[Federal Register Volume 87, Number 26 (Tuesday, February 8, 2022)]
[Proposed Rules]
[Pages 7248-7356]
[FR Doc No: 2021-27532]

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

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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<PHONE_NUMBER>,
Investment Company Regulation Office; Keri Riemer, Senior Counsel;
Penelope Saltzman, Senior Special Counsel; or Thoreau Bartmann,
Assistant Director, Chief Counsel's Office,<PHONE_NUMBER>; 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

    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

``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

[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.

[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

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.
---------------------------------------------------------------------------

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%.

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

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

    \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

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.

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

    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\

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\

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

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

apply a fee and in what amount generally should be designed to result
in timely application of a fee to address dilution.
---------------------------------------------------------------------------

    \100\ See 17 CFR 270.22c-2 (rule 22c-2 under the Investment
Company Act) (providing that an open-end fund may impose a
redemption fee, not to exceed 2% of the value of the shares
redeemed, upon the determination by the fund's board of directors
that such fee is ``necessary or appropriate to recoup for the fund
the costs it may incur as a result of those redemptions or to
otherwise eliminate or reduce so far as practicable any dilution of
the value of the outstanding securities issued by the fund''). We
anticipate that retail prime and tax-exempt money market funds would
be more likely to rely on rule 22c-2 to impose redemption fees than
institutional prime and tax-exempt funds, as the institutional funds
would be subject to a proposed swing pricing requirement to address
dilution.
    \101\ See Mutual Fund Redemption Fees, Investment Company Act
Release No. 26782 (Mar. 11, 2005) [70 FR 13328 (Mar. 18, 2005)];
Investment Company Swing Pricing, Investment Company Release No.
32316 (Oct. 13, 2016) [81 FR 82084 (Nov. 18, 2016)] (``Swing Pricing
Adopting Release''), at paragraph accompanying n.26.
    \102\ See 17 CFR 270.22c-2(b).
---------------------------------------------------------------------------

    We request comment on our proposal to no longer permit or require
money market funds to impose liquidity fees under rule 2a-7, including
on the following:
    6. Should we remove the liquidity fee provisions from rule 2a-7, as
proposed? To what extent did the possibility of liquidity fees motivate
investors' redemption decisions in March 2020? If liquidity fees are
less of a concern for investors than redemption gates, would liquidity
fee provisions, on their own, be less likely to contribute to
preemptive redemptions in future stress periods? If so, are there
advantages to retaining the current liquidity fee provisions and their
connection to weekly liquid asset thresholds? If we retain the
connection between liquidity fees and liquidity thresholds, what
liquidity threshold should we use to permit a board to impose a
liquidity fee (e.g., the current 30% weekly liquid asset threshold or
10% daily liquid asset threshold, the 50% weekly liquid asset threshold
or 25% daily liquid asset threshold we propose to use for purposes of
funds' minimum liquidity requirements, or a lower threshold, such as
10% or 15% weekly liquid assets or 5% daily liquid assets)? How would
changes to the liquidity threshold that allows a fund board to consider
liquidity fees affect investor and fund behavior?
    7. Rather than remove the current liquidity fee provisions, should
we modify the circumstances in which a money market fund may impose
liquidity fees? Should we permit a fund's board to impose liquidity
fees when it determines that fees are in the best interests of the
fund? Would a board use this tool in practice? What would be the
impediments (if any) of the board making this determination? Would the
board be able to act quickly enough to impose a fee so that redeeming
investors bear the costs associated with their redemptions and do not
have a first-mover advantage? Are there other ways we could achieve
these goals through a liquidity fee framework? For example, would it be
effective to require a fund to adopt board-approved policies and
procedures that identify the circumstances in which the fund would
impose a liquidity fee and how the fund would calculate the amount of
the fee, without requiring in-the-moment board decisions or action? If
so, what factors should those policies and procedures consider for
purposes of when to impose a liquidity fee (e.g., size of redemptions,
liquidity of the fund's portfolio, market conditions, and transaction
costs)? As another alternative, should we require a fund to adopt
board-approved policies and procedures that result in a fund
determining its liquidity costs each day it has net redemptions and
applying those costs through a fee? Under either of these approaches,
how should funds calculate the amount of a liquidity fee? Should this
calculation method be the same as or similar to the calculation of a
swing factor for purposes of our proposed swing pricing requirement or
the Commission's current swing pricing rule applicable to other mutual
funds? \103\ Should the calculation account for factors that boards may
consider in determining the level of a liquidity fee under the current
rule, such as changes in spreads for portfolio securities (whether
based on actual sales, dealer quotes, pricing vendor mark-to-model or
matrix pricing, or otherwise); the maturity of the fund's portfolio
securities; or changes in the liquidity profile of the fund in response
to redemptions and expectations regarding that profile in the immediate
future? \104\ Should the liquidity fee take into account the market
impact of selling the fund's securities to meet redemptions? \105\
Should the liquidity fee be based on an assumption that the fund meets
redemptions with its most liquid securities, a pro rata amount of each
security in its portfolio, or only the securities the fund intends to
use to meet redemptions? Should the liquidity fee be a set amount, such
as 0.5%, 1%, or 2% of the value of the shares redeemed? Instead of a
uniform fee amount, should the rule establish a default fee that funds
could adjust upward or downward, as appropriate?
---------------------------------------------------------------------------

