FINRA ALLOWS QUICK CHANGES IN SWEEP VEHICLES WHEN FUNDS SUDDENLY CLOSE
FINRA issued an Interpretive Notice allowing firms to switch customer’s money market sweep funds without providing 30 days notice in situations where the current sweep fund suddenly closes. Although Rule 2510(b) requires written authorization to exercise investment discretion, an exception to the Rule allows a firm to change a money market sweep fund using negative response letters. To effect a change based on “negative consent,” a firm must observe several disclosure conditions and provide 30 days’ written notice. As a result of a shortage of Treasury securities, several money market funds have suddenly closed or limited purchases. In these situations, FINRA will allow a firm to forego the 30-day notice requirement so long as a firm uses its best efforts to select an “appropriate” replacement, promptly notifies customers, and provides customers the ability to opt out. FINRA cautioned members that this waiver is very limited and that any deviation from the factual scenario or conditions will give rise to heightened scrutiny. FINRA also stressed that firms cannot use this exception to move from money market mutual funds to bank DDA sweep accounts.
OUR TAKE: The rule allowing changes in sweep vehicles is fairly limited because of prior abuses where firms have swept to affiliated DDA accounts. However, FINRA likely never envisioned a situation where funds would suddenly close because they couldn’t buy Treasuries. This IM gives some relief but it is very limited to the facts described.