Bernanke (March 18, 2016), 
available at https://www.brookings.edu/blog/ben-bernanke/2016/03/18/what-tools-does-the-fed-have-left-part-1-negative-interest-rates/ 
(``Overall, as a tool of monetary policy, negative interest rates 
appear to have both modest benefits and manageable costs'').
    \240\ See, e.g., ``Negative interest rates: What you need to 
know'' Wells Fargo Letter Asset Management (July 2020), available at 
https://www.wellsfargoassetmanagement.com/assets/public/pdf/insights/investing/negative-interest-rates-what-you-need-to-know.pdf; ``Everything You Needed to Know About Negative Rates to 
Impress Your Boss'' State Street Letter Global Advisors (June 2020), 
available at https://www.ssga.com/library-content/pdfs/cash/inst-cash-negative-interest-rate-piece.pdf.
    \241\ See, e.g., ``Negative Rates: Could it happen in the US?'' 
Invesco (March 31, 2020), available at https://www.Invesco.com/us-rest/contentdetail?contentId=798d6439a0331710VgnVCM1000006e36b50aRCRD&audienceType=Institutional; ``Negative interest rates: What you need to 
know'' Wells Fargo Asset Management (July 2020), available at 
https://www.wellsfargoassetmanagement.com/assets/public/pdf/insights/investing/negative-interest-rates-what-you-need-to-know.pdf.
---------------------------------------------------------------------------

    Rule 2a-7, in its current form, does not explicitly address how 
money market funds must operate when interest rates are negative. 
However, rule 2a-7 states that government and retail money market funds 
may seek to maintain a stable share price by using amortized cost and/
or penny-rounding accounting methods. A fund may only take this 
approach so long as the fund's board of directors believes that the 
stable share price fairly reflects the fund's market-based net asset 
value per share.\242\ Accordingly, if negative interest rates turn a 
stable NAV fund's gross yield negative, the board may reasonably 
believe the stable share price does not fairly reflect the market-based 
price per share, as the fund would be unable to generate sufficient 
income to support a stable share price. Under these circumstances, the 
fund would not be permitted to use amortized cost and/or penny-rounding 
accounting methods to seek to maintain a stable share price. Instead, 
the fund would need to convert to a floating share price.
---------------------------------------------------------------------------

    \242\ 17 CFR 270.2a-7(c)(1)(i).
---------------------------------------------------------------------------

    In addition to the pricing provision described above, rule 2a-7 
also includes certain procedural standards for stable NAV funds.\243\ 
These standards, overseen by the fund's board of directors, include a 
requirement that the fund periodically calculate the market-based value 
of the portfolio (``shadow price'') and compare it to the fund's stable 
share price. If the deviation between these two values exceeds \1/2\ of 
1% (50 basis points), the fund's board of directors must consider what 
action, if any, should be taken by the board, including whether to re-
price the fund's securities above or below the fund's $1.00 share price 
(i.e., ``break the buck''). Regardless of the extent of the deviation, 
rule 2a-7 imposes on the board of a money market fund a duty to 
consider appropriate action whenever the board believes the extent of 
any deviation may result in material dilution or other unfair results 
to investors or current shareholders. We believe that, if interest 
rates turn negative, the board of a stable NAV fund could reasonably 
require the fund to convert to a floating share price to prevent 
material dilution or other unfair results to investors or current 
shareholders.
---------------------------------------------------------------------------

    \243\ 17 CFR 270.2a-7(g)(1).
---------------------------------------------------------------------------

    While these pricing provisions of rule 2a-7 apply specifically to 
government and retail money market funds, the rule also requires these 
funds and their transfer agents to have the capacity to redeem and sell 
securities at prices that do not correspond to a stable price per 
share.\244\ Accordingly, these funds and their service providers also 
must understand how the floating share price mechanism would operate 
when interest rates are negative. Government and retail money market 
fund transfer agents and other service providers generally should 
confirm that they have effective procedures to facilitate transactions 
for the fund if it were to switch to a floating share price.
---------------------------------------------------------------------------

    \244\ 17 CFR 270.2a-7(h)(11).
---------------------------------------------------------------------------

    We believe the pricing provisions of rule 2a-7 provide appropriate 
flexibility for a fund with a stable share price to respond to negative 
interest rates. While we are not proposing changes to the rule 2a-7 
pricing provisions in relation to negative interest rates, we are 
proposing to expand government and retail money market funds' 
obligations to confirm that they can fulfill shareholder transactions 
if they convert to a floating share price. Specifically, we propose to 
require a government or retail money market fund (or the fund's 
principal underwriter or transfer agent on its behalf) to determine 
that financial intermediaries that submit orders--including through an 
agent--to purchase or redeem the fund's shares have the capacity to 
redeem and sell the fund's shares at prices that do not correspond to a 
stable price per share or, if this determination cannot be made, to 
prohibit the relevant financial intermediaries from purchasing the 
fund's shares in nominee name.\245\ Funds would have flexibility in how 
they make this determination for each financial intermediary but would 
be required to maintain records identifying the intermediaries the fund 
has determined have the capacity to transact at non-stable share prices 
and the intermediaries for which the fund was unable to make this 
determination.\246\ We believe it is necessary that all parties 
concerned--stable NAV money market funds, their service providers, and 
their distribution network--are capable of processing transactions in a 
fund's shares in the event that the fund converts to a floating NAV. 
Rule 2a-7 already imposes this obligation on money market funds and 
their transfer agents. Because many investors purchase shares through 
financial intermediaries, however, we believe it is important that such 
intermediaries are able to continue to process shareholder transactions 
if a stable NAV fund converts to a floating NAV. Absent this 
capability, a money market fund would not actually be able to process 
transactions at a floating NAV, as currently required by rule 2a-7.
---------------------------------------------------------------------------

    \245\ See proposed rule 2a-7(h)(11)(ii). This proposed 
requirement would apply to each financial intermediary that submits 
orders, itself or through its agent, to purchase or redeem shares 
directly to the money market fund, its principal underwriter or 
transfer agent, or to a registered clearing agency. The term 
``financial intermediary'' has the same meaning as in 17 CFR 
270.22c-2(c)(1). See proposed rule 2a-7(h)(11)(iv).
    \246\ See proposed rule 2a-7(h)(11)(iii). Funds would be 
required to preserve a written copy of such records for a period of 
not less than six years following each identification of a financial 
intermediary, the first two years in an easily accessible place.
---------------------------------------------------------------------------

    The pricing provisions of rule 2a-7 have now been in place for 
several years, and we believe fund sponsors are familiar with the 
operational requirements to operate a money market fund with a floating 
share price. This is especially true because all money market funds 
other than government and retail money market funds are currently 
required to operate with a floating share price. However, some fund 
industry representatives proposed

[[Page 7279]]

different operational responses to negative interest rates. 
Specifically, some fund sponsors discussed a reverse distribution 
mechanism, whereby a government or retail money market fund would 
maintain a stable share price, despite losing value, by reducing the 
number of its outstanding shares. We understand that European money 
market funds used a reverse distribution mechanism for a period of 
time, before the European Commission determined this approach was not 
consistent with the 2016 EU money market fund regulations.\247\ While 
some have suggested that the reverse distribution mechanism was not 
confusing to European money market fund investors, nearly all of whom 
are institutional investors, we believe such a mechanism would not be 
intuitive for retail investors in government and retail money market 
funds. Under a reverse distribution mechanism, these investors would 
observe a stable share price but a declining number of shares for their 
investment in a fund that is generating a negative gross yield. We 
believe that investors may be misled by such a mechanism and assume 
that their investment in a fund with a stable share price is holding 
its value while, in fact, the investment is losing value over 
time.\248\ In contrast, we believe investors would easily understand a 
decline in share prices in the event that a fund's gross yield turns 
negative. Due to the potentially misleading or confusing nature of the 
reverse distribution mechanism, we are proposing to amend rule 2a-7 to 
prohibit money market funds from operating a reverse distribution 
mechanism, routine reverse stock split, or other device that would 
periodically reduce the number of the fund's outstanding shares to 
maintain a stable share price.\249\
---------------------------------------------------------------------------

    \247\ See ESMA Press Release, European Commission Letter on 
Money Market Fund Regulation (Feb. 2, 2018), available at https://www.esma.europa.eu/press-news/esma-news/european-commission-letter-money-market-fund-regulation.
    \248\ Comment Letter of Jose Joseph (Apr. 13, 2021) (``Jose 
Joseph Comment Letter'') (suggesting that if money market funds 
generate negative yields, ``[u]nilaterally redeeming the shares[ ] 
by reverse distribution is like cheating'' and that funds should 
instead inform shareholder and move to a floating NAV to be fair and 
transparent).
    \249\ See proposed rule 2a-7(c)(3).
---------------------------------------------------------------------------

    Having described considerations under rule 2a-7 that are relevant 
to negative interest rates, we seek comment on possible methods that 
government or retail money market funds could use to operate if 
interest rates turn negative. We also seek comment on our proposal to 
prohibit money market funds from operating a reverse distribution 
mechanism and our proposed provisions relating to whether a government 
or retail fund's distribution network can sell and redeem the fund's 
shares at non-stable prices per share.
    87. Should the Commission mandate specific disclosure to investors 
or to the Commission if a fund's gross yield turns negative?
    88. Would a reverse distribution mechanism or similar mechanism 
mislead or confuse investors? Would such a mechanism benefit investors? 
Would investors more easily understand a decline in share prices (i.e., 
a floating share price), rather than a decline in the number of stable 
value shares (i.e., a reverse distribution mechanism), in the event 
that a fund's gross yield turns negative?
    89. Should we permit a stable NAV money market fund to engage in a 
routine reverse stock split, reverse distribution mechanism, or other 
mechanism by which the fund maintains a stable share price, despite 
losing value, by reducing the number of its outstanding shares? Should 
we permit only institutional government funds to engage in such a 
mechanism because institutional investors may be more likely to 
appreciate that the fund is losing value notwithstanding the lack of a 
change in the share price? If so, how should we define an institutional 
government fund for this purpose (e.g., a government fund that does not 
have policies and procedures reasonably designed to limit all 
beneficial owners of the fund to natural persons; or a government fund 
that has policies and procedures reasonably designed to limit all 
beneficial owners to non-natural persons)? If we permit the use of such 
a mechanism, how should a fund be required to communicate its operation 
to investors? Should the fund be required to take steps to make sure 
existing investors approve of a reverse distribution mechanism before 
operating such a mechanism? If so, what should those steps be?
    90. Should all stable NAV money market funds be required to respond 
to negative interest rates in the same manner (i.e., should all these 
funds be required to switch to a floating share price, or should each 
fund be permitted to respond to negative interest rates in a different 
manner)? If the rule permits funds to respond to negative interest 
rates on an individualized basis, should the rule prescribe specific 
options that are permissible? Would it be confusing for investors if 
each money market fund used a different method for absorbing a negative 
interest rate?
    91. Would investors prefer a government or retail money market fund 
with a negative yield to implement a floating share price or a reverse 
distribution mechanism? Does the response differ depending on the type 
of investor? Does the response differ depending on the type of money 
market fund?
    92. How likely are investors to remain invested in a money market 
fund with a negative gross yield? If investors redeem shares in a money 
market fund with a negative gross yield, where might they choose to 
invest their money instead?
    93. How likely are fund sponsors to continue to operate money 
market funds in a pervasive negative interest rate environment? Are 
certain fund sponsors (e.g., bank-affiliated sponsors) more likely than 
others to continue to operate money market funds in a negative interest 
rate environment? Are sponsors more likely to continue to operate 
certain types of money market funds (e.g., prime funds) in a negative 
interest rate environment?
    94. As proposed, should we require a government or retail fund to 
determine that financial intermediaries in its distribution network can 
sell and redeem the fund's shares at non-stable prices per share? 
Should we, as proposed, require a fund to prohibit a financial 
intermediary from purchasing the fund's shares in nominee name on 
behalf of other persons if the fund cannot make such a determination? 
Are there alternative approaches we should take to make sure financial 
intermediaries are able to handle a fund's potential transition from 
using a stable NAV to a floating NAV?
    95. As proposed, should we require a government or retail fund to 
maintain and keep current records identifying the intermediaries the 
fund has determined have the capacity to transact at non-stable share 
prices and the intermediaries for which the fund was unable to make 
this determination? Are there alternative ways of documenting this 
information that we should require? Should we require funds to 
periodically check against these records to make sure they are not 
using an intermediary that cannot transact at non-stable share prices?
    96. Should we mandate or provide additional guidance around how a 
fund would determine that a financial intermediary can sell and redeem 
the fund's shares at non-stable prices per share? Should we require a 
fund to maintain records of these determinations?
    97. Should we require a fund to report to its board of directors 
the basis of its

[[Page 7280]]

determinations that a financial intermediary has the capacity to redeem 
and sell securities issued by the fund at a price based on the current 
net asset value, including prices that do not correspond to a stable 
price per share? Should we require a fund to disclose the basis of such 
determinations publicly or to the Commission?
    98. Should we require government and retail funds and their 
financial intermediaries to test their ability to redeem and sell 
securities issued by the fund at prices that do not correspond to a 
stable price per share? Should we require a fund to report the results 
of those tests to its board of directors? Should we require a fund to 
disclose the results of those tests to the Commission or publicly?

E. Amendments To Specify the Calculation of Weighted Average Maturity 
and Weighted Average Life

    We are proposing to amend rule 2a-7 to specify the calculations of 
``dollar-weighted average portfolio maturity'' (``WAM'') and ``dollar-
weighted average life maturity'' (``WAL'').\250\ WAM and WAL are 
calculations of the average maturities of all securities in a 
portfolio, weighted by each security's percentage of net assets. These 
calculations are an important determinant of risk in a portfolio, as a 
longer WAM and WAL may increase a fund's exposure to interest rate 
risks. We have found that funds use different approaches when 
calculating WAM and WAL under the current definitions in the rule. For 
instance, we understand that a majority of money market funds calculate 
WAM and WAL based on the percentage of each security's market value in 
the portfolio, while other money market funds base calculations on the 
amortized cost of each portfolio security. This discrepancy can create 
inconsistency of WAM and WAL calculations across funds, including in 
data reported to the Commission and provided on fund websites.\251\ 
Although these inconsistencies are likely to be small, they could 
confuse investors that review funds' WAM and WAL and create 
inefficiencies for the Commission's monitoring of money market funds. 
Accordingly, we are proposing to amend rule 2a-7 to require that money 
market funds calculate WAM and WAL based on the percentage of each 
security's market value in the portfolio. We are proposing to require 
funds to use market value because all types of money market funds 
already determine the market values of their portfolio holdings for 
other purposes, while only certain money market funds use amortized 
cost.\252\ Thus, we believe all money market funds can use this 
calculation approach with information they already obtain. We believe 
that these amendments will enhance the consistency of calculations for 
funds, while allowing the Commission to better monitor and respond to 
indicators of potential risk and stress in the market.
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    \250\ See proposed amendments to rule 2a-7(d)(1)(ii) and (iii).
    \251\ See Items A.11 and A.12 of Form N-MFP; 17 CFR 270.2a-
7(h)(10)(i)(A).
    \252\ Money market funds that use a floating NAV use market 
values when determining a fund's NAV, while money market funds that 
maintain a stable NAV are required to use market values to calculate 
their market-based price at least daily.
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    We request comment on the proposed clarification of WAM and WAL 
calculations, including the following:
    99. Should we require all money market funds to calculate WAM and 
WAL based on the percentage of each security's market value in the 
portfolio, as proposed? Should certain types of money market funds be 
excluded from this requirement or subject to a different requirement? 
If so, why? For instance, should we require money market funds that 
maintain a stable NAV to calculate WAM and WAL using the amortized 
costs of the portfolio?
    100. Are there benefits to calculating WAM and WAL based on 
amortized cost of the portfolio instead of market value?
    101. Are there other changes or additions that would improve the 
accuracy or consistency of the calculations of WAM or WAL? Should we 
provide additional guidance related to the proposed amendment?

F. Amendments to Reporting Requirements

1. Amendments to Form N-CR
    Money market funds are required to file reports on Form N-CR when 
certain specified events occur.\253\ Currently, a money market fund 
typically is required to file Form N-CR reports if a portfolio security 
defaults or experiences an event of insolvency, an affiliate provides 
financial support to the fund, the fund experiences a deviation between 
current net asset value per share and intended stable price per share, 
liquidity fees or redemption gates are imposed or lifted, as well as 
any optional disclosure made at the fund's discretion. We are proposing 
to add a new requirement for a money market fund to file a report on 
Form N-CR when the fund falls below a specified liquidity threshold. We 
also propose to require funds to file Form N-CR reports in a structured 
data language. Further, we are proposing other amendments to improve 
the utility of reported information and to remove reporting 
requirements related to the imposition of liquidity fees and redemption 
gates under rule 2a-7.
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    \253\ See 17 CFR 270.30b1-8 (rule 30b1-8 under the Act).
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a. Reporting of Liquidity Threshold Events
    We propose to amend Form N-CR to require a fund to report when a 
liquidity threshold event occurs (i.e., the fund has invested less than 
25% of its total assets in weekly liquid assets or less than 12.5% of 
its total assets in daily liquid assets).\254\ Currently, money market 
funds are required to provide information about the size of their 
weekly liquid assets and daily liquid assets on a daily basis on their 
websites.\255\ We believe it is appropriate to require that a fund 
report when it falls below half of its 25% daily liquid asset and 50% 
weekly liquid asset minimum liquidity requirements, as this drop 
represents a significant decrease in liquidity. We believe this 
reporting would help investors, the Commission, and its staff monitor 
significant declines in liquidity, without having to monitor each money 
market fund's website.\256\ The reports also would provide more 
transparency, as well as facilitate our monitoring efforts, by 
providing the related facts and circumstances of any liquidity 
threshold event.
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    \254\ Proposed Part E of Form N-CR.
    \255\ 17 CFR 270.2a-7(h)(10)(ii)(A) and (B). Under these 
provisions, a money market fund must post prominently on its website 
a schedule, chart, graph, or other depiction that provides the 
percentages of the fund's total assets invested in daily liquid 
assets and in weekly liquid assets. This website disclosure must be 
updated each business day, as of the end of the preceding business 
day, and cover each business day during the preceding six months.
    \256\ See JP Morgan Comment Letter (suggesting that money market 
funds be required to report to the Commission when they fall below a 
liquidity threshold).
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    Upon falling below either of the liquidity thresholds, the proposed 
amendments would require a fund to report certain information about the 
liquidity threshold event. When reporting a liquidity threshold event, 
the fund's report on Form N-CR would be required to include: (1) The 
initial date on which the fund falls below either the 25% weekly liquid 
asset threshold or the 12.5% daily liquid asset threshold; (2) the 
percentage of the fund's total assets invested in both weekly liquid 
assets and daily liquid assets on the initial date of a liquidity 
threshold event; and (3) a brief description of the facts and 
circumstances leading to the liquidity

[[Page 7281]]

threshold event.\257\ The proposed reporting requirement would apply 
when a fund falls below either threshold. Although a fund may not 
necessarily fall below both thresholds, we are proposing to require 
funds to disclose the percentages of both weekly liquid assets and 
daily liquid assets as of the initial date that either threshold is 
crossed.\258\ We believe that reporting both weekly liquid asset and 
daily liquid asset levels would provide insight into a fund's short-
term and immediate liquidity profile. The brief description of facts 
and circumstances would include additional details about the liquidity 
threshold event, which would better inform investors, the Commission, 
and our staff of events that lead to significant declines in 
liquidity.\259\
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    \257\ Proposed Items E.1 through E.4 of Form N-CR.
    \258\ Proposed Item E.3 of Form N-CR.
    \259\ Proposed Item E.4 of Form N-CR.
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    Consistent with the timing of current Form N-CR reporting items, 
the proposal would require a money market fund to file a report within 
one business day after occurrence of a liquidity threshold event; 
however, a fund could file an amended report providing the required 
brief description of the facts and circumstances leading to the 
liquidity threshold event up to four business days after such 
event.\260\ We believe it may take funds up to four business days to 
write and review a narrative description of the relevant facts and 
circumstances, particularly where the liquidity threshold event was 
caused by multiple or complex circumstances. If a fund has daily liquid 
assets or weekly liquid assets continuously below the relevant 
threshold for consecutive business days after reporting an initial 
liquidity threshold event, the proposal would not require additional 
Form N-CR reports to disclose that the same type of liquidity threshold 
event continues.\261\
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    \260\ Proposed Instruction to Part E of Form N-CR.
    \261\ If a fund initially falls below only one threshold and 
then subsequently falls below the other threshold, the proposal 
would require a second Form N-CR report. For example, if a fund 
dropped below 25% weekly liquid assets on Tuesday and dropped below 
12.5% daily liquid assets on Thursday, it would be required to file 
two separate reports to disclose each liquidity threshold event. 
Additionally, if a fund fell below either threshold and subsequently 
resolved the liquidity threshold event before an initial or amended 
report is filed, the fund would still be required to report the 
liquidity threshold event and the facts and circumstances leading to 
the liquidity threshold event.
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    We request comment on the proposed amendments to Form N-CR to 
report information related to liquidity threshold events:
    102. Should we require money market funds to file reports on Form 
N-CR when they fall more than 50% below a minimum liquidity 
requirement, as proposed? How might liquidity reporting on Form N-CR 
affect money market funds' incentives to maintain weekly liquid assets 
and daily liquid assets above 25% and 12.5%, respectively, of total 
assets? How might this reporting affect investor behavior?
    103. Should a report on Form N-CR when a fund falls more than 50% 
below a liquidity threshold be filed confidentially with the Commission 
(e.g., because investors can already see liquidity levels on funds' 
public websites and Form N-CR reporting may increase investor 
sensitivity to liquidity levels)? Or, in addition to the proposed 
public reporting when a fund falls more than 50% below a liquidity 
threshold, should we require funds to file confidential reports at a 
different level below a minimum liquidity requirement (e.g., 25% below 
a minimum)? If we require funds to report certain information 
confidentially on Form N-CR, should that information be publicly 
available on a delayed basis and, if so, what is an appropriate delay 
(e.g., 15, 30, or 60 days)?
    104. Should we use a different daily liquid asset or weekly liquid 
asset level for determining when a fund must file a report on Form N-
CR? If so, what level(s) should we use? For example, would 10%, 25%, or 
75% (rather than 50%) below the minimum liquidity requirements be 
appropriate?
    105. As proposed, should funds be required to report both their 
current weekly liquid asset and daily liquid asset levels even if only 
one of those thresholds is crossed?
    106. Should funds be required to report each day they remain below 
either the 12.5% daily liquid asset threshold or the 25% weekly liquid 
asset threshold, or is just the initial date of liquidity threshold 
event sufficient? Should funds be required to subsequently report when 
a fund's liquidity returns above an identified threshold (e.g., to a 
level at or above the minimum liquidity requirements) or is the daily 
website disclosure of fund liquidity levels sufficient for this 
purpose?
    107. As proposed, should we require funds to report liquidity 
threshold events within one business day of the relevant event? Is four 
business days sufficient for funds to file an amended report that 
includes a brief description of the facts and circumstances leading to 
the fund falling below either threshold? Should these reporting periods 
be longer or shorter?
    108. Should any more, less, or other information be required in 
connection with liquidity threshold events?
b. Structured Data Requirement
    We are proposing to require money market funds to file reports on 
Form N-CR in a structured data language.\262\ In particular, we are 
proposing to require filing of Form N-CR reports in a custom eXtensible 
Markup Language (``XML'') -based structured data language created 
specifically for reports on Form N-CR (``N-CR-specific XML''). We 
believe use of an N-CR-specific XML language would make it easier for 
money market funds to prepare and submit the information required by 
Form N-CR accurately, and would make the submitted information more 
useful to investors and the Commission. A structured data language 
would allow tools to be developed so that users can sort and filter the 
available data according to specified parameters.
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    \262\ See proposed General Instruction D of Form N-CR 
(specifying that reporting persons must file reports on Form N-CR 
electronically on EDGAR and consult the EDGAR Filer Manual for EDGAR 
filing instructions). See also 17 CFR 232.301 (requiring filers to 
prepare electronic filings in the manner prescribed by the EDGAR 
Filer Manual).
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    Reports on Form N-CR are currently required to be filed in HTML or 
ASCII.\263\ We understand that, in order to prepare reports in HTML and 
ASCII, money market funds generally need to reformat required 
information from the way the information is stored for normal business 
uses. In this process, money market funds typically strip out 
incompatible metadata (i.e., syntax that is not part of the HTML or 
ASCII specification) that their business systems use to ascribe meaning 
to the stored data items and to represent the relationships among 
different data items. The resulting code, when rendered in an end-
user's web browser, is comprehensible to a human reader, but it is not 
suitable for automated validation or aggregation.
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    \263\ See Regulation S-T, 17 CFR 232.101(a)(1)(iv); 17 CFR 
232.301; EDGAR Filer Manual (Volume II) version 59 (September 2021), 
at 5-1 (requiring EDGAR filers generally to use ASCII or HTML for 
their document submissions, subject to certain exceptions).
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    In recent years we have gained experience with different reporting 
data languages, including with reports in an XML-based structured data 
language. For example, we have used customized XML data languages for 
reports filed on Form N-CEN and Form N-MFP.\264\ We

[[Page 7282]]

have found the XML-based structured data languages used for those 
reports allow investors to aggregate and analyze reported data in a 
much less labor-intensive manner than data filed in ASCII or HTML. 
Based on our understanding of how funds currently disclose required 
information in a structured data language, we believe that requiring a 
Form N-CR-specific XML language would minimize reporting costs while 
yielding more useful data for investors and the Commission, as 
applicable. Money market funds would be able, at their option, either 
to submit XML reports directly or use a web-based reporting application 
developed by the Commission to generate the reports, as funds are able 
to do today when submitting holdings reports on Form N-CEN.
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    \264\ See e.g., Investment Company Reporting Modernization, 
Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 
81870 (Nov. 18, 2016)] (adopting Form N-CEN); 2010 Adopting Release 
(adopting Form N-MFP).
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    We recognize that Form N-CR filers could bear some additional 
reporting costs related to adjusting their systems to a different data 
language. However, many money market funds have acquired substantial 
experience with reporting on web-based applications (or directly 
submitting information in a structured data language). For example, 
money market funds currently file Form N-MFP on a monthly basis to 
report their portfolio holdings and other information to the Commission 
in a custom XML language. We believe that aligning Form N-CR's 
reporting data language with the type of data language of other 
required reports, including Form N-MFP, may reduce costs and introduce 
additional efficiencies for money market funds already accustomed to 
reporting using structured data and may reduce overall reporting costs 
in the longer term. Furthermore, even if there are increased costs, we 
believe that the benefits to investors and the Commission of making the 
information more usable would justify these costs.
    We request comment on the reporting data language we are proposing 
to require for reports filed on Form N-CR, and, in particular, on the 
following:
    109. Should we require, as we are proposing, Form N-CR reports to 
be filed in an N-CR-specific XML language? Is an N-CR-specific XML 
language the appropriate type of data language for Form N-CR reports? 
Why or why not? If another structured data language (e.g., Inline 
eXtensible Business Reporting Language), would be more appropriate, 
which one, and why?
    110. Would this proposed requirement yield reported data that is 
more useful to investors, compared with not requiring Form N-CR to be 
filed in an N-CR-specific XML language, or requiring Form N-CR to be 
filed in a structured data language other than an N-CR-specific XML 
language?
    111. Should any subset of funds be exempt from the proposed 
structured data reporting requirement? If so, what subset and why?
    112. What implementation and long term costs, if any, would be 
associated with the proposed structured data reporting requirement?
c. Other Proposed Amendments
    In addition to the proposed items related to liquidity threshold 
events and the proposed structured data language requirement, we are 
proposing a few other amendments to Form N-CR. To improve the 
identifying information for the registrant and series reporting an 
event on Form N-CR, we are proposing to require the registrant name, 
series name, and legal entity identifiers (``LEIs'') for the registrant 
and series.\265\ We also propose to add definitions of LEI, registrant, 
and series to the form for clarity, and the definitions of these terms 
would be the same as on Form N-MFP.\266\ Further, we are proposing to 
remove the reporting events that relate to liquidity fees and 
redemption gates, consistent with our proposal to remove the underlying 
provisions from rule 2a-7.\267\ We also propose an amendment to Part C 
of Form N-CR, which relates to the provision of financial support to 
the fund. Specifically, when the support involves the purchase of a 
security from the fund, we propose to require the date the fund 
acquired the security, which would allow better identification of, and 
context for, support that occurs within a short period of time. For 
example, if the fund purchased the security a few days before the 
affiliate acquired it, this could suggest that the risk profile of the 
security deteriorated rapidly.
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    \265\ See Items A.2, A.4, A.5, and A.7 of proposed Form N-CR. An 
LEI is a unique identifier generally associated with a single 
corporate entity and is intended to provide a uniform international 
standard for identifying counterparties to a transaction. Money 
market funds are already required to report LEIs for a registrant 
and series on Form N-CEN. See Items B.1 and C.1 of Form N-CEN.
    \266\ See proposed General Instruction F of Form N-CR.
    \267\ See Parts F through G of current Form N-CR.
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    We request comment on the other proposed amendments to Form N-CR:
    113. Should we require reporting of registrant name, series name, 
and LEIs for the registrant and series on Form N-CR, as proposed? Is 
there other identifying information we should require?
    114. Should we make any changes to the definitions we propose to 
include in Form N-CR? Are there other terms we should define in the 
form?
    115. For the Form N-CR item requiring reporting of financial 
support, should we require reporting of the date the fund acquired a 
security, as proposed, if the support involves the purchase of a 
security from the fund?
2. Amendments to Form N-MFP
    Form N-MFP is the form that money market funds use to report their 
portfolio holdings and other key information each month.\268\ We use 
the information on Form N-MFP to monitor money market funds and support 
our examination and regulatory programs. We are proposing amendments to 
improve our ability to monitor money market funds. The proposed 
amendments would provide certain new information about a fund's 
shareholders and disposition of non-maturing portfolio investments. We 
are also proposing changes to enhance the accuracy and consistency of 
information funds currently report, to increase the frequency of 
certain data points, and to improve identifying information for the 
reporting fund.
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    \268\ See rule 30b1-7 under the Investment Company Act.
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a. New Information Requirements
    We are proposing to require additional information about the 
composition and concentration of money market fund shareholders. With 
respect to shareholder concentration, we are proposing that all money 
market funds disclose the name and percent of ownership of each person 
who owns of record or is known by the fund to own beneficially 5% or 
more of the shares outstanding in the relevant class.\269\ Money market 
funds currently provide substantially the same information on an annual 
basis in their registration statements.\270\ We believe more frequent 
information about shareholder concentration would be helpful for 
monitoring a fund's potential risk of redemptions by an individual or a 
small group of investors that could significantly affect the fund's 
liquidity. We recognize that as a result of omnibus accounts, there are 
circumstances in which multiple investors would be

[[Page 7283]]

represented as a single shareholder of record for purposes of this 
disclosure.\271\ The proposal would require information about 
beneficial owners known by the fund in recognition that funds may not 
have information about the amount each beneficial owner holds in an 
omnibus account. The proposed item would distinguish between record 
owners and beneficial owners to facilitate a more nuanced understanding 
of potential concentration levels. We are proposing to require funds to 
use a 5% ownership threshold for this reporting requirement to align 
with analysis funds already must conduct each year for purposes of 
updating their registration statements.\272\
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    \269\ See proposed Item B.10 of Form N-MFP. If the fund knows 
that two or more beneficial owners of the class are affiliated with 
each other, the fund would treat them as a single beneficial owner 
for purposes of the 5% ownership calculation and would report 
information about each affiliated beneficial owner. For these 
purposes, an affiliated beneficial owner would be one that directly 
or indirectly controls or is controlled by another beneficial owner 
or is under common control with another beneficial owner.
    \270\ See Item 18 of Form N-1A.
    \271\ Omnibus accounts are accounts established by 
intermediaries that typically aggregate all customer activity and 
holdings in a money market fund, which can result in the fund not 
having information about individual beneficial owners who hold their 
shares through the omnibus account.
    \272\ See Item 18 of Form N-1A.
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    We also propose to require a money market fund that is not a 
government money market fund or a retail money market fund to provide 
information about the composition of its shareholders by type.\273\ The 
proposed item would require these funds to identify the percentage of 
investors within the following categories: Non-financial corporation; 
pension plan; non-profit; state or municipal government entity 
(excluding governmental pension plans); registered investment company; 
private fund; depository institution and other banking institution; 
sovereign wealth fund; broker-dealer; insurance company; and other. 
This information would assist with monitoring the liquidity and 
redemption risks of institutional money market funds, as different 
types of investors may pose different redemption risks. We are not 
proposing to require this information of government money market funds 
because these funds have lower redemption and liquidity risks than 
other money market funds. We are not proposing to apply this 
requirement to retail funds because these funds, by definition, are 
limited to retail investors.
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    \273\ See proposed Item B.11 of Form N-MFP.
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    In addition, we propose to add new Part D to Form N-MFP, which 
would require information about the amount of portfolio securities a 
prime money market fund sold or disposed of during the reporting 
period. This information would facilitate monitoring of prime money 
market funds' liquidity management, as well as their secondary market 
activities in normal and stress periods. It also would improve the 
availability of data about how selling activity by money market funds 
relates to broader trends in short-term funding markets. The proposal 
would require a prime fund to disclose the aggregate amount it sold or 
disposed of for each category of investment.\274\ The categories of 
investments would mirror the categories funds already use on Form N-MFP 
for identifying their month-end holdings (e.g., certificate of deposit, 
non-negotiable time deposit, financial or non-financial company 
commercial paper, or U.S. Treasury debt).\275\ To focus the disclosure 
on secondary market activity, the proposal would exclude portfolio 
securities the fund held until maturity. We are proposing to require 
only prime funds to provide information about securities sold or 
disposed of because we believe that asset liquidation by this type of 
money market fund contributed to the market stress in March 2020 and 
during the 2008 financial crisis. In contrast, government funds 
generally receive inflows during periods of market stress and tend to 
provide liquidity to the market by investing incoming cash flow in the 
repurchase agreement market and purchasing securities. Tax-exempt funds 
are only a small segment of the money market fund industry and are less 
likely to generate significant liquidity concerns for the broader 
municipal market.
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    \274\ See Item D.1 of proposed Form N-MFP.
    \275\ See Item C.6 of current Form N-MFP.
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    As described above in the proposed swing pricing requirement 
section, we also propose to amend Form N-MFP to require money market 
funds that are not government money market funds or retail money market 
funds to report the number of times the fund applied a swing factor 
over the course of the reporting period, and each swing factor applied. 
In that section, we requested comment on these swing pricing-related 
amendments to Form N-MFP.
    We request comment on the new items we propose to add to Form N-
MFP, including:
    116. Should we require all money market funds to disclose 
information about shareholder concentration on Form N-MFP, as proposed? 
Should certain types of funds be excluded and, if so, why? Should the 
reporting threshold be ownership of at least 5% of a class's shares 
outstanding, as proposed? Should the threshold be lower or higher, such 
as 1%, 10%, or 15%? Instead of requiring information about shareholders 
who hold a certain amount of a class's outstanding shares, should we 
use a different method of obtaining information about shareholder 
concentration? For example, should we require funds to report the 
amount of net assets held by a specific number of the fund's largest 
investors, such as the one, five, or ten largest investors?
    117. As proposed, should the shareholder concentration item require 
the name and percentage of ownership for each shareholder who owns of 
record or beneficially 5% or more? Should we require different 
information for some or all types of investors? For example, should we 
not require name information for retail investors or other types of 
investors? As another alternative, should we require funds to report 
only the number of investors who own of record or beneficially 5% or 
more, distinguishing between record owners and beneficial owners? 
Additionally, should this information, as proposed, be reported on a 
non-confidential basis? Is there any sensitivity to identifying 
shareholder information such that it should only be reported to the 
Commission on a confidential basis?
    118. Do funds currently gather information about shareholder 
concentration and composition on at least a monthly basis, or would the 
proposal require more frequent gathering of information than current 
practices? If more frequent information gathering would be required, 
what are the associated advantages and disadvantages of assessing 
shareholder concentration and composition more frequently? Should we 
require funds to report this information on Form N-MFP less frequently 
than proposed, such as annually, semiannually, or quarterly?
    119. Should we require institutional prime and tax-exempt money 
market funds to provide information about the composition of their 
shareholders by type, as proposed? Are there any changes we should make 
to the types of shareholders the form would identify? Should certain 
shareholder categories be added or removed? Should we provide 
additional guidance or definition for any of the categories of 
shareholders? Should we also require government money market funds to 
respond to this item? If so, why?
    120. To what extent do money market funds know when an investor 
beneficially owns 5% or more of a class's outstanding shares when those 
shares are held through an omnibus account? To what extent do 
institutional money market funds know the composition of their 
shareholders by type? Are there any changes we should make to 
facilitate money market funds' abilities to collect this information, 
including for investors who invest through an omnibus account? For 
example, should we preclude a money market fund from selling its 
securities to

