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SEC Said to Discuss Floating NAV for Money Funds With IRS

Staff of the U.S. Securities and Exchange Commission have met with the Internal Revenue Service to discuss tax implications if money-market mutual funds were to adopt a floating share price, two people familiar with the talks said.

Discussions have centered on the tax treatment of small gains and losses for investors in funds, said the people, who asked not to be named because the talks weren’t public. IRS officials have told the securities regulator that they don’t have much flexibility to interpret current tax law, one of the people said.

The discussions suggest SEC staffers are developing a more detailed proposal to force money funds to adopt a floating share price, a move the industry has said would destroy their appeal. One such proposal prepared last year under the direction of former SEC Chairman Mary Schapiro was rejected by three of her four fellow commissioners in August, even before they were presented with a formal draft.

“The tax treatment of a floating fund is one of the main reservations expressed in comment letters” filed recently with regulators by fund companies, Joan Swirsky, an attorney at Philadelphia law firm Stradley, Ronon, Stevens & Young LLP, who specializes in money-fund oversight, said in an interview. “This will be a fully baked proposal by the time it comes out.”

John Nester, a spokesman for the SEC, declined to comment.

Schapiro’s Plan

Regulators have worked to impose tighter restrictions on money funds since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, caused by losses on debt issued by Lehman Brothers Holdings Inc., triggered a wider run on money funds that helped freeze global credit markets.

Schapiro’s plan aimed to make funds less susceptible to runs and better able to absorb losses. It would have offered funds a choice of replacing their fixed $1 share price with a floating price that reflects the market value of holdings, or creating capital reserves and restricting redemptions.

Following the rejection, Schapiro appealed for help from the Financial Stability Oversight Council, a super-panel of regulators formed by the Dodd-Frank Act and headed by the Treasury secretary. The council, whose job it is to identify systemic financial threats, acted in November, pressuring the SEC to revisit the issue and recommending several reform options, including a floating share value and capital buffers.

Cash Status

Republican Commissioner Daniel M. Gallagher said in a Jan. 16 speech that SEC staff were preparing a rule-making proposal he expected to see before the end of March.

“Forcing money-market funds to float their net asset value has long been on the SEC’s menu of options for structural changes,” Mike McNamee, a spokesman for the Investment Company Institute, the fund industry’s Washington-based lobby group, said in an e-mailed statement. “We continue to believe that temporary ‘gates’ to halt redemptions from prime money-market funds during times of market stress, with the option to impose fees for investors seeking further redemptions, would better address regulators’ concerns about redemption pressures.”

A floating share price may also create new accounting challenges for investors, although they could be directly addressed by the SEC, one of the people said. The agency has the authority to set accounting standards.

The commission staff is grappling with concerns that a money fund with a floating share value might not be considered a cash equivalent, the person said. That could make them less attractive to institutional investors and businesses that need to hold a certain percentage of assets in cash. The SEC could propose to clarify the cash status of money funds as part of a new rule proposal, the person said.

Mary Jo White, President Barack Obama’s pick to chair the SEC, is set to appear at a nominations hearing March 12 before the Senate Banking Committee.

To contact the reporters on this story: Christopher Condon in Boston at ccondon4@bloomberg.net; Dave Michaels in Washington at dmichaels5@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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