Money Market Fund Reform; Amendments to Form PF, 36834-37023 [X13-10619]
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Federal Register / Vol. 78, No. 118 / Wednesday, June 19, 2013 / Proposed Rules
Comments may be
submitted by any of the following
methods:
ADDRESSES:
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 210, 230, 239, 270, 274
and 279
Electronic Comments
[Release No. 33–9408, IA–3616; IC–30551;
File No. S7–03–13]
RIN 3235–AK61
Money Market Fund Reform;
Amendments to Form PF
Securities and Exchange
Commission.
ACTION: Proposed rule.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
is proposing two alternatives for
amending rules that govern money
market mutual funds (or ‘‘money market
funds’’) under the Investment Company
Act of 1940. The two alternatives are
designed to address money market
funds’ susceptibility to heavy
redemptions, improve their ability to
manage and mitigate potential contagion
from such redemptions, and increase
the transparency of their risks, while
preserving, as much as possible, the
benefits of money market funds. The
first alternative proposal would require
money market funds to sell and redeem
shares based on the current marketbased value of the securities in their
underlying portfolios, rounded to the
fourth decimal place (e.g., $1.0000), i.e.,
transact at a ‘‘floating’’ net asset value
per share (‘‘NAV’’). The second
alternative proposal would require
money market funds to impose a
liquidity fee (unless the fund’s board
determines that it is not in the best
interest of the fund) if a fund’s liquidity
levels fell below a specified threshold
and would permit the funds to suspend
redemptions temporarily, i.e., to ‘‘gate’’
the fund under the same circumstances.
Under this proposal, we could adopt
either alternative by itself or a
combination of the two alternatives. The
SEC also is proposing additional
amendments that are designed to make
money market funds more resilient by
increasing the diversification of their
portfolios, enhancing their stress testing,
and increasing transparency by
requiring money market funds to
provide additional information to the
SEC and to investors. The proposal also
includes amendments requiring
investment advisers to certain
unregistered liquidity funds, which can
resemble money market funds, to
provide additional information about
those funds to the SEC.
DATES: Comments should be received on
or before September 17, 2013.
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SUMMARY:
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• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/proposed.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number S7–03–13 on the subject line;
or
• Use the Federal eRulemaking Portal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number S7–03–13. This file number
should be included on the subject line
if email is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(https://www.sec.gov/rules/
proposed.shtml). Comments are also
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. All comments
received will be posted without change;
we do not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT:
Adam Bolter, Senior Counsel; Brian
McLaughlin Johnson, Senior Counsel;
Kay-Mario Vobis, Senior Counsel;
Amanda Hollander Wagner, Senior
Counsel; Thoreau A. Bartmann, Branch
Chief; or Sarah G. ten Siethoff, Senior
Special Counsel, Investment Company
Rulemaking Office, at (202) 551–6792,
Division of Investment Management,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–8549.