[[Page 7284]]

a financial intermediary in nominee name on behalf of others unless the 
intermediary provides certain information about investors in the fund 
(such as size of holding, type of investor, or other investor 
characteristics)?
    121. Should we require prime funds to disclose aggregate 
information about the amount of portfolio securities they sold or 
disposed of during the reporting period for each category of 
investment, as proposed? Should we instead require details about each 
instrument sold (e.g., date of sale, price, and identifying information 
for each holding)? Should we instead consider requiring that prime 
funds report information about the amount of portfolio securities sold 
or disposed of on Form N-CR if the amount is above a specific 
threshold? If so, what amount of selling activity should trigger such 
reporting?
    122. Should we require only some money market funds to disclose 
their selling activity, as proposed? Should we alternatively require 
all, or a broader subset of, money market funds to disclose this 
information?
    123. Are there other types of information we should require money 
market funds to report on Form N-MFP to facilitate monitoring of these 
funds?
b. Changes To Improve the Accuracy and Consistency of Currently 
Reported Information
    We are proposing several amendments to improve information about 
money market funds' portfolio securities. We are proposing to specify 
that, for purposes of reporting the fund's schedule of portfolio 
securities in Part C of Form N-MFP, filers must provide required 
information separately for the initial acquisition of a security and 
any subsequent acquisitions of the security (i.e., for each lot).\276\ 
Currently, some funds report information separately for each lot, while 
others do not. Requiring funds to report information separately for 
each lot would facilitate the Commission's ability to analyze other 
information we propose to require. Specifically, we are proposing an 
additional item that would require funds to provide the trade date on 
which the security was acquired and the yield of the security as of 
that trade date.\277\ These proposed amendments, collectively, would 
assist the Commission in understanding how long a fund has held a given 
position and the maturity of the position when it was first acquired. 
This information is important to understand a money market fund's 
portfolio turnover during normal market conditions and to monitor a 
potentially higher level of asset disposition during periods of market 
stress.
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    \276\ See introductory language to Part C of proposed Form N-
MFP.
    \277\ See Item C.6 on proposed Form N-MFP. Because the proposed 
amendments separately request the yield at the time of acquisition, 
we are proposing to remove language in Item C.2 requiring filers to 
include the coupon, if applicable, in response to that item.
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    Form N-MFP requires filers to report particular information about 
funds' repurchase agreements. We are proposing to amend the form to 
require additional information about repurchase agreement transactions 
and to standardize how filers report certain information. Specifically, 
the amendments would require that filers identify (1) the name of the 
counterparty in a repurchase agreement; (2) whether a repurchase 
agreement is centrally cleared and the name of the central clearing 
counterparty, if applicable; (3) if a repurchase agreement was settled 
on a triparty platform; and (4) the CUSIP of the securities involved in 
the repurchase agreement. Currently, Form N-MFP simply asks for the 
name of the issuer. For repurchase agreements, filers sometimes report 
the name of the counterparty to the repurchase agreement, the name of 
the clearing house (in the case of centrally cleared repurchase 
agreements), or both in response to this item. In addition, the 
amendments would recognize changes that have occurred in the market for 
repurchase agreements since the form was last amended, such as the 
introduction of centrally cleared (or ``sponsored'') repurchase 
agreements. These proposed amendments would improve the Commission's 
monitoring of money market fund activity in various segments of the 
market for repurchase agreements, including potentially increased or 
decreased activity during periods of market stress, which may affect 
availability of funding for borrowers.
    We are also proposing to include ``cash'' as a category of 
investment that most closely represents the collateral in repurchase 
agreements.\278\ This amendment is designed to recognize that cash is 
sometimes used as collateral for repurchase agreements, and we expect 
that the addition would reduce inaccurate disclosure suggesting that a 
repurchase agreement is under-collateralized. Moreover, we are 
proposing to remove the ability for funds to aggregate certain required 
information if multiple securities of an issuer are subject to the 
repurchase agreement.\279\ Removing this provision would provide more 
complete information about securities subject to a repurchase 
agreement.
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    \278\ See Item C.9.k of Form N-MFP (currently listing as 
categories of investments that most closely represents the 
collateral: Asset-backed securities; agency collateralized mortgage 
obligations; agency debentures and agency strips; agency mortgage-
backed securities; private label collateralized mortgage 
obligations; corporate debt securities; equities; money market; U.S. 
Treasuries (including strips); and other instruments).
    \279\ See Item C.8 of Form N-MFP.
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    Form N-MFP currently requires filers to indicate the category of 
money market fund.\280\ These categories include ``Treasury,'' 
``Government/Agency,'' and ``Exempt Government,'' among others. We 
understand that these categories for government money market funds have 
contributed to confusion and inconsistent approaches to categorization. 
We are proposing to remove these three category designations and to 
replace them with one ``Government'' category.\281\ To differentiate 
between Treasury funds and other government funds, the proposal 
includes a new subsection that requires government money market funds 
to indicate whether they typically invest at least 80% of the value of 
their assets in U.S. Treasury obligations or repurchase agreements 
collateralized by U.S. Treasury obligations.\282\ We believe that these 
amendments would provide more clarity for filers and supply the 
Commission with more accurate identification of different types of 
government money market funds.
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    \280\ Item A.10 of Form N-MFP.
    \281\ See proposed Item A.10 of Form N-MFP. We also propose to 
add definitions for ``government money market fund'' and ``retail 
money market fund'' in the form, which would be consistent with the 
definitions of these terms in rule 2a-7. Including these definitions 
in the form would clarify the meaning of references to these terms 
in this item and elsewhere in the form. See General Instruction E of 
proposed Form N-MFP. Because under this approach the definition of 
``retail money market fund'' would be clear for purposes of the 
form, we also propose to amend Item A.10.a to use this defined term, 
rather than refer to exempt retail money market funds. See proposed 
Item A.10.a of Form N-MFP.
    \282\ See proposed Item A.10.b of Form N-MFP. The 80% investment 
standard is based on 17 CFR 270.35d-1 (rule 35d-1 under the 
Investment Company Act), which requires a money market fund that 
includes ``Treasury'' in its name to adopt a policy to invest, under 
normal circumstances, at least 80% of its assets in the particular 
type of investment the fund's name suggests.
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    We are proposing a new item in Form N-MFP that would require filers 
to indicate whether the fund is established as a cash management 
vehicle for affiliated funds and accounts.\283\ This item would make it 
easier and more efficient to identify privately offered institutional 
money market funds. Our proposal also includes an amendment to

[[Page 7285]]

enhance consistency of reporting of whether a fund seeks to maintain a 
stable price per share.\284\ Currently, the form provides that if a 
fund seeks to maintain a stable price per share, it must state the 
price it seeks to maintain. However, if a fund does not respond to this 
item, it is unclear whether the fund did so in error or simply does not 
seek to maintain a stable price per share. The proposed amendment would 
require a fund to respond ``yes'' or ``no'' to whether it seeks to 
maintain a stable price per share so as to avoid any ambiguity.
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    \283\ See proposed Item A.21 of Form N-MFP.
    \284\ See proposed Item A.18 of Form N-MFP (proposing to require 
a fund to respond ``yes'' or ``no'' to whether it seeks to maintain 
a stable price per share).
---------------------------------------------------------------------------

    Currently, funds are required to provide the name of any person who 
paid for or waived all or part of the fund's operating expenses or 
management fees during the reporting period and describe the amount and 
nature of the fee and expense waiver or reimbursement. These 
disclosures are difficult to use, as they are provided in a format that 
is not structured.\285\ Moreover, the identification of the person who 
paid for or waived the fund's expenses or fees is not significantly 
beneficial to the Commission's monitoring and assessment of fund risks. 
While we continue to believe that shareholders should have access to 
this information, we believe that it is unnecessary to include in Form 
N-MFP since disclosure related to fees and expenses is available in 
funds' financial statements. Accordingly, we are proposing to require 
funds to report only the amount of any fee waiver or expense 
reimbursement during the reporting period.\286\ This proposed change 
would make it easier for the Commission and investors to analyze 
efficiently the reported data.
---------------------------------------------------------------------------

    \285\ Item B.8 of Form N-MFP.
    \286\ See proposed Item B.9 of Form N-MFP.
---------------------------------------------------------------------------

    For each portfolio security, a fund is required to indicate on Form 
N-MFP the category of instrument, using a list of categories designated 
in the form.\287\ We are proposing to include a new category that 
distinguishes between U.S. Government agency notes that are coupon-
paying and those that are no-coupon discount notes.\288\ We believe 
that including this distinction would allow us to better understand 
whether an agency security should be categorized as a weekly liquid 
asset, as only agency discount notes with less than 60 days to maturity 
can be considered weekly liquid assets under the rule. We are also 
proposing a conforming change to the list of investment categories that 
a fund must use for purposes of disclosing information about its 
holdings on its website.\289\
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    \287\ Item C.6 of Form N-MFP.
    \288\ See proposed amendments to Item C.7 of Form N-MFP.
    \289\ See proposed rule 2a-7(h)(10)(i)(B)(2).
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    We request comment on the proposed amendments to improve the 
accuracy and consistency of currently reported information on Form N-
MFP, including the following:
    124. Is the proposed requirement that funds provide required 
information separately for the initial acquisition of a security and 
any subsequent acquisitions of the security appropriate? Why or why 
not? Should we require funds to report the acquisition date and yield 
as of the acquisition date for each lot, as proposed? Are there better 
ways for us to assess how long a fund has held a position and its 
portfolio turnover? If so, how?
    125. Should we, as proposed, require additional information about 
the counterparty to the repurchase agreement and information about 
whether a repurchase agreement is centrally cleared or a triparty 
agreement? Are there other ways we could acquire this information?
    126. As proposed, should we require the CUSIP of the collateral 
subject to the repurchase agreement and add a category for cash 
collateral? As proposed, should we remove the provision that allows 
funds to aggregate information about multiple securities of an issuer 
that are subject to a repurchase agreement? To what extent do funds 
currently rely on this provision? What are the potential effects of our 
proposal to remove this provision? Is there any additional information 
related to repurchase agreement transactions that we should require?
    127. Should Form N-MFP require registrants to provide Financial 
Instrument Global Identifier for securities, if available? Should Form 
N-MFP permit registrants to report the Financial Instrument Global 
Identifier in lieu of a CUSIP number on Form N-MFP? Why or why not?
    128. Are our proposed amendments to consolidate how funds would 
identify different types of government money market funds effective? Is 
our proposed approach to identifying funds that should be classified as 
Treasury funds appropriate?
    129. Is our proposed item to identify money market funds 
established as cash management vehicles for affiliates or other related 
entities sufficiently clear? Are there any changes we should make to 
that item? Is there a more effective way of identifying these funds? 
Would this question be more appropriate on a different form instead of 
Form N-MFP, for example, Form N-CEN?
    130. Should we simplify disclosure of any fee waiver or expense 
reimbursement during the reporting period, as proposed? What scope of 
arrangements do funds currently report as fee waivers or expense 
reimbursements on Form N-MFP? For example, do they include offsets or 
credits (e.g., custodian credits)? Do funds need additional clarity or 
guidance on the types of arrangements to report? Instead of our 
proposed approach, should we retain information about the person 
waiving the fee or reimbursing the expense and a description of the fee 
waiver or expense reimbursement? For example, to better structure the 
item, should we require filers to identify the type of waiver or 
reimbursement on Form N-MFP (e.g., management fees, 12b-1 fees)? Why or 
why not? Should we require filers to provide a reason for the waiver or 
reimbursement? For instance, should the item require that filers 
designate whether such actions were taken to maintain a particular 
expense ratio or a minimum level of yield? Why or why not?
    131. As proposed, should we require funds to distinguish between 
U.S. Government agency notes that are coupon-paying and those that are 
no-coupon discount notes when categorizing their portfolio securities 
on Form N-MFP? Would this information be helpful for identifying 
securities that qualify as weekly liquid assets? Should we also require 
funds to distinguish between these two categories for purposes of 
disclosing portfolio securities on their websites, as proposed?
    132. Are there other changes or additions that would improve the 
accuracy and consistency of the required reported information on Form 
N-MFP?
c. More Frequent Data Points
    Under current rule 2a-7, a money market fund must prominently 
disclose on its website, as of the end of each business day during the 
preceding six months, the fund's percentage of total assets invested in 
daily liquid assets and in weekly liquid assets, as well as the fund's 
net asset value per share (including for each class of shares) and net 
shareholder flow.\290\ Currently, in monthly reports on Form N-MFP, a 
money market fund must provide the

[[Page 7286]]

same general information for each Friday during the month 
reported.\291\ Based on the Commission's experience with using current 
Form N-MFP data to analyze the events of March 2020 and other periods, 
we are proposing to amend Form N-MFP to require a money market fund to 
provide in its monthly report this liquidity, net asset value, and flow 
data for each business day of the month, rather than on a weekly basis.
---------------------------------------------------------------------------

    \290\ 17 CFR 270.2a-7(h)(10)(ii).
    \291\ Items A.13, A.20, B.5, and B.6 of Form N-MFP.
---------------------------------------------------------------------------

    We are proposing to require daily liquidity, net asset value, and 
flow data in monthly reports to allow Commission staff to better and 
more precisely monitor risks and trends in these areas in an efficient 
and more precise manner without requiring frequent visits to the 
websites of many different funds, and to provide industry-wide daily 
data in a central repository as a resource for investors and 
others.\292\ The weekly data currently reported on Form N-MFP provides 
only a snapshot of the liquidity, net asset value, and flow data for 
any given month, and is therefore incomplete and less useful for 
purposes of analysis and monitoring than data for each business day in 
that month. In addition, most of the data on Form N-MFP is reported as 
of the end of the month, making it difficult to analyze the weekly data 
in a comprehensive manner. This is because the weekly data points 
generally relate to different days than the monthly data points. 
Although data vendors provide some daily data based on information 
gathered from funds' websites, the staff has found this data could be 
incomplete at times, and therefore may not be appropriate for purposes 
of staff monitoring and analyses. As money market funds generally are 
already required to report on their websites the same data that we 
propose requiring be reported on Form N-MFP, we believe this change 
would impose minimal burden on money market funds. Consistent with the 
website information funds already provide, the reported daily data 
points would be calculated as of the end of each business day.
---------------------------------------------------------------------------

    \292\ To enhance consistency in reporting practices, we propose 
to specify that filers report gross subscriptions and gross 
redemptions as of the trade date (rather than as of the settlement 
date). This proposed change is intended to ensure that funds are 
reporting the information in the same manner. We also propose to 
clarify that filers that are master-feeder funds should report the 
required shareholder flow data at the feeder fund level only. See 
Item B.7 of proposed Form N-MFP. In addition, as discussed above, we 
are also proposing to amend the net asset value per share 
disclosures to require that an institutional prime or institutional 
tax-exempt fund should provide the net asset value per share as 
adjusted by a swing factor, if applicable. See supra Section II.B.4.
---------------------------------------------------------------------------

    We are also proposing to increase the frequency with which funds 
report certain yield information. Currently, funds must report 7-day 
gross yields (at the series level) and 7-day net yields (at the share 
class level) as of the end of the reporting period. We propose to 
require funds to report this information each business day. We believe 
the higher-frequency reporting would assist in the timely monitoring 
and assessment of fund risks, particularly during periods of market 
stress.
    We request comment on our proposal to require daily liquidity, net 
asset value, flow, and yield data in monthly Form N-MFP reports, 
including on the following:
    133. Should we, as proposed, require liquidity, net asset value, 
and flow data to be reported as of the close of business on each 
business day of each month? Would funds incur significantly higher 
costs than under the current weekly data reporting requirement? Please 
describe the associated costs.
    134. Would our new proposed requirements help us better identify 
certain risk characteristics that the form currently does not capture?
    135. Are there other ways to monitor risks and trends in fund 
liquidity, valuation, and shareholder flow in a more efficient and 
precise manner without requiring frequent visits to the websites of 
many different funds?
    136. When reporting required flow information on Form N-MFP, money 
market funds must include dividend reinvestments in the gross 
subscriptions figure.\293\ After last amending Form N-MFP, the 
Commission adopted Form N-PORT, which requires other types of 
registered management investment companies to report shares sold in 
connection with reinvestments of dividends and distributions 
separately.\294\ Should we similarly require money market funds to 
report dividend reinvestments and distributions separately? Would using 
an approach that is similar to Form N-PORT benefit fund complexes by 
allowing them to use consistent systems across different types of 
mutual funds for purposes of reporting flow information and allow the 
Commission and investors to better identify whether the fund is 
receiving new subscriptions? Or would such a change burden fund 
complexes and require systems changes, without significantly enhancing 
the current data because dividend reinvestments by money market fund 
investors are less substantial than for other fund types?
---------------------------------------------------------------------------

    \293\ See Item B.6 of current Form N-MFP.
    \294\ See Item B.6 of Form N-PORT.
---------------------------------------------------------------------------

    137. Should we, as proposed, require money market funds to report 
7-day yield information each business day? What are the advantages and 
disadvantages of requiring higher-frequency reporting of yield 
information? Should we instead require funds to report this information 
for each Friday of the month and for month-end, or on a different time 
cycle?
d. Other Amendments
    Form N-MFP currently provides that a filer must disclose the 
registrant's LEI, if available, and does not require the LEI of the 
series.\295\ Filers also provide the name of the registrant and series 
in metadata associated with the form, but filers do not report these 
names on the form itself. We are proposing to require funds to identify 
the name and LEI for both the fund registrant and the series.\296\ 
Requiring reporting of registrant and series names on the form is meant 
to make the form easier for investors to use. The change to require 
LEIs for the registrant and series aligns Form N-MFP with Forms N-CEN 
and N-PORT, which require LEI reporting for the registrant and series.
---------------------------------------------------------------------------

    \295\ See Item 3 of current Form N-MFP.
    \296\ See Items 2, 4, 5, and 6 of proposed Form N-MFP. We also 
propose that funds disclose the full name of the class of series, as 
the current form only includes the EDGAR class identifier.
---------------------------------------------------------------------------

    Currently, funds must report the LEI that corresponds to a 
portfolio security, if the LEI is available. We propose to clarify that 
funds should respond to an item request with ``N/A'' if the information 
is not applicable (e.g., a company does not have an LEI).\297\ We also 
propose to amend the definition of LEI in the form to remove language 
providing that, in the case of a financial institution that does not 
have an assigned LEI, a fund should instead disclose the RSSD ID 
assigned by the National Information Center of the Board of Governors 
of the Federal Reserve System, if any.\298\ Rather than classify an 
RSSD ID as an LEI under these circumstances, we propose to add RSSD ID 
as an additional category of ``other identifiers'' that a fund can use 
for relevant portfolio securities.\299\

[[Page 7287]]

These changes are designed to improve consistency and comparability of 
information funds report about the securities they hold.
---------------------------------------------------------------------------

    \297\ See General Instruction A of proposed Form N-MFP.
    \298\ See General Instruction F of proposed Form N-MFP for a 
revised definition of LEI.
    \299\ See Item C.5 of proposed Form N-MFP; General Instruction F 
of proposed Form N-MFP (adding a definition of RSSD ID). The revised 
definition of LEI would differ from the definitions of this term in 
Forms N-CEN, N-PORT, and PF, which allow an RSSD ID for a financial 
institution to be treated as an LEI if the institution has not been 
assigned an LEI. However, we do not believe that the different 
definitions of LEI among these forms would result in confusion or 
burdens. Form N-MFP would continue to allow a fund to report an RSSD 
ID for a financial institution when an LEI is not available, similar 
to the other forms, but it would make it easier to distinguish 
between the two types of identifiers.
---------------------------------------------------------------------------

    We request comment on our other proposed amendments to Form N-MFP, 
including the following:
    138. Should we require funds to provide both the name and LEI for 
the registrant and the series and the full name of the class of the 
series, as proposed? Is there other identifying information about the 
registrant, series, or class that would be helpful?
    139. As proposed, should we amend the definition of LEI in the form 
and provide a separate item for providing an RSSD ID as a securities 
identifier, as applicable?
    140. Are there other definitions we should amend, include, or 
exclude from the form? Please explain.

G. Compliance Date

    We propose to provide a transition period after the effective date 
of the amendments to give affected funds sufficient time to comply with 
the proposed changes and associated disclosure and reporting 
requirements, as described below. Based on our experience, we believe 
the proposed compliance dates would provide an appropriate amount of 
time for funds to comply with the proposed rule if adopted.
     Twelve-Month Compliance Date. We propose that 12 months 
after the effective date of the amendments, any money market fund that 
is not a government money market fund or a retail money market fund 
must comply with the proposed swing pricing requirement in rule 2a-7, 
if adopted, as well as the swing pricing disclosures applicable to 
these money market funds in the proposed amendments, if adopted, to 
Forms N-MFP and N-1A.\300\ We also propose to provide 12 months after 
the effective date for government and retail funds to determine, should 
the rule be adopted, that financial intermediaries have the capacity to 
redeem and sell at a price based on the current net asset value per 
share pursuant to rule 22c-1 or prohibit the financial intermediary 
from purchasing in nominee name on behalf of other persons, securities 
issued by the fund.\301\
---------------------------------------------------------------------------

    \300\ See proposed rule 2a-7(c); proposed amendments to Items 4 
and 6 of Form N-1A; proposed amendments to Item A.22 of Form N-MFP.
    \301\ See proposed rule 2a-7(h)(ii).
---------------------------------------------------------------------------

     Six-Month Compliance Date. The proposed compliance period 
for all other aspects of the proposal is six months after the effective 
date of the amendments, if adopted, and includes the following:
    [cir] The proposed increased daily minimum asset and weekly minimum 
asset requirements; and
    [cir] The amendments to Forms N-CR and N-MFP, except the swing 
pricing-related disclosure on Form N-MFP.
     Effective Date for Amendments Related to Liquidity Fees 
and Redemption Gates. Removal of the liquidity fee and redemption gate 
provisions in rule 2a-7, as well as removal of associated disclosure 
requirements in Form N-1A and N-CR, would be effective, if adopted, 
when the final rule is effective.
    We request comment on the proposed compliance dates, and 
specifically on the following items:
    141. Are the proposed compliance dates appropriate? If not, why 
not? Is a longer or shorter period necessary to allow affected funds to 
comply with one or more of these particular amendments? If so, what 
would be a recommended compliance date?
    142. Should removal of the fee and gate provisions be effective 
when the final rules become effective, as proposed? Alternatively, 
should these provisions not be effective until the compliance period 
ends for the increased liquidity requirements or the swing pricing 
requirement?

III. Economic Analysis

A. Introduction

    The Commission is mindful of the economic effects, including the 
costs and benefits, of the proposed amendments. Section 2(c) of the Act 
provides that when the Commission is engaging in rulemaking under the 
Act and is required to consider or determine whether an action is 
consistent with the public interest, the Commission shall also consider 
whether the action will promote efficiency, competition, and capital 
formation, in addition to the protection of investors. The analysis 
below addresses the likely economic effects of the proposed amendments, 
including the anticipated and estimated benefits and costs of the 
amendments and their likely effects on efficiency, competition, and 
capital formation. The Commission also discusses the potential economic 
effects of certain alternatives to the approaches taken in this 
proposal.
    Money market funds serve as intermediaries between investors 
seeking to allocate capital and issuers seeking to raise capital. 
Specifically, money market funds pool a diversified portfolio of short-
term debt instruments (such as government and municipal debt, 
repurchase agreements, commercial paper, certificates of deposit, and 
other short-term debt instruments), and sell shares to end investors, 
who use money market funds to manage liquidity needs. Money market 
funds play an important role in investors' asset allocation and 
liquidity management; serve as a source of wholesale funding liquidity 
in the financial system; and rely on capital subject to daily and 
intraday redemptions to invest in short-term debt instruments.\302\
---------------------------------------------------------------------------

    \302\ See Section III.B.3 for an analysis of portfolio holdings 
of different types of money market funds.
---------------------------------------------------------------------------

    As discussed in detail in the sections that follow, the proposal 
seeks to address liquidity externalities in money market funds. 
Specifically, redeeming investors impose negative liquidity 
externalities on investors remaining in the fund (``fund dilution''), 
which may amplify a first mover advantage in redemptions. For example, 
when early redemptions force a money market fund to draw down on liquid 
assets, they reduce overall fund liquidity available for future 
redemptions. The proposed removal of the tie between weekly liquid 
assets and redemption gates and the proposed elimination of redemption 
gates under rule 2a-7 are intended to reduce incentives of investors to 
redeem early to avoid losing liquidity during a potential gating 
period. The proposed increases in minimum liquidity requirements are 
designed to support funds' ability to meet redemptions from cash or 
securities convertible to cash even in market conditions in which money 
market funds cannot rely on a secondary or dealer market to provide 
liquidity, which may reduce transaction costs associated with 
redemptions and corresponding dilution borne by remaining investors. In 
addition, the proposed swing pricing requirement for institutional 
prime and institutional tax exempt money market funds is intended to 
require redeeming investors to absorb the liquidity costs they impose 
on the fund and thereby reduce unfairness to and the dilution of 
shareholders remaining in the fund.
    By reducing liquidity externalities in money market funds, the 
proposal may dampen the risk of runs on money market funds. The 
possibility that funds may impose gates or fees after crossing a 
threshold may give rise to additional

[[Page 7288]]

run risk. As discussed in Section I.B, in March 2020, when some money 
market funds approached the 30% weekly liquid asset threshold that 
would permit a fund to impose a gate or a fee, investors became more 
likely to redeem from those funds. Loss of access to liquidity by 
investors during the gating period can magnify the incentive to run 
before the gate is imposed.
    The proposal may mitigate liquidity externalities and run risk in 
money market funds in three ways. First, the proposal would remove the 
tie between weekly liquid asset thresholds and the possibility that 
gates or fees will be imposed, which incentivized runs on money market 
funds and altered portfolio management behavior of money market funds 
in 2020, based on available evidence. Second, increases in minimum 
liquidity requirements may improve the ability of funds to meet 
redemptions, reducing the risk of runs on funds with low liquidity. 
Third, the proposed swing pricing requirement may partly reduce run 
risk by reducing the first-mover advantage related to dilution 
costs.\303\
---------------------------------------------------------------------------

    \303\ Factors other than dilution costs--such as falling asset 
prices and potential differences between a fund's net asset value 
and execution prices--may also contribute to runs. These and other 
considerations are discussed in greater detail in Section III.B.2 
below.
---------------------------------------------------------------------------

    Money market fund managers' risk-taking incentives may lead them to 
hold liquidity levels that may be insufficient to meet redemptions in 
times of stress \304\ for at least three reasons. First, some investors 
may seek to maximize returns,\305\ assets with higher liquidity risks 
deliver higher returns,\306\ and fund managers' compensation may be 
related to fund size and performance.\307\ Second, large scale 
redemptions akin to those experienced by some funds in March 2020 are 
rare, and estimating the risk of such rare and large scale redemptions 
is inherently difficult. Third, money market funds do not internalize 
liquidity externalities that money market fund liquidity management 
practices may impose on market participants transacting in the same 
asset classes. While the proposal would not fundamentally change these 
incentives of money market funds or fund managers, it would require 
funds to hold a greater share of highly liquid assets. This may reduce 
the ability of money market funds to invest in less liquid assets in 
order to reach for yield, reducing the probability that money market 
funds are unable to meet redemptions with liquid assets and have to 
sell less liquid holdings at a large haircut. Moreover, future times of 
stress may involve larger redemptions that would force money market 
funds to sell less liquid assets to meet redemptions. Thus, the 
proposal may lower the risk that money market funds do not have enough 
liquidity to meet redemptions and consequently relying on government 
backstops or sponsor support.
---------------------------------------------------------------------------

    \304\ A large finance literature examines the interplay between 
maturity transformation, systemic risk, and leverage. See, e.g., 
Fahri, Emmanuel and Jean Tirole. 2012. ``Collective Moral Hazard, 
Maturity Mismatch, and Systemic Bailouts''. American Economic Review 
102(1): 60-93. See also Acharya, Viral, and S Viswanathan. 2011. 
``Leverage, Moral Hazard, and Liquidity.'' Journal of Finance 66(1): 
99-138. Other papers have examined the effects of government 
backstops on money market funds. See, e.g., Strahan, Philip, and 
Basak Tanyeri. 2015. ``Once Burned, Twice Shy: Money Market Fund 
Responses to a Systemic Liquidity Shock.'' Journal of Financial and 
Quantitative Analysis 50(1-2): 119-144. See also Kim, Hugh Hoikwang. 
2020. ``Information Spillover of Bailouts.'' Journal of Financial 
Intermediation 43.
    \305\ In a somewhat parallel open end fund context, fund inflows 
are highly sensitive to fund yields, which can incentivize a reach 
for yield. See, e.g., Choi, Jaewon, and Mathias Kronlund. 2018. 
``Reaching for Yield in Corporate Bond Mutual Funds.'' The Review of 
Financial Studies. 31(5): 1930-1965. See also Kacperczyk, Marcin, 
and Philipp Schnabl. 2013. ``How Safe are Money Market Funds?'' The 
Quarterly Journal of Economics, 138(3): 1073-1122. See also 
Fulkerson, Jon, Bradford Jordan, and Timothy Riley. 2013. ``Return 
Chasing in Bond Funds.'' Journal of Fixed Income, 22(4): 90-103.
    \306\ See, e.g., Lee, Kuan-Hui. 2011. ``The World Price of 
Liquidity Risk.'' Journal of Financial Economics 99(1): 136-161. See 
also Acharya, Viral, and Lasse Pedersen. 2005. ``Asset Pricing with 
Liquidity Risk.'' Journal of Financial Economics, 77(2): 375-410. 
See also Pastor, Lubos, and Robert Stambaugh. 2003. ``Liquidity Risk 
and Expected Stock Returns.'' Journal of Political Economy 111(3): 
642-685.
    \307\ See, e.g., Ma, Linlin, Yuehua Tang, and Juan-Pedro Gomez. 
2019. ``Portfolio Manager Compensation in the U.S. Mutual Fund 
Industry.'' Journal of Finance 74(2): 587-638.
---------------------------------------------------------------------------

    Many of the benefits and costs discussed below are difficult to 
quantify. For example, we lack data to quantify the number of funds 
that had to sell less liquid holdings during March 2020; how funds may 
adjust the liquidity of their portfolios in response to the proposed 
liquidity thresholds; the extent to which investors may reduce their 
holdings in money market funds as a result of the proposed swing 
pricing requirement; the extent to which investors may move capital 
from institutional prime to government money market funds; and the 
reductions in dilution costs to investors as a result of the proposed 
amendments (which will depend on investor redemption activity and the 
liquidity risk of underlying fund assets). Form N-MFP data is not 
sufficiently granular to allow such quantification and many of these 
effects will depend on how affected funds and investors may react to 
the proposed amendments. While we have attempted to quantify economic 
effects where possible, much of the discussion of economic effects is 
qualitative in nature. We seek comment on all aspects of the economic 
analysis, especially any data or information that would enable a 
quantification of the proposal's economic effects.

B. Economic Baseline

1. Affected Entities
a. Money Market Funds
    The proposed amendments would directly affect money market funds 
registered with the Commission. From Form N-MFP data, there are a total 
of 318 funds with approximately $5 trillion in total net assets that 
may be affected by various aspects of the proposal. Table 3 and Table 4 
below estimate the number and total net assets of funds by fund type as 
of the end of July 2021. Prime money market funds account for 
approximately 17% of the total net assets in the industry, whereas 
municipal money market funds account for approximately 2%.

[[Page 7289]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.006

[GRAPHIC] [TIFF OMITTED] TP08FE22.007

    As discussed above, the swing pricing proposal may 
disproportionately affect funds that strike their NAV at the midpoint 
price, rather than at the bid price of the securities. One commenter 
indicated that it and many other U.S. fund complexes value the 
securities held in money market and bond funds for purposes of 
computing fund NAVs at the bid price.\308\ We lack data to quantify how 
many institutional prime and institutional tax-exempt funds currently 
strike their NAV at the midpoint and, to the best of our knowledge, no 
such data is publicly available. We solicit comment and any data that 
would enable such quantification.
---------------------------------------------------------------------------

    \308\ See Fidelity Comment Letter to the Financial Stability 
Board, available at https://www.fsb.org/wp-content/uploads/Fidelity.pdf.
---------------------------------------------------------------------------

b. Other Affected Entities
    As discussed above, the proposed swing pricing requirement would 
indirectly affect a large group of intermediaries. Specifically, swing 
pricing would require certain money market funds to receive more timely 
flow information before they can strike the NAV and settle trades. As 
discussed in greater detail below, this may affect all market 
participants sending orders to relevant money market funds, including 
broker-dealers, registered investment advisers, retirement plan 
recordkeepers and administrators, banks, other registered investment 
companies, and transfer agents that receive flows directly.
    In addition, the proposed requirement that stable NAV money market 
funds determine that intermediaries submitting orders to purchase or 
redeem the fund's shares have the ability to process transactions at 
non-stable prices would also affect intermediaries sending flows to 
these money market funds. As discussed in section II.D, rule 2a-7 
already imposes the obligation on money market funds and their transfer 
agents to have the capacity to redeem and sell securities at prices 
that do not correspond to a stable price per share.
2. Certain Economic Features of Money Market Funds
    Several features of money market funds can create an incentive for 
their shareholders to redeem shares heavily in periods of market 
stress. We discuss these factors below, as well as the adverse impacts 
that can result from such heavy redemptions in money market funds.
a. Money Market Fund Investors
    As discussed elsewhere,\309\ investors in money market funds have 
varying investment goals and tolerances for risk. Many investors use 
money market funds for principal preservation and as a cash management 
tool. Such investors may be loss averse for many reasons, including 
general risk tolerance, legal or investment policy restrictions, or 
short-term cash needs. These overarching considerations may create 
incentives for money market fund investors to redeem--incentives that 
may persist regardless of market conditions and even if the other 
dilution related incentives discussed below are addressed by the 
proposal.
---------------------------------------------------------------------------

    \309\ See, e.g., 2014 Adopting Release, supra footnote 12, at 
47740.
---------------------------------------------------------------------------

    The desire to avoid loss may cause investors to redeem from certain 
money market funds in times of stress. For example, as discussed 
elsewhere, heavy redemptions from prime money market funds and 
subscriptions in government money market funds during the 2008 
financial crisis pointed to a flight to quality, given that most of the 
assets

[[Page 7290]]

held by government money market funds have a lower default risk than 
the assets of prime money market funds.\310\ As discussed above, during 
peak market stress in March 2020, investor redemptions may have been 
driven by liquidity considerations, among other things.
---------------------------------------------------------------------------

    \310\ See id.
---------------------------------------------------------------------------

    In addition, as long as investors consider their money market 
investments as relatively liquid and low risk, the possibility that a 
fund may impose gates or fees when a fund's weekly liquid assets fall 
below 30% under rule 2a-7 may contribute to the risk of triggering 
runs, particularly from institutional investors that commonly monitor 
their funds' weekly liquid asset levels.\311\ As discussed above, some 
research suggests that, during peak market volatility in March 2020, 
institutional prime money market fund outflows accelerated as funds' 
weekly liquid assets went closer to the 30% threshold.\312\ In order to 
avoid approaching or breaching the 30% weekly liquid asset threshold 
for the possible imposition of redemption gates, money market fund 
managers may also choose to sell less liquid portfolio securities 
during times of stress.\313\
---------------------------------------------------------------------------

    \311\ See, e.g., Comment Letter of the Systemic Risk Council 
(Apr. 12, 2021) (``Systemic Risk Council Comment Letter''); SIFMA 
AMG Comment Letter; Fidelity Comment Letter.
    \312\ See, e.g., Li et al., supra footnote 31. See also ICI MMF 
Report, supra footnote 45.
    \313\ Some commenters indicated that, on aggregate, prime money 
market funds pulled back little from commercial paper markets as 
they were largely unable to resell commercial paper and CDs to 
issuing banks and such securities lack a liquid secondary market. 
See, e.g., ICI MMF Report, supra footnote 45.
---------------------------------------------------------------------------

b. Liquidity Externalities and Dilution Costs
    Money market fund investors can incur dilution costs. Specifically, 
the value of shares held by investors staying in the fund may be 
diluted if other fund investors transact at a NAV that does not fully 
reflect the ex post realized costs of the fund's trading induced by 
fund flows. Shareholders in floating NAV and stable NAV funds may bear 
dilution costs in different forms. In floating NAV funds, dilution is 
reflected in the fund's NAV, which directly affects the yields of 
shareholders remaining in the fund. In stable NAV funds, dilution costs 
can accrue until the fund's shadow price declines below $0.995, which 
may result in the fund breaking the buck and re-pricing its shares 
below $1.00. Fund sponsors can also choose to absorb some or all of the 
dilution costs for reputational reasons, but are not obligated to do 
so.
    Several factors can contribute to the dilution of investors' 
interests in money market funds. First, trading costs can lead to 
dilution. To effect net redemptions or subscriptions, a fund incurs 
trading costs. If these costs are realized prior to NAV strike, they 
are distributed across both transacting and non-transacting investors. 
However, if these costs are realized after NAV strike, they are borne 
solely by non-transacting shareholders that remain in the fund. For low 
levels of net redemptions or subscriptions, the difference between the 
two scenarios for non-transacting shareholders is low; however, for 
large net redemptions, the difference in dilution costs borne by non-
transacting shareholders can be stark.
    Using a stylized example, Figure 2 compares the dilution attributed 
to trading costs that occurs when a fund trades to meet redemptions 
after NAV is struck (as is currently the case in the U.S.) with the 
dilution attributed to trading costs that occurs if a fund is able to 
trade to accommodate investor redemptions/subscriptions prior to the 
NAV strike (dotted straight line). This stylized example assumes that a 
fund holds a single asset whose value is constant, but liquidating the 
asset incurs a spread/haircut of 10%. Importantly, the haircut 
assumption in this stylized example is used purely for illustrative 
purposes; haircuts on assets in money market funds tend to be much 
smaller. However, this example demonstrates that larger redemptions can 
contribute nonlinearly to higher dilution for remaining shareholders 
when a fund trades after the NAV is struck compared to a scenario in 
which the fund trades before the NAV is struck.\314\
---------------------------------------------------------------------------

    \314\ To the degree that some funds may determine their NAV 
using holdings as of the prior trading day, such practices may also 
exacerbate dilution. In Figure 2, if funds strike their NAV using 
current trading day holdings, the dotted line would not be 
decreasing.

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[[Page 7291]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.008

    Second, stale prices could contribute to dilution, especially 
during times of market stress. Some assets that money market funds hold 
may become illiquid and stop trading during times of market stress. In 
such events, the only available prices for these assets are prices 
realized during pre-stress market conditions, i.e., stale prices. If a 
floating NAV fund's NAV on a given date is based on stale prices, net 
redemptions at that NAV can dilute non-transacting fund shareholders 
when assets are eventually sold at prices that reflect their true 
value. Since funds with a stable NAV have a fixed share price at $1, 
stale prices only affect the shadow price per share and the probability 
that a fund breaks the buck and potentially leads to sponsor support. 
The stale pricing phenomenon has been documented in fixed income funds 
\315\ and not specifically in money market funds. However, money market 
funds hold significant amounts of commercial paper, certificates of 
deposit, and other assets that do not have an active and robust 
secondary market, making them similarly opaque and difficult to 
accurately price, especially during times of market stress.
---------------------------------------------------------------------------

    \315\ See, e.g., Choi, Jaewon, Mathias Kronlund, and Ji Yeol Oh. 
2021. ``Sitting Bucks: Stale Pricing in Fixed Income Funds.'' 
Journal of Financial Economics, forthcoming.
---------------------------------------------------------------------------

    Knowing that these and other factors \316\ may contribute to 
dilution, money market fund investors may have an incentive to redeem 
quickly in times of stress to avoid realizing potential dilution, an 
effect exacerbated if they believe other investors will redeem.\317\ 
Some research in a parallel open end fund setting suggests that 
liquidity externalities may create a ``first-mover advantage'' that may 
lead to cascading anticipatory redemptions akin to traditional bank 
runs.\318\ There is a dearth of academic research about the degree to 
which dilution costs alone may trigger money market fund runs. In 
addition, theoretical models of such first-mover advantage typically 
rely on some exogenous mechanism to generate initial redemptions from 
funds.\319\ While stale NAV and trading costs can create incentives for 
early redemptions, redemptions may also occur for reasons that are not 
strategic, such as a desire to rebalance portfolios under stressed 
market conditions.
---------------------------------------------------------------------------

    \316\ For example, market risk may contribute to dilution costs. 
If a fund redeems investors at a given NAV, but must raise funds to 
meet those redemptions on a subsequent trading day during which the 
value of the fund's holdings declines significantly, non-transacting 
shareholders will be diluted. Conversely, non-transacting money 
market fund investors can benefit if assets are sold at a price 
higher than NAV. While the value of the fund's holdings can go both 
up and down, such market risk amplifies the risk fund shareholders 
would otherwise experience. However, since true market prices may be 
very difficult to forecast, the degree to which such dilution 
contributes to the first mover advantage is unclear.
    \317\ Similar effects have been shown to create run dynamics in 
banking contexts. See, e.g., Diamond, Douglas and Philip Dybvig. 
1983. ``Bank Runs, Deposit Insurance, and Liquidity.'' Journal of 
Political Economy 91(3): 401-419.
    \318\ This research generally models an exogenous response to 
negative fund returns and not trading costs. However, these results 
may extend to trading costs to the degree that cost based dilution 
may reduce subsequent fund returns, which would trigger runs in 
these models. See e.g., Chen, Qi, Itay Goldstein, and Wei Jiang. 
2010. ``Payoff Complementarities and Financial Fragility: Evidence 
from Mutual Fund Outflows.'' Journal of Financial Economics 97(2): 
239-262. See also Goldstein, Itay, Hao Jiang, and David Ng. 2017. 
``Investor Flows and Fragility in Corporate Bond Funds.'' Journal of 
Financial Economics 126(3): 592-613. See also Morris, Stephen, 
Ilhyock Shim, and Hyun Song Shin. 2017. ``Redemption Risk and Cash 
Hoarding by Asset Managers.'' Journal of Monetary Economics 89: 71-
87. See also Zeng, Yao. 2017. ``A Dynamic Theory of Mutual Fund Runs 
and Liquidity Management.'' Working Paper. See also Ma, Yiming, 
Kairong Xiao, and Yao Zeng. 2021. ``Mutual Fund Liquidity 
Transformation and Reverse Flight to Liquidity.'' Working Paper. See 
also Ma, Yiming, Kairong Xiao, and Yao Zeng. 2021. ``Bank Debt 
versus Mutual Fund Equity in Liquidity Provision.'' Working Paper.
    \319\ For example, one model assumes that investors redeem from 
funds following poor performance. See Chen, Qi, Itay Goldstein, and 
Wei Jiang. 2010. ``Payoff Complementarities and Financial Fragility: 
Evidence from Mutual Fund Outflows.'' Journal of Financial Economics 
97(2): 239-262.
---------------------------------------------------------------------------

    Regardless of the reason for a fund experiencing net redemptions on 
any given day, such redemptions impose a cost on investors remaining in 
the fund in the absence of measures to take trading costs into account. 
In addition, since money market funds can trade portfolio holdings to 
meet redemptions or subscriptions, money market fund liquidity 
management can both dampen and magnify disruptions in underlying 
securities markets.

