(The following press release from SEC was received by e-mail. The sender
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Money Market Fund Reform
SEC Open Meeting
July 23, 2014
The Commission will consider whether to adopt final rules that reform the way
money market funds are structured and operate in order to better equip them to
address run risks, while preserving the benefits of money market funds. The
money market fund reforms would:
· Require certain money market funds to maintain a floating net asset
value (NAV) for sales and redemptions based on the current market value of the
securities in their portfolios rounded to the fourth decimal place (e.g.,
$1.0000). The requirement, which would apply to institutional prime money
market funds (including institutional municipal money market funds), would
result in the daily share prices of the money market funds fluctuating along
with changes in the market-based value of the funds’ investments.
Fees and Gates
· Provide new tools to money market fund boards of directors to
directly address a run on a fund. The new tools – fees and gates – would give
fund boards the ability to impose liquidity fees or to suspend redemptions
temporarily, also known as “gate,” if a fund’s level of weekly liquid assets
falls below a certain threshold.
Portfolio Diversification, Disclosure and Stress Testing
· Enhance diversification, disclosure and stress testing requirements
as well as provide updated reporting by money market funds and private funds
that operate like money market funds.
Tax and Accounting
· The SEC was informed that should these rules be adopted, the U.S.
Department of the Treasury and the Internal Revenue Service today will release
two types of tax guidance. They will propose new regulations to allow floating
NAV money market fund investors to use a simplified tax accounting method to
track gains and losses that could be used beginning today. The proposed
regulation will eliminate the need to track individual purchase and sale
transactions for tax reporting purposes. And, they will release a new revenue
procedure that provides relief from the “wash sale” rules for any losses on
shares of a floating NAV money market fund.
· In addition, the Commission will consider whether to re-propose
amendments to the Commission’s money market fund rules and Form N-MFP to
address provisions that reference credit ratings, and propose an additional
amendment to the issuer diversification provisions in the rule.
Money market funds are a type of mutual fund registered under the Investment
Company Act of 1940 and regulated under rule 2a-7 of the Act. Money market
funds pay dividends that reflect prevailing short-term interest rates, are
redeemable on demand, and, unlike other investment companies, seek to maintain
a stable NAV, typically $1.00. This combination of principal stability,
liquidity and payment of short-term yields has made money market funds popular
cash management vehicles for both retail and institutional investors.
There are many kinds of money market funds, including ones that invest
primarily in government securities, tax-exempt municipal securities, or
corporate debt securities. Money market funds that primarily invest in
corporate debt securities are referred to as prime funds. In addition, money
market funds are often structured to cater to different types of investors.
Some funds are marketed to individuals and intended for retail investors, while
other funds that typically require high minimum investments are intended for
After the events of the 2008 financial crisis, in March 2010, the SEC adopted a
number of amendments to rule 2a-7. These amendments were designed to make
money market funds more resilient by reducing the interest rate, credit and
liquidity risks of fund portfolios. When the SEC adopted the 2010 amendments,
the SEC stated that money market funds’ experience during the 2008 financial
crisis raised questions of whether more fundamental changes to money market
funds might be warranted.
Several significant market events since the 2010 reforms have allowed the SEC
to evaluate the efficacy of those reforms. Specifically, in the summer of
2011, the Eurozone sovereign debt crisis and an impasse over the U.S.
government’s debt ceiling unfolded, and during the fall of 2013 another U.S.
government debt ceiling impasse occurred.
Although the 2010 reforms were an important step in making money market funds
better able to withstand heavy redemptions, analysis and data from the SEC’s
Division of Economic and Risk Analysis (DERA) suggested that additional reforms
would assist in addressing potential future situations when credit losses may
cause a fund’s portfolio to lose value or when the short-term financing markets
more generally come under stress. In response, in 2013, the SEC proposed
alternative reforms that could also be adopted in combination. Those reforms
were a floating NAV for institutional prime funds and permissible liquidity
fees and redemption gates. After consideration of the approximately 1,400
comments received on the proposal, the SEC is now considering whether to adopt
final rules that further amend the rules that govern money market funds.
Money Market Fund Reform Package
Floating NAV – Under the floating NAV amendments, institutional prime money
market funds would be required to transact at a floating NAV, instead of at a
$1.00 stable share price. The floating NAV amendments are designed to reduce
the first mover advantage inherent in a stable NAV fund, by dis-incentivizing
redemption activity that can result from investors attempting to exploit the
possibility of redeeming shares at the stable share price even if the portfolio
has suffered a loss. They are also intended to reduce the chance of unfair
investor dilution and make it more transparent to certain of the impacted
investors that they, and not the fund sponsors or the Federal government, bear
the risk of loss.
Floating the NAV – Institutional prime money market funds would no longer be
able to use amortized cost to value their portfolio securities. Daily share
prices of these money market funds would fluctuate along with changes in the
market-based value of their portfolio securities.