SUPPLEMENTARY INFORMATION: The
Commission is proposing for public
comment amendments to rules 419 [17
CFR 230.419] and 482 [17 CFR 230.482]
under the Securities Act of 1933 [15
U.S.C. 77a—z–3] (‘‘Securities Act’’),
rules 2a–7 [17 CFR 270.2a–7], 12d3–1
[17 CFR 270.12d3–1], 18f–3 [17 CFR
270.18f–3], 22e–3 [17 CFR 270.22e–3],
30b1–7 [17 CFR 270.30b1–7], 31a–1 [17
CFR 270.31a–1], and new rule 30b1–8
[17 CFR 270.30b1–8] under the
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Investment Company Act of 1940 [15
U.S.C. 80a] (‘‘Investment Company Act’’
or ‘‘Act’’), Form N–1A under the
Investment Company Act and the
Securities Act, Form N–MFP under the
Investment Company Act, and section 3
of Form PF under the Investment
Advisers Act [15 U.S.C. 80b], and new
Form N–CR under the Investment
Company Act.1
Table of Contents
I. Introduction
II. Background
A. Role of Money Market Funds
B. Economics of Money Market Funds
1. Incentives Created by Money Market
Funds’ Valuation and Pricing Methods
2. Incentives Created by Money Market
Funds’ Liquidity Needs
3. Incentives Created by Imperfect
Transparency, Including Sponsor
Support
4. Incentives Created by Money Market
Funds Investors’ Desire To Avoid Loss
5. Effects on Other Money Market Funds,
Investors, and the Short-Term Financing
Markets
C. The 2007–2008 Financial Crisis
D. Examination of Money Market Fund
Regulation Since the Financial Crisis
1. The 2010 Amendments
2. The Eurozone Debt Crisis and U.S. Debt
Ceiling Impasse of 2011
3. Our Continuing Consideration of the
Need for Additional Reforms
III. Discussion
A. Floating Net Asset Value
1. Certain Considerations Relating to the
Floating NAV Proposal
2. Money Market Fund Pricing
3. Exemption to the Floating NAV
Requirement for Government Money
Market Funds
4. Exemption to the Floating NAV
Requirement for Retail Money Market
Funds
5. Effect on Other Money Market Fund
Exemptions
6. Tax and Accounting Implications of
Floating NAV Money Market Funds
7. Operational Implications of Floating
NAV Money Market Funds
8. Disclosure Regarding Floating NAV
9. Transition
B. Standby Liquidity Fees and Gates
1. Analysis of Certain Effects of Liquidity
Fees and Gates
2. Terms of the Liquidity Fees and Gates
3. Exemptions To Permit Liquidity Fees
and Gates
4. Amendments to Rule 22e–3
5. Exemptions From the Liquidity Fees and
Gates Requirement
6. Operational Considerations Relating to
Liquidity Fees and Gates
7. Tax Implications of Liquidity Fees
8. Disclosure Regarding Liquidity Fees and
Gates
1 Unless otherwise noted, all references to
statutory sections are to the Investment Company
Act, and all references to rules under the
Investment Company Act, including rule 2a–7, will
be to Title 17, Part 270 of the Code of Federal
Regulations [17 CFR 270].
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9. Alternative Redemption Restrictions
C. Potential Combination of Standby
Liquidity Fees and Gates and Floating
Net Asset Value
1. Potential Benefits of a Combination
2. Potential Drawbacks of a Combination
3. Effect of Combination
4. Operational Issues
D. Certain Alternatives Considered
1. Alternatives in the FSOC Proposed
Recommendations
2. Alternatives in the PWG Report
E. Macroeconomic Effects of the Proposals
1. Effect on Current Investment in Money
Market Funds
2. Effect on Current Issuers and the ShortTerm Financing Markets
F. Amendments to Disclosure
Requirements
1. Financial Support Provided to Money
Market Funds
2. Daily Disclosure of Daily Liquid Assets
and Weekly Liquid Assets
3. Daily Web Site Disclosure of Current
NAV per Share
4. Disclosure of Portfolio Holdings
5. Daily Calculation of Current NAV per
Share Under the Liquidity Fees and
Gates Proposal
6. Money Market Fund Confirmation
Statements
G. New Form N–CR
1. Proposed Disclosure Requirements
Under Both Reform Alternatives
2. Additional Proposed Disclosure
Requirements Under Liquidity Fees and
Gates Alternative
3. Economic Analysis
H. Amendments to Form N–MFP Reporting
Requirements
1. Amendments Related to Rule 2a–7
Reforms
2. New Reporting Requirements
3. Clarifying Amendments
4. Public Availability of Information
5. Request for Comment on Frequency of
Filing
6. Operational Implications
I. Amendments to Form PF Reporting
Requirements
1. Overview of Proposed Amendments to
Form PF
2. Utility of New Information, Including
Benefits, Costs, and Economic
Implications
