Money market fund assets have climbed to record-high levels. Elevated interest rates supported by the Fed’s monetary policy and the turmoil in regional banks earlier this year have underpinned steady inflows into the space. While lower rates could create some headwinds, history suggests it could take significant rate cuts before cash in money market funds finally peaks. For equity markets, higher yields mean a higher bar for capital to crossover back into stocks, especially with the S&P 500’s equity risk premium recently falling to over a 20-year low. However, with many investors underinvested in equity markets during the first half of 2023, we suspect any meaningful pullback in the market would likely bring some cash off the sidelines and into stocks.

The increase in market interest rates directly contrasts with market expectations that the Federal Reserve is close to the end of its tightening cycle. The “Bear Steepener” may in fact be a combination of both improving economic conditions and an oversupply of Treasury bonds, as they are not mutually exclusive. Rising real yields pose risks to economic and market activity, with the attendant spending, investment and valuation risks for consumers, businesses and investors. Perhaps the biggest change for the financial markets, though, is the trend change in market interest rates and the impact on future equity returns. We will continue to monitor economic and market activity for signals, while providing diversified strategies for long-term portfolios.

Follow the Money! Attractive yields north of 5% have enticed investors to move cash from lower-yielding bank accounts to money market funds. Fund flows out of the banking space were further exacerbated by the turmoil in regional banks this spring—including the shuttering of three major regional banks. The chart below compares total money market assets to total deposit liabilities among commercial banks in the U.S. When Does the Trend Change? While a rate cut from the Fed could create some headwinds for money market fund flows, don’t hold your breath for an immediate trend change. Initial cuts to the federal funds target rate have not historically marked a peak in money market fund assets. The chart below shows that high watermarks in money market assets were not reached until the Fed significantly cut interest rates. Of course, these periods also overlapped near the last three major bottoms in the S&P 500. The exception was during the rate-cutting cycle that ended in 1992. While assets in money market funds peaked at this time, they mostly consolidated sideways for the next few years (the fed funds rate was also at 3.00%, much higher than subsequent periods).

The SEC has reopened the comment period on its proposed rule that would redesignate and amend the current custody rule under the Investment Advisers Act of 1940 to enhance protections of customer assets managed by registered investment advisers, which was proposed by the Commission on February 15, 2023. While the elements of the proposed safeguarding rule’s audit provision remain largely unchanged from those of the current custody rule, the Proposal includes some key modifications; namely, expanding the audit provision’s availability from “pooled investment vehicle” clients to “any other entity”; requiring the audited financial statements of non-U.S. clients to contain information substantially similar to statements prepared in accordance with U.S. GAAP and material differences with U.S. GAAP to be reconciled; and requiring that the adviser or the entity enter into a written agreement with the auditor requiring the auditor to notify the Commission in the event of the auditor’s termination or issuance of a modified opinion. To find out more about the proposed changes and to leave your comments you can find more information HERE.

The SEC has announced that the fees that public companies and other issuers pay to register their securities with the Commission will increase from $110.20 per million dollars to $147.60 per million dollars, effective Oct. 1. The new fee rate will be applicable to the registration of securities under Section 6(b) of the Securities Act of 1933, the repurchase of securities under Section 13(e) of the Securities Exchange Act of 1934, and proxy solicitations and statements in corporate control transactions under Section 14(g) of the Securities Exchange Act of 1934. To find out more about whether these fee increases affect you or any businesses you work with check out the announcement HERE.

The SEC has adopted new rules and rule amendments to enhance the regulation of private fund advisers and update the existing compliance rule that applies to all investment advisers. The new rules and amendments are designed to protect private fund investors by increasing transparency, competition, and efficiency in the private funds market. To enhance transparency, the final rules will require private fund advisers registered with the Commission to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance. To better protect investors, the final rules will prohibit all private fund advisers from providing investors with preferential treatment regarding redemptions and information if such treatment would have a material, negative effect on other investors. The final rules will also restrict certain other private fund adviser activity that is contrary to the public interest and the protection of investors. Advisers generally will not be prohibited from engaging in certain restricted activities, so long as they provide appropriate specified disclosure and, in some cases, obtain investor consent. I strongly suggest reading more about these rule changes and when they come into effect HERE. Now is a great time to make sure that your firm and your employees are compliant with these upcoming changes.