[[Page 7292]]

3. Money Market Fund Activities and Price Volatility
a. Portfolio Composition and Interplay With Short-Term Funding Markets
    As described in the introduction, portfolio composition of money 
market funds is determined by fund type. Figure 3 and Figure 4 show 
portfolio holdings of prime and tax-exempt money market funds since 
2016.\320\ Prime money market funds mostly hold certificates of deposit 
and time deposits, which average 33% of their portfolio holdings. The 
second largest category is financial commercial paper, which averages 
18% of fund portfolio holdings. These categories of holdings decreased 
as portfolio shares after March 2020 as prime money market funds 
increased their Treasury holdings. Tax-exempt money market funds mostly 
hold variable rate demand notes, which average 50% with a slight 
downward trend over time. The second largest category is tender options 
bonds, which average 23%, with a slight upward trend over time. Figure 
5 shows differences in portfolio holdings of commercial paper of retail 
and institutional prime money market funds: Generally retail money 
market funds have somewhat higher holdings of commercial paper compared 
to institutional funds. For instance, retail prime money market funds 
held on average 21% of financial commercial paper compared to 17% for 
institutional prime money market funds.
---------------------------------------------------------------------------

    \320\ The 2014 money market fund reforms were implemented in 
2016. For the purposes of this economic analysis, the Commission's 
baseline reflects rules currently in effect as well as how money 
market fund practices and portfolios evolved in the aftermath of the 
2014 final rule.
    \321\ The numbers on the x axis are months and years. CDs/Time 
Deposits are certificates of deposit or time deposits. Financial CP 
is commercial paper of issuers in the financial industry. Treasury 
Debt/Repos are U.S. Treasury obligations or repurchase agreements 
collateralized by U.S. Treasury securities. Government Agency Debt/
Repos are debt securities of Federal agencies and instrumentalities, 
as well as repurchase agreements collateralized by government agency 
securities. ABCP is asset-backed commercial paper. Non/Financial CP 
is commercial paper of issuers not in the financial industry. In a 
repurchase agreement, one party sells an asset, usually a Treasury 
security or other fixed income security, to another party with an 
agreement to repurchase the asset at a later date at a slightly 
higher price. Repo contracts are a common form of short-term 
financing. In a repo, the party selling the security is similar to 
the lender in a securities lending agreement; the party purchasing 
the security is similar to a borrower in cash collateralized 
securities lending. In both cases, the transaction is facilitated by 
cash transfers from the purchaser (borrower) to the seller (lender). 
In a securities loan, the cash is in the form of collateral while in 
a repo transaction the cash is payment for the security. In both 
cases, the purchaser or borrower becomes the legal owner of the 
security. To unwind the repurchase agreement or securities loan, 
cash transfers back to the purchaser in terms of the repurchase cost 
for a repo or in the form of returned collateral in a securities 
loan. Repos and securities loans differ in that repos typically are 
primarily used for short-term financing while securities loans 
typically are used to gain access to the security itself. Also loans 
generally allow the lender to recall the security on demand while 
repos do not. Additionally, the cash received by the seller of a 
repo is often not re-invested but is used to finance the operations 
of a company whereas the cash received in a securities loan is 
generally re-invested in low risk fixed income securities for the 
life of the loan. See, e.g., Gorton, Gary and Andrew Metrick. 2012. 
``Securitized Banking and the Run on Repo,'' Journal of Financial 
Economics 104.
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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP08FE22.009

[[Page 7293]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.010

[GRAPHIC] [TIFF OMITTED] TP08FE22.011

    While money market funds are only one type of participant among 
many in short-term funding markets, money market fund activity may 
influence short-term funding markets. A wave of redemptions can force 
money market funds to liquidate portfolio holdings at reduced prices, 
if they have insufficient cash on hand from maturing daily and weekly 
liquid assets or cash from subscriptions, which can contribute to 
stress in underlying short-term funding markets. As a result, money 
market fund liquidity has the potential to impact underlying securities 
issuers' ability to raise capital in short-term markets during stress 
periods. Figure 6 shows trends in holdings of commercial paper by money 
market funds.

[[Page 7294]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.012

b. NAV and Price Volatility
    After the 2014 rule 2a-7 amendments, only one money market fund had 
its market NAV drop below $.9975 in 2020; \322\ however, in a few 
instances, fund sponsors provided financial support by purchasing 
securities from affiliated institutional prime money market funds to 
prevent these funds from dropping below the 30% weekly liquid asset 
threshold.\323\
---------------------------------------------------------------------------

    \322\ All money market funds have a market NAV, which is a four 
digit price that is calculated using available market prices and/or 
fair value market pricing models of the portfolio securities. In 
contrast, retail and government money market funds also have a 
stable NAV, which is a two digit price usually set at $1.00 that 
does not fluctuate and is calculated using amortized cost 
accounting.
    \323\ See, e.g., ICI Comment Letter I; Wells Fargo Comment 
Letter.
---------------------------------------------------------------------------

    To reduce volatility in their market NAVs, money market funds 
invest in short-term, high-credit-quality, well diversified debt 
securities pursuant to rule 2a-7. Although the limits on maturity and 
credit risk of money market fund holdings under rule 2a-7 reduce risks 
a money market fund may face, they do not eliminate those risks. Risks 
that remain may cause the fund's market NAV to deviate from $1. Changes 
in interest rates or a security's credit rating, for example, could put 
temporary downward pressure on an asset's price before it matures at 
par. In addition, if any securities were sold or matured for less than 
the amortized cost, then any deviation between the fund's market price 
and $1 would become permanent. Finally, an issuer may default on 
payments of principal or interest, generating losses for funds holding 
the issuer's securities. If the loss is large enough, a stable NAV fund 
could break the buck while a floating NAV fund could see a decline in 
its share price.
    We have examined the distribution of market NAVs before and after 
the compliance date of the 2014 amendments (October 2016).\324\ Figure 
7 quantifies the trends in the distribution of money market fund market 
NAVs before and after the 2014 rule amendments went into effect and in 
the run up to the 2020 market stress. The distribution of money market 
fund market NAVs, as a whole, changed little over time. However, as can 
be seen from Figure 8 and Figure 9, the distribution of prime money 
market fund's market NAVs tightened around the compliance date with the 
2014 amendments.
---------------------------------------------------------------------------

    \324\ This analysis relies on Form N-MFP submissions between 
November 2010 and November 2020 for all money market funds. From 
these filings, portfolio holdings and fund characteristics, 
including fund NAV prices from Item B.5, are extracted for each 
fund. Item B.5 requires filers to report the net asset value per 
share as of the close of business on each Friday of the month. To 
avoid duplication, master funds are removed from the sample: 
Although feeder funds generally have the same characteristics as 
their master fund, feeder funds have different investor redemption 
patterns, which can affect the fund's market price. As a result, 
Form N-MFP filers generally provide market prices for the feeder 
funds and leave the market prices for master funds blank or zero.

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[[Page 7295]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.013

[GRAPHIC] [TIFF OMITTED] TP08FE22.014

[[Page 7296]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.015

    The dispersion of market NAVs across all retail prime money market 
funds each month in Figure 9 is larger than the dispersion of market 
NAVs of their institutional counterparts.\325\ This result is 
consistent with the possibility that, following the 2014 amendments, 
advisers to institutional prime and institutional municipal funds were 
under increased pressure to keep their weekly liquid assets high and 
their floating NAV near $1.0000, possibly because sophisticated 
institutional investors are more likely to track the standard 
deviations and redeem shares in a crisis.\326\ In other words, the 
baseline daily disclosure of the market prices may allow institutional 
investors to monitor NAV fluctuations, and may influence the liquidity 
risk management of money market funds.
---------------------------------------------------------------------------

    \325\ For example, between October 2016 and February 2020 the 
mean market NAV was $1.0001 with a standard deviation of $0.0003 for 
retail prime funds and for institutional prime funds the mean market 
NAV was $1.0001 with a standard deviation of $0.0002.
    \326\ See, e.g., Response to Questions Posed by Commissioners 
Aguilar, Paredes, and Gallagher, Page 10, available at http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf.
---------------------------------------------------------------------------

    Figure 10 and Figure 11 show the distribution of weekly retail and 
institutional prime money market fund market NAVs during the COVID-19 
pandemic, respectively. On average, retail prime money market fund 
market NAVs dropped from $1.0002 to $0.9994 or 8 bps as a result of the 
market dislocation. Similarly, the average institutional prime money 
market fund market NAV dropped from $1.0003 to $0.9994 or 9 bps as a 
result of the market dislocation. The lowest market NAV for retail 
prime dropped from $0.9994 to $0.9980 or 14 bps. In contrast, 
institutional prime money market fund lowest market NAV dropped from 
$0.9999 to $0.9976 or 23 bps. No prime money market fund market NAV 
dropped below $0.9975. To the degree that the only available prices for 
some affected money market fund holdings during March 2020 stress may 
have been realized during pre-stress market conditions, these NAV 
fluctuations may underestimate the degree of asset volatility in these 
funds.

[[Page 7297]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.016

[GRAPHIC] [TIFF OMITTED] TP08FE22.017

    Holdings of retail and institutional money market funds may 
contribute to NAV volatility of these funds. Figure 12 shows 
differences in the holdings of Treasuries, commercial paper, and 
certificates of deposit of retail prime and institutional prime money 
market funds.

[[Page 7298]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.018

c. Liquidity Management
    The above portfolio differences between retail and institutional 
money market funds are also observed in the amount of the daily liquid 
assets and weekly liquid assets in prime fund portfolios, with retail 
fund daily and weekly liquid assets being lower than those of 
institutional funds. Figure 13 reports daily and weekly liquid asset 
percentages for prime funds.
[GRAPHIC] [TIFF OMITTED] TP08FE22.019

BILLING CODE 8011-01-C
    During peak volatility in March 2020, some funds experienced a 
reduction in their daily and weekly liquid asset values as they drew 
down on their liquid assets to meet large redemptions. Specifically, a 
high of 6 institutional prime funds on March 18 had weekly liquid 
assets below 35%, and one of the institutional prime money market funds 
had weekly liquid assets below 30%.\327\ The largest fund outflow was a 
weekly decrease of 55% in assets under management, and the fund's 
weekly liquid assets declined from 38.8% to 32.2% over three 
consecutive days.
---------------------------------------------------------------------------

    \327\ See ICI MMF Report, supra footnote 45. ICI also reports 
that one of the institutional prime money market funds had weekly 
liquid assets of less than 30% on March 18, 2020. Currently, rule 
2a-7 requires that a money market fund comply with the daily and 
weekly liquid asset standards at the time each security is acquired 
(rule 2a-7(d)(4)(ii) and (iii)).
---------------------------------------------------------------------------

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
a. Benefits
    The proposal would remove the tie between money market funds' 
weekly liquid assets and the possible imposition of fees and redemption 
gates, as well as eliminate gate provisions from rule 2a-7. These 
amendments may benefit money market funds and their investors by 
reducing the risk of runs on money market funds, especially during 
times of liquidity stress.
    As discussed in the introduction, money market funds use a pool of 
assets subject to daily redemptions to invest in short-term debt 
instruments that are not perfectly liquid, which renders them 
susceptible to a first mover advantage in investor redemptions akin to 
bank runs.\328\ Moreover, money market fund

[[Page 7299]]

redemptions can impose liquidity externalities on shareholders 
remaining in the fund, as discussed in Section III.B.2. The possibility 
of a redemption fee or gate can magnify those incentives and 
externalities. Specifically, under the current baseline, money market 
funds may impose redemption fees or gates if their weekly liquid assets 
are below 30% of their total assets. Thus, as funds approach the 30% 
threshold, investors seeking to avoid a redemption gate or fee are 
incentivized to redeem before other redemptions further deplete a 
fund's liquid assets. The proposal is expected to reduce such 
incentives to redeem.
---------------------------------------------------------------------------

    \328\ See, e.g., Schmidt, Lawrence, Allan Timmermann, and Russ 
Wermers. 2016. ``Runs on money market mutual funds.'' American 
Economic Review, 106(9): 2625-57. Run dynamics in funds have been 
explored in a large body of finance research, including, for 
example: Zeng, Yao. 2017. ``A dynamic theory of mutual fund runs and 
liquidity management.'' Available at SSRN 2907718; Chen, Qi, Itay 
Goldstein, and Wei Jiang. 2010. ``Payoff complementarities and 
financial fragility: Evidence from mutual fund outflows.'' Journal 
of Financial Economics, 97(2): 239-262.
---------------------------------------------------------------------------

    As a result, the proposed removal of the tie between weekly liquid 
assets and the potential imposition of liquidity fees or redemption 
gates may better enable funds to use their daily and weekly liquid 
assets to meet redemptions in times of stress without giving rise to 
risk of runs.\329\ This benefit may be strongest for money market funds 
that have weekly liquid assets close to the minimum threshold during 
times of liquidity stress, as they are currently most susceptible to 
runs. Moreover, money market fund investors would no longer face the 
possibility of the imposition of gates outside of liquidations, 
enhancing the attractiveness of money market funds as a highly liquid 
investment product.
---------------------------------------------------------------------------

    \329\ See, e.g., SIFMA AMG Comment Letter; State Street Comment 
Letter.
---------------------------------------------------------------------------

    This amendment may also benefit money market fund investors. As 
discussed above, the weekly liquid asset triggers for the possible 
imposition of redemption fees or gates create incentives for investors 
to redeem first, at the expense of investors remaining in the fund who 
experience further dilution during the gating period. The proposed 
removal of the weekly liquid asset trigger as well as the elimination 
of redemption gates outside of liquidation may reduce the liquidity 
costs borne by investors remaining in the fund. This aspect of the 
proposal may increase the attractiveness of money market funds as a low 
risk cash management tool and sweep investor account to risk averse 
investors.
b. Costs
    As discussed in Section II.A, the proposal would not only remove 
the tie between fund weekly liquid assets and the possibility of gating 
and fees, but would also eliminate gate and fee provisions from rule 
2a-7. As a result, money market funds would only be able to impose 
gates in the event of liquidation. To the degree that the ability to 
impose redemption gates or fees under rule 2a-7 may be a useful 
redemption management tool during times of stress, the proposed 
amendment may reduce the scope of tools available to money market funds 
to manage their liquidity risk in times of stress.
    Four factors may mitigate this economic cost of the proposed 
amendment. First, no money market fund imposed a fee or a gate under 
the rule during the market stress of 2020, and investors exhibited 
anticipatory redemptions when funds approached the 30% weekly liquid 
threshold for the potential imposition of fees and gates. In light of 
these factors, money market funds may be unlikely to impose redemption 
gates outside of fund liquidation, even if we retained a redemption 
gate provision in rule 2a-7. As discussed in Section II.A, the 
possibility that a money market fund would impose redemption gates may 
influence investment and redemption decisions, which could trigger 
runs.
    Second, under the proposal, institutional prime and institutional 
tax-exempt money market funds would be required to impose swing 
pricing, as discussed in greater detail below. NAV adjustments would 
not be tied to weekly liquid assets of the fund, but to the size of net 
redemptions and the liquidity costs redeeming investors are imposing on 
the shareholders remaining in the fund. The proposed swing pricing 
approach may be a more valuable tool for money market funds in managing 
investor redemptions than redemption gates and liquidity fees under 
rule 2a-7. Moreover, the proposed increases to daily and weekly 
liquidity thresholds may increase fund liquidity buffers that can be 
used to manage liquidity costs of redemptions.
    Third, money market funds would continue to be able to suspend 
redemptions under rule 22e-3 in anticipation of fund liquidation. 
Specifically, money market funds would be able to suspend redemptions 
if a fund's weekly liquid assets decline below 10% or, in the case of a 
stable NAV money market fund, if the board determines that the 
deviation between its amortized cost price per share and its market-
based NAV per share may result in material dilution or other unfair 
results to investors or existing shareholders, in each case if the 
board also approves liquidation of the fund.\330\ Thus, money market 
funds would still have access to a form of gating during large 
liquidity shocks in connection with a fund liquidation.
---------------------------------------------------------------------------

    \330\ See 17 CFR 270.22e-3.
---------------------------------------------------------------------------

    Fourth, as a result of the run dynamics described above, the tie 
between weekly liquid assets and the potential imposition of fees and 
gates may have contributed to incentives for money market fund managers 
to preserve their weekly liquid assets during liquidity stress, rather 
than using them to meet redemptions. Therefore, the tie between weekly 
liquid assets and the possibility of fees and gates may magnify 
liquidity stress because it incentivizes money market funds to sell 
less liquid assets with higher liquidity costs rather than absorb 
redemptions out of liquid assets. Thus, the proposed removal of fees 
and gates under rule 2a-7 may reduce run risk and liquidity 
externalities in money market funds.
2. Raised Liquidity Requirements
a. Benefits
    The proposed amendments increasing daily and weekly liquid asset 
requirements to 25% and 50% respectively may reduce run risk in money 
market funds. Early redemptions can deplete a fund's daily or weekly 
liquid assets, which reduces liquidity of the remainder of the fund's 
portfolio and increases the risk that a fund may need to sell less 
liquid assets into the market during fire sales. Thus, higher levels of 
daily and weekly liquid assets in a fund may reduce trading costs and 
the first mover advantage during a wave of redemptions, potentially 
disincentivizing runs. When money market funds experience runs, funds 
with higher daily and weekly liquid assets may experience lower 
liquidity costs as they may be more likely to be able to use their 
liquid assets to meet redemptions rather than be forced to sell assets 
during liquidity stress.\331\ Although liquidity dynamics in open end 
funds may differ from those in money market funds,\332\ some research 
in that context shows that fund illiquidity can contribute to run 
dynamics, as discussed in section III.B.2b. Some other work finds that 
less liquid open-end bond funds suffered more severe outflows during 
the COVID-19 crisis than liquid funds, and

[[Page 7300]]

that less liquid funds experienced redemptions well before more liquid 
funds.\333\ Other research shows that runs were more likely in less 
liquid funds for both U.S. and European institutional prime money 
market funds.\334\
---------------------------------------------------------------------------

    \331\ See Prime MMFs at the Onset of the Pandemic Report, supra 
footnote 41, at 4. According to Form N-MFP filings, no prime money 
market fund reported daily liquid assets declining below the 10% 
threshold in March 2020.
    \332\ For example, unlike open end funds, money market funds are 
subject to daily and weekly liquid asset requirements.
    \333\ See Falato, Antonio, Itay Goldstein and Ali 
Horta[ccedil]su. 2021. ``Financial Fragility in the COVID-19 Crisis: 
The Case of Investment Funds in Corporate Bond Markets.'' Journal of 
Monetary Economics, forthcoming.
    \334\ See Cipriani, Marco and Gabriele La Spada. 2020. 
``Sophisticated and Unsophisticated Runs.'' FRB of New York Staff 
Report No. 956. See also Anadu, Kenechukwu, Marco Cipriani, Ryan 
Craver, and Gabriele La Spada. 2021. ``The Money Market Mutual Fund 
Liquidity Facility.'' FRM of New York Staff Report No. 980.
---------------------------------------------------------------------------

    The proposed increases to liquidity requirements may reduce the 
likelihood that funds need to sell portfolio securities during periods 
of market stress. This may reduce the potential effect of redemptions 
from money market funds on short-term funding markets during times of 
stress. Some commenters stated that redemptions from money market funds 
may not have contributed to stress in short-term debt markets during 
March 2020 and noted a relation between sales and the introduction of 
the Money Market Liquidity Facility (MMLF).\335\ For example, one 
industry group conducted a survey of members that indicated the two-
thirds of the reduction in prime money market funds' commercial paper 
holdings ($23 billion) represented sales to the MMLF after that 
facility was announced on March 18. The commenter suggested that 
because these sales moved assets from money market funds to the Federal 
Reserve's balance sheet, these sales would not have placed downward 
pressure on prices.\336\ There may be varying interpretations of the 
effects of fund outflows in March 2020 on the prices of assets held by 
money market funds and, thus, the degree to which the proposed 
liquidity requirements may reduce the transaction costs and losses 
money market funds would face when selling portfolio securities into 
stressed markets. Importantly, the proposed liquidity requirements 
would enhance the ability of funds to meet large redemptions and reduce 
the dilution of remaining fund shareholders which would protect 
investors. Some commenters indicated that increases in the weekly 
liquid asset threshold would not necessarily result in enhanced money 
market fund liquidity because fund managers would continue to be 
reluctant to use a fund's liquid assets to fulfill redemptions.\337\ 
Funds may choose between drawing down on daily or weekly liquid assets 
and selling other assets in distressed markets to meet redemptions. 
However, the proposed removal of the tie between weekly liquid assets 
and the potential imposition of redemption fees and gates may reduce 
the disincentives funds currently face to draw down their weekly liquid 
assets during a wave of redemptions. Before the 2014 amendments, the 
only consequence of a money market fund having weekly liquid assets 
below the 30% threshold was that the fund could not acquire any 
security other than a weekly liquid asset until its investments were 
above the 30% threshold. As a result, funds were more comfortable using 
their weekly liquid assets and dropping below the 30% threshold. For 
example, at the peak of the Eurozone sovereign crises in the summer of 
2011 the lowest reported weekly liquid asset value was approximately 
5%.\338\ In combination with the proposed elimination of the tie 
between weekly liquid assets and potential imposition of gates and 
fees, the proposed liquidity requirements may similarly increase the 
reliance of money market funds on daily and weekly liquid assets in 
meeting redemptions. However, the proposal would also require prompt 
notice of falling below liquidity thresholds, which may decrease these 
benefits, as discussed in greater detail in Section III.C.6.
---------------------------------------------------------------------------

    \335\ See, e.g., ICI Comment Letter I; ICI Comment Letter II; 
Federated Hermes Comment Letter I; SIFMA AMG Comment Letter.
    \336\ See, e.g., ICI Comment Letter I; ICI Comment Letter II.
    \337\ See, e.g., Wells Fargo Comment Letter; JP Morgan Comment 
Letter.
    \338\ See, supra footnote 274, Figure 8.
---------------------------------------------------------------------------

    These benefits may also be mitigated to the extent that many money 
market funds may already voluntarily hold daily and weekly liquid 
assets in excess of the regulatory minimum thresholds.\339\ For 
example, the asset weighted average daily and weekly liquid assets for 
publicly offered institutional prime money market funds between October 
2016 and February 2020 was 33% and 48% respectively.\340\ After the 
peak volatility in March 2020, money market funds generally increased 
their daily and weekly liquidity, with the asset weighted average daily 
and weekly liquid assets for publicly offered institutional prime money 
market funds rising to 44% and 56% respectively between March 2020 and 
November 2020. Importantly, the distribution of liquid assets is 
skewed, with approximately 50% of publicly offered institutional prime 
funds holding below average (44%) in daily liquid assets and 75% of 
funds holding below average (less than 56%) in weekly liquid assets. As 
a result, fewer prime funds may benefit from the proposed higher daily 
liquid asset threshold than the proposed higher weekly liquid asset 
threshold.
---------------------------------------------------------------------------

    \339\ Wells Fargo Comment Letter; JP Morgan Comment Letter; 
Western Asset Comment Letter (noting that reporting and transparency 
requirements encourage managers to maintain liquid assets in excess 
of the existing WLA threshold).
    \340\ Averages were calculated by dividing the aggregate amount 
of daily (weekly) liquid assets from all funds by the aggregated 
amount of assets from all fund.
---------------------------------------------------------------------------

    Reduced run risk in money market funds may enhance the resilience 
of affected funds and reduce the risk that money market funds may rely 
on government backstops. Moreover, this amendment may benefit investors 
to the degree that increasing the liquidity of money market fund 
portfolios would allow funds to meet large redemptions from liquidity 
buffers more easily. For example, after the March 2020 market 
dislocation, some prime money market funds voluntarily shifted their 
portfolios by swapping out longer maturity commercial paper and 
certificates of deposit for more liquid Treasuries, allowing them to 
meet any future redemptions better. Raising liquidity thresholds may 
have a similar benefit.
    The magnitude of these economic benefits is likely to depend on the 
way in which money market funds may respond to the proposed amendments. 
Specifically, some affected money market funds (i.e., money market 
funds with less than the proposed 25% in daily and 50% in weekly liquid 
assets) may react to the proposal by increasing the maturity of the 
remainder of their portfolios, potentially reducing their liquidity to 
the extent that it is tied to maturity. However, under the current 
rules money market funds are constrained in the maturity and weighted 
average life of the assets they hold, which is intended to limit the 
degree to which funds are able to risk shift their portfolios while 
remaining registered as money market funds. Moreover, the liquidity 
stress in 2020 was so severe that commercial paper across a variety of 
maturities became illiquid.
b. Costs
    The proposed amendments would impose indirect costs on money market 
funds, investors, and issuers. Because less liquid assets are more 
likely to yield higher returns in the form of a liquidity premium,\341\ 
to the degree that the

[[Page 7301]]

proposal improves the liquidity of money market fund portfolios, it 
would lower expected returns of those funds to investors that are 
already earning low and or zero net yields in a low interest rate 
environment. Several commenters have indicated that an increase in 
weekly liquid assets would likely decrease money market fund yields and 
make them less desirable to investors.\342\ This may reduce the 
attractiveness of money market funds to some investors. Reduced 
investor demand may lead to a decrease in the size of assets under 
management of affected money market funds and the wholesale funding 
liquidity they provide to other market participants. Investors that 
prefer to use money market funds as a cash management tool, giving them 
the ability to preserve the value of their investments and receiving a 
small yield, may move out of prime money market funds and into 
government money market funds that deliver lower yields, but have lower 
risk to the value of the investment. Moreover, to the degree that some 
money market funds are only viable because investors treat them as cash 
equivalents, this amendment may result in better matching of investors 
to funds that meet their risk tolerance and yield expectations, 
mitigating the above costs.
---------------------------------------------------------------------------

    \341\ See, e.g., Lee, Kuan-Hui. 2011. ``The World Price of 
Liquidity Risk.'' Journal of Financial Economics 99(1): 136-161. See 
also Acharya, Viral, and Lasse Pedersen. 2005. ``Asset Pricing with 
Liquidity Risk.'' Journal of Financial Economics, 77(2): 375-410. 
See also Pastor, Lubos, and Robert Stambaugh. 2003. ``Liquidity Risk 
and Expected Stock Returns.'' Journal of Political Economy 111(3): 
642-685.
    \342\ SIFMA AMG Comment Letter; Western Asset Comment Letter; 
Wells Fargo Comment Letter; JP Morgan Comment Letter.
---------------------------------------------------------------------------

    The proposed increase of daily and weekly liquid assets may require 
as many as 15% of affected funds to increase their daily liquid assets 
and 50% of affected funds to increase their weekly liquid assets, as 
discussed in further detail below.\343\ The proposal would thus 
increase the demand of money market funds for daily liquid assets, such 
as repos, and the liquidity in overnight funding markets may then flow 
through banking entities to leveraged market participants, such as 
hedge funds. Thus, the proposal may reduce the liquidity risk borne by 
money market funds, but may result in a concentration of risk taking 
among leveraged and less regulated market participants. At the same 
time, this shift could allocate risk that currently resides in money 
market funds to hedge funds and other more speculative vehicles.
---------------------------------------------------------------------------

    \343\ The analysis is based on March 2020 redemptions from 
publicly offered institutional prime funds. The possible new 
thresholds determined by stress in publicly offered institutional 
prime fund portfolios are then applied to all money market funds 
(except for the daily liquid asset threshold for tax-free money 
market funds). As such, these figures also reflect the percentage of 
retail and institutional prime funds that would be impacted by the 
various liquidity thresholds. Important caveats and limitations of 
this analysis are discussed in Section III.D.2.a below.
---------------------------------------------------------------------------

    The proposed amendments may also impose indirect costs on issuers. 
Specifically, money market funds are significant holders of commercial 
paper and certificates of deposit, as described in the economic 
baseline,\344\ and most of the commercial paper they hold is issued by 
banks, including foreign bank organizations.\345\ Therefore, issuers of 
commercial paper and certificates of deposit are likely to experience 
incrementally reduced demand for their securities from money market 
funds, particularly demand for debt that would fall outside of the 
weekly liquid assets category. This may reduce such issuers' access to 
capital and increase the cost of capital, negatively affecting capital 
formation in commercial paper and certificates of deposit. Issuers may 
respond to such changes by reducing their issuance of commercial paper 
and certificates of deposit and increasing issuance of longer-term 
debt. In a somewhat analogous setting, some research explores the 
effects of the 2014 money market fund reforms, which resulted in asset 
outflows from prime money market funds into government money market 
funds and affected funding for large foreign banking organizations in 
the U.S., on bank business models.\346\ One paper finds that banks were 
able to replace some of the lost funding, but reduced arbitrage 
positions that relied on unsecured funding, rather than reducing 
lending.\347\ Another paper finds that money market fund reforms led to 
an increase in the relative share of lending in bank assets and 
concludes that reduction in unstable funding can discourage bank 
investments in illiquid assets.\348\ Other research examined the 
effects of decreased holdings of European bank debt by money market 
funds during the Eurozone sovereign crisis in 2011. One paper found 
that reduced wholesale dollar funding from money market funds during 
this period led to a sharp reduction in dollar lending by Eurozone 
banks relative to euro lending, which reduced the borrowing ability of 
firms reliant on Eurozone banks prior to the sovereign debt 
crisis.\349\
---------------------------------------------------------------------------

    \344\ To the degree that some money market funds hold 
significant quantities of commercial paper issued by foreign banks 
seeking dollar funding, such issuer costs may have a greater effect 
foreign issuers.
    \345\ See ICI MMF Report, supra footnote 45.
    \346\ These outflows around the October 2016 compliance date for 
the 2014 reforms, for example, led to reduced money market funds 
purchases of commercial paper with other entities like mutual funds 
eventually picking up the shortfall and an approximately 30 basis 
point spike in 90-day financial commercial paper rates for about 
three months.
    \347\ See, e.g., Anderson, Alyssa, Wenxin Du, Bernd Schlusche. 
2019. ``Money Market Fund Reform and Arbitrage Capital.'' Working 
Paper.
    \348\ See Thomas Flanagan. 2020. ``Funding Stability and Bank 
Liquidity.'' Working Paper.
    \349\ See Ivashina, Victoria, David Scharfstein, and Jeremy 
Stein, 2015. ``Dollar Funding and the Lending Behavior of Global 
Banks.'' Quarterly Journal of Economics 130(3): 1241-1281.
---------------------------------------------------------------------------

    These potential costs of the proposed amendment to issuers may be 
mitigated by four potential factors. First, as discussed above, money 
market funds may respond to a higher weekly liquid asset threshold by 
increasing the maturity and liquidity risk in their non-weekly liquid 
asset portfolio allocations. This effect may dampen the adverse demand 
shock for commercial paper, but increase portfolio risk of affected 
money market funds. However, as discussed in Section II.C. above, for 
the past several years prime money market funds have maintained levels 
of liquidity that are close to or that exceed the proposed thresholds, 
without generally barbelling.\350\ Second, as discussed in Section 
III.B.3.a), money market funds hold less than a quarter of outstanding 
commercial paper, which could limit the impact of the proposal on 
commercial paper issuers and markets. Third, the proposed increases to 
liquidity requirements may increase some money market fund's liquidity 
buffers, which may enable such funds to meet large redemptions from 
liquid assets and reduce the need to sell commercial paper to meet 
large redemptions during fire sales. This may enhance the stability of 
commercial paper markets during times of market stress--an effect that 
is also limited by the relative size of money market fund holdings of 
commercial paper. Fourth, money market funds are just one group of 
investors investing in commercial paper markets and hold less than a 
quarter of commercial paper outstanding, as discussed above. If money 
market funds pull back from commercial paper markets and commercial 
paper prices decrease as a result, other investors, such as mutual 
funds or insurance companies, may be attracted to commercial paper, 
absorbing some of the newly available supply, as observed after the 
2016 reforms.
---------------------------------------------------------------------------

    \350\ See BlackRock Comment Letter (stating that they have not 
seen evidence that barbelling was a problem in March 2020, or that 
money market fund portfolios were generally structured with a 
barbell). We similarly have not observed significant use of 
barbelling strategies among money market funds.

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[[Page 7302]]

3. Stress Testing Requirements
a. Benefits
    The proposal would also alter stress testing requirements for money 
market funds. Under the baseline, money market funds are required to 
stress test their ability to maintain 10% weekly liquid assets under 
the specified hypothetical events described in rule 2a-7 since breach 
of the 10% weekly liquid asset threshold would impose a default 
liquidity fee. The proposal would eliminate the default liquidity fee 
triggered by the 10% threshold and the corresponding stress testing 
requirement around the 10% weekly liquid asset threshold. Instead, the 
proposal would require funds to determine the minimum level of 
liquidity they seek to maintain during stress periods and to test 
whether they are able to maintain sufficient minimum liquidity under 
such specified hypothetical events, among other requirements.
    Money market funds may have different optimum levels of liquidity 
under times of stress. Many factors influence optimum levels of minimum 
liquidity, including the type of money market fund, investor 
concentration, investor composition, and historical distribution of 
redemption activity under stress. This aspect of the proposal may 
increase the value of stress testing as part of fund liquidity 
management by allowing funds to tailor their stress testing to the 
fund's relevant factors, which may enhance the ability of funds to meet 
redemptions and the Commission's oversight of money market funds.
b. Costs
    Proposed amendments to fund stress testing requirements may impose 
direct and indirect costs. Specifically, a fund would be required to 
determine the minimum level of liquidity it seeks to maintain during 
stress periods, identify that liquidity level in its written stress 
testing procedures, periodically test its ability to maintain such 
liquidity level, and provide the fund's board with a report on the 
results of the testing. As a baseline matter, funds are expected 
already to identify minimum levels of liquidity they seek to maintain 
during stress as part of routine liquidity management, and are required 
to test their ability to maintain such liquidity levels under the 
baseline liquidity thresholds. Money market funds have also established 
written stress testing procedures to comply with existing stress 
testing requirements and report the results of the testing to the 
board. Thus, such funds may experience costs related to altering 
existing stress testing procedures as the proposal would move from 
bright line requirements to a principles based approach, as well as 
costs related to board reporting and recordkeeping.
    Moreover, to the degree that funds may not always have sufficient 
incentives to manage liquidity to meet redemptions, they may choose 
insufficiently low minimum levels of liquidity for stress testing, 
which may reduce the value of stress testing and corresponding 
reporting for board oversight of fund liquidity risk. However, funds 
may have significant reputational incentives to manage liquidity 
costs--incentives that have, for example, led many funds to voluntarily 
provide sponsor support.
4. Swing Pricing
a. Benefits and Costs of Swing Pricing in Money Market Funds in General
    As discussed in the economic baseline, money market fund investors 
transacting their shares typically do not incur the costs associated 
with their transaction activity. Instead, these liquidity costs may be 
borne by shareholders remaining in the fund, which may contribute to a 
first-mover advantage and run risk.\351\ Moreover, as discussed above, 
liquidity management by money market funds imposes externalities on all 
participants investing in the same asset classes. This effect may be 
especially acute if there are large-scale net redemptions during times 
of market stress.
---------------------------------------------------------------------------

    \351\ As discussed in the economic baseline, dilution costs most 
directly impact shareholders in floating NAV funds through changes 
to the NAV. In stable NAV funds, dilution costs can make the fund 
more likely to breach the $1 share price if dilution costs are 
large. It is also important to note that sponsors can choose to 
provide sponsor support to manage reputational costs.
---------------------------------------------------------------------------

    The proposed amendments implementing swing pricing would require 
institutional prime and institutional tax-exempt money market funds to 
implement swing pricing procedures to adjust the fund's floating NAV so 
as to charge redeeming shareholders for the liquidity costs they impose 
on the fund when a fund experiences net redemptions. The adjusted NAV 
would apply to redeemers and subscribers alike. Thus, adjusting the NAV 
down when a fund is faced with net redemptions charges redeemers for 
the liquidity costs of their redemptions, but also allows subscribers 
to buy into the fund at the lower, adjusted NAV.\352\ Under the 
proposal, the affected money market fund would recoup the full dilution 
costs by charging the redeemers for both the dilution cost of 
redemptions as well as the cost of allowing subscribers to buy into the 
fund at the lower adjusted NAV.
---------------------------------------------------------------------------

    \352\ Adjusting the NAV captures the liquidity costs that 
redeemers impose on the shareholders remaining in the fund. However, 
subscribers benefit from the lower NAV as well since subscribers buy 
into the fund at a lower NAV. Thus, the benefits of adjusting the 
NAV are shared between existing shareholders in the fund and 
subscribers.
---------------------------------------------------------------------------

    As discussed in greater detail in the section that follows, the 
proposed swing pricing requirement would require funds to estimate 
swing factors differently depending on the level of redemptions. If net 
redemptions in a particular pricing period are at or below the market 
impact threshold (of 4% divided by the number of pricing periods per 
day), swing factors would be required to incorporate spread and other 
transaction costs. If net redemptions exceed the market impact 
threshold, swing factors would be required to reflect spread and other 
transaction costs, as well as a good faith estimate of market impact of 
net redemptions. Thus, the magnitude of the adjustments to the NAV 
during normal market conditions may be small since money market funds 
already hold relatively high quality and liquid investments and would 
hold even higher levels of liquidity under the proposal, which may 
reduce liquidity costs when meeting redemptions.
    One commenter indicated that because NAV adjustments may be small 
and investors are unable to observe at the time of placing their orders 
whether the fund will adjust its NAV, swing pricing may not have the 
intended impacts of swing pricing on investor behavior.\353\ The 
proposed swing pricing requirement may increase the variability of 
institutional funds' NAV, which can reduce their attractiveness to 
investors. However, under the baseline, institutional funds experience 
NAV volatility, as demonstrated in Section III.B, and risk averse 
investors that prefer NAV stability may have already shifted to 
government money market funds or bank accounts around the 2016 
implementation of money market fund reforms. Moreover, even if 
investors cannot observe whether the NAV will be adjusted on a 
particular day, if swing pricing accurately reflects liquidity costs, 
investors know that they would not be diluted if they stay in the fund, 
reducing their incentives to exit in anticipation of the application of 
a swing factor. Moreover, the rule is intended to address the dilution 
that can occur when a money market fund experiences net redemptions and 
is not intended to result in significant NAV

[[Page 7303]]

adjustments unless there is significant net redemption activity leading 
to large liquidity costs.
---------------------------------------------------------------------------

    \353\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    The proposed swing pricing requirement may reduce dilution of non-
redeeming shareholders in the face of net redemptions. Thus, swing 
pricing may reduce any first mover advantage, fund outflows, and any 
dilution resulting from these outflows.\354\ In other jurisdictions 
swing pricing is used as a mechanism to protect non-transacting 
shareholders from dilution attributable to trading costs, and as an 
additional tool to help funds manage liquidity risks.\355\ To the 
degree that swing pricing reduces dilution, swing pricing may serve to 
protect investors that remain in a fund, for instance, during periods 
of high net redemptions. In addition, the proposed elimination of the 
ability to impose liquidity fees and gates under rule 2a-7 may increase 
the benefit of swing pricing as an important tool for money market 
funds to manage the liquidity costs of large-scale redemptions.
---------------------------------------------------------------------------