J. Diversification
1. Treatment of Certain Affiliates for
Purposes of Rule 2a–7’s Five Percent
Issuer Diversification Requirement
2. Asset-Backed Securities
3. The Twenty-Five Percent Basket
4. Additional Diversification Alternatives
Considered
K. Issuer Transparency
L. Stress Testing
1. Stress Testing Under the Floating NAV
Alternative
2. Stress Testing Under the Liquidity Fees
and Gates Alternative
3. Economic Analysis
4. Combined Approach
M. Clarifying Amendments
1. Definitions of Daily Liquid Assets and
Weekly Liquid Assets
2. Definition of Demand Feature
3. Short-Term Floating Rate Securities
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4. Second Tier Securities
N. Proposed Compliance Date
1. Compliance Period for Amendments
Related to Floating NAV
2. Compliance Period for Amendments
Related to Liquidity Fees and Gates
3. Compliance Period for Other
Amendments to Money Market Fund
Regulation
4. Request for Comment
O. Request for Comment and Data
IV. Paperwork Reduction Act Analysis
A. Alternative 1: Floating Net Asset Value
1. Rule 2a–7
2. Rule 22e–3
3. Rule 30b1–7 and Form N–MFP
4. Rule 30b1–8 and Form N–CR
5. Rule 34b–1(a)
6. Rule 482
7. Form N–1A
8. Advisers Act Rule 204(b)–1 and Form PF
B. Alternative 2: Standby Liquidity Fees
and Gates
1. Rule 2a–7
2. Rule 22e–3
3. Rule 30b1–7 and Form N–MFP
4. Rule 30b1–8 and Form N–CR
5. Rule 34b–1(a)
6. Rule 482
7. Form N–1A
8. Advisers Act Rule 204(b)–1 and Form PF
C. Request for Comments
V. Regulatory Flexibility Act Certification
VI. Statutory Authority
Text of Proposed Rules and Forms
I. Introduction
Money market funds are a type of
mutual fund registered under the
Investment Company Act and regulated
under rule 2a–7 under the Act.2 Money
market funds pay dividends that reflect
prevailing short-term interest rates,
generally are redeemable on demand,
and, unlike other investment
companies, seek to maintain a stable net
asset value per share (‘‘NAV’’), typically
$1.00.3 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. As of February 28, 2013, there
were approximately 586 money market
funds registered with the Commission,
and these funds collectively held over
$2.9 trillion of assets.4
2 Money market funds are also sometimes called
‘‘money market mutual funds’’ or ‘‘money funds.’’
3 See generally Valuation of Debt Instruments and
Computation of Current Price Per Share by Certain
Open-End Investment Companies (Money Market
Funds), Investment Company Act Release No.
13380 (July 11, 1983) [48 FR 32555 (July 18, 1983)]
(‘‘1983 Adopting Release’’). Most money market
funds seek to maintain a stable net asset value per
share of $1.00, but a few seek to maintain a stable
net asset value per share of a different amount, e.g.,
$10.00. For convenience, throughout this Release,
the discussion will simply refer to the stable net
asset value of $1.00 per share.
4 Based on Form N–MFP data. SEC regulations
require that money market funds report certain
portfolio information on a monthly basis to the SEC
on Form N–MFP. See rule 30b1–7.
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Money market funds seek to maintain
a stable share price by limiting their
investments to short-term, high-quality
debt securities that fluctuate very little
in value under normal market
conditions.5 They also rely on
exemptions provided in rule 2a–7 that
permit them to value their portfolio
securities using the ‘‘amortized cost’’
method of valuation and to use the
‘‘penny-rounding’’ method of pricing.6
Under the amortized cost method, a
money market fund’s portfolio securities
generally are valued at cost plus any
amortization of premium or
accumulation of discount, rather than at
their value based on current market
factors.7 The penny rounding method of
pricing permits a money market fund
when pricing its shares to round the
fund’s net asset value to the nearest one
percent (i.e., the nearest penny).8
Together, these valuation and pricing
techniques create a ‘‘rounding
convention’’ that permits a money
market fund to sell and redeem shares
at a stable share price without regard to
small variations in the value of the
securities that comprise its portfolio.9
5 Throughout this Release, we generally use the
term ‘‘stable share price’’ to refer to the stable share
price that money market funds seek to maintain and
compute for purposes of distribution, redemption
and repurchases of fund shares.