    \103\ See infra Section II.B.1 (discussing calculation of a
swing factor under our proposal); 17 CFR 270.22c-1(a)(3)(i)(C)
(describing calculation of a swing factor under the Commission's
current swing pricing rule applicable to non-money market funds).
    \104\ See 2014 Adopting Release, supra footnote 12, at paragraph
accompanying n.303.
    \105\ Market impact costs are costs incurred when the price of a
security changes as a result of the effort to purchase or sell the
security. Market impact costs reflect price concessions (amounts
added to the purchase price or subtracted from the selling price)
that are required to find the opposite side of the trade and
complete the transaction.
---------------------------------------------------------------------------

    8. If we maintain a liquidity fee provision in the rule, should it
apply only to institutional prime and tax-exempt funds, or should
retail or government funds also be subject to the provision? What are
the key distinguishing characteristics of the funds that would lead to
differing approaches?
    9. If we allowed or required funds to impose liquidity fees, are
there other changes we should make to the current framework? For
example, should we continue to limit the size of the liquidity fee to
no more than 2% of the value of the shares redeemed? Are there
circumstances in which the liquidity costs associated with meeting
redemptions may exceed 2% of the value of the shares redeemed, such
that increasing or removing the limit would better mitigate dilution?
    10. If we adopted a modified liquidity fee framework that required
funds to apply liquidity fees more frequently than is contemplated by
the current rule, are there operational issues we would need to
consider? For example, are intermediaries able to apply liquidity fees
on a dynamic basis (e.g., where liquidity fees vary in size and may
apply more frequently than during periods of stress)?
    11. Should we require money market funds to implement practices to
mitigate investor dilution but permit money market funds to choose
between imposing liquidity fees or imposing the proposed swing pricing
approach as the method for doing so? Should we allow money market funds
to choose other unspecified options for mitigating investor dilution?
What are the advantages and disadvantages of these approaches? What
factors would influence a fund's decision of whether to implement swing
pricing, a liquidity fee framework, or another method of mitigating
dilution?
    12. Do money market funds view rule 22c-2 as a viable way to
implement liquidity fees, if the board approves the use of such fees?
Should we modify any of the requirements of rule 22c-2 or Form N-1A
that relate to redemption fees for these funds? For example, should we
specify that, like a liquidity fee under rule 2a-7, a money market fund
redemption fee under rule 22c-2 does not need to be disclosed in the
prospectus fee table? Would retail prime or retail tax-exempt funds opt
to rely on rule 22c-2? Would institutional prime or institutional tax-
exempt funds ever use rule 22c-2 in addition to the proposed swing
pricing requirement and, if so, why?