    \354\ See, e.g., Jin, Dunhong, Marcin Kacperczyk, Buge Kahraman, 
and Felix Suntheim. 2021. ``Swing Pricing and Fragility in Open-end 
Mutual Funds.'' Review of Financial Studies, forthcoming.
    \355\ However, swing pricing in these other jurisdictions 
differs somewhat from our proposed approach. For example, swing 
pricing often involves adjusting a fund's NAV in the event of net 
redemptions or net subscriptions. Recommendation of the European 
Systemic Risk Board (ESRB) on liquidity risk in investment funds, 
European Securities and Markets Authority (November 2020); Liquidity 
Management in UK Open-Ended Funds, Bank of England and the Financial 
Conduct Authority (March 26, 2021); and Jin, et al., Swing Pricing 
and Fragility in Open-end Mutual Funds (January 1, 2021) The Review 
of Financial Studies, forthcoming, available at SSRN: https://ssrn.com/abstract=3280890 or http://dx.doi.org/10.2139/ssrn.3280890.
---------------------------------------------------------------------------

    The above economic benefits of swing pricing may be reduced by 
several factors. First, several commenters have suggested that swing 
pricing adjustments would have been too small to affect investor 
redemptions and may not have addressed the issues that occurred in 
March 2020.\356\ The implementation of swing pricing in the proposal 
appears to differ from that in these comment letters in that when net 
redemptions exceed the market impact threshold, swing factors would be 
required to reflect estimates of market impacts assuming redemptions 
are met through the liquidation of a pro-rata share of total portfolio 
assets. Thus, when net redemptions are large, swing factors may be 
larger than estimated in these comment letters and may capture more of 
the dilution costs currently borne by nontransacting shareholders.
---------------------------------------------------------------------------

    \356\ See, e.g., Fidelity Comment Letter; Western Asset Comment 
Letter; GARP Risk Institute Comment Letter.
---------------------------------------------------------------------------

    Second, the proposed swing pricing requirement only addresses the 
portion of dilution costs related to trading costs, and would not 
address other sources of dilution discussed in section III.B.2. Thus, 
the proposed requirement may only partly reduce the dilution costs that 
redemptions impose on non-transacting investors and the related 
liquidity externalities. We do not have granular data about daily money 
market fund holdings that would enable us to estimate the amount of 
dilution that could have been recaptured under the proposed approach in 
March 2020 or the prevalence of other sources of dilution discussed in 
Section III.B.2. To the best of our knowledge, such data is not 
publicly available, and we solicit any comment or data that could 
enable such quantification.
    Third, as discussed in greater detail in Section II, the proposed 
swing pricing approach would require affected funds to calculate swing 
factors based on, among other things, estimates of market impacts. To 
the degree that it may be difficult to value illiquid assets without an 
active secondary market, particularly in times of severe liquidity 
stress, funds may need to use their discretion in the estimation of 
market impact factors. This may give affected funds some discretion in 
the calculation of swing factors. To the extent that institutional 
investors may be sensitive to NAV adjustments under the proposal, some 
funds may use discretion in the calculation of swing factors to reduce 
the NAV adjustments. At the same time, funds may use discretion to 
apply larger NAV adjustments so as to manipulate and presumably improve 
reported fund performance. Importantly, the proposed rule would require 
affected funds to use good faith estimates of market impact factors. 
Moreover, discretion in the calculation of swing factors may increase 
noise in the NAV and may decrease comparability in returns. Investors 
may find it more difficult to interpret returns if swing pricing is 
applied inconsistently across funds.
    The proposal would require affected funds to implement swing 
pricing, rather than make it optional. While money market funds may 
have reputational incentives to manage liquidity to meet redemptions, 
affected funds also face collective action problems and disincentives 
stemming from investor behavior. Specifically, to the degree that 
institutional investors may use institutional prime and institutional 
tax-exempt funds for cash management and their flows are sensitive to 
NAV adjustments, funds may be disincentivized to implement swing 
pricing and/or to adjust the NAV frequently. For example, even if all 
institutional money market funds recognized the benefits of charging 
redeeming investors for the liquidity costs of redemptions, no fund may 
be incentivized to be the first to adopt such an approach as a result 
of the collective action problem. By making swing pricing mandatory, 
rather than optional, the proposal is intended to ensure that funds 
adjust the NAV to capture the dilution costs of net redemptions and 
that money market fund returns are comparable across funds. Moreover, 
it may be suboptimal for an individual money market fund to implement 
swing pricing routinely, as the operational costs of doing so are 
immediate and certain, while the benefits are largest in relatively 
rare times of liquidity stress. The proposed application of swing 
pricing by all institutional prime and institutional tax-exempt funds 
is intended to ensure that swing pricing is deployed in times of severe 
stress by all affected funds, protecting investors from dilution costs 
when they are highest, and reducing liquidity externalities that money 
market funds may impose on other market participants trading the same 
asset classes.
    The proposed swing pricing requirement would impose certain costs, 
as analyzed in Section IV. These costs may be passed along in part or 
in full to institutional money market fund investors, that are already 
earning low and or zero net yields in a low interest rate environment, 
in the form of higher expense ratios or fees. In addition, the proposal 
would require affected funds to calculate the swing factor based on 
net, rather than gross redemptions. As a result, the redeeming 
investors would be charged both for the direct liquidity costs of their 
redemptions, as well as for the dilution cost that results from 
allowing subscribers to buy into the fund at a lower adjusted NAV. 
While this would result in the non-transacting shareholders recapturing 
more of the dilution costs from redemptions, this aspect of the 
proposal would charge redeeming investors for more than the direct 
dilution cost of their redemptions, which may disincentivize 
redemptions and incentivize subscriptions.
    The proposal may reduce investor demand for institutional prime and 
institutional tax-exempt money market funds. If the proposal reduces 
investor demand in some funds, it would lead to a decrease in assets 
under management of these money market funds, thereby potentially 
reducing the wholesale funding liquidity they provide to other

[[Page 7304]]

market participants. The implementation of the floating NAV for 
institutional money market funds in 2016 resulted in a large scale 
reallocation of investor capital into stable NAV money market funds, as 
discussed in Section II.A. Thus, investor demand for institutional 
money market funds may depend on the low variability of their NAVs. The 
proposed swing pricing requirement would increase the volatility of 
affected money market fund NAVs, particularly in times of market 
stress. Some commenters also suggested that swing pricing would reduce 
investor interest in money market funds.\357\ A reduction in the number 
of money market funds and/or the amount of money market fund assets 
under management as a result of any further money market fund reforms 
would have a greater negative impact on money market fund sponsors 
whose fund groups consist primarily of money market funds, as opposed 
to sponsors that offer a more diversified range of mutual funds or 
engage in other financial activities (e.g., brokerage).
---------------------------------------------------------------------------

    \357\ See, e.g., BlackRock Comment Letter; GARP Risk Institute 
Comment Letter; mCD IP Comment Letter.
---------------------------------------------------------------------------

    These economic costs may be mitigated by three factors. First, the 
proposed swing pricing requirement is tailored to the level of net 
redemptions. When net redemptions are low (at or below the market 
impact factor threshold) and under normal market conditions, the 
proposed swing pricing requirement is economically equivalent to 
requiring funds strike the NAV at bid prices of securities (since other 
transaction costs may also be low under normal conditions). As 
discussed in the economic baseline, some fund complexes may already be 
striking NAV at bid prices.
    Second, money market funds hold assets that are more liquid and 
less risky when compared to other open-end funds. Under normal market 
conditions, funds may be able to apply a small swing factor that only 
affects the fund's NAV to the fourth decimal place. Affected money 
market funds' NAV adjustments would likely be greater during severe 
stress, when redeemers impose significant costs on the remaining fund 
investors.
    Third, the proposed swing pricing requirement would require 
redeeming investors to internalize the costs that their trading imposes 
on the investors remaining in the fund, reducing the liquidity 
externalities currently present in institutional prime and 
institutional tax exempt money market funds. Moreover, to the degree 
that some institutional investors may not be aware of the dilution risk 
of affected money market funds, the proposed swing pricing requirement 
may increase investor awareness of such risks. Importantly, the 
proposed swing pricing requirement may enhance allocative efficiency. 
As discussed above, the swing pricing requirement could cause some 
investors to move their assets to government money market funds to 
avoid the possibility of paying liquidity costs of redemptions. 
Government money market funds may be a better match for these 
investors' preferences, however, in that government money market funds 
face lower liquidity costs and these investors may be unwilling to bear 
any liquidity costs.
    The proposed swing pricing requirement may impose costs on 
investors redeeming shares in response to poor fund management or a 
fund complex's emerging reputational risk. Under the proposal, all net 
redemptions out of affected funds, regardless of the cause for the 
redemption, would result in the NAV being adjusted by the swing factor. 
While this may impose costs on efficiency--as redemptions out of poorly 
managed funds are efficient and an important part of market discipline 
of fund managers--this aspect of the proposal would also capture the 
liquidity costs that such redemptions impose on affected funds.
    Two factors may reduce the magnitude of these effects on the 
incentives of fund managers. First, money market funds are subject to 
requirements of rule 2a-7 and the proposal would increase minimum daily 
and weekly liquid asset requirements applicable to money market funds 
thereby further restricting fund managers from investing in illiquid 
assets. Second, the proposal would require disclosures regarding 
historical swing factors, which may make liquidity costs of redemptions 
more transparent to investors and lead to affected funds competing on 
swing factors they charge investors. In addition, the proposed swing 
pricing requirement may pose a number of implementation challenges and 
impose related costs on money market funds, third party intermediaries, 
and investors.\358\ First, swing pricing would require affected money 
market funds to estimate both direct and indirect trading costs on a 
daily or more frequent basis, which may be particularly time consuming 
and challenging during times of stress. Liquidity costs are not 
normally charged separately to money market funds, but are expressed in 
less favorable prices or the inability to sell assets under stress. 
Moreover, money market fund holdings of many assets, such as municipal 
securities, certificates of deposit and commercial paper, are not 
exchange traded and many such assets do not have an active secondary 
market. As a result, estimating transaction costs and market impact 
factors of each component of a money market fund portfolio may be time 
consuming and difficult, especially during a liquidity freeze. 
Moreover, to the degree that some affected funds may engage in 
interfund borrowing to meet redemptions, such costs would not be 
captured by the proposed approach.
---------------------------------------------------------------------------

    \358\ See, e.g., SIFMA AMG Comment Letter; JP Morgan Comment 
Letter; GARP Risk Institute Comment Letter.
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    Second, the implementation of swing pricing would require affected 
money market funds to receive timely information about order flows. 
Some commenters indicated that swing pricing in money market funds is 
currently impractical because some intermediaries may report flows with 
a delay.\359\ However, as discussed in section III.B.1.a above, many 
affected money market funds impose order cut-off times that ensure that 
they receive orders prior to striking their NAV. Therefore, many 
affected money market funds may already have the necessary information 
to determine when the fund has net redemptions and a swing factor needs 
to be applied. Affected money market funds that do not already have 
cut-off times may introduce cut-off times for order submissions by 
intermediaries, such as broker-dealers, retirement fund administrators, 
investment advisers, transfer agents, and banks, bearing related costs. 
Such funds 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 for each pricing period.
---------------------------------------------------------------------------

    \359\ See, e.g., ICI Comment Letter I; PIMCO Comment Letter; 
Fidelity Comment Letter; Federated Hermes Comment Letter I.
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    Third, the proposed swing pricing requirement is likely to reduce 
the feasibility and increase the costs of same day settlement and the 
ability of affected funds to offer multiple NAV strikes per day.\360\ 
Specifically, affected money market funds may not have enough time to 
accurately estimate flows, make pricing decisions, and strike the NAV 
while meeting their existing settlement timeframes. This

[[Page 7305]]

may cause affected funds to reduce the number of NAV strikes per day or 
move the last NAV strike to an earlier time, which could reduce the 
attractiveness of affected money market funds for liquidity-seeking 
investors. Some research finds that funds offering multiple intraday 
NAVs and redemptions experienced significantly larger outflows during 
times of stress when compared with single-strike funds.\361\ While this 
research does not distinguish between causal impacts of multiple NAV 
strikes a day on run risk and selection effects (with more liquidity 
seeking investors being attracted to multiple-strike funds), it 
suggests that multiple-strike funds were more prone to large investor 
redemptions in March 2020. Thus, the proposed swing pricing requirement 
for multiple NAV strikes per day funds may represent a tradeoff between 
potential adverse effects on the ability of some affected funds to 
offer intraday redemptions and slower settlement on the one hand, and 
potential reductions in run risk in money market funds on the other.
---------------------------------------------------------------------------

    \360\ 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; CCMR Comment Letter.
    \361\ See, e.g., Casavecchia, Lorenzo, Georgina Ge, Wei Li, and 
Ashish Tiwari. 2021. ``Prime Time for Prime Funds: Floating NAV, 
Intraday Redemptions and Liquidity Risk During Crises.'' Working 
paper.
---------------------------------------------------------------------------

    Fourth, the proposed swing pricing requirement may increase costs 
of tax reporting. Specifically, the swing pricing requirement may 
increase tax reporting burdens for investors if the requirement 
prevents an investor from using the NAV method of accounting for gain 
or loss on shares in a floating NAV money market fund or affects the 
availability of the exemption from the wash sale rules for redemptions 
of shares in these funds.
b. Benefits and Costs of Specific Aspects of the Proposed 
Implementation of Swing Pricing
    The proposed implementation of swing pricing to institutional prime 
and tax-exempt funds is characterized by four features. First, the 
swing factor must reflect spread and transaction costs, as applicable. 
Second, if the institutional fund has net redemptions exceeding 4% 
divided by the number of pricing periods per day, the swing factor 
would also require the inclusion of estimated market impacts that net 
redemption would have on the value of the fund portfolio. Swing pricing 
administrators would have flexibility to include market impacts in the 
swing factor if net redemptions are at or below the market impact 
threshold. Third, the proposal would require funds to calculate the 
swing factor under the assumption that the fund would sell all assets 
in the fund portfolio proportionally to the amount of net flows to meet 
net redemptions (the so-called vertical slice of the fund portfolio), 
rather than absorb redemptions out of liquid assets (the so-called 
horizontal slice of the fund portfolio). Fourth, the NAV adjustment 
would only occur when affected funds have net redemptions and not when 
they have net subscriptions. These features of the proposed swing 
pricing requirement aim to more fully and in a more tailored manner 
address the liquidity externalities that redeemers impose on investors 
remaining in the fund and are expected to result in reductions in the 
first mover advantage and run risk in institutional money market funds.
i. Benefits
    Under the proposal, when net redemptions are at or below the market 
impact threshold of 4% divided by the number of pricing periods per 
day, the swing factor would be determined based on 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 discussed above, such direct transaction costs contribute to 
dilution of shareholders remaining in the fund and this aspect of the 
proposal may reduce dilution costs of non-transacting investors. 
Notably, adjusting the NAV by the spread costs of redemptions is 
economically equivalent to striking the NAV at the bid price and, as 
discussed above, some money market funds may already do so in the 
regular course of business. As a result, the swing pricing requirement 
for funds when net redemptions are at or below the market impact 
threshold would primarily affect institutional funds that use mid-
market pricing to compute their current NAVs. In addition, when net 
redemptions are at or below the market impact threshold, the proposal 
would require the NAV adjustment to reflect other transaction costs, 
which currently contribute to dilution of non-transacting shareholders. 
Based on an analysis of historical daily redemptions out of 
institutional prime and institutional tax-exempt money market funds 
between December 2016 and October 2021 and discussed in greater detail 
in Section III.D.4, approximately 5% of trading days \362\ may involve 
such net redemptions. Approximately 3 out of the 53 (5%) institutional 
funds as of October 2021 would have outflows exceeding this threshold 
on an average trading day. As can be seen from that analysis, net flows 
on most days are low, so funds rarely experience large net redemptions 
that have significant market impact that would dilute investors.\363\
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    \362\ This analysis is based on historical daily redemptions. 
Since multiple NAV-strike a day funds would apply the threshold 
multiple times a day under the proposal, this analysis may under- or 
over-estimate how frequently a threshold may be applied.
    \363\ The threshold is based on historical data demonstrating 
that the 4% threshold approximately corresponds to the 5th 
percentile of daily fund flows.
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    Under the proposal, if net redemptions exceed the market impact 
threshold of 4% divided by the number of pricing periods per day, the 
swing factor would be required to include not only the spread costs and 
other transaction costs, but also good faith estimates of the market 
impact of net redemptions. To the extent funds are able to estimate/
forecast market impact costs accurately, the proposed requirement to 
assess the market impact of redemptions when net redemptions exceed the 
market impact threshold would result in redeeming investors bearing not 
only the direct spread and transaction costs from their redemptions, 
but also the impact of their redemptions on the market value of the 
fund's holdings. This may allow shareholders remaining in the fund to 
capture more of the dilution cost of redemptions, which includes not 
only direct transaction costs and near-term price movements, but the 
impact of the redemptions on the fund's portfolio as a whole. However, 
the magnitude of this benefit may be reduced by the fact that the 
proposal would only require market impact factor adjustments if 
redemptions exceed the market impact threshold. Based on an analysis of 
historical daily redemptions, approximately 5% of trading days may 
involve such net redemptions.\364\
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    \364\ Id.
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    Importantly, the proposed implementation of swing pricing would 
require funds to calculate the swing factor as if the fund were selling 
the pro-rata share of all of the fund's holdings, rather than, for 
example, assuming the fund would absorb redemptions out of daily liquid 
assets. If a fund were to absorb large redemptions out of daily or 
weekly liquid assets, the immediate transaction costs imposed on the 
funds would be lower. However, the fund would have less remaining daily 
and weekly liquidity and transacting shareholders would be diluting 
remaining investors in a manner not captured by estimated transaction 
costs.

[[Page 7306]]

Thus, this aspect of the proposal would make redeeming investors bear 
not just the immediate costs of covering redemptions, but also the 
costs of rebalancing the fund portfolio to the pre-redemption levels of 
liquid asset holdings.
    Finally, the proposal would apply swing pricing to net redemptions, 
rather than both net redemptions and net subscriptions. Redemptions, 
not subscriptions, pose the greatest run risk. This aspect of the 
proposal may reduce the operational costs of implementing swing pricing 
by eliminating the need for funds to perform the swing factor analysis 
when they are faced with net subscriptions.
ii. Costs
    The proposed implementation of swing pricing may give rise to 
burdens on money market funds. As described in the economic baseline, 
money market fund holdings exhibit little price volatility outside of 
times of severe stress, such as during the 2008 financial crisis and 
March 2020 volatility. The proposal would require funds to apply swing 
pricing during pricing periods with net redemptions, which would impose 
operational burdens on money market funds. However, these burdens may 
be mitigated by the fact that the funds scoped into this proposed 
requirement already have to perform an analysis to float the NAV \365\ 
and the fact that some affected money market funds may already be using 
bid prices to strike the NAV.
---------------------------------------------------------------------------

    \365\ See 17 CFR 270.2a-7(c)(1)(ii); 17 CFR 270.2a-4.
---------------------------------------------------------------------------

    In addition, the proposed approach would require redeeming 
shareholders to bear liquidity costs larger than the direct liquidity 
costs they may impose on the fund. Specifically, the proposal would 
require institutional funds to calculate the swing factor assuming the 
fund would absorb flows by trading the pro-rata share of all of the 
fund's holdings, rather than specific asset types. Given the nature of 
money market fund holdings (as described in the economic baseline), 
money market funds typically absorb redemptions out of daily and weekly 
liquid assets. Moreover, their ability to do so may be increased by the 
proposed amendments to raise the daily and weekly liquid asset 
requirements. At the same time, assets other than daily and weekly 
liquid assets--such as municipal securities and commercial paper that 
do not mature in the near term--may become illiquid in times of stress 
and may need to be held to maturity by the fund. Thus, the realized 
transaction costs of most redemptions may be zero as funds absorb them 
out of daily liquidity, while the true liquidity costs of redemptions 
may consist of the depletion of daily and weekly liquidity during times 
of stress (when rebalancing is especially expensive) rather than the 
sale of illiquid assets. This aspect of the proposal, therefore, could 
impose a large cost on redeemers that does not represent the actual 
cost realized from their trading activity, which may reduce the 
attractiveness of affected money market funds to investors. Notably, 
liquidity costs paid by redeemers under the proposed swing pricing 
requirement would flow back to remaining shareholders, disincentivizing 
redemptions and reducing the first mover advantage during times of 
stress.
    Moreover, market impact factors (which are estimates of the percent 
change in the price of an asset per dollar sold) and spread costs may 
be difficult to estimate precisely, especially in times of stress and 
when many of the assets money market funds hold lack a liquid secondary 
market. These difficulties may be attenuated to the degree that funds 
may be calculating market impact factors to assess trading costs and 
determine optimal trading strategies; however ex ante estimates of 
transaction costs and market impact factors may be more difficult than 
ex post assessment of trading costs and market impacts. This aspect of 
the proposal may lead money market funds to disinvest from some 
securities and asset classes with less trade and quotation data for an 
accurate estimate of market impact factors. While this may decrease 
liquidity risk in institutional funds, this may also reduce the amount 
of maturity and liquidity transformation they perform. Moreover, to the 
degree that funds' estimation of market impacts and spread costs may be 
imprecise, funds may charge redeeming investors an inaccurate fee that 
under- or over-estimates the actual liquidity costs funds incurred by 
funds after redemptions. The proposal seeks to reduce such costs by 
requiring the calculation of market impact factors in swing pricing 
only when net redemptions exceed 4% divided by the number of pricing 
periods per day.
5. Amendments Related to Potential Negative Interest Rates
    As a baseline matter, negative interest rates have not occurred in 
the United States and money market funds are not currently implementing 
reverse distribution mechanisms. Moreover, government and retail money 
market funds and their transfer agents are already required to be able 
to process transactions at a floating NAV. Thus, the proposal would 
restrict how money market funds may react to possible future market 
conditions resulting in negative fund yields and would effectively 
expand existing requirements related to processing orders under 
floating NAV conditions to all intermediaries. Government and retail 
money market funds would also be required to keep records identifying 
intermediaries able to process orders at a floating NAV.
    The proposal is intended to create transparency for investors in 
stable NAV funds in the event of negative yields. As discussed in 
Section III.D., the reverse distribution mechanism, if implemented by 
some funds, may mislead investors about the value of their investments. 
Requiring stable NAV funds to implement a floating NAV in a negative 
yield environment may better inform investors about the performance of 
their investment than allowing such funds to preserve a stable NAV, but 
decrease the number of investor shares.\366\ Moreover, the proposed 
amendments related to fund intermediaries may facilitate a transition 
of stable NAV funds to floating NAV in a negative yield environment. 
Notably, these benefits would only be realized in persistently negative 
yield environments.
---------------------------------------------------------------------------

    \366\ Jose Joseph Comment Letter.
---------------------------------------------------------------------------

    The proposed amendments may impose significant operational burdens 
and costs on investors. For example, requiring retail funds to switch 
from a stable NAV to a floating NAV may create accounting and tax 
complexities for some retail investors.\367\ In addition, a floating 
NAV requirement may be incompatible with popular cash management tools 
such as check-writing and wire transfers that are currently offered for 
many stable NAV money market fund accounts.\368\
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    \367\ See, e.g., ICI Comment Letter I; Federated Hermes Comment 
Letter I; Madison Grady Comment Letter; Comment Letter of Carter 
Ledyard Milburn (Apr. 15, 2021).
    \368\ See, e.g., ICI Comment Letter I; Madison Grady Comment 
Letter.
---------------------------------------------------------------------------

    The proposed requirement that government and retail money market 
funds determine that their intermediaries have the capacity to process 
the transactions at floating NAV and the related recordkeeping 
requirements would impose burdens on these funds, as estimated in 
Section IV. For example, affected money market funds may have to review 
their contracts with intermediaries, and some contracts may need to be 
renegotiated. Funds would have flexibility in how they make this 
determination for each financial intermediary, which may

[[Page 7307]]

reduce these costs for some funds. Moreover, intermediaries that are 
currently unable to process transactions in stable NAV funds at a 
floating NAV may need to upgrade their processing systems to be able to 
continue to transact in government and retail funds. If some 
intermediaries are unable or unwilling to do so, the proposed 
requirement may adversely impact the size of intermediary distribution 
networks of some funds, which can limit access or increase the costs of 
investor access to some affected funds. However, there may be economies 
of scope in intermediating orders for both stable NAV and floating NAV 
funds, especially since some investors may allocate assets in both 
stable NAV and floating NAV funds. To the extent that many of the same 
intermediaries may process orders for floating and stable NAV money 
market funds, such intermediaries may already have processing systems 
adequate capable of processing transactions in stable NAV funds at a 
floating NAV should such a transition occur. Nevertheless, the use of 
stable NAV money market funds as sweep vehicles may present operational 
difficulties for intermediaries, and the burdens of the rule may 
increase the costs of and reduce the reliance on stable NAV funds for 
sweep accounting.
    As with other costs of the proposal, any compliance costs borne by 
money market funds may be passed along to investors in the form of 
higher fund expense ratios. The proposed amendments are justified 
because they serve to protect investors of stable NAV funds and create 
price transparency in the event of negative yields.
6. Amendments to Disclosures on Form N-CR, Form N-MFP, and Form N-1A
a. Benefits and Costs of the Proposed Prompt Notice of Liquidity 
Threshold Events on Form N-CR and Board Reporting
    The proposed amendments would require money market funds to file a 
Form N-CR report whenever a fund has invested less than 25% of its 
total assets in weekly liquid assets or less than 12.5% of its total 
assets in daily liquid assets. Specifically, in the event of such a 
liquidity threshold event, the amendments would require money market 
funds to disclose: the date of the initial liquidity threshold event, 
the percentage of the fund's total assets invested in both weekly 
liquid assets and daily liquid assets on the day of the event, and a 
brief description of the facts and circumstances leading to the event.
    As a baseline matter, daily and weekly liquid assets are currently 
required to be disclosed on fund websites on a daily basis. Relative to 
that baseline, the proposed requirement for funds to report on Form N-
CR may enhance Commission oversight and transparency about money market 
fund liquidity during times of stress by providing additional 
information about the circumstances of a fund's significantly reduced 
liquidity levels. The proposed amendments may also have the effect of 
incentivizing funds to maintain daily and weekly liquidity above the 
reporting thresholds, including in times of stress.
    Publication of notices surrounding liquidity threshold events may 
inform investors about reasons behind the threshold event. To the 
degree that some funds' liquidity threshold events may be indicative of 
persistent liquidity problems or mismanagement of liquidity risk, and 
to the extent that notices may better inform investors about such 
causes (relative to baseline website disclosures of liquidity levels), 
publication of such notices may trigger investor redemptions out of the 
most distressed funds. However, this risk may be reduced because under 
the proposed swing pricing approach, redeemers would be charged the 
cost of their redemptions and related dilution costs would be 
recaptured by the shareholders remaining in the fund.
    The proposal would also require money market funds to notify their 
boards when they drop below the 12.5% daily and 25% weekly liquidity 
asset thresholds, as discussed in section II.C.2. Since the proposal 
would require that liquidity threshold events are reported on Form N-
CR, we preliminarily believe that funds would routinely notify the 
board of such events without an explicit board notification 
requirement. However, to the degree that some fund boards may not be 
notified of some events subject to Form N-CR reporting, the board 
notification requirement could enhance the oversight of fund boards 
over liquidity management, particularly during periods of stress.
    The proposed amendments to Form N-CR would impose direct compliance 
costs by imposing reporting burdens discussed in Section IV. Due to 
economies of scale, such costs may be more easily borne by larger fund 
families. In addition, the proposed prompt notice requirement may give 
rise to two sets of costs. First, the proposed requirement may lead 
fund managers to manage their portfolios specifically to try to avoid a 
reporting event, rather than in a way that is most efficient for fund 
shareholders. Second, the proposed requirement may result in money 
market fund managers spending compliance resources on amending Form N-
CR to describe the circumstances of the liquidity threshold event, 
which may divert managerial resources away from managing redemptions in 
times of stress. Costs borne by money market funds may be passed along 
to investors in the form of higher fees and expenses. However, as 
discussed above, the promptness of the notice requirement may enhance 
Commission oversight and transparency to investors, incentivize funds 
to closely monitor their liquidity levels, and ultimately better 
protect investors.
b. Benefits and Costs of the Proposed Form N-MFP Amendments
    Proposed amendments to Form N-MFP would require reporting of daily 
data points on a monthly basis, of securities that prime funds have 
disposed of before maturity, of the composition of institutional money 
market funds' shareholders and concentration of money market fund 
shareholders, and of additional information about repurchase agreement 
transactions (including through the proposed removal of a provision 
that allows aggregate information when multiple securities of an issuer 
are subject to a repurchase agreement), among other changes.
    Broadly, the proposed amendments to Form N-MFP may make the form 
more usable by filers, regulators, and investors, and may increase 
transparency around money market fund activities in four ways. First, 
the amendments may reduce uncertainty among filers and reduce filing 
errors. Second, the proposed requirement that the funds report their 
liquid assets, flows, and NAV on a daily basis may reduce costs of 
accessing this information relative to the baseline of routinely 
accessing and downloading information across many fund websites. Third, 
additional information about fund repo activities would enable 
investors and the Commission to better assess fund liquidity risks and 
oversee the industry. Fourth, information about shareholder 
concentration and composition can help the Commission and investors 
understand and evaluate potential redemption behavior and related 
investor risks.
    In addition, the proposal would add disclosure requirements to Form 
N-MFP intended to capture information about the relevant funds' use of 
swing pricing, which would include each swing factor applied during the 
reporting period, the number of times a

[[Page 7308]]

fund applies a swing factor during the reporting period, and the end-
of-day NAV per share (as adjusted by a swing factor, as applicable) for 
each business day of the reporting period. These amendments are 
expected to benefit investors in money market funds by reducing 
information asymmetries between institutional funds and investors about 
these funds' swing pricing practices. Investors in these funds 
experience price fluctuations and, thus, accept price risks inherent in 
floating NAVs. However, swing pricing has not yet been implemented by 
any U.S. open-end fund, and money market funds are currently not 
permitted to use swing pricing. The purpose of the proposed disclosure 
requirement is, thus, to inform investors about the manner in which 
affected money market funds implement swing pricing. Such transparency 
may result in greater allocative efficiency as investors with low 
tolerance of liquidity risk and costs may choose to reallocate capital 
to money market funds that have lower liquidity risk and costs. In 
addition, to the degree that uncertainty about the proposed swing 
pricing requirement may reduce the attractiveness of affected money 
market funds to investors, transparency about historical swing factors 
may reduce those adverse effects.
    The proposed amendments to Form N-MFP would impose initial and 
ongoing PRA costs, as discussed in Section IV below. We understand that 
money market funds generally already maintain the information they 
would be required to report on Form N-MFP pursuant to other regulatory 
requirements or in the ordinary course of business. However, funds 
would incur some costs in reporting the information. We continue to 
note that, due to economies of scale, such costs may be more easily 
borne by larger fund families, and that costs borne by money market 
funds may be passed along to investors in the form of higher fees and 
expenses. In addition, the proposed disclosures of each swing factor, 
the number of times a swing factor was applied, and the end-of-day NAV 
per share (which would reflect applicable swing pricing adjustments to 
that end of day NAV) may create incentives for money market funds to 
compete on this dimension. Specifically, institutional investors who 
use institutional funds for cash management and prefer lower 
variability in the value of their investments may move capital from 
money market funds that had high historical swing factors to funds with 
lower swing factors. However, while NAV swings penalize redeemers, they 
benefit investors remaining in the fund, which may make funds actively 
using swing pricing more attractive to longer term institutional 
investors.
c. Benefits and Costs of the Proposed Amendments to Form N-1A
    The proposal would require institutional money market funds to 
provide swing pricing disclosures to investors, including a risk 
disclosure. Specifically, the proposal would require funds required to 
implement swing pricing to explain how they use swing pricing and 
describe the effects of swing pricing on the fund's average annual 
total returns for the applicable period(s). This aspect of the proposed 
amendments to Form N-1A is expected to enhance transparency about 
institutional fund's swing pricing practices. NAV adjustments under the 
proposed swing pricing requirement would be a novel aspect of pricing, 
influencing both the dilution risk and the returns of affected funds. 
Disclosure about the effects of swing pricing on historical fund 
returns is expected to help investors understand the liquidity costs of 
redemptions from a particular fund, as well as the degree to which the 
fund would recapture dilution of shareholders remaining in the fund. 
However, the proposed amendments would impose direct reporting burdens 
estimated in Section IV--costs that may be more easily borne by larger 
fund complexes due to economies of scale, and costs that may be passed 
along in part or in full to end investors.
    The proposed amendments would also remove current disclosures 
related to the imposition of liquidity fees and any suspension of 
redemptions, the need for which would be obviated by the proposal to 
remove fees and gates from rule 2a-7.
d. Benefits and Costs of Proposed Requirements Related to Identifying 
Information on Form N-CR and Form N-MFP
    The proposed amendments would also require the registrant name, 
series name, related definitions, and LEIs for the registrant and 
series on Form N-CR. In addition, the proposal would require money 
market funds to report LEIs for the series on Form N-MFP.\369\ The LEI 
is used by numerous domestic and international regulatory regimes for 
identification purposes.\370\ As such, requiring these additional 
disclosures could enable data users such as investors and regulators to 
cross-reference the data reported on Forms N-CR with data reported on 
Forms N-MFP and with data received from other sources more easily, 
thereby expanding the scope of information available to such data users 
in their assessments.\371\ All money market funds already have 
registrant and series LEI due to baseline Form N-CEN reporting 
requirements. The proposed amendments to Form N-MFP would also require 
other information to better identify different types of money market 
funds, such as amendments to better identify Treasury funds and funds 
that are used solely by affiliates and other related parties. These 
amendments would help the Commission and market participants to 
identify certain categories of money market funds more efficiently. 
However, the proposed requirements to improve identifying information 
may give rise to direct compliance costs associated with amending 
reporting on Forms N-CR and N-MFP, as discussed in Section IV.
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    \369\ Under the baseline, money market funds are already 
currently required to report registrant LEIs on Form N-CEN.
    \370\ Other regulators with LEI requirements include the U.S. 
Federal Reserve, E.U.'s MiFid II regime, and Canada's IIROC; the LEI 
is also used by private market participants for risk management and 
operational efficiency purposes. See https://www.leiroc.org/lei/uses.htm.
    \371\ Fees and restrictions are not imposed for the usage of or 
access to LEIs.
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    In addition to the entity identification information (e.g., 
registrant name, series name, related definitions, and LEIs) discussed 
above, the proposed amendments would also expand security 
identification information by adding a CUSIP requirement for collateral 
securities that money market funds report on Form N-MFP. CUSIP numbers 
are proprietary security identifiers and their use (including storage, 
assignment, and distribution) entails licensing restrictions and fees 
that vary based on factors such as the number of CUSIP numbers 
used.\372\ Money market funds are currently required to disclose CUSIP 
numbers for each holding they report on Form N-MFP.\373\ As such, the 
incremental compliance cost on money market funds associated with the 
proposed CUSIP requirement, compared to the baseline, would be limited 
to those costs, if any, incurred by money market funds as a result of 
storing additional CUSIP numbers (to the extent money market funds do 
not already store CUSIP

[[Page 7309]]

numbers for their collateral securities).\374\
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    \372\ The CUSIP system (formally known as CUSIP Global Services) 
is owned by the American Bankers Association and managed by Standard 
& Poor's Global Market Intelligence. See CGS History, available at 
https://www.cusip.com/about/history.html, and License Fees, 
available at https://www.cusip.com/services/license-fees.html.
    \373\ See Item C.3 of Form N-MFP.
    \374\ CUSIP license costs vary based upon, among other factors, 
the quantity of CUSIP numbers to be used, on a tiered model, with 
the lowest tier being up to 500 CUSIP numbers. See CGS License 
Structure, available at https://www.cusip.com/services/license-fees.html#/licenseStructure. Based on our understanding of current 
CUSIP licenses and usage among money market funds, we do not believe 
the proposed CUSIP reporting requirement for collateral securities 
is likely to impose incremental compliance costs on money market 
funds by moving them into a new CUSIP license pricing tier.
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e. Benefits and Costs of Proposed Structured Data Requirement for Form 
N-CR
    The proposed amendments would require money market funds to submit 
reports on Form N-CR using a structured, machine-readable data 
language--specifically, in an XML-based language created specifically 
for Form N-CR (``N-CR-specific XML'').\375\ Currently, money market 
funds submit reports on Form N-CR in HTML or ASCII, neither of which is 
a structured data language.\376\ This aspect of the proposed amendments 
is expected to benefit investors in money market funds by facilitating 
the use and analysis, both by the public and by the Commission, of the 
event-related disclosures reported by money market funds on Form N-CR, 
as compared to the current baseline. The improved usability of Form N-
CR could enhance market and Commission monitoring and analysis of 
reported events, thus providing greater transparency into potential 
risks associated with money market funds on an individual level and a 
population level.
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    \375\ This would be consistent with the approach used for other 
XML-based structured data languages created by the Commission for 
certain specific EDGAR Forms, including Form N-CEN and Form N-MFP. 
See Current EDGAR Technical Specifications, available at https://www.sec.gov/edgar/filer-information/current-edgar-technical-specifications.
    \376\ See supra footnote 247.
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    We anticipate that the incremental costs associated with requiring 
money market funds to submit reports on Form N-CR in N-CR-specific XML, 
compared to the baseline of submitting Form N-CR in HTML or ASCII, 
would be low given that money market funds already utilize XML-based 
languages to meet similar requirements in their other reporting, and 
can utilize their existing capabilities for preparing and submitting 
Form N-CR.\377\ Under the proposed rule, money market funds that choose 
to submit Form N-CR directly in N-CR-specific XML (rather than use the 
fillable web form) would incur the incremental compliance costs of 
updating their existing preparation and submission processes to 
incorporate the new technical schema for N-CR-specific XML.\378\
---------------------------------------------------------------------------

    \377\ See supra footnote 331. In addition, money market funds 
would be given the option of filing Form N-CR using a fillable web 
form that will render into N-CR-specific XML in EDGAR, rather than 
filing directly in N-CR-specific XML using the technical 
specifications published on the Commission's website.
    \378\ See infra Section IV.E.
---------------------------------------------------------------------------

7. Amendments Related to the Calculation of Weighted Average Maturity 
and Weighted Average Life
    The Commission is proposing amendments to rule 2a-7 to specify that 
WAM and WAL must be calculated based on percentage of each security's 
market value in the portfolio, rather than based on amortized cost of 
each portfolio security. These amendments may enhance consistency and 
comparability of disclosures by money market funds in data reported to 
the Commission and provided on fund websites. A consistent definition 
of WAM and WAL across funds can enhance transparency for investors 
seeking to assess the risk of various money market funds and may 
increase allocative efficiency. Moreover, greater comparability of WAM 
and WAL across money market funds may enhance Commission oversight of 
risks in money market funds. These amendments are not expected to give 
rise to direct compliance costs. Specifically, we understand that all 
money market funds currently determine the market values of their 
portfolio holdings.\379\ Thus, the costs of these proposed amendments 
may be de minimis.
---------------------------------------------------------------------------

    \379\ Money market funds that use a floating NAV use market 
values when determining a fund's NAV, while money market funds that 
maintain a stable NAV are required to use market values to calculate 
their market-based price at least daily.
---------------------------------------------------------------------------

D. Alternatives \380\
---------------------------------------------------------------------------

    \380\ This discussion supplements the discussion of alternatives 
in other sections of the release.
---------------------------------------------------------------------------