6 Money market funds use a combination of the
two methods so that, under normal circumstances,
they can use the penny rounding method to
maintain a price of $1.00 per share without pricing
to the third decimal point like other mutual funds,
and the amortized cost method so that they need
not strike a daily market-based NAV. See infra text
accompanying nn.163, 177.
7 See rule 2a–7(a)(2). See also infra note 10.
8 See rule 2a–7(a)(20).
9 When the Commission initially established its
regulatory framework allowing money market funds
to maintain a stable share price through use of the
amortized cost method of valuation and/or the
penny rounding method of pricing (so long as they
abided by certain risk limiting conditions), it did so
understanding the benefits that stable value money
market funds provided as a cash management
vehicle, particularly for smaller investors, and
focusing on minimizing inappropriate dilution of
assets and returns for shareholders. See Proceedings
before the Securities and Exchange Commission in
the Matter of InterCapital Liquid Asset Fund, Inc.
et al., 3–5431, Dec. 28, 1978, at 1533 (Statement of
Martin Lybecker, Division of Investment
Management at the Securities and Exchange
Commission) (stating that Commission staff had
learned over the course of the hearings the strong
preference of money market fund investors to have
a stable share price and that with the right risk
limiting conditions the Commission could limit the
likelihood of a deviation from that stable value,
addressing Commission concerns about dilution);
1983 Adopting Release, supra note 3, at nn.42–43
and accompanying text (‘‘[T]he provisions of the
rule impose obligations on the board of directors to
assess the fairness of the valuation or pricing
method and take appropriate steps to ensure that
shareholders always receive their proportionate
interest in the money market fund.’’). At that time,
the Commission was persuaded that deviations to
an extent that would cause material dilution
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Other types of mutual funds not
regulated by rule 2a–7, must calculate
their daily NAVs using market-based
factors (with some exceptions) and do
not use penny rounding.10 We note,
however, that banks and other
companies also make wide use of
amortized cost accounting to value
certain of their assets.11
In exchange for the ability to rely on
the exemptions provided by rule 2a–7,
the rule imposes important conditions
designed to limit deviations between the
fund’s $1.00 share price and the market
value of the fund’s portfolio. It requires
money market funds to maintain a
significant amount of liquid assets and
to invest in securities that meet the
rule’s credit quality, maturity, and
diversification requirements.12 For
example, a money market fund’s
portfolio securities must meet certain
credit quality requirements, such as
posing minimal credit risks.13 The rule
also places limits on the remaining
maturity of securities in the fund’s
portfolio to limit the interest rate and
credit spread risk to which a money
market fund may be exposed. A money
market fund generally may not acquire
generally would not occur given the risk limiting
conditions of the rule. See id., at nn.41–42 and
accompanying text (noting that testimony from the
original money market fund exemptive order
hearings alleged that the risk limiting conditions,
short of extraordinarily adverse conditions in the
market, should ensure that a properly managed
money market fund should be able to maintain a
stable price per share and that rule 2a–7 is based
on that representation).
10 For a mutual fund not regulated under rule 2a–
7, the Investment Company Act and applicable
rules generally require that it price its securities at
the current net asset value per share by valuing
portfolio instruments at market value or, if market
quotations are not readily available, at fair value as
determined in good faith by the fund’s board of
directors. See section 2(a)(41)(B) of the Act and
rules 2a–4 and 22c–1. The Commission, however,
has stated that it would not object if a mutual fund
board of directors determines, in good faith, that the
value of debt securities with remaining maturities
of 60 days or less is their amortized cost, unless the
particular circumstances warrant otherwise. See
Valuation of Debt Instruments by Money Market
Funds and Certain Other Open-End Investment
Companies, Investment Company Act Release No.