Showing Fluctuations in Price – Institutional prime money market funds would be
required to price their shares using a more precise method so that investors
are more likely to see fluctuations in value. Currently, money market funds
“penny round” their share prices to the nearest one percent (to the nearest
penny in the case of a fund with a $1.00 share price). Under the floating NAV
amendments, institutional prime money market funds instead would be required to
“basis point round” their share price to the nearest 1/100th of one percent
(the fourth decimal place in the case of a fund with a $1.0000 share price).
Government and Retail Money Market Funds – Government and retail money market
funds would be allowed to continue using the amortized cost method and/or penny
rounding method of pricing to seek to maintain a stable share price. A
government money market fund would be defined as any money market fund that
invests 99.5 percent (formerly 80 percent) or more of its total assets in cash,
government securities and/or repurchase agreements that are collateralized
solely by government securities or cash. A retail money market fund would be
defined as a money market fund that has policies and procedures reasonably
designed to limit all beneficial owners of the money market fund to natural
persons. A municipal (or tax-exempt) fund would be required to transact at a
floating NAV unless the fund meets the definition of a retail money market
fund, in which case it would be allowed to use the amortized cost method and/or
penny rounding method of pricing to seek to maintain a stable share price.
Notice of Proposed Rule 10b-10 Exemptive Relief – The SEC today would issue a
Notice of Proposed Rule 10b-10 Exemptive Relief, soliciting comment on a
proposal to exempt broker-dealers from the written notification requirement
under Rule 10b-10(a) of the Securities Exchange Act of 1934 for transactions
effected in shares of floating NAV money market funds. The proposed order
would, subject to certain conditions, grant exemptive relief from the immediate
confirmation delivery requirements of Rule 10b-10 for such floating NAV
Liquidity Fees and Redemption Gates – The SEC would adopt a new liquidity fees
and gates regime to give fund boards a new tool to directly address runs.
[*] Liquidity Fees – Under the rules, if a money market fund’s level of
“weekly liquid assets” falls below 30 percent of its total assets (the
regulatory minimum), the money market fund’s board would be allowed to impose a
liquidity fee of up to two percent on all redemptions. Such a fee could be
imposed only if the money market fund’s board of directors determines that such
a fee is in the best interests of the fund. If a money market fund’s level of
weekly liquid assets falls below 10 percent, the money market fund would be
required to impose a liquidity fee of one percent on all redemptions. However,
such a fee would not be imposed if the fund’s board of directors determines
that such a fee is not in the best interests of the fund or that a lower or
higher (up to two percent) liquidity fee is in the best interests of the fund.
Weekly liquid assets generally include cash, U.S. Treasury securities, certain
other government securities with remaining maturities of 60 days or less, and
securities that convert into cash within one week.
[*] Redemption Gates – Under the rules, if a money market fund’s level of
weekly liquid assets falls below 30 percent, a money market fund’s board could
in its discretion temporarily suspend redemptions (gate). To impose a gate,
the board of directors would find that imposing a gate is in the money market
fund’s best interests. A money market fund that imposes a gate would be
required to lift that gate within 10 business days, although the board of
directors could determine to lift the gate earlier. Money market funds would
not be able to impose a gate for more than 10 business days in any 90-day
[*] Prompt Public Disclosure – Money market funds would be required to
promptly and publicly disclose instances in which the fund’s level of weekly
liquid assets falls below the 10 percent threshold and the imposition and
removal of any liquidity fee or gate.
[*] Government Money Market Funds – Government money market funds would
not be subject to the new fees and gates provisions. However, under the
proposed rules, these funds could voluntarily opt into them, if previously
disclosed to investors.
Enhanced Disclosure Requirements – The final rules would seek to improve the
transparency of money market fund operations and risks by, among other things:
[*] Website Disclosure – Money market funds would be required to disclose
on their website, on a daily basis, their levels of daily and weekly liquid
assets, net shareholder inflows or outflows, market-based NAVs per share,
imposition of fees and gates, and any use of affiliate sponsor support.
[*] New Material Event Disclosure – Money market funds would be required
to promptly disclose certain events on a new Form N-CR. These events would
include the imposition or removal of fees or gates and the primary
considerations or factors taken into account by a board of directors in its
decision related to fees and gates; portfolio security defaults; sponsor or
fund affiliate support, including the amount of support and a brief description
of the reason for support; and–for retail and government funds–a fall in the
fund’s market-based NAV per share below $0.9975.
[*] Disclosure of Sponsor Support – Money market funds would be required
to provide in their statements-of-additional-information (SAIs) disclosure
regarding any occasion during the last 10 years (but not for occasions that
occurred before the compliance date) in which the money market fund received
sponsor or fund affiliate support. This disclosure would be in addition to the
current-event disclosures required on Form N-CR.
Immediate Reporting of Fund Portfolio Holdings – Money market funds currently
report detailed information about their portfolio holdings to the SEC each
month on Form N-MFP. The final rules would amend Form N-MFP to clarify
existing requirements and require reporting of additional information relevant
to assessing money market fund risk. In addition, the final rules would
eliminate the current 60-day delay on public availability of the information
filed on the form and make it public immediately upon filing.