1. Alternatives to the Removal of the Tie Between the Weekly Liquid 
Asset Threshold and Liquidity Fees and Redemption Gates
    The proposal could have replaced the 30% weekly liquid asset 
threshold for the imposition of redemption gates or fees with a 
different threshold. This alternative would allow money market funds to 
impose gates or fees during large redemptions to reduce some of the 
dilution costs during large redemptions. However, this alternative 
could still trigger runs on money market funds close to the regulatory 
threshold in times of liquidity stress. When funds approach any 
regulatory threshold that can trigger a redemption gate or fee, 
investors are incentivized to redeem ahead of others to avoid a 
potential gate or fee and retain access to their capital during 
liquidity stress. Thus, the existence of a transparent threshold, 
rather than the size of the threshold itself, may make money market 
funds vulnerable to runs. Moreover, even under the proposed removal of 
redemption fees and gates under rule 2a-7, money market funds are still 
able to reduce dilution costs during large redemptions under current 
rule 22e-3 where a fund's weekly liquid assets drop below 10%. A fund's 
board could also determine to impose redemption fees under Rule 22c-2.
    The proposal could also have reduced or eliminated the transparency 
of the trigger for the imposition of redemption gates and liquidity 
fees. For example, the proposal could have required fund boards to 
impose their own policies and procedures around factors they would take 
into account before redemption gates and fees are imposed that are not 
transparent to investors. As another alternative, the proposal could 
have required fund managers to seek regulatory approval confidentially 
before a fund is able to impose a redemption fee or gate. As yet 
another alternative, the proposal could have preserved the 30% weekly 
liquid asset trigger for the potential imposition of a fee or gate, 
while prohibiting the public disclosure of weekly liquid assets.
    These alternatives would increase uncertainty among investors about 
how close a given money market fund is to imposing a redemption gate or 
fee in times of severe market stress. Because the first mover advantage 
is strongest when a fund is on the cusp of imposing a redemption gate 
or fee (as many money market fund investors may be risk averse and the 
potential imposition of redemption gates could reduce shareholders' 
access to liquidity), investor uncertainty about whether a fund is 
approaching a redemption gate or fee could prevent runs. The 
alternatives making the imposition of redemption gates or fees 
discretionary, subject to regulatory approval, or mechanical but 
triggered by an unobserved level of weekly liquid assets would also 
increase investor uncertainty but could disrupt run dynamics.
    However, these alternatives involve drawbacks. First, while such 
alternatives could interrupt runs on the funds closest to the 
imposition of the redemption gate or fee, they could also trigger runs 
on funds that were less illiquid and less likely to impose redemption 
gates or fees. For example, a lack of transparency about which funds 
are close to imposing liquidity

[[Page 7310]]

fees or gates may lead risk averse investors to redeem from money 
market funds in general to preserve access to their capital during 
times of liquidity stress, which can lead to runs on more liquid and 
less liquid funds alike. Second, requiring money market fund managers 
to receive permission from the Commission before a redemption gate or 
fee is imposed may create undue delay during market stress events.\381\ 
Third, these alternatives would not present the same benefits from the 
proposed approach, which would both reduce run incentives related to 
the potential imposition of redemption gates or fees and, upon net 
redemptions, require redeeming shareholders to pay for the dilution 
cost they impose on the fund (under the proposed swing pricing approach 
discussed below).
---------------------------------------------------------------------------

    \381\ See, e.g., SIFMA AMG Comment Letter; Comment Letter of 
James L Setterlund (Apr. 12, 2021) (``James Setterlund Comment 
Letter'').
---------------------------------------------------------------------------

2. Alternatives to the Proposed Increases in Liquidity Requirements
a. Alternative Thresholds
    The proposal could have included a variety of alternative daily and 
weekly liquid asset thresholds. To quantify the potential effect of 
various liquidity thresholds on the probability that money market funds 
would confront liquidity stress, we modeled stress in publicly offered 
institutional prime fund portfolios using the distribution of 
redemptions from 42 institutional prime funds observed during the week 
of March 16 to 20, 2020 (``stressed week'') at various starting levels 
of daily and weekly liquid assets. The possible new thresholds 
determined by stress in publicly offered institutional prime fund 
portfolios were then applied to all money market funds except for the 
daily liquid asset threshold for tax-free money market funds. We also 
calculated from the distribution of daily and weekly liquidity asset 
values what percentage of retail and institutional prime funds combined 
would be impacted by the various liquidity thresholds. The analysis 
below estimates the probability that a publicly offered institutional 
prime fund with a given level of daily and weekly liquid assets would 
deplete daily liquid assets to meet redemptions (and have to liquidate 
assets under stressed market conditions) on a given day during the 
stressed week.\382\ Specifically, Figure 14 below plots the probability 
that a fund will run out of daily liquid assets on a given day of the 
stressed week. For the proposed thresholds of weekly liquid assets at 
50% and daily liquid assets at 25%, Figure 14 shows that less than 10% 
of funds would deplete daily liquid assets and be unable to absorb 
redemptions out of daily liquid assets on at least one of the five 
stressed days. By contrast, a threshold of 15% daily liquid assets and 
40% weekly liquid assets would approximately double the estimate of 
funds that would deplete daily liquidity to meet redemptions on at 
least one of the days of a stressed week (to approximately 20%). As 
referenced above, the largest weekly and daily redemption during the 
week of March 16 to 20, 2020, was approximately 55% and 25% 
respectively. Thus, an approach aimed at eliminating the risk of funds 
having insufficient liquid assets to absorb redemptions (using 
redemption data from March 16 to20, 2020) would require funds to hold 
more than 55% of weekly and at least 25% of daily liquid assets. Lower 
thresholds increase the probability that some funds may deplete their 
liquid assets to meet redemptions, but also reduce the adverse impacts 
described above.
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    \382\ See supra footnote 206.
    [GRAPHIC] [TIFF OMITTED] TP08FE22.020
    
    Table 5 quantifies the daily probability that a publicly offered 
institutional prime fund depletes daily liquid assets to meet 
redemptions under four scenarios: The current baseline daily and weekly 
liquid asset thresholds, thresholds based on the largest daily and 
weekly redemption during the week of March 16, 2020; pre-COVID weighted 
mean daily and weekly liquid assets; and post-COVID weighted mean daily 
and weekly liquid assets. The baseline scenario would require no change 
for money market funds; the ``biggest redemptions'' alternative would 
require approximately 10% of all prime funds (including both 
institutional and retail prime funds) to increase their daily liquid 
assets and approximately 75% of all prime funds to increase their 
weekly liquid assets. The alternative of imposing thresholds at the 
``pre-COVID'' mean would require approximately 25% of all prime funds 
to increase their daily and 50% of all prime funds to increase their 
weekly liquid assets. Finally, the alternative

[[Page 7311]]

that would impose ``post-COVID'' average liquidity metrics on the 
industry would require approximately 50% of all prime funds to increase 
daily and 75% of all prime funds to increase weekly liquid assets.
[GRAPHIC] [TIFF OMITTED] TP08FE22.021

    This analysis includes a number of modeling assumptions. First, 
institutional prime fund redemptions were historically higher than 
redemptions out of retail funds, which may bias the analysis to 
overestimate the probability a retail or private institutional prime 
fund runs out of liquidity on a given day. Second, the analysis assumes 
that assets maturing on a given business day will be available at the 
end of that day. Third, the analysis assumes no assets are sold into a 
distressed market and redemptions are absorbed fully into a fund's 
liquid assets. Fourth, the models do not include government agency 
securities with a maturity in excess of seven days, and assume Treasury 
securities have daily liquidity regardless of maturity and can be sold 
without any loss. Fifth, the analysis assumes that funds would go below 
the 30% weekly liquid asset threshold, continuing to meet redemptions 
out of liquid assets, rather than hold on to the weekly liquid assets. 
As discussed above, the removal of the trigger for the potential 
imposition of redemption gates may increase the willingness of money 
market funds to meet redemptions with daily and weekly liquid assets. 
Sixth, these estimates are based on redemption patterns in March 2020 
and the distribution of future redemptions may differ, in part, as a 
result of the proposed amendments.
    Therefore, the above estimates show that alternatives imposing 
higher minimum daily and weekly liquidity thresholds relative to the 
proposal would require funds to hold more liquid assets, reducing the 
risk of fund liquidations or selloffs that may necessitate future 
government backstops. However, higher minimum liquidity thresholds 
would require a larger number of money market funds to reallocate their 
portfolios towards lower yielding investments. In addition, higher 
liquidity thresholds may lead funds to increase the risk in the 
remainder of their portfolios to attract investor flows or to keep fund 
yields from sliding below zero and ensure the viability of the asset 
class (the latter risk may be more pronounced in very low interest rate 
environments). Moreover, higher liquidity requirements may increase the 
availability of funding liquidity through repos to leveraged market 
participants, resulting in a higher levels of risk taking in less 
transparent and less regulated sectors of the financial system. As 
discussed in more detail in Section III.C.2.a, an analysis of 
redemptions during market stress of March 2020 shows that, under the 
proposed liquidity thresholds, the probability that a fund depletes 
available weekly liquidity on at least one day during the stressed week 
was only approximately 9%. Thus, the proposed liquidity thresholds may 
be sufficient to meet redemptions during periods of liquidity stress.
    Similarly, lower thresholds relative to the proposal would allow 
funds to hold less liquid assets, increasing fund liquidity risks. 
However, lower thresholds would decrease the number of money market 
funds having to shift portfolios; would reduce the incentives of funds 
to take larger risks in the less liquid portion of their portfolios; 
and would reduce the concentration of liquidity in repos that are used 
by leveraged market participants for funding liquidity. The proposed 
thresholds reasonably balance these economic costs and benefits.
b. Caps on Fund Holdings of Certain Assets
    As an alternative to increasing the minimum daily and weekly liquid 
asset requirements, the Commission considered proposing caps on money 
market fund holdings of certain assets, such as commercial paper and 
certificates of deposit. Commercial paper and certificates of deposit 
lack an actively traded secondary market and are difficult to value or 
sell during times of liquidity stress. Limiting money market fund 
holdings of such instruments may reduce run risk to the degree that the 
illiquidity of all or a portion of a fund's portfolio may create 
externalities from redeeming investors borne by investors remaining in 
the fund, which may incentivize early redemptions.
    However, this alternative relies on the assumption that commercial 
paper and certificates of deposit homogeneously reduce the liquidity of 
a fund's portfolio by more than other money market fund holdings across 
maturities. These assumptions may not always hold for different money 
market funds and over different time horizons. Moreover, to the degree 
that investors prefer funds that deliver higher returns and money 
market funds benefit from investor expectations of implicit government 
backstops during times of liquidity stress, money market funds may 
react to this alternative by changing the maturity structure of their 
portfolio and reallocating into other securities with potentially 
higher liquidity risk. For example, money market funds may substitute 
short-term commercial paper and certificates of deposit that are 
classified as daily or weekly liquid assets with longer term commercial 
paper and certificates of deposit that

[[Page 7312]]

would not be classified as daily or weekly liquid assets. Finally, 
because this alternative would involve defining the types of 
instruments subject to the cap, issuers may be able to create new 
financial instruments that are similar, and perhaps synthetically 
identical, to commercial paper and certificates of deposit along risk 
and return dimensions, but that would not be subject to the caps. The 
proposed approach, which would increase minimum daily and weekly liquid 
asset requirements, may reduce liquidity and run risk in money market 
funds without such potential drawbacks, while ensuring funds have 
minimum liquidity to meet large redemptions.
    As another alternative, the proposal could have replaced the 
minimum daily and weekly liquid asset thresholds with asset 
restrictions, such as imposing a minimum threshold for holdings of 
government securities \383\ and repos backed by government securities. 
Under the baseline, such assets are generally categorized as daily 
liquid assets. Thus, such an approach would have the effect of 
replacing minimum daily and weekly liquid asset thresholds with a 
single daily liquid asset threshold, and restricting the types of 
assets that would qualify as daily liquid assets. This alternative 
would reduce the liquidity risk of liquid assets held by money market 
funds, which may help them meet redemptions without transaction costs. 
However, waves of redemptions as experienced in 2008 and 2020 occur 
over multiple days, suggesting that money market funds need to have 
both daily and weekly liquidity to meet redemptions. Moreover, asset 
restrictions imposing large minimum thresholds for holdings of 
government securities would decrease not only the risk, but also the 
yield of money market funds and their attractiveness to investors, 
reducing the viability of the asset class in low interest rate 
environments. This approach would also further concentrate money market 
fund holdings in specific types of assets, which may increase the 
likelihood of funds selling the same assets to meet redemptions in 
times of stress.
---------------------------------------------------------------------------

    \383\ See, e.g., CCMR Comment Letter.
---------------------------------------------------------------------------

    Finally, under the baseline, funds falling below minimum liquid 
asset thresholds may not acquire any assets other than daily or weekly 
liquid assets, respectively, until funds meet those minimum thresholds. 
The proposal would retain this baseline approach, while increasing the 
absolute daily and weekly liquid asset thresholds. As an alternative, 
the proposal could have imposed penalties on funds or fund sponsors 
upon dropping below the required minimum liquidity threshold. 
Similarly, the proposal could have imposed a minimum liquidity 
maintenance requirement, which would require that a money market fund 
maintain the minimum daily liquid asset and weekly liquid asset 
thresholds at all times instead of the current requirement to maintain 
the minimums immediately after the acquisition of an asset. During the 
market stress in 2020, funds experiencing large redemptions were 
reluctant to draw down on weekly liquid assets due to the existence of 
the threshold for the potential imposition of redemption fees and 
gates. Such alternatives may have a similar effect of penalizing money 
market funds for using liquidity when liquidity is most scare, which 
may make money market funds reluctant to use daily and weekly liquid 
assets to meet large redemptions during market stress. As a result, 
money market funds would be incentivized to sell less liquid assets, 
such as longer maturity commercial paper, into distressed markets, 
rather than risk penalties and dropping below minimum liquidity 
maintenance requirements. This may increase transaction costs borne by 
redeeming investors and may result in money market fund redemptions 
magnifying liquidity stress in underlying securities markets.
3. Alternative Stress Testing Requirements
    As an alternative to the proposed amendments to stress testing 
requirements, the proposal could have modified weekly liquidity 
thresholds that funds must use for stress testing. For example, the 
proposal could have required money market funds to perform stress 
testing using 15%, 20%, or 30% minimum weekly liquid asset thresholds. 
As another example, the proposal could have required money market funds 
to use specific minimum daily and weekly liquid asset thresholds. These 
alternatives would reduce the discretion of fund managers to identify 
their own optimal liquid asset thresholds for purposes of stress 
testing. However, as discussed above, optimum levels of liquidity will 
vary depending on the type of money market fund, investor 
concentration, investor composition, and historical distribution of 
redemption activity under stress, among other factors. The alternatives 
establishing bright line thresholds for stress testing could reduce the 
ability of funds to stress test against the most optimal liquid asset 
thresholds, which may reduce usability of stress testing results for 
board and Commission oversight.
4. Alternative Implementations of Swing Pricing
a. Alternative Thresholds for the Application of Market Impact Factors
    As described in Section II.B above, the proposal would require 
funds to apply different swing factor calculations depending on the 
size of net redemptions. Specifically, if net redemptions are at or 
below 4% of the fund's NAV divided by the number of pricing periods per 
day, the swing factor would reflect spread and transaction costs of 
redemptions. If net redemptions exceed 4% of the fund's NAV divided by 
the number of pricing periods per day, the swing factor would include 
not only spread and transaction costs, but also a good faith estimation 
of market impacts of net redemptions. The proposal could have used a 
different net redemption threshold for the application of market impact 
factors. For example, the proposal could have required funds to 
estimate market impacts if net redemptions exceed 2% or 0.5% divided by 
the number of pricing periods per day. Based on an analysis in Table 6 
below, these alternatives would require funds to estimate market impact 
factors on 10% or 25% of trading days.\384\ Since net flows of these 
funds are zero at the median, and because there are only 53 
institutional funds in our sample, a 10%-ile or 25%-ile alternative 
threshold would correspond to approximately 5 and 13 funds respectively 
having outflows greater than the threshold on an average trading day, 
relative to approximately 3 funds under the proposal. Alternatively, 
the proposal could have used different redemption thresholds for the 
swing factor calculation for institutional prime or institutional tax-
exempt funds.
---------------------------------------------------------------------------

    \384\ This analysis is based on historical daily redemptions, 
but multiple NAV-strike a day funds would apply the threshold 
multiple times a day under the proposal. Thus, this analysis may 
under- or over-estimate how frequently a threshold may be applied.

---------------------------------------------------------------------------

[[Page 7313]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.046

    Higher (lower) net redemption thresholds for the calculation of 
market impact factors would reduce (increase) the number of pricing 
periods for which affected money market funds must calculate market 
impact factors for portfolio securities, reducing (increasing) related 
costs and operational challenges. However, higher (lower) net 
redemption thresholds would also reduce (increase) the amount of 
dilution from redemptions that is recaptured by money market funds and 
accrue to non-transacting shareholders.
---------------------------------------------------------------------------

    \385\ This table reports the results of an analysis of daily 
flows 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. Flows at the class 
level were aggregated to the fund level. Flows of feeder funds were 
aggregated for an approximation of flows for the corresponding 
master fund.
---------------------------------------------------------------------------

    As can be seen from Table 6, the proposed 4% market impact 
threshold would represent approximately the 5th percentile of daily 
redemptions. We note that 1st and 5th percent correspond to standard 
confidence levels in statistical testing, and such confidence levels 
have been used in other Commission rules.\386\ Importantly, when daily 
net redemptions reach 4%, most funds may experience significant market 
impact if they were to sell a pro-rata share of their portfolio 
holdings to meet redemptions. Thus, the proposed market impact 
threshold may appropriately tailor the market impact factor requirement 
to relatively rare pricing periods of extreme stress.
---------------------------------------------------------------------------

    \386\ For example, rule 18f-4 requires that an open end fund's 
value at risk model use a 99% confidence level. The Commission also 
considered requiring a different confidence level for the value at 
risk test, such as the 95% or 99% confidence levels. See, e.g., Use 
of Derivatives by Registered Investment Companies and Business 
Development Companies, Investment Company Act Release No. 34084 
(Nov. 2, 2020) [85 FR 83162 (Dec. 21, 2020)], at 83250.
---------------------------------------------------------------------------

    As another alternative, the proposal could have defined the market 
impact threshold on a fund-by-fund basis, with reference to a fund's 
historical flows.\387\ For example, each fund could have been 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 redemptions.\388\ While this alternative 
could allow funds to customize their market impact thresholds to their 
historical redemption flows, it may reduce the comparability of money 
market fund returns for investors because swing factors, including the 
associated market impact factor, influence reported fund returns. 
Finally, such an alternative may create strategic incentives for fund 
complexes to open and close funds depending on historical redemption 
activity. For example, to the degree that the estimation of market 
impact factors may be burdensome, fund families may choose to close 
funds that experienced high redemptions to avoid the application of 
market impact factors.
---------------------------------------------------------------------------

    \387\ As another possibility, the proposal we could have allowed 
funds discretion over which historical period could be chosen. 
However, because money market funds may not internalize the 
externalities that their liquidity management imposes on investors 
in the same asset class, they may not be incentivized to use such 
discretion in a way that mitigates those externalities. For example, 
some affected funds may choose a historical time period that results 
in market impact thresholds that are too high, so that market impact 
factors are rarely applied. Moreover, because market impact 
thresholds would influence NAV adjustments and reported returns, the 
alternative may reduce the comparability of money market fund 
returns for investors.
    \388\ As another alternative, the rule could have required 
policies and procedures regarding the choice of a threshold percent 
level based on historical data.
---------------------------------------------------------------------------

b. Other Alternative Approaches to Market Impact Factors
    The proposal could have required institutional funds to apply swing 
pricing as proposed, but without any requirement to estimate market 
impact factors. As a related alternative, the proposal could have made 
the use of market impact factors in swing factor calculations less 
prescriptive and more principled-based or optional in their entirety. 
These alternatives would reduce the likelihood and frequency with which 
affected money market funds would estimate market impacts, which may 
reduce costs and operational challenges of doing so. However, this may 
reduce the frequency and size of NAV adjustments and the benefits of 
swing pricing for non-transacting shareholders.
    Increased discretion may allow funds to tailor the calculation of 
market impact factors to individual portfolio and asset characteristics 
and prevailing market conditions. This may make swing factors a more 
precise measure of liquidity costs assessed to redeeming investors. 
However, because swing factor adjustments influence reported fund 
returns, greater discretion over the calculation of swing factors may 
reduce the comparability of money market fund returns for investors. 
Moreover, because money market funds may not internalize the 
externalities that their liquidity management practices may impose on 
investors in the same asset class, they may not be incentivized to use 
such discretion in a way that mitigates those externalities.
c. Other Alternative Implementations of Swing Pricing
    Under the proposal, all institutional prime and institutional tax 
exempt money-market funds would be required to apply swing pricing 
during pricing periods with net redemptions. As an alternative, the 
proposal could have required a fund to adopt policies and procedures 
that specify how the fund would determine swing pricing thresholds and 
swing factors based on a principles based approach, instead of 
specifying swing factor calculations and thresholds in the rule. As 
another alternative, the proposal could have made the application of 
swing pricing optional. The operational costs of implementing swing 
pricing are immediate and certain, while the benefits are largest in 
relatively rare times of liquidity stress. Moreover, while money market 
funds may have reputational incentives to manage liquidity to meet 
redemptions--and fund sponsors may have chosen to provide sponsor 
support in the past--institutional money market funds also face 
disincentives from investor behavior and collective action problems. 
Specifically, to the degree that institutional investors may use 
institutional prime and institutional tax-

[[Page 7314]]

exempt funds for cash management and are sensitive to NAV adjustments, 
funds may be disincentivized to swing the NAV and recapture the 
dilution costs for shareholders remaining in the fund.
    These alternatives may allow funds not to implement swing pricing 
or to implement a swing pricing approach with higher swing thresholds 
and different swing factors (for example, without estimating market 
impacts). Relative to the proposal, these alternatives may allow funds 
to better tailor their liquidity management and swing pricing design to 
investor composition, portfolio and asset characteristics, and 
prevailing market conditions. This alternative may also avoid 
operational costs and challenges of swing pricing for some funds. To 
the degree that the implementation of swing pricing may increase the 
variability of fund NAVs which reduces the attractiveness of affected 
funds to investors, these alternatives may reduce potential adverse 
impacts of swing pricing on the size of the institutional money market 
fund sector, the number of institutional money market funds available 
to investors, and the availability of wholesale funding liquidity in 
the financial system. However, affected funds may not internalize the 
externalities that they impose on investors in the same asset classes 
or the externalities that redeeming investors impose on investors 
remaining in the fund. In addition, as a result of the collective 
action problem and disincentives from investor flows, no fund may be 
incentivized to be the first to implement swing pricing, even if all 
institutional money market funds recognize the value of charging 
redeeming investors for the liquidity costs of redemptions. Thus, these 
alternatives could reduce the likelihood that funds adjust the NAV to 
capture the dilution costs of net redemptions relative to the proposal 
because affected funds may not internalize the externalities that they 
impose on investors in the same asset class. This may reduce or 
eliminate important benefits of the proposed swing pricing requirement, 
including protecting non-transacting investors from dilution, reducing 
first-mover advantage and run risk, and reducing liquidity 
externalities money market funds may impose on market participants 
transacting in the same asset classes. In addition, relative to the 
proposal, these alternatives would increase fund manager discretion 
over the choice of swing threshold, swing factors, and the application 
of swing pricing in general. As a result, because the application of 
swing pricing in general and swing factor adjustments in particular 
influence reported fund returns, greater discretion over the 
application of swing pricing may reduce the comparability of money 
market fund returns for investors.
    The proposal could have required institutional funds to adjust the 
NAV only when net flows exceed a certain swing threshold (either 
regulatory threshold or threshold selected by each institutional fund), 
allowing funds to not adjust the NAV at all when redemptions are low. 
As described in the economic baseline, money market funds generally 
hold highly liquid assets, and the proposal would require money market 
funds to hold even higher levels of daily and weekly liquid assets. As 
a result, unless both net redemptions and price uncertainty are large, 
institutional funds may be able to absorb redemptions of transacting 
investors without imposing large liquidity costs on the remaining 
investors. Thus, the alternative may allow institutional funds to avoid 
the costs and operational burdens of calculating spread and transaction 
costs when net redemptions are low.
    However, alternatives that allow funds not to apply swing pricing 
when net redemptions are below a swing threshold selected by the fund 
may reduce the expected economic benefits of swing pricing. First, if 
money market funds are able to select their own swing thresholds, they 
may choose to set high swing thresholds, reducing the probability that 
funds would swing the NAV under normal conditions. To the degree that 
money market fund investors use institutional funds as a very low risk 
or cash-like investment vehicle and are averse to any fluctuations in 
the value of their money market fund holdings, these funds may seek to 
only swing the NAV when redemptions are large enough that they would 
have required fund liquidation. Second, in 2020 institutional money 
market fund investors appeared to be highly sensitive to the 
possibility that a redemption gate or fee would be imposed. To the 
extent money market investors are able or attempt to forecast when 
swing pricing would apply or attempt to do so, the existence of a swing 
threshold may incent these investors to redeem before the swing. 
Importantly, formulating a swing threshold based on redemptions in a 
particular pricing period, rather than based on historical redemptions, 
is likely to interrupt self-fulfilling run dynamics and eliminate 
incentives for strategic redemptions around swing thresholds.
    The proposal could have allowed funds to calculate the swing factor 
under the assumption that the fund would absorb redemptions out of 
liquid assets (the so-called horizontal slice of the fund portfolio) or 
otherwise provide funds with flexibility to determine the costs based 
on how they would satisfy redemptions on a given day. Money market 
funds may manage their liquidity so as to be able to absorb redemptions 
out of daily and weekly liquid assets, rather than having to sell a 
pro-rata share of their portfolio holdings. Moreover, the proposal 
would require money market funds to hold higher levels of daily and 
weekly liquid assets. Assets that are not daily and weekly liquid 
assets can be illiquid and generally may need to be held to maturity by 
the fund. Thus, the alternative would allow funds to avoid swinging the 
NAV if they are able to, for example, by absorbing redemptions out of 
more liquid assets. This may reduce uncertainty for investors about the 
magnitude of the potential NAV adjustment, especially when liquidity is 
not scarce. However, this alternative would result in redeeming 
investors not being charged for the true liquidity costs of 
redemptions, which consist not only of the immediate costs of 
liquidating fund assets, but also of the cost of leaving the fund more 
depleted of liquidity and thus more vulnerable to future redemptions.
    As another alternative, the proposal could have required that 
affected money market funds calculate the swing factor based on the 
fund's best estimate of the liquidity costs of redemptions. Under this 
alternative, swing factors may more accurately capture the costs of 
redemptions as funds would be able to tailor swing factors to their 
liquidity management strategies (whether that is, for example, 
liquidating pro-rata shares of portfolio holdings, absorbing 
redemptions out of daily or weekly liquidity, some combination of the 
two, or borrowing). However, this alternative would increase fund 
discretion in the calculation of swing factors, and fund manager 
incentives may not be aligned with incentives to accurately estimate 
liquidity costs of redemptions. For example, larger swing factors 
applied to redemptions benefit the fund and can improve reported fund 
performance. At the same time, disclosures about historical swing 
factors can incentivize fund managers to apply excessively low swing 
factors to attract investors.
    The proposal could have required institutional funds to allocate 
the aggregate dollar cost of trading to gross (as opposed to net) 
redemptions. Under the alternative, redeeming investors

[[Page 7315]]

would bear the dilution cost of the redemptions, but not the dilution 
cost that comes from subscribers being able to buy into the fund at the 
lower adjusted NAV.\389\ This approach could result in redeeming 
investors paying only the liquidity costs of their orders. However, 
this alternative may not fully compensate shareholders remaining in the 
fund for the full dilution cost associated with redemptions.
---------------------------------------------------------------------------

    \389\ Some regulatory authorities in other countries allow fund 
managers to choose one of two allocation rules: A rule under which 
costs are fully borne by subscribing and redeeming investors and a 
rule under which costs are borne on a pro-rata basis by transacting 
investors. See, e.g., ``Code of Conduct for Asset Managers Using 
Swing Pricing and Variable Anti-Dilution Levies,'' 2016, available 
at https://www.afg.asso.fr.
---------------------------------------------------------------------------

    The proposal also could have required that institutional funds 
apply swing pricing to both net redemptions and net subscriptions. 
Relative to the proposal, this alternative would involve greater 
benefits to non-transacting investors by not only capturing the 
dilution costs of redemptions, but also the dilution costs arising out 
of the need to invest net subscriptions. At the same time, waves of 
subscriptions may be less likely to destabilize the money market fund 
sector in a way that leads to government support. Moreover, the 
alternative would increase the ongoing operational costs of swing 
pricing--costs that are expected to be passed along to fund investors 
that are already earning low or zero net yields in a low interest rate 
environment. Finally, as discussed in Section II above, applying the 
proposed swing pricing requirements to fund subscriptions would require 
these funds to make certain assumptions about how they invest cash from 
new subscriptions and, in some cases, these assumptions would be 
inconsistent with requirements in rule 2a-7.
5. Liquidity Fees
    As an alternative to the proposed swing pricing requirement, the 
proposal could have required that institutional prime and institutional 
tax exempt money market funds establish board-approved procedures to 
impose liquidity fees that capture liquidity externalities of 
redemptions. As a related alternative, the proposal could have required 
institutional prime and tax-exempt money market funds to establish a 
dynamic liquidity fee framework that uses the same, or similar, 
parameters as swing pricing for determining when to impose a fee and 
how to calculate the fee. For instance, the liquidity fee framework 
could apply a fee any time the fund has net redemptions, and calculate 
the amount of the fee in the same or similar way as the swing factor 
under our proposed approach. Alternatively, the liquidity fee framework 
could be modified in the same or similar manner as one of the swing 
pricing alternatives discussed above (e.g., the fee could apply only 
when net redemptions exceed a certain threshold, or the fee calculation 
method could be based on how the fund expects to satisfy redemptions 
instead of assuming sale of a vertical slice of the fund's portfolio).
    While the PWG Report largely analyzed liquidity fees in the context 
of the removal of the ties between weekly liquid asset thresholds and 
the potential imposition of fees and gates, several commenters 
discussed the above related liquidity fee alternatives (collectively, 
the ``alternative liquidity fee approach''). For example, some 
commenters recommended allowing the board to impose liquidity fees when 
it determines that doing so is in the best interest of shareholders, 
without reference to a specific weekly liquid asset threshold.\390\ 
Some commenters suggested a modified fee framework whereby money market 
funds would be required to have policies and procedures that provide 
the fund's board with direction on when to impose fees and how to 
calculate them, in order to impose fees that reflect the cost of 
liquidity.\391\ Two such commenters suggested that the Commission could 
identify non-binding factors to consider (e.g., net redemptions; 
portfolio specific characteristics like liquid assets, investor 
concentration, and diversity of holdings; and market-based 
metrics).\392\ Under these commenters' suggested approach, funds would 
be required to disclose the possibility of liquidity fees to investors 
but could avoid providing information that would allow investors to 
preemptively redeem before fees apply.
---------------------------------------------------------------------------

    \390\ See, e.g., JP Morgan Comment Letter; Federated Hermes I 
Comment Letter; Federated Hermes II Comment Letter; Wells Fargo 
Comment Letter; ICI I Comment Letter; Western Asset Comment Letter.
    \391\ See, e.g., JP Morgan Comment Letter; ICI I Comment Letter; 
Western Asset Comment Letter.
    \392\ See, e.g., JP Morgan Comment Letter; ICI I Comment Letter.
---------------------------------------------------------------------------

    Like the proposed swing pricing approach, the liquidity fee 
alternative would require funds to recapture the liquidity costs of 
redemptions to make non-redeeming investors whole. Thus, many of the 
economic costs and benefits of the proposed swing pricing approach are 
also expected with the liquidity fee alternative.
    Specifically, like the proposed swing pricing requirement, the 
liquidity fee alternative may reduce dilution of non-redeeming 
shareholders in the face of net redemptions. Liquidity fees may reduce 
the first mover advantage, fund outflows during market stress, and 
dilution. To the degree that liquidity fees may reduce dilution, they 
may protect investors that remain in the fund, for instance, during 
periods of high net redemptions.
    Similar to the proposal, the magnitude of liquidity fees applied by 
affected funds may be quite small since money market funds hold 
relatively high quality and liquid investments, which may reduce 
liquidity costs when meeting redemptions. The fact that the alternative 
may result in relatively small liquidity fees as well as the inability 
of investors to observe at the time of placing their orders whether the 
liquidity fee will be applied may interrupt self-fulfilling run 
dynamics and reduce the likelihood of strategic behavior around 
liquidity fees. The alternative would address the dilution that can 
occur when a money market experiences net redemptions and would not 
result in large liquidity fees unless there is significant net 
redemption activity leading to large liquidity costs.
    Some of the direct and indirect costs of the liquidity fee 
alternative may be similar to those of the proposed swing pricing 
requirement. First, a liquidity fee framework in which funds are more 
likely to apply liquidity fees relative to the baseline may reduce 
investor demand for institutional prime and institutional tax-exempt 
money market funds. Reduced investor demand may lead to a decrease in 
assets under management of affected money market funds, thereby 
potentially reducing the wholesale funding liquidity they provide to 
other market participants. If some institutional money market fund 
investors are concerned about preserving their invested capital and to 
the degree that the liquidity fee alternative would require redeeming 
investors to bear the liquidity risk of their redemptions (a risk they 
do not currently internalize), the alternative may reduce investor 
demand for institutional money market funds.
    Second, the liquidity fee alternative could impose costs on 
investors redeeming shares in response to poor fund management or a 
fund complex's emerging reputational risk. The alternative would assess 
liquidity fees based on the liquidity costs of effecting redemptions 
and regardless of the cause for the redemptions. Similar to the 
proposed swing pricing approach, this could reduce the strength of 
market discipline of poor fund management.

[[Page 7316]]

    Third, liquidity fees would require affected funds to pass along 
liquidity costs of redemptions onto investors. This may decrease the 
need of funds to provide and investor expectation of sponsor support to 
cover liquidity costs of redemptions. As a result, like the proposed 
swing pricing approach, the liquidity fee alternative could magnify the 
incentives of affected funds to invest in more illiquid assets, may 
reduce their incentives to manage downside liquidity risk, and may 
reduce fund incentives to find the cheapest way to source liquidity to 
meet redemptions. In addition, fund managers may be incentivized to 
apply liquidity fees frequently and to use their discretion to apply 
larger liquidity fees because they improve a fund's reported returns 
and benefit the fund. These factors may be partly mitigated by 
reputational incentives of fund managers, to the degree that the large 
and frequent application of liquidity fees may discourage liquidity 
seeking investors from allocating to such funds. Fourth, the 
implementation of the alternative liquidity fee approach would pose 
some operational challenges and impose related costs on money market 
funds, third party intermediaries, as well as investors. Similar to the 
proposed swing pricing approach, the calculation of liquidity fees 
would require affected money market funds to estimate spread and other 
costs on days with net redemptions, which may be particularly time 
consuming and challenging during times of stress. As discussed above, 
many assets that money market funds hold are not exchange traded and do 
not have an active secondary market. As a result, estimating spread 
costs and market impact factors of each component of a money market 
fund portfolio may be time consuming and difficult, especially during a 
liquidity freeze.
    The liquidity fee alternative also has several important 
differences from the proposed swing pricing approach, and these 
differences give rise to different economic benefits, costs, and 
operational challenges. Specifically, the proposed swing pricing 
approach would recapture dilution costs of redemptions by adjusting the 
NAV of the fund as a whole depending on the volume of net redemptions, 
spread and other costs, and estimates of market impacts. The liquidity 
fee alternative would, instead, require funds to assess liquidity fees 
on redeeming investors depending on the same or similar considerations.
    As a result, the alternative liquidity fee approach may have 
several benefits relative to the proposed swing pricing approach. 
First, liquidity fees could be more transparent than a swing factor 
adjustment to the fund's NAV, as redeeming investors would more clearly 
see application of a separate fee. However, while redeeming investors 
would enjoy greater transparency regarding liquidity fees, other 
investors would not observe when a liquidity fee is charged. Second, 
similar to the proposed swing pricing approach, liquidity fees would 
mitigate dilution. However, under the proposed swing pricing approach 
redeemers compensate the fund for the dilution of redemptions as well 
as the dilution from subscriptions. Thus, redeemers would subsidize 
subscribers in the fund--an incentive effect that may be particularly 
important when liquidity is scarce and a fund is facing a wave of 
redemptions. By contrast, the alternative liquidity fee approach could 
charge redeeming investors fees that compensate the fund for dilution 
from redemptions only. While the liquidity fee alternative would not 
create a positive incentive for subscriptions, it would avoid charging 
subscribers for more than the liquidity cost of their redemptions. 
Third, if liquidity fees are to be assessed after the NAV is struck, it 
could reduce the operational challenges and time pressures of swing 
pricing and allow affected money market funds to charge the ex post 
trading costs to redeeming investors. The alternative liquidity fee 
approach could avoid the potentially adverse impacts of swing pricing 
on settlement cycles and may be less likely to affect the number of NAV 
strikes some funds currently offer each day.
    Importantly, the alternative liquidity fee approach could give rise 
to several sets of operational concerns and related costs. In contrast 
with the proposed swing pricing approach, which is implemented through 
affected funds adjusting the NAV, the alternative liquidity fee 
approach would require intermediaries to assess fees to investors. As a 
result, the alternative liquidity fee approach would require greater 
involvement by intermediaries in applying the fees and submitting the 
proceeds to the fund. While intermediaries to non-government money 
market funds and other service providers should be equipped to impose 
liquidity fees under the current rule, the alternative liquidity fee 
approach would likely result in more frequent and varying application 
of fees than the current rule contemplates. Requiring intermediaries to 
apply a fee more frequently, with the potential to change in amount 
from pricing period-to-pricing period, could introduce additional 
operational complexity and cost. By consequence, intermediaries may 
need to develop or modify policies, procedures, and systems designed to 
apply fees to individual investors and submit liquidity fee proceeds to 
the fund. In addition, liquidity fees may require more coordination 
with a fund's service providers than swing pricing, since fees need to 
be imposed on an investor-by-investor basis by each intermediary, which 
may be particularly difficult with respect to omnibus accounts. 
Moreover, funds may not have insight into whether an intermediary is 
appropriately and fairly applying the liquidity fee to redeeming 
investors and affected funds may need to develop or modify policies and 
procedures reasonably designed to ensure intermediaries are 
appropriately and fairly applying the fees. Finally, due to the costs 
that the alternative may impose on intermediaries and distribution 
networks of affected funds, the alternative liquidity fee approach may 
require money market funds to alter their intermediary distribution 
contracts, networks, and flow aggregation practices. We lack data to 
quantify such burdens and costs and solicit comment and data that would 
inform this analysis.
6. Expanding the Scope of the Floating NAV Requirements
    The proposal could have expanded the floating NAV requirements to a 
broader scope of money market funds. For example, the proposal could 
have imposed floating NAV requirements on all prime money market funds, 
but not on tax-exempt funds.\393\ As another alternative, the proposal 
could have imposed floating NAV requirements on all prime and tax-
exempt money market funds.\394\ Finally, the proposal could have 
required that all money market funds float their NAVs.\395\
---------------------------------------------------------------------------

    \393\ See, e.g., PIMCO Comment Letter; Vanguard Comment Letter.
    \394\ See, e.g., Schwab Comment Letter; Northern Trust Comment 
Letter.
    \395\ See, e.g., Comment Letter of the CFA Institute (Apr. 14, 
2021) (``CFA Comment Letter''); Comment Letter of Better Markets, 
Inc. (Apr. 12, 2021) (``Better Markets Comment Letter''); Systemic 
Risk Council Comment Letter; Comment Letter of Professor David 
Zaring, The Wharton School (Apr. 2, 2021) (``Prof. Zaring Comment 
Letter'').
---------------------------------------------------------------------------

    Expanding the scope of the floating NAV requirements beyond 
institutional prime and institutional tax-exempt funds would involve 
several main benefits. First, a floating NAV may increase transparency 
about the risk of money market fund investments. Portfolios of money 
market funds give rise to liquidity, interest rate, and credit risks--
risks that are relatively low under normal market conditions, but may 
be