9786 (May 31, 1977) [42 FR 28999 (June 7, 1977)]
(‘‘1977 Valuation Release’’). In this regard, the
Commission has stated that the ‘‘fair value of
securities with remaining maturities of 60 days or
less may not always be accurately reflected through
the use of amortized cost valuation, due to an
impairment of the credit worthiness of an issuer, or
other factors. In such situations, it would appear to
be incumbent upon the directors of a fund to
recognize such factors and take them into account
in determining ‘fair value.’ ’’ Id.
11 See FASB ASC paragraph 320–10–35–1c
indicating investments in debt securities classified
as held-to-maturity shall be measured subsequently
at amortized cost in the statement of financial
position. See also Vincent Ryan, FASB Exposure
Draft Alarms Bank CFOs (June 2, 2010) available at
https://www.cfo.com/article.cfm/14502294.
12 See rule 2a–7(c)(2), (3), (4), and (5).
13 See rule 2a–7(a)(12), (c)(3)(ii).
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any security with a remaining maturity
greater than 397 days, and the dollarweighted average maturity of the
securities owned by the fund may not
exceed 60 days and the fund’s dollarweighted average life to maturity may
not exceed 120 days.14 Money market
funds also must maintain sufficient
liquidity to meet reasonably foreseeable
redemptions, and generally must invest
at least 10% of their portfolios in assets
that can provide daily liquidity and
invest at least 30% of their portfolios in
assets that can provide weekly
liquidity.15 Finally, rule 2a–7 also
requires money market funds to
diversify their portfolios by generally
limiting the funds to investing no more
than 5% of their portfolios in any one
issuer and no more than 10% of their
portfolios in securities issued by, or
subject to guarantees or demand features
(i.e., puts) from, any one institution.16
Rule 2a–7 also includes certain
procedural requirements overseen by
the fund’s board of directors. These
include the requirement that the fund
periodically calculate the market-based
value of the portfolio (‘‘shadow
price’’) 17 and compare it to the fund’s
stable share price; if the deviation
between these two values exceeds 1⁄2 of
1 percent (50 basis points), the fund’s
board of directors must consider what
action, if any, should be initiated by the
board, including whether to re-price the
fund’s securities above or below the
fund’s $1.00 share price (an event
colloquially known as ‘‘breaking the
buck’’).18
Different types of money market funds
have been introduced to meet the
differing needs of money market fund
investors. Historically, most investors
have invested in ‘‘prime money market
funds,’’ which hold a variety of taxable
short-term obligations issued by
corporations and banks, as well as
repurchase agreements and asset-backed
commercial paper.19 ‘‘Government
14 Rule
2a–7(c)(2).
rule 2a–7(c)(5). The 10% daily liquid asset
requirement does not apply to tax exempt funds.
16 See rule 2a–7(c)(4).
17 See rule 2a–7(c)(8)(ii)(A).
18 See rule 2a–7(c)(8)(ii)(A) and (B). Regardless of
the extent of the deviation, rule 2a–7 imposes on
the board of a money market fund a duty to take
appropriate action whenever the board believes the
extent of any deviation may result in material
dilution or other unfair results to investors or
current shareholders. Rule 2a–7(c)(8)(ii)(C). In
addition, the money market fund can use the
amortized cost or penny-rounding methods only as
long as the board of directors believes that they
fairly reflect the market-based net asset value per
share. See rule 2a–7(c)(1).
19 See Investment Company Institute, 2013
Investment Company Fact Book, at 178, Table 37
(2013), available at https://www.ici.org/pdf/
2013_factbook.pdf.
15 See
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money market funds’’ principally hold
obligations of the U.S. government,
including obligations of the U.S.
Treasury and federal agencies and
instrumentalities, as well as repurchase
agreements collateralized by
government securities. Some
government money market funds limit
themselves to holding only U.S.
