At its March 14 open meeting, the SEC approved a proposal that while still mandating funds to use the SEC’s Form N-PORT to report liquidity classifications, commonly known as “buckets”, it would, among other things, eliminate the public reporting of buckets. The vote was generally split along party lines, with Republican Commissioners Piwowar and Peirce voting for, Democratic Commissioner Stein and Independent Commissioner Jackson voting against, and Independent Chairman Clayton breaking the tie by voting with Commissioners Piwowar and Peirce. From a back-office perspective the proposal is a non-event, but the statements from each Commissioner that accompanied the vote are of great interest to the industry as a whole.
During their comments, both Commissioners Stein and Jackson talked up the importance of bucketing and both Commissioners Piwowar and Peirce called for the SEC to eliminate the buckets altogether. While all of that is old news, Chairman Clayton’s comments – that he would like to see the buckets in practice for a while before deciding if they should be continued or discontinued – and what those comments mean for the future of bucketing were both new and interesting. While I find Chairman Clayton’s approach personally appealing, and in general, good practice, I question whether the industry is nimble enough to support it. Take a couple of recent examples, 2014’s Money Market Reform (MM Reform) and the DOL’s Fiduciary Rule.
In January of this year, Republicans in the House Financial Services Committee advanced H.R. 2319, a bill that would rescind the floating NAV requirement, a controversial component of MM Reform, and once again permit a stable NAV for all types of money market funds. Back in 2013, Paul Schott Stevens, President and CEO of the ICI, represented an industry that was emphatically opposed to the floating NAV. Roughly four years later in his November 2017 statement to the House Financial Services Committee that, in part, dealt with H.R. 2319, he remarked that since some “ICI members urge that a third round of regulatory changes to money market funds is neither appropriate nor desirable”, the ICI no longer has a position on the floating NAV. The floating NAV caused massive disruption in the money market fund industry a year and a half ago, and rather than go through that all over again in reverse, the industry would rather just keep things static for a while – an object at rest tends to stay at rest.
The DOL Fiduciary Rule is also no stranger to controversial elements, and like MM Reform was heavily criticized by the industry. Yet despite those criticisms and despite having plenty of opportunities to slow play their compliance based on delays, reassessments, and most recently a legal decision that vacated the rule, many financial advisors are still moving forward. Take the case of Merrill Lynch Wealth Management. Despite all of the events mentioned earlier, up to and including the 5th Circuit’s vote to vacate the rule, Merrill has not changed its approach from the compliance policy it laid out in late 2016. Once they started going down the regulatory path, it was easier to just keep going than to turn around – an object in motion tends to stay in motion.
There are certainly differences between these two examples, and differences between these examples and the Liquidity Rule’s bucketing requirements. The MM Reform’s variable NAV created a huge shift in product offerings and AUM, a disruption that, as noted, most asset managers do not want to repeat anytime soon. And while the DOL’s Fiduciary Rule is taking a beating, state regulators are moving forward with requirements of their own, and an SEC Fiduciary Rule is almost certain in the near future. Even though some of the DOL’s Fiduciary Rule is despised, other parts have been seen as good hygiene and because of this, many financial advisors are going forward with their DOL Fiduciary Rule inspired changes. Liquidity buckets are none of these things – they will not result in major product changes, there is no complementary state regulatory action, and no one would consider buckets to be good risk management hygiene.
The one thing all three have in common is inertia. While the root cause of the inertia might be different, there is always something keeping bodies at rest at rest and bodies in motion in motion. Commissioner Peirce recognized this in her comments at the March ICI conference when she said “I have heard from some fund sponsors that they view the bucketing chapter as closed. Lots of money already has been spent, so why stop now? The would-be economist in me cringes at such logic.” Cringe worthy or not, the industry is more aircraft carrier than speedboat, and once it gets going in a certain direction it takes a lot to turn it around. By the time Chairman Clayton has evaluated bucketing in practice, the interest in changing what funds do about liquidity risk will probably be about much as the interest in stable NAVs and suitability standards. Ultimately, Chairman Clayton’s vote on March 14 is the only one that matters.