[[Page 7317]]

magnified during market stress. To the degree that investors in stable 
NAV funds are currently treating them as if they were holding U.S. 
dollars due to a lack of transparency about risks of such funds, 
expanding the scope of the floating NAV requirements may enhance 
investor protections and enable investors to make more informed 
investment decisions. Some commenters stated that expanding a floating 
NAV requirement could enhance transparency about the underlying 
performance of credit-sensitive assets within prime money market 
funds.\396\ Another commenter indicated that a floating NAV provides 
investors with more accurate information about the fund's financial 
condition, enhances transparency about the risks of the fund's 
portfolio holdings, and is consistent with the valuation of investment 
funds generally.\397\ Yet another commenter suggested that a floating 
NAV can provide more flexibility and resilience than a stable NAV, but 
tax-exempt money market funds could continue to support a stable NAV as 
long as the Commission tightened portfolio restrictions on such 
funds.\398\
---------------------------------------------------------------------------

    \396\ See, e.g., PIMCO Comment Letter.
    \397\ See, e.g., CFA Comment Letter.
    \398\ Id. (noting that tax-exempt money market funds invest in 
entities that often have the taxing power to support their debt, may 
not be able to discharge their debt obligations through bankruptcy, 
and issue notes that offer contractual liquidity).
---------------------------------------------------------------------------

    Second, these alternatives could reduce run risk in affected stable 
NAV funds. Specifically, floating the NAV may reduce the first mover 
advantage in redemptions, partly mitigating investor incentives to run. 
Some commenters supported the benefits of a floating NAV requirement in 
discouraging herd redemption behavior across all prime money market 
funds,\399\ and suggested that a floating NAV may reduce the advantages 
of sophisticated investors that redeem quickly under stressed 
conditions.\400\ We are also aware of research that examined fund 
outflows outside the U.S. and found reduced outflows in floating NAV 
funds.\401\
---------------------------------------------------------------------------

    \399\ See, e.g., PIMCO Comment Letter.
    \400\ See, e.g., Better Markets Comment Letter.
    \401\ See, e.g., Witmer, Jonathan. 2016. ``Does the Buck Stop 
Here? A Comparison of Withdrawals from Money Market Mutual Funds 
with Floating and Constant Share Prices.'' Journal of Banking and 
Finance 66: 126-142.
---------------------------------------------------------------------------

    As a caveat, to the degree that heavy redemptions in floating NAV 
funds reduce available liquidity and credit quality of remaining fund 
holdings, investors may still be incentivized to redeem early, albeit 
at a NAV below $1. In this sense, floating the NAV may reduce, but not 
eliminate incentives for early redemptions during market selloffs that 
are present in securities markets and open-end funds more generally. 
Some commenters stated that floating the NAV of stable NAV funds would 
do little to reduce redemption activity during periods of market 
stress, particularly given that institutional prime funds experienced 
heavy redemptions in March 2020 despite having a floating NAV.\402\ 
Another commenter opposed a floating NAV requirement, suggesting that 
it likely would not address run risk but may give the appearance of 
discouraging runs.\403\ Some academic research \404\ shows that 
floating the NAV in the US has not eliminated run risk in the 
redemption decisions of investors in institutional funds. However, that 
research does not distinguish between causal impacts of a floating NAV 
requirement and investor selection effects. Specifically, the paper 
does not rule out the possibility that investors that need liquidity 
the most invest in floating NAV and multi-strike funds and that such 
investors are also most likely to redeem in times of liquidity stress. 
Yet another paper models the problem theoretically and finds that a 
stable NAV can reduce risk taking by money market funds in low interest 
rate environments because it can create default risk and the need to 
have a buffer of safe assets, reducing risky investment when risk-free 
rates fall.\405\
---------------------------------------------------------------------------

    \402\ SIFMA AMG Comment Letter; ICI Comment Letter I; Western 
Asset Comment Letter; Fidelity Comment Letter; Federated Hermes 
Comment Letter I; JP Morgan Comment Letter; BlackRock Comment 
Letter; Americans for Financial Reform Comment Letter; Comment 
Letter of Madison E. Grady (Apr. 14, 2021) (``Madison Grady Comment 
Letter'').
    \403\ Comment Letter of Professor Jeffrey N. Gordon, Columbia 
Law School (Feb. 26, 2021) (noting that money market funds should 
not be treated similarly to other mutual funds because MMF investors 
typically redeem en masse during periods of liquidity stress and 
money market fund investments tend to be concentrated in the credit 
issuances of financial firms).
    \404\ See, Casavecchia, Lorenzo, Georgina Ge, Wei Li, and Ashish 
Tiwari. 2021. ``Prime Time for Prime Funds: Floating NAV, Intraday 
Redemptions and Liquidity Risk During Crises.'' Working paper.
    \405\ See La Spada, Gabriele. 2018. ``Competition, Reach for 
Yield, and Money Market Funds.'' Journal of Financial Economics 
129(1): 87-110.
---------------------------------------------------------------------------

    Third, floating the NAV of a broader range of money market funds 
could more accurately capture their role in asset transformation and 
corresponding risks. As quantified in Section III.B.3.a, retail prime 
and retail tax exempt funds have some risky portfolio holdings. 
Specifically, some of the underlying holdings of retail money market 
funds are similar to those of institutional prime funds, which 
experienced significant stress in 2020. One commenter \406\ supported 
floating the NAV for government money market funds, citing redemption 
pressure and run risks associated with U.S. debt ceiling negotiations 
and potential credit rating downgrades of U.S. Government securities 
and suggesting that all money market fund investors should be aware 
that all such funds can, and do, fluctuate in value. Expanding the 
floating NAV requirements to all money market funds would result in a 
consistent regulatory treatment of money market funds. Moreover, it may 
enhance the allocative efficiency in the money market fund industry and 
may enhance competition between floating NAV and stable NAV funds. For 
example, some commenters indicated that the disparate treatment of 
floating NAV and stable NAV funds led to a significant migration of 
institutional investments from prime and tax-exempt money market funds 
to government money market funds.\407\ An alternative that would expand 
the scope of the floating NAV requirement to all money market funds may 
lead to outflows from government money market funds back into prime and 
tax-exempt sectors.
---------------------------------------------------------------------------

    \406\ See, e.g., Better Markets Comment Letter.
    \407\ See, e.g., CFA Comment Letter.
---------------------------------------------------------------------------

    Floating NAV alternatives would give rise to three groups of costs. 
First, such alternatives may reduce the attractiveness of affected 
money market funds to investors and may result in significant 
reductions in the size of the money market fund sector.\408\ The 
Commission understands that retail investors use money market funds as 
a safe, cash-like product. To that extent, floating the NAV of some or 
all stable NAV funds may lead investors of stable NAV funds to 
reallocate capital into cash accounts subject to deposit 
insurance.\409\ In a somewhat parallel setting, in the aftermath of the 
2016 implementation of the floating NAV requirement for institutional 
prime and institutional tax-exempt funds, approximately $1 trillion 
left newly floating NAV funds and flowed into government money market 
funds, matched by corresponding outflows from floating NAV products. 
About 90% of these outflows came from the larger institutional prime 
funds, while the remaining 10% came from the smaller institutional tax-
exempt funds. Thus, many investors may flee to safety in times of 
stress and may be unlikely to

[[Page 7318]]

remain invested in money market funds affected by the floating NAV 
alternative. Some commenters stated that a floating NAV requirement 
would, indeed, diminish the appeal of money market funds relative to 
other cash management vehicles.\410\ Importantly, such reallocation 
effects are not necessarily suboptimal per se, if it is a result of 
greater investor awareness of the risks of money market fund 
investments.
---------------------------------------------------------------------------

    \408\ See, e.g., SIFMA AMG Comment Letter; Western Asset Comment 
Letter; Federated Hermes Comment Letter I (noting that some 
investors may choose to move assets to banks or to less regulated 
and less transparent products such as private funds).
    \409\ See, e.g., Schwab Comment Letter.
    \410\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter I; 
Federated Hermes Comment Letter I; JP Morgan Comment Letter; Comment 
Letter of the National Association of State Treasurers and 
Government Finance Officers Association (Apr. 12, 2021) (``NAST and 
GFOA Comment Letter''); Comment Letter of the State Financial 
Officers Foundation and Ron Crane (Apr. 26, 2021) (``SFOF and Crane 
Comment Letter''); Madison Grady Comment Letter.
---------------------------------------------------------------------------

    Second, if the floating NAV alternatives resulted in a decrease in 
the size of the money market fund industry, they would adversely impact 
the availability of wholesale funding liquidity and access to capital 
for issuers. Prior research suggests that increasingly constrained 
balance sheets of regulated financial institutions after the financial 
crisis reduced both their involvement in arbitrage activities and their 
willingness to provide leverage to other arbitrageurs, leading to 
growing mispricings across markets.\411\ Given this baseline, a 
reduction of wholesale funding liquidity available to arbitrageurs may 
magnify mispricings across securities markets. However, under the 
alternative, wholesale funding costs would more accurately reflect true 
costs of funding liquidity, since the alternative would reduce the 
distortions arising out of implicit government guarantees of money 
market funds. Similarly, a reduction in the size of affected money 
market funds or the money market fund industry as a whole would 
increase the costs of or decrease access to capital for issuers in 
short-term funding markets.\412\ However, the current reliance of some 
issuers on short-term financing from money market funds that is 
susceptible to refinancing and run risks may be sustainable, in part, 
due to perceived government backstops of money market funds and lack of 
transparency to investors about the risks inherent in money market fund 
investments. While the alternative would impose potentially significant 
costs on issuers, it would do so by reducing cross-subsidization of 
money market funds and increasing transparency about risks of money 
market fund investments.
---------------------------------------------------------------------------

    \411\ See, e.g., Boyarchenko, Nina, Thomas Eisenbach, Pooja 
Gupta, Or Shachar, and Peter Van Tassel. 2020. ``Bank-Intermediated 
Arbitrage.'' Federal Reserve Bank of New York Staff Report No. 854.
    \412\ SIFMA AMG Comment Letter; ICI I; Federated Hermes Comment 
Letter I; JP Morgan Comment Letter; NAST and GFOA Comment Letter 
(describing increased borrowing costs for municipalities upon the 
implementation of floating NAVs for institutional funds); SFOF and 
Crane Comment Letter; Madison Grady Comment Letter.
---------------------------------------------------------------------------

    Third, the floating NAV alternative would involve significant 
operational, accounting, and tax challenges. Specifically, the 
Commission is concerned that switching retail funds from stable NAV to 
floating NAV may create accounting and tax complexities for some retail 
investors.\413\ A floating NAV requirement may be incompatible with 
popular cash management tools such as check-writing and wire transfers 
that are currently offered for many stable NAV money market fund 
accounts.\414\ In addition, a floating NAV alternative would involve 
many of the same implementation burdens on broker-dealers, retirement 
plan administrators, and other intermediaries \415\ as the proposed 
amendment requiring that stable NAV funds determine that their 
intermediaries are capable of transacting at non-stable prices.
---------------------------------------------------------------------------

    \413\ See, e.g., ICI Comment Letter I; Federated Hermes Comment 
Letter I; Madison Grady Comment Letter; Comment Letter of Carter 
Ledyard Milburn (Apr. 15, 2021).
    \414\ See, e.g., ICI Comment Letter I; Madison Grady Comment 
Letter.
    \415\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter I; 
Federated Hermes Comment Letter I; Western Asset Comment Letter; JP 
Morgan Comment Letter; Dreyfus Comment Letter; BlackRock Comment 
Letter.
---------------------------------------------------------------------------

    Importantly, the floating NAV alternative would not address three 
key market failures in money market funds. First, floating the NAV may 
reduce, but does not eliminate, the first mover advantage and 
corresponding run incentives during selloffs. As discussed above, 
floating NAV funds experienced a significant amount of redemptions in 
2020. During past episodes of stress in money market funds (in 2008 and 
2020), retail investor redemptions were far more limited than 
redemptions out of institutional prime money market funds. Moreover, as 
referenced above, in 2020 capital flowed into government money market 
funds as investors fled to safety. Future redemption dynamics in stable 
NAV funds may evolve as a function of investor type, risk tolerance, 
investment horizons, liquidity needs, and sophistication, among others. 
However, modest historical redemptions out of stable NAV funds may 
suggest that they are currently less susceptible to run risk, reducing 
the value of floating NAV alternatives for such funds.
    Second, floating NAV alternatives would not alter economic 
incentives of stable NAV fund managers to reduce risk taking. For 
example, floating the NAV would not incentivize stable NAV fund 
managers to hold enough liquid assets and to have low enough credit 
risk to meet redemptions in times of stress; nor would it constrain 
portfolio composition. Insofar as investor flows remain sensitive to 
fund performance, and fund managers are compensated for performance, 
money market funds may have incentives to take greater risks to deliver 
higher returns. The proposed liquidity requirement amendments, while 
not altering incentives of fund managers, may meaningfully constrain 
money market fund portfolio composition and risk taking.
    Third, floating NAV alternatives may not influence the liquidity 
risk of affected money market funds as directly as the proposal. At 
their core, money market funds transform capital subject to daily 
redemptions into short-term debt instruments that carry liquidity and 
credit risk. Some research suggests that floating the NAV would not 
reduce, and may even increase risk taking incentives.\416\ However, as 
can be seen from Section III.B.3.b, the distribution of market NAV 
fluctuations among prime money market funds decreased around the 
compliance date with the 2014 amendments. In contrast, the proposed 
increases to daily and weekly liquidity requirements may directly 
reduce the amount of liquidity risk in money market fund portfolios.
---------------------------------------------------------------------------

    \416\ See, e.g., La Spada, Gabriele. 2018. ``Competition, Reach 
for Yield, and Money Market Funds.'' Journal of Financial Economics 
129(1): 87-110.
---------------------------------------------------------------------------

7. Countercyclical Weekly Liquid Asset Requirement
    The PWG Report raised an alternative countercyclical weekly liquid 
asset requirement approach. For instance, during periods of market 
stress, the minimum weekly liquid asset threshold could decrease, for 
example, by 50%. The proposal could have specified the definitions of 
market stress that would trigger a change in weekly liquid asset 
thresholds. Alternatively, the proposal could have specified that 
decreases in weekly liquid asset thresholds would be triggered by 
Commission administrative order or notice.\417\
---------------------------------------------------------------------------

    \417\ See ABA Comment Letter.
---------------------------------------------------------------------------

    Such alternatives could help clarify that money market funds' 
liquidity buffers are meant for use in times of stress and may provide 
assurance to investors that funds may utilize their liquidity reserves 
to absorb redemptions.\418\ To the degree that these

[[Page 7319]]

alternatives may increase the willingness of affected funds to absorb 
redemptions out of daily or weekly liquidity during times of stress, 
the alternatives may reduce liquidity costs borne by fund investors and 
may reduce incentives to redeem.
---------------------------------------------------------------------------

    \418\ See BlackRock Comment Letter; ABA Comment Letter; mCD IP 
Comment Letter; CFA Comment Letter.
---------------------------------------------------------------------------

    However, an analysis of investor redemptions out of institutional 
prime and institutional tax exempt funds during market stress of 2020 
points to a high level of sensitivity of redemptions to threshold 
effects. Thus, any decrease in regulatory minimum thresholds may create 
investor concerns about liquidity stress in money market funds and 
trigger an increase in investor redemptions. Moreover, under the 
current baseline, rule 2a-7 does not prohibit a fund from operating 
with weekly liquid assets below the regulatory minimum. The proposed 
elimination of the tie between liquidity thresholds and fees and gates 
under rule 2a-7may more efficiently incentivize funds to use their 
liquidity buffers in times of stress, while removing threshold effects 
around weekly liquidity levels.\419\
---------------------------------------------------------------------------

    \419\ See JP Morgan Comment Letter (expressing the view that the 
introduction of fees and gates in the 2014 reform effectively 
nullified the intent of the 2010 reform's requirement that money 
market funds maintain a 30% WLA minimum in order to ensure that a 
fund could meet shareholder redemptions even when market conditions 
have deteriorated).
---------------------------------------------------------------------------

    Moreover, alternatives involving Commission orders or notices 
triggering decreases in weekly liquidity thresholds may impede or slow 
fund liquidity management decisions during times of market stress. In 
addition, Commission action to reduce liquidity requirements may be 
read as a signal of broader stress in money market funds and may 
accelerate investor redemptions under stress.\420\
---------------------------------------------------------------------------

    \420\ See Western Asset Comment Letter; Fidelity Comment Letter; 
JP Morgan Comment Letter; SIFMA AMG Comment Letter (noting that 
``[t]o the extent the Commission does consider countercyclical 
weekly liquid asset requirements, SIFMA AMG urges the Commission to 
further consider how the Commission could construct a 
countercyclical requirement that would apply on an automatic basis, 
versus requiring Commission action'').
---------------------------------------------------------------------------

8. Alternatives to the Amendments Related to Potential Negative 
Interest Rates
    As an alternative to the proposed amendments related to potential 
negative interest rates, the proposal could have allowed stable NAV 
funds to use the reverse distribution mechanism in lieu of requiring 
stable NAV funds to float the NAV in the event of persistent negative 
interest rates. This alternative would be consistent with the practice 
of European money market funds, which used a reverse distribution 
mechanism for a period of time, before the European Commission 
determined this approach was not consistent with the 2016 EU money 
market fund regulations. As another alternative, the proposal could 
have mandated that in the event of persistent negative interest rates, 
all stable NAV funds must use the reverse distribution mechanism.
    Alternatives allowing (requiring) stable NAV funds to use a reverse 
distribution mechanism in the event of negative fund yields would 
reduce (eliminate) NAV fluctuations in a negative yield environment, 
which may enhance (preserve) the use of stable NAV funds for sweep 
accounting. Such alternatives may, thus, increase demand for government 
and retail money market funds, with positive effects on the 
availability of wholesale funding liquidity and capital formation. The 
alternatives would avoid disruptions to distribution networks of stable 
NAV funds if some of their intermediaries would be unable or unwilling 
to upgrade systems to process transactions at a floating NAV.
    However, such alternatives may decrease price transparency to 
investors in stable NAV funds and may give rise to investor protection 
concerns. As discussed in Section II, under a reverse distribution 
mechanism, investors would observe a stable share price but a declining 
number of shares for their investment when a fund generates a negative 
gross yield. This may decrease the transparency and salience of 
negative fund yields to investors, particularly for less sophisticated 
retail investors. One commenter indicated that investors may observe a 
stable share price and assume that their investment in a fund with a 
stable share price is holding its value while the investment is 
actually losing value over time.\421\ While disclosures could partly 
mitigate such informational asymmetries, we believe that reverse 
distribution mechanisms may mislead or confuse investors about the 
value and performance of their investments, particularly for retail 
money market fund investors.
---------------------------------------------------------------------------

    \421\ Jose Joseph Comment Letter (suggesting that if money 
market funds generate negative yields, ``[u]nilaterally redeeming 
the shares[] by reverse distribution is like cheating'' and that 
funds should instead inform shareholder and move to a floating NAV 
to be fair and transparent).
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9. Alternatives to the Amendments Related to Processing Orders Under 
Floating NAV Conditions for All Intermediaries
    The proposal also could have not expanded existing requirements 
related to processing orders under floating NAV conditions to all 
intermediaries. Under this approach, stable NAV money market funds 
would not be required to keep records identifying which intermediaries 
they were able to identify as being able to process orders at a 
floating NAV. This alternative would avoid the costs of the proposed 
amendments related to intermediaries being required to upgrade systems 
if they are unable to process transactions in stable NAV funds at a 
floating NAV. However, beyond negative interest rates, there are other 
scenarios in which stable NAV money market funds may need to be able to 
float their NAVs, such as if they break the buck due to credit events 
or other market stress. Thus, this alternative could result in some 
intermediaries of stable NAV money market funds being unable to process 
certain transactions during severe stress, which could adversely affect 
the ability of investors to access their investments and further 
magnify stress in money market funds and short-term funding markets. 
Therefore, expanding the floating NAV processing conditions to all 
intermediaries, as proposed, would be appropriate even if we were to 
permit or require stable NAV funds to use a reverse distribution 
method.
10. Alternatives to the Amendments Related to WAL/WAM Calculation
    The proposal would amend rule 2a-7 to require that WAM and WAL are 
calculated based on the percentage of each security's market value in 
the portfolio. The Commission could have instead proposed to base the 
calculation on amortized cost of each portfolio security. Similar to 
the proposal, such an alternative would also enhance consistency and 
comparability of disclosures by money market funds in data reported to 
the Commission and provided on fund websites. Thus, the alternative 
would achieve the same benefits as the proposal in terms of enhancing 
transparency for investors and enhancing the ability of the Commission 
to assess the risk of various money market funds and increasing 
allocative efficiency.
    However, relative to the proposal, the alternative may give rise to 
higher compliance costs. While all money market funds are required to 
determine the market values of portfolio holdings, no such requirements 
exist for amortized costs of portfolio securities. Thus, funds that do 
not currently estimate amortized costs would be required to do so for 
the WAL and WAM calculation. Moreover, amortized cost may be a poor 
proxy of a security's value if market conditions change

[[Page 7320]]

drastically due to, for example, liquidity or credit stress, and if the 
fund is unable to hold the security until maturity. This may distort 
WAL and WAM calculations during market dislocations--when comparable 
and accurate information about fund risks may be most important for 
investment decisions.
11. Sponsor Support
    Dilution occurs because shareholders remaining in the fund 
effectively buy back shares at NAV from redeeming investors. The assets 
underlying those shares are eventually sold at a price that may differ 
from that NAV for the reasons described in the economic baseline, 
causing dilution in some cases. The proposal could have required money 
market fund sponsors to provide explicit sponsor support to cover 
dilution costs. For stable NAV funds, this alternative would mean 
purchasing assets so that their value remains $1 per share. For 
floating NAV funds, this would require a sponsor to pay redeeming 
shareholders the NAV, transfer the corresponding pro-rata assets to 
their balance sheet, sell the assets, and cover the difference between 
the value of those assets and the redemption NAV from their own 
capital.
    The proposal only considers the mitigation of one of the factors 
that contributes to dilution (trading costs), but does not 
significantly change current incentives around the liquidity mismatch 
between money market fund assets and liabilities. In contrast, this 
alternative may significantly change incentives around the liquidity 
mismatch between money market fund assets and liabilities. 
Specifically, this alternative would give fund sponsors a more direct 
incentive to manage the amount of dilution risk they impose on a fund 
via their choice of fund investments.
    Directly exposing the sponsor, rather than money market fund 
investors, to the dilution risk associated with the difference between 
NAV and the ultimate liquidation value of the fund's underlying 
securities could have several benefits. First, money market funds would 
have a stronger incentive to overcome any operational impediments that 
expose them to unnecessary risk. For example, funds might be 
incentivized to invest in developing more accurate valuation models of 
opaque assets so they can hedge their exposure to the difference 
between NAV and asset liquidation prices. Second, the amount of 
required operating capital to process redemptions/subscriptions would 
be higher for money market funds that held relatively less liquid 
securities, and money market funds would have to charge higher fees to 
raise that capital. Such fees would effectively externalize the costs 
of investing in less liquid assets via money market funds. As those 
fees increase, money market funds that hold less liquid assets might 
become less desirable to investors, and money market fund investors 
might select into other structures, such as closed-end funds, that are 
a more natural fit with illiquid assets. These benefits may be reduced 
to the degree that the sponsor support requirement may incentivize 
money market funds to take additional risks to recoup the sponsor's 
costs or may incentivize fund managers to increase risk taking due to 
the backstop of the sponsor support.\422\
---------------------------------------------------------------------------

    \422\ See JP Morgan Comment Letter; ICI Comment Letter I.
---------------------------------------------------------------------------

    Such an alternative approach may significantly disrupt the money 
market fund industry. First, it would make sponsoring money market 
funds a more capital intensive business, which might reduce or create 
barriers to entry into the money market fund industry, disadvantage 
smaller funds and fund complexes, and increase concentration.\423\ 
Second, it could cause fund sponsors to opt, instead, for other open-
end funds, ETFs, or closed-end funds as vehicles for certain less 
liquid assets. Third, it may reduce the attractiveness of money market 
funds to investors as it may reduce fund yields and the number of 
available money market funds.\424\ The alternative, may thus, 
significantly reduce the number of fund sponsors offering money market 
funds and the number of money market funds available to investors. 
Importantly, we recognize that some aspects of the proposal--such as 
the proposed swing pricing amendments, the proposed increases to 
liquidity requirements, and the proposed amendments related to negative 
interest rates--may reduce the attractiveness of affected money market 
funds for investors and the size of the money market fund sector. These 
adverse effects may flow through to institutions, such as banks, and to 
leveraged participants, such hedge funds, that rely on banks for 
liquidity and capital formation.
---------------------------------------------------------------------------

    \423\ See, e.g., Western Asset Comment Letter; Fidelity Comment 
Letter; State Street Comment Letter; BlackRock Comment Letter; JP 
Morgan Comment Letter (stating that bank-affiliated sponsors would 
likely be required to hold capital against any potential support 
obligation).
    \424\ See Western Asset Comment Letter; Federated Hermes I 
Comment Letter.
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    The effects of the sponsor support alternative on investors may be 
mixed. On the one hand, sponsor support may increase the ability of 
investors to redeem their shares in full without bearing liquidity 
costs. On the other hand, sponsor support could lead some investors to 
believe that their investments carry no risk and may make investors 
less discerning in their choice of money market fund allocations.\425\ 
Moreover, sponsor support reduces investor risk only to the degree that 
fund sponsors are well capitalized and easily capable of providing 
sponsor support. Uncertainty surrounding the ability of the sponsor to 
provide support to the money market fund could trigger a wave of 
shareholder redemptions, particularly during stressed conditions.\426\
---------------------------------------------------------------------------

    \425\ See Federated Hermes I Comment Letter; ICI I Comment 
Letter; Carter, Ledyard, Milburn Comment Letter.
    \426\ Federated Hermes I Comment Letter.
---------------------------------------------------------------------------

12. Disclosures
a. Eliminating Website Disclosure of Fund Liquidity Levels
    The proposal could have eliminated the requirement that money 
market funds post their daily and weekly liquid assets on their 
websites. As discussed above, the Commission understands that the 
public nature of fund liquid asset disclosures, in combination with the 
regulatory thresholds for the potential imposition of redemption fees 
and gates, may have triggered a run on institutional money market funds 
and made other funds reluctant to use liquid assets to absorb 
redemptions if it meant approaching or falling below regulatory 
thresholds. The proposal would partly mitigate run incentives 
surrounding disclosures of daily liquid assets, by removing the tie 
between liquid assets and the potential imposition of fees and gates, 
but also increasing minimum daily and weekly liquidity requirements and 
imposing a requirement to promptly report liquidity threshold events. 
Moreover, money market funds play an important asset transformation 
role and inherently carry liquidity risks. The Commission believes that 
public disclosures of money market fund liquidity convey important 
information to investors about the liquidity risks of their 
investments.
b. Alternatives to the Proposed Form N-MFP Amendments
    We could have proposed Form N-MFP amendments without including some 
or all of the proposed new collections of information. For example, the 
proposal could have amended Form

[[Page 7321]]

N-MFP without requiring new disclosures related to repurchase agreement 
transactions or related to investor concentration and composition. 
While these alternatives may have reduced compliance burdens compared 
to the proposal, compliance with disclosure requirements may involve 
significant fixed costs. As a result, the elimination of one or several 
items from the proposed amendments may not lead to a proportional 
reduction in compliance burdens. Moreover, information about repurchase 
agreement transactions, fund liquidity management, investor 
concentration and composition, and sales of securities into the market 
would provide important benefits of transparency for investors and 
would enhance Commission oversight.
    The proposal would require the disclosure of every swing factor 
applied in the reporting period by date. Alternatively, the proposal 
could have required the disclosure of less information about when the 
fund swings the NAV. For example, the proposal could have required 
disclosure of the lowest, median, and highest swing factor a fund 
applied in a given reporting period. Alternatives proposing less 
information about fund swing pricing practices and eliminating current 
website disclosures of daily fund flows would reduce the scope of the 
economic benefits and costs of the proposed amendments described above. 
To the degree that disclosures of swing factors may make swing factors 
more salient to investors and may lead funds to compete on swing 
factors, alternatives proposing less disclosure about swing factors can 
reduce those effects. Moreover, to the degree that granular disclosure 
about historical swing factors can incentivize or inform strategic 
redemption behavior, alternatives involving less disclosure about swing 
factors can reduce those effects.
c. Alternatives to the Proposed Form N-CR Amendments
    The proposal could have required money market funds to make notices 
concerning liquidity threshold events public with a delay (e.g., 15, 
30, or 60 days). The proposal alternatively could have required that 
some or all information about the liquidity threshold event be kept 
confidential upon filing. Under the baseline, such funds are required 
to report daily and weekly liquid assets daily on fund websites. To the 
degree that the publication of such notices gives investors additional 
information about fund liquidity management and can trigger investor 
redemptions out of funds with low levels of weekly and daily liquid 
assets, the alternatives may reduce the risk of redemptions around 
liquidity thresholds and the increase the willingness of funds to 
absorb redemptions out of their weekly liquidity relative to the 
proposal. However, relative to the proposal, the alternatives would 
reduce the availability of a central source that investors could use to 
identify when money market funds fall more than 50% below liquidity 
requirements. The delayed reporting alternative also would reduce the 
amount of information available to investors surrounding the context 
for the liquidity threshold events as notices are likely to clarify 
reasons for the threshold event. Thus, the alternative would reduce 
transparency for investors around liquidity management of affected 
money market funds, which may reduce allocative efficiency. Notably, a 
delay in publication of the notices may increase staleness of the 
information in the notices.
    In addition, the proposal could have amended Form N-CR to include 
some of the proposed new collections of information on Form N-MFP. For 
example, the proposal could have amended Form N-CR to include 
information about sales of securities into the market of prime funds 
that exceed a particular size. This alternative would enhance the 
timeliness of such reporting. Thus, the alternative may enhance 
transparency about fund liquidity management for investors, which may 
enhance informational and allocative efficiency and Commission 
oversight. However, the alternative would increase direct reporting 
burdens related to the filing of Form N-CR--costs that may flow through 
in part or in full to end investors in the form of fund expenses. 
Moreover, timely reporting of prime funds' sales of portfolio 
securities may signal fund liquidity stress to investors even where 
funds may be able to maintain their daily and weekly liquidity levels. 
This may influence investor decisions to redeem out of reporting funds; 
thus, relative to the proposal, the alternative may place heavier 
redemption pressure on reporting funds.
    With respect to the proposed structured data requirement for Form 
N-CR, the proposal could have required Form N-CR to be submitted in the 
Inline eXtensible Business Reporting Language (Inline XBRL), rather 
than the proposed N-CR-specific XML. As with N-CR-specific XML, Inline 
XBRL is a structured data language and would provide similar benefits 
to investors (e.g., facilitating analysis of the event-related 
disclosures reported by money market funds on Form N-CR and thereby 
providing more transparency into potential risks associated with money 
market funds). From a filer compliance perspective, money market funds 
have experience complying with Inline XBRL compliance requirements, 
because they are required to tag prospectus risk/return summary 
disclosures on Form N-1A in Inline XBRL. This existing experience would 
counter the incremental implementation cost of complying with an Inline 
XBRL requirement under the alternative.\427\
---------------------------------------------------------------------------

    \427\ For example, registered open-end management investment 
companies (including money market funds) must tag their Form N-1A 
prospectus risk/return summary disclosures in Inline XBRL. See 
Instruction C.3.g to Form N-1A; 17 CFR 232.405(b)(2).
---------------------------------------------------------------------------

    However, unlike N-CR-specific XML, which the Commission would 
create specifically for Form N-CR submissions on EDGAR, Inline XBRL is 
an existing data language that is maintained by a public standards 
setting body, and it is used for different disclosures across various 
Commission filings (and for uses outside of regulatory disclosures). 
Due to the number of individual transactions that might be reported as 
Form N-CR data and the constrained nature of the content of Form N-CR 
and the absence of a clear need for the N-CR disclosures to be used 
outside the Form N-CR context, the alternative to include an Inline 
XBRL requirement might result in formatting for human readability of 
tabular data within a web browser that provides no additional 
analytical insight. This would likely include more complexity than is 
called for by the disclosures on Form N-CR, thus potentially making the 
disclosures more burdensome to use for analysis and possibly muting the 
benefits to investors of a structured data requirement, compared to the 
proposed N-CR-specific XML requirement.
d. Alternatives to the Proposed Amendments to Form N-1A
    The proposal could have required more information relative to the 
proposal about how affected money market funds implement swing pricing. 
Alternatively, the proposal could have required the disclosure of less 
information than proposed about when the fund swings the NAV. Expanding 
disclosure requirements relative to the proposal would help better 
inform investors about swing pricing practices of different funds and 
could help liquidity seeking investors make more efficient capital 
allocation decisions. Similarly, alternatives proposing less

[[Page 7322]]

information about fund swing pricing practices and eliminating current 
website disclosures of daily fund flows would reduce the scope of the 
economic benefits and costs of the proposed amendments described above.
    The proposed disclosures may inform investors about swing pricing 
that may be applied to their redemptions, while not being so granular 
as to incentivize strategic investor behavior. Importantly, the 
proposed swing pricing approach would involve fewer incentives for 
strategic behavior and runs, compared to the baseline redemption gates 
with a transparent liquidity trigger for two reasons. First, under the 
proposed swing pricing approach, strategic early redemptions are more 
likely to cause the fund to swing. Second, swinging the NAV benefits 
investors staying in the fund by recapturing the dilution costs that 
redeeming investors impose on the fund.
13. Capital Buffers
    The PWG Report also discussed the alternative capital buffer 
requirement. For example, the proposal could have required that money 
market funds maintain a NAV buffer, or a specified amount of additional 
assets available to absorb daily fluctuations in the value of the 
fund's portfolio securities.\428\ For example, one option would require 
that stable NAV money market funds have a risk-based NAV buffer of up 
to 1% to absorb day-to-day fluctuations in the value of the funds' 
portfolio securities. Floating NAV money market funds could reserve 
their NAV buffers to absorb fund losses under rare circumstances only, 
such as when a fund suffers a large drop in NAV or is closed. The 
required minimum size of a fund's NAV buffer could be determined based 
on the composition of the money market fund's portfolio, with specified 
buffer requirements for daily liquid assets, other weekly liquid 
assets, and all other assets.
---------------------------------------------------------------------------

    \428\ See, e.g., Lewis, Craig. April 6, 2015. ``Money Market 
Fund Capital Buffers,'' available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2687687; See also Hanson, Samuel G., David S. 
Scharfstein, and Adi Sunderam. May 2014. ``An Evaluation of Money 
Market Fund Reform Proposals,'' available at https://www.imf.org/external/np/seminars/eng/2013/mmi/pdf/Scharfstein-Hanson-Sunderam.pdf.
---------------------------------------------------------------------------

    Some commenters on the PWG Report expressed support of capital 
buffers, indicating that such a provision could provide some protection 
from losses, including the default of a major asset or certain market 
fluctuations, but would not by itself prevent all investor runs.\429\ 
Another commenter stated that a capital buffer could enable money 
market funds to sustain broad losses without resorting to fire sales 
that further depress share values, and would also increase investor 
confidence about a fund's ability to withstand periods of market 
turmoil.\430\ Similarly, some commenters supported capital buffers as a 
source of strength if redemptions or declining asset values began to 
affect a fund.\431\ One commenter stated that a capital buffer is 
preferable to sponsor support or potential government backstops because 
investors would understand the scale and operation of the buffer in 
advance of its deployment.\432\ One commenter stated that a capital 
buffer should be required if money market funds are provided access to 
Federal Reserve liquidity backstops.\433\
---------------------------------------------------------------------------

    \429\ See, e.g., CFA Comment Letter; Systemic Risk Council 
Comment Letter.
    \430\ See, e.g., Better Markets Comment Letter (calculating that 
a sufficient buffer would need to be larger than the 3.9% of losses 
that money market funds have incurred in the past).
    \431\ See, e.g., Prof. Zaring Comment Letter; Comment Letter of 
Fermat Capital Management, LLC (Mar. 2, 2021).
    \432\ See, e.g., Better Markets Comment Letter.
    \433\ See, e.g., Systemic Risk Council Comment Letter.
---------------------------------------------------------------------------

    The alternative may have four primary benefits. First, it could 
preserve the stable share price of money market funds with stable NAV 
and could reduce NAV variability in floating NAV money market funds. 
Money market funds that are supported by a NAV buffer would be more 
resilient to redemptions and liquidity stress in their portfolios than 
money market funds without a buffer. This may reduce shareholders' 
incentive to redeem shares quickly in response to small losses or 
concerns about the liquidity of the money market fund portfolio, 
particularly during periods of severe liquidity stress.
    Second, a NAV buffer would require money market funds to provide 
explicit capital support rather than the implicit and uncertain support 
that is permitted under the current regulatory baseline. This would 
require funds to internalize some of the cost of the discretionary 
capital support sometimes provided to money market funds and to define 
in advance how losses will be allocated. In addition, a NAV buffer 
could reduce fund managers' incentives to take risk beyond what is 
desired by fund shareholders because investing in less risky securities 
reduces the probability of buffer depletion.
    Third, a NAV buffer may also provide counter-cyclical capital to 
the money market fund industry. Once a buffer is funded it remains in 
place regardless of redemption activity. With a buffer, redemptions 
increase the relative size of the buffer because the same dollar buffer 
now supports fewer assets. The NAV buffer strengthens the ability of 
the fund to absorb further losses, reducing investors' incentive to 
redeem shares.
    Fourth, by reducing the NAV variability in money market funds, a 
NAV buffer may facilitate and protect capital formation in short-term 
financing markets during periods of modest stress. To the degree that 
funds may avoid trading when markets are stressed, they may contribute 
to further illiquidity in short-term funding markets. A NAV buffer 
could enable funds to absorb small losses and thus could reduce this 
tendency. Thus, by adding resiliency to money market funds and 
enhancing their ability to absorb losses, a NAV buffer may benefit 
capital formation in the long term. A more stable money market fund 
industry may produce more stable short-term funding markets, which 
could provide more reliability as to the demand for short-term credit 
to the economy.
    The alternative may involve both direct and indirect costs. In 
terms of direct costs, capital buffer requirements may be challenging 
to design and administer.\434\ From the standpoint of design of capital 
buffers, calibrating the appropriate size of the buffer as well as 
establishing the parameters for when a floating NAV fund should use its 
NAV buffer could present operational and implementation difficulties 
and, if not done effectively, could contribute to self-fulfilling runs 
on funds experiencing large redemptions. From the standpoint of 
administering capital buffers, floating NAV funds would need to 
establish policies and procedures around the use of buffers, 
replenishing capital buffers when they are depleted and raising 
requisite financing, regulatory reporting, and investor disclosures 
about buffers, among other things. Depending on how a capital buffer is 
structured (e.g., as sponsor provided capital or as a subordinated 
share class requiring shareholder approval), there may be other 
administrative, accounting, tax, and legal challenges and costs for 
fund sponsors and investors.
---------------------------------------------------------------------------

    \434\ See, e.g., CCMC Comment Letter; Schwab Comment Letter; 
Northern Trust Comment Letter; Western Asset Comment Letter; 
Fidelity Comment Letter; State Street Comment Letter; GARP Risk 
Institute Comment Letter.
---------------------------------------------------------------------------

    The alternative may also involve three sets of indirect costs. 
First, the alternative would result in opportunity costs associated 
with maintaining a NAV buffer.\435\ Those contributing to