Treasury obligations or repurchase
agreements collateralized by U.S.
Treasury securities and are called
‘‘Treasury money market funds.’’
Compared to prime funds, government
and Treasury money market funds
generally offer greater safety of principal
but historically have paid lower yields.
‘‘Tax-exempt money market funds’’
primarily hold obligations of state and
local governments and their
instrumentalities, and pay interest that
is generally exempt from federal income
tax for individual taxpayers.
In the analysis that follows, we begin
by reviewing the role of money market
funds and the benefits they provide
investors. We then review the
economics of money market funds. This
includes a discussion of several features
of money market funds that, when
combined, can create incentives for
fund shareholders to redeem shares
during periods of stress, as well as the
potential impact that such redemptions
can have on the fund and the markets
that provide short-term financing.20 We
then discuss money market funds’
experience during the 2007–2008
financial crisis against this backdrop.
We next analyze our 2010 reforms and
their impact on the heightened
redemption activity during the 2011
Eurozone sovereign debt crisis and U.S.
debt ceiling impasse.
Based on these analyses as well as
other publicly available analytical
works, some of which are contained in
the report responding to certain
questions posed by Commissioners
Aguilar, Paredes and Gallagher (‘‘RSFI
Study’’) 21 prepared by staff from the
Division of Risk, Strategy, and Financial
Innovation (‘‘RSFI’’), we propose two
alternative frameworks for additional
regulation of money market funds. Each
alternative seeks to preserve the ability
of money market funds to function as an
effective and efficient cash management
tool for investors, but also address
20 Throughout this Release, we generally refer to
‘‘short-term financing markets’’ to describe the
markets for short-term financing of corporations,
banks, and governments.
21 See Response to Questions Posed by
Commissioners Aguilar, Paredes, and Gallagher, a
report by staff of the Division of Risk, Strategy, and
Financial Innovation (Nov. 30, 2012), available at
https://www.sec.gov/news/studies/2012/moneymarket-funds-memo-2012.pdf.
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certain features in money market funds
that can make them susceptible to heavy
redemptions, provide them with better
tools to manage and mitigate potential
contagion from high levels of
redemptions, and increase the
transparency of their risks. We are also
proposing amendments that would
apply under each alternative that would
result in additional changes to money
market fund disclosure, diversification
limits, and stress testing, among other
reforms.22
II. Background
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A. Role of Money Market Funds
The combination of principal
stability, liquidity, and short-term yields
offered by money market funds, which
is unlike that offered by other types of
mutual funds, has made money market
funds popular cash management
vehicles for both retail and institutional
investors, as discussed above. Retail
investors use money market funds for a
variety of reasons, including, for
example, to hold cash for short or long
periods of time or to take a temporary
‘‘defensive position’’ in anticipation of
declining equity markets. Institutional
investors commonly use money market
funds for cash management in part
because, as discussed later in this
Release, money market funds provide
efficient diversified cash management
due both to the scale of their operations
and their expertise.23
Money market funds, due to their
popularity with investors, have become
an important source of financing in
certain segments of the short-term
financing markets, as discussed in more
detail in section III.E.2 below. Money
market funds’ ability to maintain a
stable share price contributes to their
popularity. Indeed, the $1.00 stable
share price has been one of the
fundamental features of money market
funds. As discussed in more detail in
section III.A.7 below, the funds’ stable
share price facilitates the funds’ role as
a cash management vehicle, provides
tax and administrative convenience to
both money market funds and their
shareholders, and enhances money
market funds’ attractiveness as an
investment option.
Rule 2a–7, in addition to facilitating
money market funds’ maintenance of
stable share prices, also benefits
investors by making available an
22 We note that we have consulted and
coordinated with the Consumer Financial
Protection Bureau regarding this proposed
rulemaking in accordance with section 1027(i)(2) of
the Dodd-Frank Wall Street Reform and Consumer
Protection Act.