Improved Private Liquidity Fund Reporting – To better monitor whether
substantial assets migrate to private “liquidity funds” in response to money
market fund reforms, the final rules would amend Form PF, which private fund
advisers use to report information about certain private funds they advise.
The final rules would require a large liquidity fund adviser (a liquidity fund
adviser managing at least $1 billion in combined money market fund and
liquidity fund assets) to report substantially the same portfolio information
on Form PF as registered money market funds are required to report on Form
N-MFP. A liquidity fund is essentially an unregistered money market fund.
Stronger Diversification Requirements – The final rules would also include the
following changes to the diversification requirements for money market funds’
[*] Aggregation of Affiliates – Money market funds would be required to
treat certain entities that are affiliated with each other as single issuers
for purposes of determining whether they are complying with money market funds’
five percent issuer diversification limit. Under this limitation, a fund
generally could not invest more than five percent of its assets in any one
issuer, or group of affiliated issuers.
[*] Removal of the 25 Percent Basket – For money market funds other than
tax-exempt money market funds, the final rules would require that all of a
money market fund’s assets meet the 10 percent diversification limit for
guarantors and demand feature providers, thereby removing the so-called 25
percent basket that permitted as much as 25 percent of the value of securities
held in a money market fund’s portfolio to be subject to guarantees or demand
features from a single institution. For tax-exempt money market funds (also
referred to as municipal money market funds), the 25 percent guarantor basket
would be reduced to 15 percent so that no more than 15 percent of the value of
securities held in a tax-exempt money market fund’s portfolio could be subject
to guarantees or demand features from a single institution.
[*] Asset-Backed Securities – Money market funds would be required to
treat the sponsors of asset-backed securities as guarantors subject to the 10
percent diversification limit applicable to guarantees and demand features,
unless the money market fund’s board of directors (or its delegate) determines
that the fund is not relying on the sponsor’s financial strength or its ability
or willingness to provide liquidity, credit or other support to determine the
asset-backed security’s quality or liquidity.
Enhanced Stress Testing – The final rules would further enhance the stress
testing requirements adopted by the SEC in 2010. In particular, a money market
fund would be required to test its ability to maintain weekly liquid assets of
at least 10 percent and to minimize principal volatility in response to certain
specified hypothetical stress scenarios. In addition, the SEC would be
adopting modifications to the current reporting requirements to boards of
directors regarding stress testing aimed at improving the quality of reports
the boards receive.
Removal of References to Credit Ratings and Amendment to Issuer Diversification
In addition to the broad reforms to money market fund regulation discussed
above, the SEC today would re-propose amendments to rule 2a-7 and Form N-MFP to
address provisions that reference credit ratings. The SEC would also propose
an amendment to the issuer diversification provisions of rule 2a-7.
Re-proposed Ratings Removal – The re-proposed amendments would implement
section 939A of the Dodd-Frank Act, which requires the SEC to remove any
reference to or requirement of reliance on credit ratings in its regulations
and to establish appropriate standards of creditworthiness in place of certain
references to credit ratings in SEC rules. Currently, to ensure that these
funds are invested in high quality short-term securities, rule 2a-7 requires
that money market funds invest only in securities that have received one of the
two highest short-term ratings (that is, are rated either “first tier” or
“second tier”) or if they are not rated, are of comparable quality.
It also currently requires that a money market fund invest at least 97 percent
of its assets in first tier securities. In addition, rule 2a-7 requires that a
fund’s board of directors (or its delegate) determine that the security
presents minimal credit risks. This determination must be based on factors
pertaining to credit quality in addition to any rating assigned to the security.
Credit Quality Determinations for Money Market Fund Portfolio Securities – The
re-proposed amendments to rule 2a-7 would eliminate the credit ratings
requirements for money market funds. Instead, a money market fund could invest
in a security only if the fund’s board of directors (or its delegate)
determines that it presents minimal credit risks, and that determination would
require the board of directors to find that the security’s issuer has an
exceptionally strong capacity to meet its short-term obligations.
Amendments to Form N-MFP – Currently money market funds report their portfolio
holdings and other information to the Commission each month on Form N-MFP,
including certain credit ratings assigned to each portfolio security. The
re-proposed amendments to Form N-MFP would require that a money market fund
disclose any credit rating that the fund’s board considered in determining that
a portfolio security presents minimal credit risk.
Proposed Issuer Diversification Exclusion – The proposed amendment to rule 2a-7
would eliminate an exclusion from the issuer diversification provisions for
securities with certain guarantees.
Compliance Dates for Money Market Fund Reform
The amendments would become effective 60 days after the date of publication of
the rules in the Federal Register. The compliance dates would be as follows:
· The compliance date for the floating NAV amendments and fees and
gates amendments would be two years after the date of publication of the
release in the Federal Register.
· The compliance date for a new Form N-CR would be nine months after
the date of publication of the rules in the Federal Register.
· The compliance date for the amendments to diversification, stress
testing, disclosure, Form PF, Form N-MFP and clarifying amendments would be 18
months after the date of publication of the rules in the Federal Register.
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