B. Proposed Swing Pricing Requirement

1. Purpose and Terms of the Proposed Requirement
    We are proposing a swing pricing requirement specifically for
institutional prime and institutional tax-exempt money market funds
that would apply when the fund experiences net

redemptions.\106\ This requirement is designed to ensure that the costs
stemming from net redemptions are fairly allocated and do not give rise
to a first-mover advantage or dilution under either normal or stressed
market conditions.\107\ The swing pricing requirement would complement
our proposal to require funds to hold additional liquidity by requiring
redeeming investors to pay the cost of depleting a fund's liquidity.
Requiring swing pricing also would address a fund's potential
reluctance to impose a voluntary liquidity fee even when doing so might
be beneficial to the fund.
---------------------------------------------------------------------------

    \106\ We refer to money market funds that are not government
money market funds or retail money market funds collectively as
``institutional funds'' when discussing the proposed swing pricing
requirement.
    \107\ The proposed swing pricing requirement differs in certain
respects from the swing pricing provision in rule 22c-1, which does
not apply to money market funds. We are proposing a swing pricing
requirement specifically for institutional funds in rule 2a-7,
rather than proposing amendments to rule 22c-1, because we are
focused on money market fund reform in this release. The Fall 2021
Unified Agenda notes that the Division of Investment Management is
considering recommending changes to regulatory requirements relating
to open-end funds' liquidity and dilution management. See Securities
and Exchange Commission, Fall 2021 Unified Agenda, available at
www.reginfo.gov.
---------------------------------------------------------------------------

    Swing pricing is a process of adjusting a fund's current NAV such
that the transaction price effectively passes on costs stemming from
shareholder transaction flows out of the fund to shareholders
associated with that activity.\108\ Trading activity and other changes
in portfolio holdings associated with meeting redemptions may impose
costs, including trading costs and costs of depleting a fund's daily or
weekly liquid assets. These costs, which currently are borne by the
remaining investors in the fund, can dilute the interests of non-
redeeming shareholders. This can create incentives for shareholders to
redeem quickly to avoid losses, particularly in times of market stress.
If shareholder redemptions are motivated by this first-mover advantage,
they can lead to increasing outflows, and as the level of outflows from
a fund increases, the incentive for remaining shareholders to redeem
may also increase. Regardless of whether investor redemptions are
motivated by a first-mover advantage or other factors, there can be
significant, unfair adverse consequences to remaining investors in a
fund in these circumstances, including material dilution of remaining
investors' interests in the fund. Swing pricing can reduce the
potential for dilution of investors who choose to remain in the fund.
---------------------------------------------------------------------------

    \108\ While the term swing pricing typically refers to a process
of adjusting a fund's NAV for either net redemptions or net
subscriptions, the proposed swing pricing framework for money market
funds would only apply when a fund has net redemptions.
---------------------------------------------------------------------------

    The proposed swing pricing requirement is designed to address these
concerns. Under the proposal, an institutional fund would be required
to adjust its current NAV per share by a swing factor reflecting spread
and transaction costs, as applicable, if the fund has net redemptions
for the pricing period.\109\ If the institutional fund has net
redemptions for a pricing period that exceed the ``market impact
threshold,'' which would be defined as 4% of the fund's net asset value
divided by the number of pricing periods the fund has in a business
day, or such smaller amount of net redemptions as the swing pricing
administrator determines, the swing factor would also include market
impacts, as described below.\110\ The ``pricing period'' would be
defined, in substance, to mean the period of time in which an order to
purchase or sell securities issued by the fund must be received to be
priced at the next computed NAV. This is designed to address money
market funds that compute their NAVs multiple times per day. For
example, if a fund computes a NAV as of 12:00 p.m. and 4:00 p.m., the
fund would determine if it had net redemptions for each pricing period
and, if so, apply swing pricing for the corresponding NAV
calculation.\111\ Consistent with the approach taken by the Commission
with respect to the swing pricing provision in rule 22c-1, an
institutional fund with multiple share classes must determine whether
it experienced net redemption activity across all share classes in the
aggregate, rather than determining net redemption activity on a class
by class basis.\112\
---------------------------------------------------------------------------