23 See infra notes 72–73 and accompanying text.
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investment option that provides an
efficient and diversified means for
investors to participate in the short-term
financing markets through a portfolio of
short-term, high quality debt
securities.24 Many investors likely
would find it impractical or inefficient
to invest directly in the short-term
financing markets, and some investors
likely would not want the relatively
undiversified exposure that can result
from investing in those markets on a
smaller scale or that could be associated
with certain alternatives to money
market funds, like bank deposits.25
Although other types of mutual funds
can and do invest in the short-term
financing markets, investors may prefer
money market funds because the risk
the funds may undertake is limited
under rule 2a–7 (and because of the
funds’ corresponding ability to maintain
a stable share price).26
Therefore, although rule 2a–7 permits
money market funds to use techniques
to value and price their shares not
permitted to other mutual funds (or not
permitted to the same extent), the rule
also imposes additional protective
conditions on money market funds.
These additional conditions are
designed to make money market funds’
use of the pricing techniques permitted
by rule 2a–7 consistent with the
protection of investors, and more
generally, to make available an
investment option for investors that
seek an efficient way to obtain shortterm yields. These conditions thus
reflect the differences in the way money
market funds operate and the ways in
24 See, e.g., Comment Letter of Harvard Business
School Professors Samuel Hanson, David
Scharfstein, & Adi Sunderam (Jan. 8, 2013)
(available in File No. FSOC–2012–0003) (‘‘Harvard
Business School FSOC Comment Letter’’)
(explaining that prime money market funds, by
providing a way for investors to invest in the shortterm financing markets indirectly, ‘‘provides MMF
investors with a diversified pool of deposit-like
instruments with the convenience of a single
deposit-like account,’’ and that, ‘‘[g]iven the fixed
costs of managing a portfolio of such instruments,
MMFs provide scale efficiencies for small-balance
savers (e.g., households and small and mid-sized
nonfinancial corporations) along with a valuable set
of transactional services (e.g., check-writing and
other cash-management functions).’’).
25 Id. See also, e.g., Comment Letter of Investment
Company Institute (Jan. 24, 2013) (available in File
No. FSOC–2012–0003) (‘‘ICI Jan. 24 FSOC Comment
Letter’’) (explaining that although bank deposits are
an alternative to money market funds, ‘‘corporate
cash managers and other institutional investors do
not view an undiversified holding in an uninsured
(or underinsured) bank account as having the same
risk profile as an investment in a diversified shortterm money market fund subject to the risk-limiting
conditions of Rule 2a–7’’).
26 See, e.g., ICI Jan. 24 FSOC Comment Letter,
supra note 25 (‘‘The regulatory regime established
by Rule 2a–7 has proven to be effective in
protecting investors’ interests and maintaining their
confidence in money market funds.’’).
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36837
which investors use money market
funds compared to other types of
mutual funds.
We recognize, and considered when
developing the reform proposals we are
putting forward today, that money
market funds are a popular investment
product and that they provide many
benefits to investors and to the shortterm financing markets. Indeed, it is for
these reasons that we are proposing
reforms designed to make the funds
more resilient, as discussed throughout
this Release, while preserving, to the
extent possible, the benefits of money
market funds. These reform proposals
may, however, make money market
funds less attractive to certain investors
as discussed more fully below.
B. Economics of Money Market Funds
The combination of several features of
money market funds can create an
incentive for their shareholders to
redeem shares heavily in periods of
financial stress, as discussed in greater
detail in the RSFI Study. We discuss
these factors below, as well as the harm
that can result from heavy redemptions
in money market funds.
1. Incentives Created by Money Market
Funds’ Valuation and Pricing Methods
Money market funds are unique
among mutual funds in that rule 2a–7
permits them to use the amortized cost
method of valuation and the pennyrounding method of pricing. As
discussed above, these valuation and
pricing techniques allow a money
market fund to sell and redeem shares
at a stable share price without regard to
small variations in the value of the
securities that comprise its portfolio,
and thus to maintain a stable $1.00
share price under most conditions.
