SECURITIES CORNER

The SEC has approved new rules aimed at assisting and stabilizing the money-market funds industry during periods of market stress. While previous rules were passed in 2010 and 2014, events in the recent past revealed additional vulnerabilities. During the financial crisis of 2008 and again during the 2020 coronavirus pandemic, money-market funds experienced stress requiring government intervention.  

The new rules will increase minimum liquidity requirements for money-market funds in order to provide a substantial liquidity buffer in the event of rapid redemptions by investors trying to escape a market.  Pursuant to the plan, institutional prime funds and tax-exempt money funds will be required to impose mandatory liquidity fees when a fund experiences daily net redemptions that exceed 5% of its assets.  Additionally, money-market funds' ability to temporarily suspend redemptions after crossing a certain liquidity threshold has been removed as well as “swing- pricing” which required some fund investors to bear liquidity costs on redemptions in certain circumstances.

The SEC Chair Gary Gensler views the rules as a means to deter future bailouts and protect investments. The goal is for liquidity fees to assure that redeeming investors bear the costs of their redemptions rather than remaining investors. Approval of the rules was not unanimous, and opponents are concerned that mandatory liquidity fees could backfire by having fluctuating redemption fees during times of market stress. Time will tell if the measures enacted will serve to protect and benefit investors.  

Although a federal judge in a recent split-ruling curbed the SEC’s efforts to regulate cryptocurrency and, the SEC may view this ruling as a setback, the agency maintains its enthusiasm to appeal it. 

In its longstanding attempts to exercise oversight of cryptocurrency markets, the SEC claimed that cryptocurrency constitutes a security, and thus should be subject to the SEC’s regulative authority. In the case at issue, a cryptocurrency provider (the “Company”) and its senior leaders were sued for an unlawful offer and sale of securities in violation of the Securities Act of 1933 (the “Securities Act”). Specifically, the SEC commenced the action by arguing that the Company’s native cryptocurrency token (the “Token”) was a security because it was an investment contract specifically defined as a type of security by the Securities Act. 

The Company denied that the Token constituted an investment contract because it never represented that future Tokens would be sold as a way to raise money and has not promised to deliver any profit to a Token-holder. 

The judge ruled that a Token, when sold directly to institutions, constitutes a security; however, when it is offered on cryptocurrency exchange platforms directly to the public, it should not be deemed a security. While the split-ruling allowed each side of the litigation to claim a partial victory, this decision will, likely, limit the SEC’s regulatory powers about the cryptocurrency industry by defining their scope and reach. On the other hand, this decision expands the SEC’s ability to regulate cryptocurrency that is being sold to the institutions directly.