[[Page 7323]]

the buffer would deploy valuable scarce resources to maintain a NAV 
buffer rather than being able to use the funds elsewhere. Estimates of 
these opportunity costs are not possible because the relevant data is 
not currently available to the Commission. Second, entities providing 
capital for the NAV buffer, such as the fund sponsor, would expect to 
be paid a return that sets the market value of the buffer equal to the 
amount of the capital contribution. Since a NAV buffer is designed to 
absorb the same amount of risk regardless of its size, the promised 
yield, or cost of the buffer, increases with the relative amount of 
risk it is expected to absorb (also known as a leverage effect).\436\ 
Third, money market funds with buffers may avoid holding riskier short-
term debt securities (like commercial paper) and instead hold a higher 
amount of low yielding investments like cash, Treasury securities, or 
Treasury repos. This could lead money market funds to hold more 
conservative portfolios than investors may prefer, given tradeoffs 
between principal stability, liquidity, and yield. Moreover, the costs 
of establishing and maintaining a capital buffer would decrease returns 
to fund investors.\437\ The increased costs and decreased returns of a 
capital buffer requirement may decrease the size of the money market 
fund sector, which would affect short-term funding markets, and could 
lead to increased industry concentration.\438\ Moreover, this may alter 
competition in the money market fund industry as capital buffer 
requirements may be easier to comply with for bank-sponsored funds, 
funds that are members of large fund families, and funds that have a 
large parent.
---------------------------------------------------------------------------

    \435\ Some commenters noted that it would take a substantial 
amount of time to raise a capital buffer by retaining fund earnings. 
See e.g., ICI Comment Letter I; Federated Hermes Comment Letter I 
(noting also that the issuance of a subordinated class of shares 
would go against the principles of the Investment Company Act that 
limit the use of leverage and the issuance of multiple classes of 
shares). One commenter proposed that a capital buffer be financed 
through the issuance of subordinated shares that would absorb losses 
before ordinary shareholders. See Prof. Hanson et al. Comment Letter 
(proposing a share class of approximately 3-4% of assets, with an 
estimated reduction in yield to ordinary shareholders of 
approximately 0.05%). Another commenter supported the development of 
contingent financing facilities to be provided by non-bank private 
investors. See Fermat Capital Comment Letter. Other commenters 
stated that the addition of a subordinated class of shares would add 
complexity to the industry and disproportionately affect smaller 
funds and new entrants. See also State Street Comment Letter 
(stating ``we understand this proposal was considered during 
previous rounds of reform, but it was the SEC itself that questioned 
whether this would be a meaningful or effective solution'').
    \436\ The leverage effect reflects the concept that higher 
leverage levels induce an equity holder to demand higher returns to 
compensate for the higher risk levels.
    \437\ See, e.g., SIFMA AMG Comment Letter; CCMC Comment Letter; 
Northern Trust Comment Letter; Fidelity Comment Letter; Federated 
Hermes I Comment Letter; CCMR Comment Letter.
    \438\ See, e.g., SIFMA AMG Comment Letter; ICI I Comment Letter 
(stating that requiring advisers to take a first-loss position would 
be a radical departure from the current role that fund advisers play 
under the federal securities laws); Western Asset Comment Letter; 
Fidelity Comment Letter; JP Morgan Comment Letter; Institute of 
International Finance Comment Letter; BlackRock Comment Letter; GARP 
Risk Institute Comment Letter; CCMR Comment Letter.
---------------------------------------------------------------------------

    Importantly, capital buffers may not have prevented the liquidity 
stresses that arose in March 2020.\439\ A NAV buffer does not protect 
shareholders completely from the possibility of heightened rapid 
redemption activity during periods of market stress, particularly in 
periods where the buffer is at risk of depletion, such as during March 
2020. As the buffer becomes impaired (or if shareholders believe the 
fund may suffer a loss that exceeds the size of its NAV buffer), 
shareholders have an incentive to redeem shares quickly because, once 
the buffer fails, and shareholders will experience sudden losses. At 
the same time, capital buffers could lead some investors to believe 
that their investments carry no risk, which may influence investor 
allocations and adversely impact allocative efficiency. Moreover, 
capital buffers may not have the same benefits for investment products 
such as money market funds, where the investor bears the risk of loss, 
as they do for banks.
---------------------------------------------------------------------------

    \439\ See, e.g., SIFMA AMG Comment Letter; Northern Trust 
Comment Letter; Fidelity Comment Letter; State Street Comment 
Letter; CCMR Comment Letter (stating that capital buffers are 
intended to reduce credit risk for investors, but the redemptions 
from money market funds in March 2020 were not driven by credit 
risk). See also Americans for Financial Reform Comment Letter 
(expressing some support for a capital buffer but stating that a 
capital buffer alone would not appear sufficient to absorb losses 
associated with the investor redemptions in March 2020).
---------------------------------------------------------------------------

14. Minimum Balance at Risk
    Another alternative discussed in the PWG Report is minimum balance 
at risk. Specifically, the proposal could have required that a portion 
of each shareholder's recent balance in a money market fund be 
available for redemption only with a time delay. Under the alternative, 
all shareholders could redeem most of their holdings immediately 
without being restricted by the minimum balance at risk. This 
alternative also could include a requirement to put a portion of 
redeeming investors' holdback shares first in line to absorb losses 
that occur during the holdback period. A floating NAV fund could be 
required to use a minimum balance at risk mechanism to allocate losses 
only under certain rare circumstances, such as when the fund has a 
large drop in NAV or is closed.
    Such an alternative could provide some benefits to money market 
funds. First, it would force redeeming shareholders to pay for the cost 
of liquidity during periods of severe market stress when liquidity is 
particularly costly. Such a requirement could create an incentive 
against shareholders participating in a run on a fund facing potential 
losses of certain sizes because shareholders will incur greater losses 
if they redeem.\440\
---------------------------------------------------------------------------

    \440\ See, e.g., Americans for Financial Reform Comment Letter; 
CFA Comment Letter; Robert Rutkowski Comment Letter (support as an 
alternative to swing pricing).
---------------------------------------------------------------------------

    Second, it would allocate liquidity costs to investors demanding 
liquidity when the fund itself is under severe stress. This would be 
accomplished primarily by making redeeming shareholders bear first 
losses when the fund first depletes its buffer and then the fund's 
value falls below its stable share price within 30 days after their 
redemption. Redeeming shareholders subject to the holdback are the ones 
whose redemptions may have contributed to fund losses if securities are 
sold at fire sale prices to satisfy those redemptions. If the fund 
sells assets to meet redemptions, the costs of doing so would be 
incurred while the redeeming investor is still in the fund because of 
the delay in redeeming holdback shares.
    Third, the alternative would provide the fund with a period of time 
to obtain cash to satisfy the holdback portion of a shareholder's 
redemption. This may give the fund time for distressed securities to 
recover when, for example, the market has acquired additional 
information about the ability of the issuer to make payment upon 
maturity. The alternative would provide time for potential losses in 
fund portfolios to be avoided since distressed securities could trade 
at a heavy discount in the market but may ultimately pay in full at 
maturity.
    Implementing minimum balance at risk could involve operational 
challenges and direct implementation costs. The alternative would 
involve costs to convert existing shares or issue new holdback and 
subordinated holdback shares, changes to systems that would allow 
record-keepers to account for and track the minimum balance at risk and 
allocation of unrestricted, holdback or subordinated holdback shares in 
shareholder accounts, and systems to calculate and reset average 
account balances and

[[Page 7324]]

restrict redemptions of applicable shares.\441\ These costs could vary 
significantly among funds depending on a variety of factors. In 
addition, funds subject to a minimum balance at risk may have to amend 
or adopt new governing documents to issue different classes of shares 
with different rights: Unrestricted shares, holdback shares, and 
subordinated holdback shares. The costs to amend governing documents 
would vary based on the jurisdiction in which the fund is organized and 
the amendment processes enumerated in the fund's governing documents, 
including whether board or shareholder approval is necessary. The costs 
of obtaining shareholder approval, amending governing documents, or 
changing domicile would depend on a number of factors, including the 
size and the number of shareholders of the fund.
---------------------------------------------------------------------------

    \441\ See, e.g., SIFMA AMG Comment Letter; Western Asset Comment 
Letter; Fidelity Comment Letter; ICI Comment Letter I; JP Morgan 
Comment Letter; BlackRock Comment Letter.
---------------------------------------------------------------------------

    In addition, this alternative would give rise to a number of 
indirect costs. First, the alternative may have different and unequal 
effects on investors in stable NAV and floating NAV money market funds. 
During the holdback period, investors in a stable NAV fund would only 
experience losses if the fund breaks the buck. Investors in a floating 
NAV fund, however, are always exposed to changes in the fund's NAV and 
would continue to be exposed to such risk for any shares held back. 
These differential effects could reduce investor demand for floating 
NAV money market funds.
    Second, under the MBR alternative, there would still be an 
incentive to redeem in times of fund and market stress. The alternative 
could force shareholders that redeem more than a certain percent of 
their assets to pay for any losses, if incurred, on the entire 
portfolio on a ratable basis. The contingent nature of the way losses 
are distributed among shareholders forces early redeeming investors to 
bear the losses they are trying to avoid. Money market funds may choose 
to meet redemptions by selling assets that are the most liquid and have 
the smallest capital losses. Once a fund exhausts its supply of liquid 
assets, it may sell less liquid assets to meet redemption requests, 
possibly at a loss. If in fact assets are sold at a loss, the value of 
the fund's shares could be impaired, motivating shareholders to be the 
first to leave.
    Third, minimum balance at risk may reduce the utility of money 
market funds for investors.\442\ Many current investors who value 
liquidity in money market funds may shift their investment to other 
short-term investments that offer higher yields or fewer restrictions 
on redemptions.\443\ A reduction in the number of money market funds 
and/or the amount of money market fund assets under management as a 
result of any further money market fund reforms would have a greater 
negative impact on money market fund sponsors whose fund groups consist 
primarily of money market funds, than on sponsors that offer a more 
diversified range of mutual funds or engage in other financial 
activities (e.g., brokerage). Given that one of the largest money 
market funds' commercial paper exposures is to issuances by financial 
institutions, a reduction in the demand of money market instruments may 
have an impact on the ability of financial institutions to issue 
commercial paper.
---------------------------------------------------------------------------

    \442\ See, e.g., SIFMA AMG Comment Letter; Western Asset Comment 
Letter; Fidelity Comment Letter; ICI I Comment Letter; Federated 
Hermes I Comment Letter; Healthy Markets Association Comment Letter.
    \443\ See, e.g., SIFMA AMG Comment Letter; Western Asset Comment 
Letter; Fidelity Comment Letter; ICI I Comment Letter; JP Morgan 
Comment Letter; State Street Comment Letter; Healthy Markets 
Association Comment Letter; mCD IP Comment Letter.
---------------------------------------------------------------------------

    Fourth, the alternative may not have addressed the liquidity 
stresses that occurred in March 2020.\444\ The minimum balance at risk 
alternative generally impairs the liquidity of money market fund 
investments. To the degree that many investor redemptions in March 2020 
were driven by exogenous liquidity needs (arising out of the Covid-19 
pandemic), investors would still have strong incentives to redeem 
assets they could in order access liquidity.
---------------------------------------------------------------------------

    \444\ See, e.g., CCMC Comment Letter; SIFMA AMG Comment Letter; 
ICI I Comment Letter; Fidelity Comment Letter.
---------------------------------------------------------------------------

15. Liquidity Exchange Bank Membership
    The PWG Report also discussed an alternative requiring prime and 
tax-exempt money market funds to be members of a private liquidity 
exchange bank (``LEB''). The LEB would be a chartered bank that would 
provide a liquidity backstop during periods of market stress. Money 
market fund members and their sponsors would capitalize the LEB through 
initial contributions and ongoing commitment fees, for example. During 
times of market stress, the LEB would purchase eligible assets from 
money market funds that need cash, up to a maximum amount per fund. The 
intent of the LEB would be to diminish investors' incentive to redeem 
in times of market stress while having the benefit of pooling liquidity 
resources rather than requiring each money market fund to hold higher 
levels of liquidity separately.
    This alternative, as well as broader industry-wide insurance 
programs, could mitigate the risk of liquidity runs in money market 
funds and their detrimental impacts on investors and capital 
formation.\445\ The alternative could replace money market funds' 
historical reliance on discretionary sponsor support, which has covered 
capital losses in money market funds in the past but, as discussed 
above, also contributes to these funds' vulnerability to liquidity 
runs. One commenter suggested that some sort of collective emergency 
insurance fund would be helpful to reduce the moral hazard of funds 
that may be reliant on future Federal Reserve facilities in times of 
market stress.\446\
---------------------------------------------------------------------------

    \445\ See, e.g., James Setterlund Comment Letter; Prof. Zaring 
Comment Letter; Systemic Risk Council Comment Letter.
    \446\ See James Setterlund Comment Letter.
---------------------------------------------------------------------------

    Several commenters on the PWG Report opposed an LEB option for 
money market funds.\447\ These commenters expressed concern that the 
establishment and continued funding of an LEB for prime and tax-exempt 
money market funds would be operationally complex and impractical.\448\ 
Further, commenters suggested that a significant amount of capital 
would be necessary to create a meaningful liquidity backstop for money 
market funds and that such costs would be burdensome for sponsors and 
investors. Commenters suggested that if LEB membership were required, 
prime and tax-exempt money market funds could no longer exist in a 
manner that is attractive to investors due to increased fees and, as a 
result, advisers would simply stop sponsoring such products.\449\ One 
commenter pointed out that even a well-capitalized LEB

[[Page 7325]]

would struggle to absorb an adequate level of assets during the March 
2020 downturn.\450\
---------------------------------------------------------------------------

    \447\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter I; 
Fidelity Comment Letter; Western Asset Comment Letter.
    \448\ See ICI Comment Letter I (stating that ``[o]ver ten years 
ago, ICI, with assistance from its members, outside counsel, and 
consultants, spent about 18 months developing a preliminary 
framework for a private liquidity facility, including how it could 
be structured, capitalized, governed, and operated. There were many 
drawbacks, limitations, and challenges to creating such a facility 
that we described in our framework and that are noted in the PWG 
Report. Each of these impediments remains today''); see also State 
Street Comment Letter (stating ``we understand this proposal was 
considered during previous rounds of reform, but it was the SEC 
itself that questioned whether this would be a meaningful or 
effective solution'').
    \449\ SIFMA AMG Comment Letter; ICI Comment Letter I; Western 
Asset Comment Letter.
    \450\ JP Morgan Comment Letter.
---------------------------------------------------------------------------

    Moreover, some commenters also expressed concern that an LEB that 
does not have sufficient liquidity would risk a run by causing investor 
alarm, similar to how redemption behavior increased in March 2020 when 
a fund's level of weekly liquid assets neared 30%.\451\ Some commenters 
also suggested that the establishment of a chartered LEB would 
introduce complex banking regulatory issues and inherent conflicts of 
interest.\452\ Further, commenters expressed that any reform that 
involves pooling liquidity resources that are shared by all members 
could create moral hazard concerns by forcing more responsible funds 
that invest in safer assets to bear the costs of supporting less 
responsible funds.\453\ Lastly, commenters suggested that to be viable, 
the LEB would need access to the Federal Reserve discount window.\454\
---------------------------------------------------------------------------

    \451\ SIFMA AMG Comment Letter; Fidelity Comment Letter.
    \452\ SIFMA AMG Comment Letter; Fidelity Comment Letter; 
Institute of International Finance Comment Letter (noting that 
``[t]he Federal Reserve's Section 23A restrictions on affiliate 
transactions would impose significant constraints on LEB support to 
MMFs absent a clear exemption.''); see also mCP (stating that 
``unless an exemption from a normal bank regulations were granted, 
that would put the LEB in clear breach of the Liquidity Coverage 
Ratio . . .'').
    \453\ SIFMA AMG Comment Letter; Fidelity Comment Letter; Western 
Asset Comment Letter.
    \454\ See, e.g., JP Morgan Comment Letter; Fidelity Comment 
Letter; SIFMA AMG Comment Letter; Institute of International Finance 
Comment Letter. As the Commission recognized in 2014, ``access to 
the discount window would raise complicated policy considerations 
and likely would require legislation. In addition, such a facility 
would not protect money market funds from capital losses triggered 
by credit events as the facility would purchase securities at the 
prevailing market price.'' See 2014 Adopting Release, supra footnote 
12, at paragraph accompanying n.2118. We believe that an LEB without 
such additional loss protection may not sufficiently prevent 
widespread liquidity induced runs on money market funds similar to 
those experienced in March 2020.
---------------------------------------------------------------------------

    This alternative may not significantly reduce the contagion effects 
from heavy redemptions at money market funds without undue costs. 
Membership in the LEB has the potential to create moral hazard and 
encourage excessive risk-taking by money market funds, given the 
difficulties and costs involved in creating effective risk-based 
pricing for insurance and additional regulatory structure to offset 
this incentive. If the alternative actually increases moral hazard and 
decreases corresponding market discipline, it may in fact increase 
rather than decrease money market funds' susceptibility to liquidity 
runs. These incentives may be countered by imposing a very costly 
regulatory structure and risk-based pricing system; however, related 
costs are likely to be passed along to investors and may reduce the 
attractiveness of money market funds relative to bank products and 
other cash management tools. Finally, it may be difficult to create 
private insurance at an appropriate cost and of sufficient capacity for 
a several trillion-dollar industry that tends to have highly correlated 
tail risk.

E. Effects on Efficiency, Competition, and Capital Formation

    The proposed amendments are intended to reduce run risk, mitigate 
the liquidity externalities transacting investors impose on non-
transacting investors, and enhance the resilience of money market 
funds. To the degree that the proposal would increase the resilience of 
money market funds, it may enhance the availability of wholesale 
funding liquidity to market participants and enhance their ability to 
raise capital, particularly during severe stress. The proposed 
amendments may also reduce the probability that runs would result in 
future government interventions, inform investors about liquidity risks 
of their money market fund investments, and enhance the ability of 
investors to optimize their portfolio allocations.
    The proposal may enhance the efficiency of liquidity provision. 
Specifically, money market funds and issuers of short-term debt that 
money market funds hold benefit from perceived government backstops and 
the safety and soundness of the financial system. When the liquidity of 
underlying assets in money market fund portfolios is impaired, 
investors benefit from selling money market fund shares before or 
instead of selling assets that funds hold. Thus, in times of market 
stress, liquidity demand may be directed to money market funds even 
though the relative cost of liquidity in money market funds may be 
greater, resulting in inefficient provision of liquidity. While the 
proposal would not result in money market funds fully internalizing the 
costs of investing in illiquid assets, to the degree that the proposal 
would reduce the need for future implicit government backstops in times 
of stress, the proposal may result in more efficient provision of 
liquidity.
    The proposed disclosure requirements are expected to enhance 
informational efficiency. To the degree that some investors may 
currently be uninformed about liquidity risks of money market fund 
investments, the proposed swing pricing and disclosure requirements may 
increase transparency about liquidity costs transacting investors 
impose on remaining fund investors and liquidity risks in money market 
funds. While many investors may use money market funds as cash 
equivalents, money market funds use capital subject to daily or 
intraday redemptions to invest in portfolios of risky assets. This 
gives rise to liquidity risk and liquidity externalities between 
transacting and non-transacting investors, as discussed throughout the 
release. The possibility that a fund's NAV may swing as a result of net 
redemptions, as well as the proposed disclosure requirements may help 
inform investors about the liquidity risks inherent in money market 
funds and liquidity costs of redemptions, particularly during times of 
stress. To the degree that greater transparency about liquidity risk of 
money market funds may lead some risk averse investors to use other 
instruments, such as banking products, in lieu of money market funds 
for cash management, allocative efficiency may increase.
    The proposal may have two groups of competitive effects. First, 
proposed increases in liquidity requirements may affect competition 
among prime money market funds. As discussed in detail in Section 
III.C.2, many affected funds already have liquidity levels that would 
meet or exceed the proposed minimum daily and weekly liquid asset 
thresholds. However, other funds would have to rebalance their 
portfolios to come into compliance with the proposed amendments, which 
may reduce the yields they are able to offer investors. The proposed 
amendments may, thus improve the competitive standing of funds that 
currently have higher levels of daily and weekly liquidity relative to 
funds that currently do not and may, thus, be able to offer higher 
yields to investors.
    Second, the proposed amendments may influence the competitive 
standing of prime money market funds relative to government money 
market funds. The proposed elimination of gates and fees and swing 
pricing may reduce the risk of runs on prime money market funds and may 
protect the value of investments of non-transacting shareholders. 
However, swing pricing may increase the variability of prime money 
market funds net asset values, while higher liquidity requirements may 
reduce the yields they are able to offer to investors. This may reduce 
their attractiveness to investors and may result in a greater 
reallocation of capital from prime to government funds, bank deposit 
accounts, insurance company

[[Page 7326]]

separate accounts, and other types of liquid vehicles.
    The proposed increases in minimum liquidity thresholds may reduce 
access to and increase costs of raising capital for some issuers of 
short-term debt, thereby potentially negatively affecting capital 
formation. Moreover, to the degree that raising liquidity thresholds 
may reduce money market fund yields and to the extent that swing 
pricing may increase uncertainty about investors' redemption costs, the 
proposal may reduce the viability of prime money market funds as an 
asset class. This reallocation need not be inefficient since government 
money market funds or banking products may be more suitable for cash 
management by liquidity risk averse investors. Moreover, banking 
entities insured by the FDIC pay deposit insurance assessments, whereas 
money market funds do not internalize any portion of government 
interventions or externalities they impose on other investors in the 
same asset classes.
    Nevertheless, potential decreases in the size of the prime money 
market fund sector may have adverse follow-on effects on capital 
formation and the availability of wholesale funding liquidity to 
issuers and institutions seeking to arbitrage mispricings across 
markets. Issuers may respond to such changes by shifting their 
commercial paper and certificate of deposit issuance toward longer 
maturity instruments, which may reduce their exposure to rollover risk.
    These aspects of the proposal may be borne disproportionately by 
global or foreign banking organizations that rely on money market funds 
for dollar funding. Specifically, academic research has explored the 
effects of outflows from prime money market funds into government money 
market funds around the 2014 money market fund reforms on business 
models and lending activities of foreign banking organizations in the 
U.S. To the degree that the proposed amendments would result in further 
outflows from prime money market funds, banking organizations reliant 
on unsecured funding from money market funds may reduce arbitrage 
positions and investments in illiquid assets, rather than reducing 
lending.\455\ However, reduced wholesale dollar funding from money 
market funds may also lead to a reduction in capital formation through 
dollar lending by affected banks, which may reduce the dollar borrowing 
ability of firms reliant on affected banks.\456\
---------------------------------------------------------------------------

    \455\ See, e.g., Anderson, Alyssa, Wenxin Du, Bernd Schlusche. 
2019. ``Money Market Fund Reform and Arbitrage Capital.'' Working 
Paper. See also Thomas Flanagan. 2020. ``Funding Stability and Bank 
Liquidity.'' Working Paper.
    \456\ See, e.g., Ivashina, Victoria, David Scharfstein, and 
Jeremy Stein, 2015. ``Dollar Funding and the Lending Behavior of 
Global Banks.'' Quarterly Journal of Economics 130(3): 1241-1281.
---------------------------------------------------------------------------

    Amendments related to potential negative interest rates may 
increase informational and allocative efficiency. In the event gross 
fund yields turn negative, the proposal would prohibit the use of 
reverse share distribution mechanisms, and would require stable NAV 
funds to float the NAV. This may enhance transparency of fund yields to 
investors, which may enhance informational and allocative efficiency in 
stable NAV funds. However, to the degree that stable NAV fund investors 
may use such accounts for sweep accounting or for cash management, 
floating the NAV under such circumstances may increase price 
variability of and decrease investor interest in affected retail or 
government money market funds. As a result, investors may move their 
capital to bank accounts or other cash alternatives, which may reduce 
the size of the retail and government money market fund sector. Since 
money market funds play an essential role in the provision of wholesale 
funding liquidity and since negative interest rates may be most likely 
during severe macroeconomic stress, the proposal may lead to a negative 
shock to wholesale funding liquidity and capital formation during peak 
macroeconomic stress.
    The proposed requirement that money market funds determine that 
their intermediaries have the capacity to process the transactions at 
floating NAV and the related recordkeeping requirements may affect 
competition among funds and intermediaries. Specifically, 
intermediaries that are currently unable to process stable NAV fund 
shares at floating NAV prices would have to update their transaction 
processing systems or lose the ability to process transactions with 
stable NAV money market funds. Such costs are more easily borne by 
larger intermediary complexes, which are also more likely to be 
processing both stable and floating NAV fund transactions and be 
already equipped for the potential transition. This may place smaller 
intermediaries processing transactions in stable NAV funds at a 
competitive disadvantage relative to larger intermediaries. In 
addition, funds heavily reliant for their distribution on smaller 
intermediaries that are not currently equipped to process transactions 
at a floating NAV may experience more significant disruptions to their 
distribution networks. Such funds are more likely to bear higher 
compliance costs of the proposal and may lose investor capital to other 
funds that rely on larger intermediaries that are already in compliance 
with the proposed amendments. Notably, such reallocation need not be 
inefficient if larger intermediaries have superior processing systems 
and, due to economies of scale and scope, are able to process 
transactions for a variety of funds under different market conditions. 
However, it may place funds reliant on less technologically advanced 
intermediaries for their distribution at a competitive disadvantage 
relative to funds using better equipped intermediaries. It may also 
disadvantage smaller fund complexes generally as they may have fewer 
economies of scale and scope.
    The proposed amendments related to the methods of calculation of 
WAM and WAL may increase consistency and comparability of disclosures 
by money market funds in data reported to the Commission and provided 
on fund websites. The amendments, therefore, may reduce informational 
asymmetries between funds and fund investors about interest rate and 
liquidity risk exposures across fund portfolios. To the degree that 
consistency and comparability of WAM and WAL information may inform 
investors and may influence their capital allocation decisions, the 
proposed amendments may improve allocative efficiency. The proposed 
amendments related to the calculation of WAM and WAL are not expected 
to affect competition and capital formation.

F. Request for Comment

    We request comment on all aspects of the economic analysis of the 
proposed amendments. To the extent possible, we request that commenters 
provide supporting data and analysis with respect to the benefits, 
costs, and effects on competition, efficiency, and capital formation of 
adopting the proposed amendments or any reasonable alternatives. In 
particular, we ask commenters to consider the following questions:
    143. What additional qualitative or quantitative information should 
be considered as part of the baseline for the economic analysis of 
these amendments? What fraction of institutional prime and 
institutional tax-exempt funds currently strike their NAV at the bid 
price of securities?
    144. Are the costs and benefits of proposed amendments accurately 
characterized? If not, why not? Should any of the costs or benefits be 
modified? What, if any, other costs or benefits

[[Page 7327]]

should be taken into account? If possible, please offer ways of 
estimating these costs and benefits. What additional considerations can 
be used to estimate the costs and benefits of the proposed amendments?
    145. Are the costs and benefits of proposed swing pricing 
amendments accurately characterized? If not, why not? How many 
institutional prime and institutional tax exempt money market funds 
already impose order cut-off times? Are the costs of funds doing so 
accurately characterized? What, if any, other costs or benefits should 
be taken into account? If possible, please offer ways of estimating 
these costs and benefits.
    146. Are the costs and benefits of proposed amendments related to 
potential negative interest rates accurately characterized? If not, why 
not? Should any of the costs or benefits be modified? What, if any, 
other costs or benefits should be taken into account? If possible, 
please offer ways of estimating these costs and benefits. What 
additional considerations can be used to estimate the costs and 
benefits of the proposed amendments?
    147. Are the effects on competition, efficiency, and capital 
formation arising from the proposed amendments accurately 
characterized? If not, why not?
    148. Are the economic effects of the above alternatives accurately 
characterized? If not, why not? Should any of the costs or benefits be 
modified? What, if any, other costs or benefits should be taken into 
account?
    149. Are the economic effects of the dynamic liquidity fee 
alternative to the proposed swing pricing requirement accurately 
characterized? If not, why not? Should any of the costs or benefits be 
modified? What, if any, other costs or benefits should be taken into 
account?
    150. Are the economic effects of the alternative approaches to 
implementing swing pricing adequately characterized? If not, why not? 
Should any of the costs or benefits be modified? What, if any, other 
costs or benefits should be taken into account?
    151. Are the economic effects of the sponsor support alternative 
accurately characterized? If not, why not? Should any of the costs or 
benefits be modified? What, if any, other costs or benefits should be 
taken into account?
    152. Are the economic effects of the minimum balance at risk 
alternative accurately characterized? If not, why not? Should any of 
the costs or benefits be modified? What, if any, other costs or 
benefits should be taken into account?
    153. Are the economic effects of the Inline XBRL alternative for 
Form N-CR accurately characterized? If not, why not? Should any of the 
costs or benefits be modified? What, if any, other costs or benefits 
should be taken into account?
    154. Are there other reasonable alternatives to the proposed 
amendments that should be considered? What are the costs, benefits, and 
effects on competition, efficiency, and capital formation of any other 
alternatives?
    155. Are there data sources or data sets that can help refine the 
estimates of the costs and benefits associated with the proposed 
amendments? If so, please identify them.

IV. Paperwork Reduction Act

A. Introduction

    The proposed amendments to rule 2a-7 rule 31a-2, and Forms N-1A, N-
CR, and N-MFP contain ``collection of information'' requirements within 
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\457\ We 
are submitting the proposed collections of information to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA.\458\ The titles for the existing collections of information are: 
(1) ``Rule 2a-7 under the Investment Company Act of 1940, Money market 
funds'' (OMB Control No. 3235-0268); (2) ``Rule 31a-2: Records to be 
preserved by registered investment companies, certain majority-owned 
subsidiaries thereof, and other persons having transactions with 
registered investment companies'' (OMB Control No. 3235-0179; (3) 
``Form N-1A under the Securities Act of 1933 and under the Investment 
Company Act of 1940, registration statement of open-end management 
investment companies'' (OMB Control No. 3235-0307); (4) ``Rule 30b1-8 
under the Investment Company Act of 1940, current report for money 
market funds and Form N-CR, current report, money market fund material 
events'' (OMB Control No. 3235-0705); and (5) ``Rule 30b1-7 under the 
Investment Company Act of 1940, monthly report for money market funds, 
and Form N-MFP, monthly schedule of portfolio holdings of money market 
funds'' (OMB Control No. 3235-0657).
---------------------------------------------------------------------------

    \457\ 44 U.S.C. 3501-3520.
    \458\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid OMB control number. We discuss below the collection of 
information burdens associated with proposed amendments to rules 2a-7 
and 31a-2 as well as to Forms N-1A, N-CR, and N-MFP.

B. Rule 2a-7

    Certain provisions of our proposed rule would affect the baseline 
collection of information requirements of rule 2a-7 Several of the 
amendments create new collection of information requirements or modify 
existing ones. These amendments include: (1) Removal of fee and gate 
provisions from rule 2a-7 and the associated board determinations of 
whether to impose a fee or gate; (2) new provisions requiring 
institutional prime and institutional tax-exempt money market funds to 
establish and implement swing pricing policies and procedures and 
deliver a board report no less frequently than annually; and (3) new 
provisions requiring government and retail money market funds to 
maintain and keep current records identifying the financial 
intermediaries the fund has determined have the capacity to transact at 
non-stable prices per share and the intermediaries for which the fund 
was unable to make this determination. The retention period with 
respect to the swing pricing policies and procedures, board reports, 
and financial intermediary determinations is six years, the first two 
years in an easily accessible place.
    The respondents to these collections of information will be money 
market funds. We estimate that there are 318 money market funds subject 
to rule 2a-7, although the proposed new collections of information 
would each apply to certain subsets of money market funds, as reflected 
in the below table.\459\ The new collections of information are 
mandatory for the identified types of money market funds that rely on 
rule 2a-7. The proposed amendments are designed to enable Commission 
staff in its examinations of money market funds to determine compliance 
with the rule. To the extent the Commission receives confidential 
information pursuant to the collections of information, such 
information will be kept confidential, subject to the provisions of 
applicable law.\460\
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    \459\ Based on Form N-MFP filings, there were 318 money market 
funds as of July 2021.
    \460\ See, e.g., 5 U.S.C. 552. Exemption 4 of the Freedom of 
Information Act provides an exemption for trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential. Exemption 8 of the Freedom of 
Information Act provides an exemption for matters that are contained 
in or related to examination, operating, or condition reports 
prepared by, or on behalf of, or for the use of an agency 
responsible for the regulation or supervision of financial 
institutions.
---------------------------------------------------------------------------

    In our most recent Paperwork Reduction Act submission for rule 2a-
7, we estimated the annual aggregate compliance burden to comply with 
the collection of information requirement of

[[Page 7328]]

rule 2a-7 is 337,328 burden hours with an internal cost burden of 
$92,875,630 and an external cost burden estimate of $38,100,454.\461\
---------------------------------------------------------------------------

    \461\ The most recent rule 2a-7 PRA submission was approved in 
2019 (OMB Control No. 3235-0268).
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to rule 2a-7.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP08FE22.022

[[Page 7329]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.023

BILLING CODE 8011-01-C

C. Rule 31a-2

    Section 31(a)(1) of the Investment Company Act requires registered 
investment companies and certain others to maintain and preserve 
records as prescribed by Commission rules. Rule 31a-1 specifies the 
books and records that must be maintained. Rule 31a-2 specifies the 
time periods that entities must retain certain books and records, 
including those required to be maintained under rule 31a-1. The 
retention of records, as required by rule 31a-2, is necessary to ensure 
access by Commission staff to material business and financial 
information about funds and certain related entities. This information 
will be used by the Commission staff to evaluate fund compliance with 
the Investment Company Act and regulations thereunder. We are proposing 
that certain money market funds retain books and records containing 
schedules evidencing and supporting each computation of an adjustment 
to net asset value of their shares based on swing pricing policies and 
procedures established and implemented pursuant to proposed rule 2a-
7(c)(2). The respondents to these collections of information will be 
money market funds. The new collections of information are mandatory 
for the money market funds subject to rule 2a-7(c)(2). We estimate that 
there are 53 institutional prime and institutional tax-exempt money 
market funds that would be subject to the proposed collection of 
information requirements related to swing pricing. To the extent the 
Commission receives confidential information pursuant to the 
collections of information, such information will be kept confidential, 
subject to the provisions of applicable law.\462\
---------------------------------------------------------------------------

    \462\ See id.
---------------------------------------------------------------------------

    In our most recent Paperwork Reduction Act submission for rule 31a-
2, we estimated the annual aggregate compliance burden to comply with 
the collection of information requirement of rule 31a-2 is 696,464 
burden hours with an internal cost burden of $54,672,424 and an 
external cost burden estimate of $115,372,485.\463\
---------------------------------------------------------------------------

    \463\ The most recent rule 31a-2 PRA submission was approved in 
2020 (OMB Control No. 3235-0179).
---------------------------------------------------------------------------

    The table below summarizes our PRA annual burden estimates 
associated with the proposed amendments to rule 31a-2.

[[Page 7330]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.024

D. Form N-MFP

    The proposed amendments to Form N-MFP would include additional data 
collection and certain technical improvements that will assist our 
monitoring and analysis of money market funds. We are proposing to 
increase the frequency of certain data points from weekly to daily, 
collect new information about securities that have been disposed of 
before maturity, collect new information about the composition and 
concentration of money market funds' shareholders, collect additional 
information and remove the ability for funds to aggregate certain 
required information about repurchase agreement transactions, as well 
as certain other information about the fund's portfolio securities 
(e.g., the acquisition date for a security). We are also proposing 
amendments to improve identifying information about the fund, including 
changes to better identify different categories of government money 
market funds, changes to identify privately offered funds that are used 
for internal cash management purposes, and amendments to provide the 
name and other identifying information for the registrant, series, and 
class. The proposed amendments to Form N-MFP also include several 
changes to clarify current instructions or items.
    The information collection requirements on Form N-MFP are designed 
to assist the Commission in analyzing the portfolio holdings of money 
market funds, and thereby augment our understanding of the risk 
characteristics of individual money market funds and money market funds 
as a group and industry trends. The proposed amendments enhance our 
oversight of money market funds and our ability to respond to market 
events. Preparing a report on Form N-MFP is mandatory for money market 
funds that rely on rule 2a-7, and responses to the information 
collections will not be kept confidential.
    The respondents to these collections of information will be money 
market funds. The Commission estimates there are 318 money market funds 
that report information on Form N-MFP although certain components of 
the proposed new collections of information would apply to certain 
subsets of money market funds, as reflected in the below table. We 
estimate that 35% of money market funds (or 111 money market funds) 
license a software solution and file reports on Form N-MFP in house. We 
estimate that the remaining 65% of money market funds (or 207 money 
market funds) retain the services of a third party to provide data 
aggregation and validation services as part of the preparation and 
filing of reports on Form N-MFP on the fund's behalf. We understand 
that the required data in the proposed amendments to Form N-MFP 
generally are already maintained by money market funds pursuant to 
other regulatory requirements or in the ordinary course of business. 
Accordingly, for the purposes of our analysis, we do not believe that 
the proposed amendments add significant burden hours for filers of Form 
N-MFP.
    In our most recent Paperwork Reduction Act submission for Form N-
MFP, we estimated the annual aggregate compliance burden to comply with 
the collection of information requirement of Form N-MFP is 64,667 
burden hours with an internal cost burden of $6,754,832 and an external 
cost burden estimate of $8,682,037.\464\
---------------------------------------------------------------------------

    \464\ This estimate is based on the last time the PRA submission 
for the rule's information collection was approved in 2019 (OMB 
Control No. 3235-0657).
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to Form N-MFP.
BILLING CODE 8011-01-P

[[Page 7331]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.025

E. Form N-CR

    The proposed amendments to Form N-CR would include the removal of 
the disclosure items related to fund suspensions of redemptions and 
liquidity fees. The proposal would require a fund to file a report when 
its investments are more than 50% below the minimum weekly liquid asset 
or daily liquid asset requirements. In addition, the proposal would 
require money market funds to file Form N-CR reports in a custom XML 
data language. The information collection requirements are designed to 
assist Commission staff in its oversight of money market funds and its 
ability to respond to market events. We estimate that there are 318 
money market funds subject to Form N-CR reporting requirements, but a 
fund is required to file a report on Form N-CR only when a reportable 
event occurs.\465\ Compliance with the disclosure requirements of Form 
N-CR is mandatory for money market funds that rely on rule 2a-7, and 
the responses to the disclosure requirements will not be kept 
confidential.
---------------------------------------------------------------------------

    \465\ Based on Form N-MFP filings, there were 318 money market 
funds as of July 2021.
---------------------------------------------------------------------------

    In our most recent Paperwork Reduction Act submission for Form N-
CR, we estimated that we would receive, in the aggregate, an average of 
6 reports filed on Form N-CR per year. We also estimated the annual 
aggregate compliance burden to comply with the collection of 
information requirement of Form N-CR is 51 burden hours with an 
internal cost burden of $19,839, and an external cost burden estimate 
of $6,111.\466\
---------------------------------------------------------------------------

    \466\ The most recent Form N-CR PRA submission was approved in 
2021 (OMB Control No. 3235-0705).
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to Form N-CR. 
Our most recent Paperwork Reduction Act submission for Form N-CR based 
the burden estimates on the number of Form N-CR reports filed between 
2018 and 2020, and no funds filed reports related to liquidity fees or 
suspensions of redemptions during that period (or at any other time). 
As a result, we do not believe that removing the items related to 
liquidity fees and suspensions of redemptions would affect the current 
burden estimates.

