SEC ISSUES FACT SHEET ON MONEY MKT RULES AHEAD OF VOTE TODAY

     (The following press release from SEC was received by e-mail. The sender  verified the statement.)  FACT SHEET Money Market Fund Reform SEC Open Meeting  July 23, 2014  Action 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:  Floating NAV ·         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.  Other Measures ·         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. Background  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  institutional investors. 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  transactions.  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  period. [*]       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’  portfolios: [*]       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  Provisions 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.  -kc    
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