Resilient and vibrant capital markets serve investors and issuers as well as economic growth and stability. Efforts continue to ensure investment funds, including money market and open-end investment funds, are resilient to credit and liquidity stresses.

Common investment funds include mutual funds, money market funds, index funds, exchange traded funds (ETFs), and more. Funds combine the assets of many different investors into a single investment vehicle.  Joining together can reduce the cost of investing, achieve scale, access professional management, and improve diversification. Open-end mutual funds are designed to target investments in specific sectors of the market and/or use particular investment strategies. Money market funds invest in high-quality, short-term debt and cash equivalents, such as U.S. Treasury securities.

Mutual funds are an efficient vehicle for investing and a source of capital for issuers. The first mutual fund was established in 1924 and has continued to evolve and develop to meet market needs. Mutual fund managers have a long history of effectively managing liquidity risk and ensuring that funds are resilient through market events.

Money-Market Funds

Money market funds play an important role in the orderly functioning of the short-term funding markets. Investors include individual retail investors, retirement accounts, college savings plans, health savings plans, endowments, small businesses, corporate treasurers, pension plans, state and local governments, variable annuities, insurance companies, and nonprofit organizations.

In 2023, the SEC adopted changes to Rule 2a-7, which governs the operations of U.S. money market funds. Resilience of money market funds is of paramount importance. However, imposing additional fees and operational costs on shareholders could adversely impact money market funds and the investors they serve. The SEC should closely monitor the implementation of its rule amendments and ensure that regulatory mandates enhance rather than impede the ability of money market funds  to play their important role in financial markets.

Open-End Funds

Open-end mutual funds have a long history of effectively managing liquidity risk. Isolated instances of fund failures are extremely rare and illustrate the point that funds are managed effectively. The events of March 2020 were a market-wide condition and not specific to open-end mutual funds. While open-end funds were impacted, fund sponsors and advisers diligently navigated through the choppy seas to deliver for their investors and shareholders.

In November 2022, the U.S. Securities and Exchange Commission issued a rule proposal that built on Rule 22e-4, a rule adopted only four years earlier. The existing rule and proposed amendments  sought to mandate how U.S. open-end mutual funds manage liquidity risk. One aspect of the proposal would overhaul how funds characterize the liquidity characteristics of their holdings and meet various minimums and maximums. Another aspect of the proposal was the introduction of mandatory anti-dilution measure known as “swing pricing.” The concept would require adjusting the price of fund shares and allocating transaction costs to redeeming shareholders.

This proposal would have significant adverse consequences for the millions of investors who invest in mutual funds through intermediaries or retirement plans.

The SEC has indicated that it plans to consider a re-proposal. In doing so, they should assess the costs, benefits, and potential downstream consequences to investors and other market participants of any proposed approach. The proposal could impact many entities, beginning with shareholders and extending through investment companies, fund intermediaries, recordkeepers, and others. There must be a compelling benefit to investors to warrant the significant costs and operational risks involved.