[[Page 7332]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.026

F. Form N-1A

    The proposed amendments to Form N-1A would include a requirement 
for any money market fund that is not a government money market fund or 
a retail money market fund to provide swing pricing disclosures to 
investors, including an explanation of the fund's use of swing pricing 
and a general description of the effects of swing pricing on the fund's 
average annual total returns for the applicable period(s). The proposed 
amendments would additionally include a proposal to remove the current 
disclosures related to the imposition of liquidity fees and any 
suspension of redemptions. Compliance with the disclosure requirements 
of Form N-1A is mandatory for money market funds that rely on rule 2a-
7, and the responses to the disclosure requirements will not be kept 
confidential.
    The purpose of the information collection requirements on Form N-1A 
are to meet the filing and disclosure requirements of the Securities 
Act and the Investment Company Act and to enable funds to provide 
investors with information necessary to evaluate an investment in the 
fund. The proposed amendments to Form N-1A are designed to provide 
investors with information about a fund's swing pricing policies and 
procedures and how swing pricing may affect an investor, which 
investors can use to inform their investment decisions.
    The respondents to these collections of information will be money 
market funds. The Commission estimates there are 318 money market funds 
that are subject to Form N-1A, although the proposed new collections of 
information would apply to certain subsets of money market funds. The 
Commission estimates there are 53 money market funds that will provide 
swing pricing-related disclosures on Form N-1A. We estimate that 129 
money market funds will remove the current disclosures related to the 
imposition of liquidity fees and any suspension of redemptions. Given 
the removal of the prior disclosure requirements, we do not believe 
that the proposed amendments add significant burden hours for filers of 
Form N-1A.
    In our most recent Paperwork Reduction Act submission for Form N-
1A, we estimated the annual aggregate burden to comply with the 
collection of information requirement of Form N-1A is 1,672,077 burden 
hours with an internal cost burden of $474,392,078, and an external 
cost burden estimate of $132,940,008.\467\
---------------------------------------------------------------------------

    \467\ The most recent Form N-1A PRA submission was approved in 
2019 (OMB Control No. 3235-0307).
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to Form N-1A.

[[Page 7333]]

[GRAPHIC] [TIFF OMITTED] TP08FE22.027

BILLING CODE 8011-01-C

V. Initial Regulatory Flexibility Analysis

    Section 3(a) of the Regulatory Flexibility Act of 1980 \468\ 
(``RFA'') requires the Commission to undertake an initial regulatory 
flexibility analysis (``IRFA'') of the proposed rule amendments on 
small entities unless the Commission certifies that the rule, if 
adopted, would not have a significant economic impact on a substantial 
number of small entities.\469\ Pursuant to 5 U.S.C. 605(b), the 
Commission hereby certifies that the proposed amendments to rule 2a-7, 
rule 31a-2, and Forms N-MFP and N-CR under the Investment Company Act, 
and Form N-1A under the Investment Company Act and the Securities Act, 
would not, if adopted, have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \468\ 5 U.S.C. 603(a).
    \469\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    We are proposing amendments to rule 2a-7 under the exemptive and 
rulemaking authority set forth in sections 6(c), 8(b), 22(c), and 38(a) 
of the Investment Company Act of 1940 [15 U.S.C. 80a-6(c), 80a-8(b), 
80a-22(c), 80a-37(a)]. The proposed amendments would remove the 
liquidity fee and redemption gate provisions in rule 2a-7 under the 
Act. The proposed amendments would further require institutional prime 
and tax-exempt money market funds to implement swing pricing policies 
and procedures to require redeeming investors to bear the costs of 
their decision to redeem. The proposed amendments to rule 2a-7 would 
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 proposed 
amendments would provide guidance and amend rule 2a-7 to address how 
money market funds with stable net asset values should handle a 
negative interest rate environment. Finally, the proposed amendments 
would specify the calculation method for weighted average maturity and 
weighted average life.
    We are proposing amendments to rule 31a-2 under the authority set 
forth in section 31(a) of the Investment Company Act [15 U.S.C. 80a-
30(a)]. The proposed amendments would require certain money market 
funds to maintain records related to swing pricing. In addition, we are 
proposing amendments to Forms N-MFP and N-CR under the Investment 
Company Act under the authority set forth in sections 8(b), 30(b), 
31(a), and 38 of the Investment Company Act [15 U.S.C. 80a-8(b), 80a-
29(b), 80a-30(a), 80a-37]. We propose amendments to Form N-1A under the 
Investment Company Act and the Securities Act, under the authority set 
forth in sections 5, 6, 7, 10, and 19(a) of the Securities Act [15 
U.S.C. 77e, 77f, 77g, 77j, and 77s(a)] and sections 8, 24(a), 24(g), 
30, and 38 of the Investment Company Act [15 U.S.C. 80a-8, 80a-24(a), 
80a-24(g), 80a-29, and 80a-37]. These proposed amendments would update 
the 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.
    Based on information in filings submitted to the Commission, we 
believe that only one money market fund is a small entity.\470\ For 
this reason, the Commission believes the proposed amendments to rule 
2a-7, rule 31a-2, Forms N-MFP, N-CR, and N-1A, would not, if adopted, 
have a significant economic impact on a substantial number of small 
entities.
---------------------------------------------------------------------------

    \470\ Under the Investment Company Act, an investment company is 
considered a small business or small organization if it, together 
with other investment companies in the same group of related 
investment companies, has net assets of $50 million or less as of 
the end of its most recent fiscal year. See 17 CFR 270.0-10.
---------------------------------------------------------------------------

    We encourage written comments regarding this certification. We 
solicit comment as to whether the proposed amendments to rule 2a-7, 
rule 31a-2, Forms N-MFP, N-CR, and N-1A could have an effect on small 
entities that has not been considered. We request that commenters 
describe the nature of any impact on small entities and provide 
empirical data to support the extent of such impact.

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of

[[Page 7334]]

1996, or ``SBREFA,'' \471\ we must advise OMB whether a proposed 
regulation constitutes a ``major'' rule. Under SBREFA, a rule is 
considered ``major'' where, if adopted, it results in or is likely to 
result in (1) an annual effect on the economy of $100 million or more; 
(2) a major increase in costs or prices for consumers or individual 
industries; or (3) significant adverse effects on competition, 
investment or innovation.
---------------------------------------------------------------------------

    \471\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    We request comment on the potential impact of the proposed rule on 
the economy on an annual basis. Commenters are requested to provide 
empirical data and other factual support for their views to the extent 
possible.

VII. Statutory Authority

    The Commission is proposing amendments to rule 2a-7 of the Act 
under the exemptive and rulemaking authority set forth in sections 
6(c), 8(b), 22(c), and 38(a) of the Investment Company Act of 1940 [15 
U.S.C. 80a-6(c), 80a-8(b), 80a-22(c), 80a-37(a)]. The Commission is 
proposing amendments to rule 31a-2 under the Act pursuant to the 
authority set forth in section 31(a) of the Investment Company Act [15 
U.S.C. 80a-30(a)]. The Commission is proposing amendments to Form N-1A 
pursuant to the authority set forth in sections 5, 6, 7, 10, and 19(a) 
of the Securities Act [15 U.S.C. 77e, 77f, 77g, 77j, and 77s(a)] and 
sections 8, 24(a), 24(g), 30, and 38 of the Investment Company Act [15 
U.S.C. 80a-8, 80a-24(a), 80a-24(g), 80a-29, and 80a-37]. The Commission 
is proposing amendments to Form N-MFP pursuant to the authority set 
forth in sections 8(b), 30(b), 31(a), and 38(a) of the Investment 
Company Act [15 U.S.C. 80a-8(b), 80a-29(b), 80a-30(a), and 80a-37(a)]. 
The Commission is proposing amendments to Form N-CR pursuant to the 
authority set forth in sections 8(b), 30(b), 31(a), and 38(a) of the 
Investment Company Act [15 U.S.C. 80a-8(b), 80a-29(b), 80a-30(a), and 
80a-37(a)].

List of Subjects in 17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Rule and Form Amendments

    For the reasons set out in the preamble, the Commission proposes to 
amend title 17, chapter II, of the Code of Federal Regulations as 
follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
1. The general authority citation for part 270 continues to read as 
follows:

    Authority:  15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless 
otherwise noted.
* * * * *
0
2. Amend section 270.2a-7 by:
0
a. Revising paragraphs (c)(1)(ii) and (c)(2);
0
b. Adding paragraph (c)(3); and
0
c. Revising paragraphs (d)(1)(ii) and (iii), (d)(4)(ii) and (iii), 
(g)(8)(i), (g)(8)(ii)(A), (h)(8), (h)(10) introductory text, 
(h)(10)(i)(B)(2), (h)(10)(iii) through (v), (h)(11), and (j).
    The revisions and addition read as follows:

Sec.  270.2a-7   Money market funds

* * * * *
    (c) * * *
    (1) * * *
    (ii) Any money market fund that is not a government money market 
fund or a retail money market fund must compute its price per share for 
purposes of distribution, redemption and repurchase by rounding the 
fund's current net asset value per share (including any adjustment to 
that price under paragraph (c)(2) of this section) 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).
    (2) Swing pricing.
    (i) Swing pricing requirement. Notwithstanding Sec.  270.22c-1, any 
money market fund that is not a government money market fund or a 
retail money market fund must establish and implement swing pricing 
policies and procedures as described in paragraph (2)(ii) of this 
section.
    (ii) The fund's swing pricing policies and procedures must:
    (A) Provide that the fund must adjust its current net asset value 
per share by a swing factor if the fund has net redemptions for the 
pricing period. In determining whether the fund has net redemptions for 
a pricing period and the amount of net redemptions, the swing pricing 
administrator is permitted to make such determination based on receipt 
of sufficient investor flow information for the pricing period to allow 
the fund to reasonably estimate whether it has net redemptions and the 
amount of net redemptions. This investor flow information may consist 
of individual, aggregated, or netted orders, and may include reasonable 
estimates where necessary.
    (B) Specify the process for determining the swing factor, in 
accordance with paragraph (c)(2)(iii) of this section.
    (iii) In determining the swing factor, the swing pricing 
administrator must make good faith estimates, supported by data, of the 
costs the fund would incur if it sold a pro rata amount of each 
security in its portfolio to satisfy the amount of net redemptions for 
the pricing period.
    (A) If the fund has net redemptions for the pricing period, the 
good faith estimates must include, for each security in the fund's 
portfolio:
    (1) Spread costs, such that the fund is valuing each security at 
its bid price;
    (2) Brokerage commissions, custody fees, and any other charges, 
fees, and taxes associated with portfolio security sales; and
    (B) If the amount of the fund's net redemptions for the pricing 
period exceeds the market impact threshold, the good faith estimates 
also must include, for each security in the fund's portfolio, market 
impacts, which a fund must determine by:
    (1) Establishing a market impact factor for each security, which is 
an estimate of the percentage change 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; and
    (2) Multiplying the market impact factor for each security 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.
    (C) The 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.
    (iv) The fund's board of directors, including a majority of 
directors who are not interested persons of the fund must:
    (A) Approve the fund's swing pricing policies and procedures;
    (B) Designate the swing pricing administrator. The administration 
of swing pricing must be reasonably segregated from portfolio 
management of the fund and may not include portfolio managers;
    (C) Review, no less frequently than annually, a written report 
prepared by

[[Page 7335]]

the swing pricing administrator that describes:
    (1) Its review of the adequacy of the fund's swing pricing policies 
and procedures and the effectiveness of their implementation, including 
their effectiveness at eliminating or reducing any liquidity costs 
associated with satisfying shareholder redemptions;
    (2) Any material changes to the fund's swing pricing policies and 
procedures since the date of the last report; and
    (3) Its review and assessment of the fund's swing factors and 
market impact threshold, considering the requirements of paragraphs 
(c)(2)(ii)(B) and (c)(2)(iii) of this section, 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.
    (v) Any fund (a ``feeder fund'') that invests, pursuant to section 
12(d)(1)(E) of the Act (15 U.S.C. 80a-12(d)(1)(E), in another fund (a 
``master fund'') may not use swing pricing to adjust the feeder fund's 
net asset value per share; however, a master fund subject to this 
paragraph (c)(2) must use swing pricing to adjust the master fund's net 
asset value per share, pursuant to the requirements in this paragraph 
(c)(2).
    (vi) For purposes of this paragraph (c)(2):
    (A) Investor flow information means information about the fund 
investors' purchase and redemption activity for the pricing period.
    (B) Market impact threshold means an amount of net redemptions for 
a pricing period that equals the value of four percent 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.
    (C) Pricing period means the period of time an order to purchase or 
sell securities issued by the fund must be received to otherwise be 
priced at a given current net asset value under Sec.  270.22c-1, 
notwithstanding any adjustment to that price that paragraph (c)(2) of 
this section may require.
    (D) Swing factor means the amount, expressed as a percentage of the 
fund's net asset value and determined pursuant to the fund's swing 
pricing policies and procedures, by which a fund adjusts its net asset 
value per share.
    (E) Swing pricing administrator means the fund's investment 
adviser, officer, or officers responsible for administering the swing 
pricing policies and procedures. The swing pricing administrator may 
consist of a group of persons.
    (3) Prohibited activities. A money market fund may not reduce the 
number of its shares outstanding to seek to maintain a stable net asset 
value per share or stable price per share.
    (d) * * *
    (1) * * *
    (i) * * *
    (ii) Maintain a dollar-weighted average portfolio maturity 
(``WAM'') that exceeds 60 calendar days, with the dollar-weighted 
average based on the percentage of each security's market value in the 
portfolio; or
    (iii) Maintain a dollar-weighted average portfolio maturity that 
exceeds 120 calendar days, determined without reference to the 
exceptions in paragraph (i) of this section regarding interest rate 
readjustments (``WAL'') and with the dollar-weighted average based on 
the percentage of each security's market value in the portfolio.
* * * * *
    (4) * * *
    (ii) Minimum daily liquidity requirement. The money market fund may 
not acquire any security other than a daily liquid asset if, 
immediately after the acquisition, the fund would have invested less 
than twenty-five percent of its total assets in daily liquid assets. 
This provision does not apply to tax exempt funds.
    (iii) Minimum weekly liquidity requirement. The money market fund 
may not acquire any security other than a weekly liquid asset if, 
immediately after the acquisition, the fund would have invested less 
than fifty percent of its total assets in weekly liquid assets.
* * * * *
    (f) * * *
    (4) Notice to the board of directors.
    (i) The money market fund must notify its board of directors within 
one business day following the occurrence of:
    (A) The money market fund investing less than twelve and a half 
percent of its total assets in daily liquid assets; or
    (B) The money market fund investing less than twenty-five percent 
of its total assets in weekly liquid assets.
    (ii) Following an event described in paragraphs (f)(4)(i) or (ii) 
of this section, the money market fund must provide its board of 
directors with a brief description of the facts and circumstances 
leading to such event within four business days after occurrence of the 
event.
    (g) * * *
    (8) * * *
    (i) General. The periodic stress testing, at such intervals as the 
board of directors determines appropriate and reasonable in light of 
current market conditions, of the money market fund's ability to 
maintain sufficient minimum liquidity, and the fund's ability to 
minimize principal volatility (and, in the case of a money market fund 
using the amortized cost method of valuation or penny rounding method 
of pricing as provided in paragraph (c)(1) of this section, the fund's 
ability to maintain the stable price per share established by the board 
of directors for the purpose of distribution, redemption and 
repurchase), based upon specified hypothetical events that include, but 
are not limited to:
* * * * *
    (ii) * * *
    (A) The date(s) on which the testing was performed and an 
assessment of the money market fund's ability to maintain sufficient 
minimum liquidity and to minimize principal volatility (and, in the 
case of a money market fund using the amortized cost method of 
valuation or penny rounding method of pricing as provided in paragraph 
(c)(1) of this section to maintain the stable price per share 
established by the board of directors); and
* * * * *
    (h) * * *
* * * * *
    (8) Reports. For a period of not less than six years (the first two 
years in an easily accessible place), written copies of the swing 
pricing reports required under paragraph (c)(2)(iv)(C) and the stress 
testing reports required under paragraph (g)(8)(ii) of this section 
must be maintained and preserved.
* * * * *
    (10) Website disclosure of portfolio holdings and other fund 
information. The money market fund must post prominently on its website 
the following information:
    (i) * * *
    (B) * * *
    (2) Category of investment (indicate the category that identifies 
the instrument from among the following: U.S. Treasury Debt; U.S. 
Government Agency Debt, if categorized as coupon-paying notes; U.S. 
Government Agency Debt, if categorized as no-coupon discount notes; 
Non-U.S. Sovereign, Sub-Sovereign and Supra-National debt; Certificate 
of Deposit; Non-Negotiable Time Deposit; Variable Rate Demand Note; 
Other Municipal Security; Asset Backed Commercial Paper; Other Asset 
Backed Securities; U.S. Treasury Repurchase Agreement, if 
collateralized only by U.S. Treasuries (including Strips) and cash; 
U.S. Government Agency Repurchase Agreement, collateralized only by 
U.S. Government Agency securities, U.S. Treasuries, and

[[Page 7336]]

cash; Other Repurchase Agreement, if any collateral falls outside 
Treasury, Government Agency and cash; Insurance Company Funding 
Agreement; Investment Company; Financial Company Commercial Paper; Non-
Financial Company Commercial Paper; and Other Instrument. If Other 
Instrument, include a brief description);
* * * * *
    (iii) A schedule, chart, graph, or other depiction showing the 
money market fund's net asset value per share (which the fund must 
calculate based on current market factors before applying the amortized 
cost or penny-rounding method, if used, and which must incorporate the 
application of a swing factor under paragraph (c)(2) of this section, 
if applied), rounded to the fourth decimal place in the case of funds 
with a $1.0000 share price or an equivalent level of accuracy for funds 
with a different share price (e.g., $10.000 per share), as of the end 
of each business day during the preceding six months, which must be 
updated each business day as of the end of the preceding business day.
    (iv) A link to a website of the Securities and Exchange Commission 
where a user may obtain the most recent 12 months of publicly available 
information filed by the money market fund pursuant to Sec.  270.30b1-
7.
    (v) For a period of not less than one year, beginning no later than 
the same business day on which the money market fund files an initial 
report on Form N-CR (Sec.  274.222 of this chapter) in response to the 
occurrence of any event specified in Part C of Form N-CR, the same 
information that the money market fund is required to report to the 
Commission on Part C (Items C.1, C.2, C.3, C.4, C.5, C.6, and C.7) of 
Form N-CR concerning such event, along with the following statement: 
``The Fund was required to disclose additional information about this 
event on Form N-CR and to file this form with the Securities and 
Exchange Commission. Any Form N-CR filing submitted by the Fund is 
available on the EDGAR Database on the Securities and Exchange 
Commission's internet site at http://www.sec.gov.''
    (11) Processing of transactions.
    (i) A government money market fund and a retail money market fund 
(or its transfer agent) must have the capacity to redeem and sell 
securities issued by the fund at a price based on the current net asset 
value per share pursuant to Sec.  270.22c-1. Such capacity must include 
the ability to redeem and sell securities at prices that do not 
correspond to a stable price per share.
    (ii) With respect to each financial intermediary that submits 
orders, itself or through its agent, to purchase or redeem shares 
directly to the government money market fund or retail money market 
fund, its principal underwriter or transfer agent, or to a registered 
clearing agency, the fund (or on the fund's behalf, the principal 
underwriter or transfer agent) must either:
    (A) Determine that the financial intermediary has the capacity to 
redeem and sell securities issued by the fund at a price based on the 
current net asset value per share pursuant to Sec.  270.22c-1. Such 
capacity must include prices that do not correspond to a stable price 
per share; or
    (B) Prohibit the financial intermediary from purchasing in nominee 
name on behalf of other persons, securities issued by the fund.
    (iii) A government money market fund and a retail money market fund 
must maintain and keep current records identifying the financial 
intermediaries the fund has determined have the capacity described in 
paragraph (h)(11)(ii)(A) of this section and the financial 
intermediaries for which the fund was unable to make this 
determination. A fund must preserve a written copy of such records for 
a period of not less than six years following each identification of a 
financial intermediary (the first two years in an easily accessible 
place).
    (iv) For purposes of this paragraph (h)(11), the term ``financial 
intermediary'' has the same meaning as in Sec.  270.22c-2(c)(1).
* * * * *
    (j) Delegation. The money market fund's board of directors may 
delegate to the fund's investment adviser or officers the 
responsibility to make any determination required to be made by the 
board of directors under this section other than the determinations 
required by paragraphs (c)(1) (board findings), (c)(2) (swing pricing 
requirement), (f)(1) (adverse events), (g)(1) and (2) (amortized cost 
and penny rounding procedures), and (g)(8) (stress testing procedures) 
of this section.
0
3. Amend Sec.  270.31a-2 by revising paragraph (a)(2) to read as 
follows:

Sec.  270.31a-2   Records to be preserved by registered investment 
companies, certain majority-owned subsidiaries thereof, and other 
persons having transactions with registered investment companies.

    (a) * * *
    (2) Preserve for a period not less than six years from the end of 
the fiscal year in which any transactions occurred, the first two years 
in an easily accessible place, all books and records required to be 
made pursuant to paragraphs (b)(5) through (12) of Sec.  270.31a-1 and 
all vouchers, memoranda, correspondence, checkbooks, bank statements, 
cancelled checks, cash reconciliations, cancelled stock certificates, 
and all schedules evidencing and supporting each computation of net 
asset value of the investment company shares, including schedules 
evidencing and supporting each computation of an adjustment to net 
asset value of the investment company shares based on swing pricing 
policies and procedures established and implemented pursuant to Sec.  
270.22c-1(a)(3) or Sec.  270.2a-7(c)(2), and other documents required 
to be maintained pursuant to Sec.  270.31a-1(a) and not enumerated in 
Sec.  270.31a-1(b).
* * * * *

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
4. The general authority citation for part 274 continues to read as 
follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and Pub. L. 111-203, 
sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *
0
5. Amend Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) by 
revising Instruction 2(b) to Item 3, Item 4(b)(1)(ii), Item 6(d), and 
Item 16(g).

    Note:  The text of Form N-1A does not, and these amendments will 
not, appear in the Code of Federal Regulations.

Form N-1A

* * * * *

Item 3. Risk/Return Summary: Fee Table

* * * * *

Instructions

* * * * *
    2. Shareholder Fees
    (a) * * *
    (b) ``Redemption Fee'' includes a fee charged for any redemption of 
the Fund's shares, but does not include a deferred sales charge (load) 
imposed upon redemption.
* * * * *

Item 4. Risk/Return Summary: Investments, Risks, and Performance

* * * * *
    (b) Principal Risks of Investing in the Fund.
    (1) Narrative Risk Disclosure.
    (i) * * *
    (ii)(A) If the Fund is a Money Market Fund that is not a government 
Money

[[Page 7337]]

Market Fund, as defined in Sec.  270.2a-7(a)(16), or a retail Money 
Market Fund, as defined in Sec.  270.2a-7(a)(25), include the following 
statement:
    You could lose money by investing in the Fund. Because the share 
price of the Fund will fluctuate, when you sell your shares they may be 
worth more or less than what you originally paid for them. Also, the 
Fund may adjust the price of its shares to reflect the Fund's liquidity 
costs from net sales of the Fund's shares. If you sell on a day when 
net sales occur, you may receive less for your shares than the value of 
the fund's net assets that day. An investment in the Fund is not a bank 
account and is not insured or guaranteed by the Federal Deposit 
Insurance Corporation or any other government agency. The Fund's 
sponsor is not required to reimburse the fund for losses, and you 
should not expect that the sponsor will provide financial support to 
the Fund at any time, including during periods of market stress.
    (B) If the Fund is a Money Market Fund that is a government Money 
Market Fund, as defined in Sec.  270.2a-7(a)(16), or a retail Money 
Market Fund, as defined in Sec.  270.2a-7(a)(25), include the following 
statement:
    You could lose money by investing in the Fund. Although the Fund 
seeks to preserve the value of your investment at $1.00 per share, it 
cannot guarantee it will do so, particularly during periods of market 
stress. An investment in the Fund is not a bank account and is not 
insured or guaranteed by the Federal Deposit Insurance Corporation or 
any other government agency. The Fund's sponsor is not required to 
reimburse the fund for losses, and you should not expect that the 
sponsor will provide financial support to the Fund at any time, 
including during periods of market stress.
    Instruction. If an affiliated person, promoter, or principal 
underwriter of the Fund, or an affiliated person of such a person, has 
contractually committed to provide financial support to the Fund, and 
the term of the agreement will extend for at least one year following 
the effective date of the Fund's registration statement, the statement 
specified in Item 4(b)(1)(ii)(A) or Item 4(b)(1)(ii)(B) may omit the 
last sentence (``The Fund's sponsor has no legal obligation to provide 
financial support to the Fund, and you should not expect that the 
sponsor will provide financial support to the Fund at any time, 
including during periods of market stress.''). For purposes of this 
Instruction, the term ``financial support'' includes any capital 
contribution, purchase of a security from the Fund in reliance on Sec.  
270.17a-9, purchase of any defaulted or devalued security at par, 
execution of letter of credit or letter of indemnity, capital support 
agreement (whether or not the Fund ultimately received support), 
performance guarantee, or any other similar action reasonably intended 
to increase or stabilize the value or liquidity of the fund's 
portfolio; however, the term ``financial support'' excludes any routine 
waiver of fees or reimbursement of fund expenses, routine inter-fund 
lending, routine inter-fund purchases of fund shares, or any action 
that would qualify as financial support as defined above, that the 
board of directors has otherwise determined not to be reasonably 
intended to increase or stabilize the value or liquidity of the fund's 
portfolio.
* * * * *

Item 6. Purchase and Sale of Fund Shares

* * * * *
    (d) If the Fund uses swing pricing, explain the Fund's use of swing 
pricing; including what swing pricing is, the circumstances under which 
the Fund will use it, and the effects of swing pricing on the Fund and 
investors, and provide the upper limit the Fund has set on the swing 
factor (except a Money Market Fund that uses swing pricing does not 
need to disclose a swing factor upper limit). With respect to any 
portion of a Fund's assets that is invested in one or more open-end 
management investment companies that are registered under the 
Investment Company Act, the Fund shall include a statement that the 
Fund's net asset value is calculated based upon the net asset values of 
the registered open-end management companies in which the Fund invests, 
and, if applicable, state that the prospectuses for those companies 
explain the circumstances under which they will use swing pricing and 
the effects of using swing pricing.
* * * * *

Item 16. Description of the Fund and Its Investments and Risks

* * * * *
    (g) Money Market Fund Material Events. If the Fund is a Money 
Market Fund, disclose, as applicable, any occasion during the last 10 
years on which an affiliated person, promoter, or principal underwriter 
of the Fund, or an affiliated person of such a person, provided any 
form of financial support to the Fund, including a description of the 
nature of support, person providing support, brief description of the 
relationship between the person providing support and the Fund, date 
support provided, amount of support, security supported (if 
applicable), and the value of security supported on date support was 
initiated (if applicable).

Instructions

    1. * * *
    2. If during the last 10 years, the Fund has participated in one or 
more mergers with another investment company (a ``merging investment 
company''), provide the information required by Item 16(g) with respect 
to any merging investment company as well as with respect to the Fund; 
for purposes of this Instruction, the term ``merger'' means a merger, 
consolidation, or purchase or sale of substantially all of the assets 
between the Fund and a merging investment company. If the person or 
entity that previously provided financial support to a merging 
investment company is not currently an affiliated person, promoter, or 
principal underwriter of the Fund, the Fund need not provide the 
information required by Item 16(g) with respect to that merging 
investment company.
    3. The disclosure required by Item 16(g) should incorporate, as 
appropriate, any information that the Fund is required to report to the 
Commission on Items C.1, C.2, C.3, C.4, C.5, C.6, and C.7 of Form N-CR 
[17 CFR 274.222].
    4. The disclosure required by Item 16(g) should conclude with the 
following statement: ``The Fund was required to disclose additional 
information about this event [or ``these events,'' as appropriate] on 
Form N-CR and to file this form with the Securities and Exchange 
Commission. Any Form N-CR filing submitted by the Fund is available on 
the EDGAR Database on the Securities and Exchange Commission's internet 
site at http://www.sec.gov.''
* * * * *
0
6. Form N-MFP (referenced in Sec.  274.201) is revised to read as 
follows:

    Note:  The text of Form N-MFP does not, and these amendments 
will not, appear in the Code of Federal Regulations.

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BILLING CODE 8011-01-C

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form N-MFP

Monthly Schedule of Portfolio Holdings of Money Market Funds

    Form N-MFP is to be used by registered open-end management 
investment companies, or series thereof, that are regulated as money 
market funds pursuant to rule 2a-7 under the Investment Company Act of 
1940 (``Act'') (17 CFR 270.2a-7) (``money market funds''), to file 
reports with the Commission pursuant to rule 30b1-7 under the Act (17 
CFR 270.30b1-7). The Commission may use the information provided on 
Form N-MFP in its regulatory, disclosure review, inspection, and 
policymaking roles.

General Instructions

A. Rule as To Use of Form N-MFP

    Form N-MFP is the public reporting form that is to be used for 
monthly reports of money market funds required by section 30(b) of the 
Act and rule 30b1-7 under the Act (17 CFR 270.30b1-7). A money market 
fund must report information about the fund and its portfolio holdings 
as of the last business day or any subsequent calendar day of the 
preceding month. The Form N-MFP must be filed with the Commission no 
later than the fifth business day of each month, but may be filed any 
time beginning on the first business day of the month. Each money 
market fund, or series of a money market fund, is required to file a 
separate form. If the money market fund does not have any classes, the 
fund must provide the information required by Part B for the series. A 
money market fund is not required to respond to an item that is wholly 
inapplicable. If an item requests information that is not

[[Page 7355]]

applicable (for example, a company does not have an LEI), respond N/A.
    A money market fund may file an amendment to a previously filed 
Form N-MFP at any time, including an amendment to correct a mistake or 
error in a previously filed form. A fund that files an amendment to a 
previously filed form must provide information in response to all items 
of Form N-MFP, regardless of why the amendment is filed.

B. Application of General Rules and Regulations

    The General Rules and Regulations under the Act contain certain 
general requirements that are applicable to reporting on any form under 
the Act. These general requirements should be carefully read and 
observed in the preparation and filing of reports on this form, except 
that any provision in the form or in these instructions shall be 
controlling.

C. Filing of Form N-MFP

    A money market fund must file Form N-MFP in accordance with rule 
232.13 of Regulation S-T. Form N-MFP must be filed electronically using 
the Commission's EDGAR system.

D. Paperwork Reduction Act Information

    A registrant is not required to respond to the collection of 
information contained in Form N-MFP unless the Form displays a 
currently valid Office of Management and Budget (``OMB'') control 
number. Please direct comments concerning the accuracy of the 
information collection burden estimate and any suggestions for reducing 
the burden to the Secretary, Securities and Exchange Commission, 100 F 
Street NE, Washington, DC 20549-1090.
    The OMB has reviewed this collection of information under the 
clearance requirements of 44 U.S.C. 3507.

E. Definitions

    References to sections and rules in this Form N-MFP are to the 
Investment Company Act of 1940 [15 U.S.C. 80a] (the ``Investment 
Company Act''), unless otherwise indicated. Terms used in this Form N-
MFP have the same meaning as in the Investment Company Act or related 
rules, unless otherwise indicated.
    As used in this Form N-MFP, the terms set out below have the 
following meanings:
    ``Cash'' means demand deposits in depository institutions and cash 
holdings in custodial accounts.
    ``Class'' means a class of shares issued by a Multiple Class Fund 
that represents interests in the same portfolio of securities under 
rule 18f-3 [17 CFR 270.18f-3] or under an order exempting the Multiple 
Class Fund from sections 18(f), 18(g), and 18(i) [15 U.S.C. 80a-18(f), 
18(g), and 18(i)].
    ``Fund'' means the Registrant or a separate Series of the 
Registrant. When an item of Form N-MFP specifically applies to a 
Registrant or a Series, those terms will be used.
    ``Government Money Market Fund'' means a money market fund as 
defined in 17 CFR 270.2a-7(a)(14).
    ``LEI'' means, with respect to any company, the ``legal entity 
identifier'' assigned by or on behalf of an internationally recognized 
standards setting body and required for reporting purposes by the U.S. 
Department of the Treasury's Office of Financial Research or a 
financial regulator.
    ``Master-Feeder Fund'' means a two-tiered arrangement in which one 
or more Funds (or registered or unregistered pooled investment 
vehicles) (each a ``Feeder Fund'') holds shares of a single Fund (the 
``Master Fund'') in accordance with section 12(d)(1)(E) [15 U.S.C. 80a-
12(d)(1)(E)].
    ``Money Market Fund'' means a registered open-end management 
investment company, or series thereof, that is regulated as a money 
market fund pursuant to rule 2a-7 (17 CFR 270.2a-7) under the 
Investment Company Act of 1940.
    ``Retail Money Market Fund'' means a money market fund as defined 
in 17 CFR 270.2a-7(a)(21).
    ``RSSD ID'' means the identifier assigned by the National 
Information Center of the Board of Governors of the Federal Reserve 
System, if any.
    ``Securities Act'' means the Securities Act of 1933 [15 U.S.C. 77a-
aa].
    ``Series'' means shares offered by a Registrant that represent 
undivided interests in a portfolio of investments and that are 
preferred over all other series of shares for assets specifically 
allocated to that series in accordance with rule 18f-2(a) [17 CFR 
270.18f-2(a)].
    ``Swing Factor'' means a swing factor as defined in 17 CFR 270.2a-
70(c)(2)(vi)(D).
    ``Value'' has the meaning de[filig]ned in section 2(a)(41) of the 
Act (15 U.S.C. 80a-2(a)(41)).
0
7. Amend Form N-CR (referenced in Sec.  274.222) by:
0
a. Revising the General Instructions in Sections A, C, D, and F and 
revising Parts A and C;
0
b. Removing Parts E, F, and G and replacing them with new Part E; and
0
c. Redesignating Part H to Part F.
    The revisions read as follows:

    Note:  The text of Form N-CR does not, and these amendments will 
not, appear in the Code of Federal Regulations.

Form N-CR

* * * * *

General Instructions

A. Rule as To Use of Form N-CR

    Form N-CR is the public reporting form that is to be used for 
current reports of money market funds required by section 30(b) of the 
Act and rule 30b1-8 under the Act. A money market fund must file a 
report on Form N-CR upon the occurrence of any one or more of the 
events specified in Parts B-F of this form. Unless otherwise specified, 
a report is to be filed within one business day after occurrence of the 
event. A report will be made public immediately upon filing. If the 
event occurs on a Saturday, Sunday, or holiday on which the Commission 
is not open for business, then the report is to be filed on the first 
business day thereafter.
* * * * *

C. Information To Be Included in Report Filed on Form N-CR

    Upon the occurrence of any one or more of the events specified in 
Parts B-F of Form N-CR, a money market fund must file a report on Form 
N-CR that includes information in response to each of the items in Part 
A of the form, as well as each of the items in the applicable Parts B-F 
of the form.

D. Filing of Form N-CR

    A money market fund must file Form N-CR in accordance with rule 
232.13 of Regulation S-T. Reports on Form N-CR must be filed 
electronically using the Commission's Electronic Data Gathering, 
Analysis, and Retrieval (``EDGAR'') system in accordance with 
Regulation S-T. Consult the EDGAR Filer Manual and Appendices for EDGAR 
filing instructions.
* * * * *

F. Definitions

    References to sections and rules in this Form N-CR are to the 
Investment Company Act (15 U.S.C. 80a), unless otherwise indicated. 
Terms used in this Form N-CR have the same meaning as in the Investment 
Company Act or rule 2a-7 under the Investment Company Act, unless 
otherwise indicated.
    In addition, the following definitions apply:
    ``Fund'' means the registrant or a separate series of the 
registrant.
    ``LEI'' means, with respect to any company, the ``legal entity 
identifier'' as assigned by a utility endorsed by the

[[Page 7356]]

Global LEI Regulatory Oversight Committee or accredited by the Global 
LEI Foundation.
    ``Registrant'' means the investment company filing this report or 
on whose behalf the report is filed.
    ``Series'' means shared offered by a Registrant that represent 
undivided interests in a portfolio of investments and that are 
preferred over all other series of shares for assets specifically 
allocated to that series in accordance with rule 18f-2(a) (17 CFR 
270.18f-2(a)).
* * * * *

Part A: General Information

Item A.1 Report for [mm/dd/yyyy].
Item A.2 Name of registrant.
Item A.3 CIK Number of registrant.
Item A.4 LEI of registrant.
Item A.5 Name of series.
Item A.6 EDGAR Series Identifier.
Item A.7 LEI of series.
Item A.8 Securities Act File Number.
Item A.9 Provide the name, email address, and telephone number of the 
person authorized to receive information and respond to questions about 
this Form N-CR.
* * * * *

Part C: Provision of Financial Support to Fund

    If an affiliated person, promoter, or principal underwriter of the 
fund, or an affiliated person of such a person, provides any form of 
financial support to the fund (including any (i) capital contribution, 
(ii) purchase of a security from the fund in reliance on Sec.  270.17a-
9, (iii) purchase of any defaulted or devalued security at par, (iv) 
execution of letter of credit or letter of indemnity, (v) capital 
support agreement (whether or not the fund ultimately received 
support), (vi) performance guarantee, or (vii) any other similar action 
reasonably intended to increase or stabilize the value or liquidity of 
the fund's portfolio; excluding, however, any (i) routine waiver of 
fees or reimbursement of fund expenses, (ii) routine inter-fund lending 
(iii) routine inter-fund purchases of fund shares, or (iv) any action 
that would qualify as financial support as defined above, that the 
board of directors has otherwise determined not to be reasonably 
intended to increase or stabilize the value or liquidity of the fund's 
portfolio), disclose the following information:

Item C.1 Description of nature of support.
Item C.2 Person providing support.
Item C.3 Brief description of relationship between the person providing 
support and the fund.
Item C.4 Date support provided.
Item C.5 Amount of support.
Item C.6 Security supported (if applicable). Disclose the name of the 
issuer, the title of the issue (including coupon or yield, if 
applicable), at least two identifiers, if available (e.g., CUSIP, ISIN, 
CIK, LEI), and the date the fund acquired the security.
Item C.7 Value of security supported on date support was initiated (if 
applicable).
Item C.8 Brief description of reason for support.
Item C.9 Term of support.
Item C.10 Brief description of any contractual restrictions relating to 
support.

    Instruction. If an affiliated person, promoter, or principal 
underwriter of the fund, or an affiliated person of such a person, 
purchases a security from the fund in reliance on Sec.  270.17a-9, the 
fund must provide the purchase price of the security in responding to 
Item C.6.
    A report responding to Items C.1 through C.7 is to be filed within 
one business day after occurrence of an event contemplated in this Part 
C. An amended report responding to Items C.8 through C.10 is to be 
filed within four business days after occurrence of an event 
contemplated in this Part C.
* * * * *

Part E: Liquidity Threshold Events

    If a fund has invested less than: (i) 25% of its total assets in 
weekly liquid assets or (ii) 12.5% of its total assets in daily liquid 
assets, disclose the following information:

Item E.1 Initial date on which the fund invested less than 25% of its 
total assets in weekly liquid assets, if applicable.
Item E.2 Initial date on which the fund invested less than 12.5% of its 
total assets in daily liquid assets, if applicable.
Item E.3 Percentage of the fund's total assets invested in both weekly 
liquid assets and daily liquid assets as of any dates reported in Items 
E.1 or E.2.
Item E.4 Brief description of the facts and circumstances leading to 
the fund investing less than 25% of its total assets in weekly liquid 
assets or less than 12.5% of its total assets in daily liquid assets, 
as applicable.

    Instruction. A report responding to Items E.1, E.2, and E.3 is to 
be filed within one business day after occurrence of an event 
contemplated in this Part E. An amended report responding to Item E.4 
is to be filed within four business days after occurrence of an event 
contemplated in this Part E.

Part F: Optional Disclosure

    If a fund chooses, at its option, to disclose any other events or 
information not otherwise required by this form, it may do so under 
this Item F.1.

Item F.1 Optional disclosure.

    Instruction. Item F.1 is intended to provide a fund with additional 
flexibility, if it so chooses, to disclose any other events or 
information not otherwise required by this form, or to supplement or 
clarify any of the disclosures required elsewhere in this form. Part F 
does not impose on funds any affirmative obligation. A fund may file a 
report on Form N-CR responding to Part F at any time.
* * * * *

    By the Commission.

    Dated: December 15, 2021.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021-27532 Filed 2-7-22; 8:45 am]
 BILLING CODE 8011-01-P