    \109\ See proposed rule 2a-7(c)(2)(ii)(A). The proposal would
implement the swing pricing requirement by requiring an affected
money market fund to adopt swing pricing policies and procedures,
approved by the fund's board and administered by a ``swing pricing
administrator,'' as discussed in more detail below. In addition, and
consistent with the Commission's current swing pricing rule (rule
22c-1), with respect to master-feeder funds, only the master fund
can apply swing pricing under our proposed rule. See proposed rule
2a-7(c)(2)(v).
    \110\ See proposed rule 2a-7(c)(2)(iii)(B) and proposed rule 2a-
7(c)(2)(vi)(B). See infra Section III.D.4 for a more detailed
analysis of the proposed market impact threshold and potential
alternative approaches.
    \111\ Under the proposal a fund may estimate shareholder flow
information to determine whether the fund has net redemptions for a
pricing period and to determine the amount of net redemptions,
provided the swing pricing administrator receives sufficient
investor flow information to make a reasonable estimate. Although
institutional funds generally have more timely flow information than
other kinds of open-end funds, we believe reasonable estimates are
appropriate in the absence of complete flow information.
    \112\ See Swing Pricing Adopting Release, supra footnote 102, at
paragraph accompanying n.175. If a fund were to only include the
transaction activity of a single share class, and were to swing one
share class and not another, one share class would pay expenses
incurred in the management of the fund's portfolio as a whole, which
would generally be inconsistent with rule 18f-3.
---------------------------------------------------------------------------

    A mandatory swing pricing regime for net redemptions is intended to
address funds' (or fund boards') likely reluctance to impose a
voluntary swing pricing regime or voluntary liquidity fee. For example,
while money market funds were permitted to impose liquidity fees on
redeeming investors under rule 2a-7 if a fund had less than 30% of its
assets invested in weekly liquid assets no money market fund imposed
such fees during the March 2020 market turmoil. Moreover, even if all
institutional money market funds recognized the benefits of charging
redeeming investors for liquidity costs, we believe there is a
collective action problem in which no fund would want to be the first
to adopt such an approach. We believe past experience with the existing
liquidity fee regime supports a mandatory approach to dilution
mitigation for institutional funds.
    The proposed swing pricing requirement would not apply to net
subscriptions because, for money market funds, we believe net
redemptions are more likely to contribute to dilution and other
liquidity costs than net subscriptions. Institutional funds have come
under significant stress twice in the last 13 years in the face of high
levels of redemptions--significant subscriptions into these funds have
not had similar effects. Beyond these considerations, we also recognize
that applying our proposed swing pricing requirements to institutional
fund subscriptions would require these funds to make certain
assumptions about how they invest cash from new subscriptions that
would be inconsistent with the requirements in rule 2a-7.\113\
---------------------------------------------------------------------------

    \113\ For example, an institutional fund with weekly liquid
assets below the regulatory threshold must invest only in weekly
liquid assets and could not purchase a pro rata amount of each
security in its portfolio, but our proposed swing pricing framework
would require such a fund to assume the purchase of a pro rata
amount of each portfolio holding if the framework extended to net
subscriptions.
---------------------------------------------------------------------------

    Our proposed money market fund swing pricing framework specifies
how an institutional fund would determine its swing factor, which would
differ based on the amount of net redemptions (see Figure 1, below).
The swing factor

would be determined by calculating identified types of costs the fund
would incur, as applicable, by selling a pro rata amount of each
security in its portfolio to satisfy the amount of net redemptions for
the pricing period.\114\
---------------------------------------------------------------------------

    \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\
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    \120\ See proposed rule 2a-7(c)(2)(iii)(B).
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    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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[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\
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    \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).
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    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\
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    \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.
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    We are not proposing an upper limit on a fund's swing factor. The
Commission included a 2% upper limit in the current swing pricing rule
in light of concerns that, without an upper limit, a fund's application
of swing pricing could operate as a ``de facto gate'' or place an undue
restriction on investors' ability to redeem.\129\ We believe the more
specific parameters in this proposal for determining a fund's swing
factor sufficiently mitigate these concerns. Further, if a fund were to

experience such high costs, we believe it would be appropriate for
redeeming investors to bear the costs their redemptions create for the
benefit of remaining investors. Given our experience with investor
behavior in March 2020, we also believe that requiring redeeming
investors to internalize the liquidity costs of their redemptions would
make investors consider potential redemption requests more carefully,
particularly during periods of market stress, and would prevent
remaining investors from bearing costs imposed on the fund by redeeming
investors.
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    \129\ Swing Pricing Adopting Release, supra footnote 102, at
paragraph accompanying n.254.
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    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\
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    \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.
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    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.
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    \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.
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    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\
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    \135\ See proposed rule 2a-7(h)(8).
    \136\ See 17 CFR 270.2a-7(h)(1).
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    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\