Although the stable $1.00 share price
calculated using these methods provides
a close approximation to market value
under normal market conditions,
differences may exist because market
prices adjust to changes in interest rates,
credit risk, and liquidity. We note that
the vast majority of money market fund
portfolio securities are not valued based
on market prices obtained through
secondary market trading because the
secondary markets for most portfolio
securities such as commercial paper,
repos, and certificates of deposit are not
actively traded. Accordingly, most
money market fund portfolio securities
are valued largely through ‘‘mark-tomodel’’ or ‘‘matrix pricing’’ estimates.27
27 See, e.g., Harvard Business School FSOC
Comment Letter, supra note 24 (‘‘secondary markets
for commercial paper and other private money
market assets such as CDs are highly illiquid.
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Federal Register / Vol. 78, No. 118 / Wednesday, June 19, 2013 / Proposed Rules
internally in the event that the fund
realizes a capital gain elsewhere in the
portfolio, which generally is unlikely
given the types of securities in which
money market funds typically invest.29
If a fund’s shadow price deviates far
enough from its stable $1.00 share price,
investors may have an economic
incentive to redeem money market fund
shares.30 For example, investors may
have an incentive to redeem shares
when a fund’s shadow price is less than
$1.00.31 If investors redeem shares when
the shadow price is less than $1.00, the
fund’s shadow price will decline even
further because portfolio losses are
spread across a smaller asset base. If
enough shares are redeemed, a fund can
‘‘break the buck’’ due, in part, to heavy
investor redemptions and the
concentration of losses across a
shrinking asset base. In times of stress,
this reason alone provides an incentive
for investors to redeem shares ahead of
other investors: early redeemers get
$1.00 per share, whereas later redeemers
may get less than $1.00 per share even
This example shows that if a fund’s
shadow price falls below $1.00 and the
fund experiences redemptions, the
remaining investors have an incentive to
redeem shares to potentially avoid
holding shares worth even less,
particularly if the fund re-prices its
shares below $1.00. This incentive
exists even if investors do not expect the
fund to incur further portfolio losses.
As discussed in greater detail in the
RSFI Study and as we saw during the
2007–2008 financial crisis as further
discussed below, money market funds,
although generally able to maintain
stable share prices, remain subject to
credit, interest rate, and liquidity risks,
all of which can cause a fund’s shadow
price to decline below $1.00 and create
an incentive for investors to redeem
shares ahead of other investors.32
Although defaults are very low
probability events, the resulting losses
will be most acute if the default occurs
in a position that is greater than 0.5%
of the fund’s assets, as was the case in
the Reserve Primary Fund’s investment
in Lehman Brothers commercial paper
in September 2008.33 As discussed
further in section III.J of this Release, we
note that money market funds hold
significant numbers of such larger
positions.34
Therefore, the asset prices used to calculate the
floating NAV would largely be accounting or
model-based estimates, rather than prices based on
secondary market transactions with sizable
volumes.’’); Institutional Money Market Funds
Association, The Use of Amortised Cost Accounting
by Money Market Funds, available at https://
www.immfa.org/assets/files/IMMFA%20The%20
use%20of%20amortised%20cost%20
accounting%20by%20MMF.pdf (noting that
‘‘investors typically hold money market
instruments to maturity, and so there are relatively
few prices from the secondary market or broker
quotes,’’ that as a result most money market funds
value their assets using yield curve pricing,
discounted cash flow pricing, and amortized cost
valuation, and surveying several money market
funds and finding that only U.S. Treasury bills are
considered ‘‘level one’’ assets under the relevant
accounting standards for which traded or quoted
prices are generally available).
28 The credit quality standards in rule 2a–7 are
designed to minimize the likelihood of such a
default or credit deterioration.
29 It is important to understand that, in practice,
a money market fund cannot use future portfolio
earnings to rebuild its shadow price because
Subchapter M of the Internal Revenue Code
effectively forces money market funds to distribute
virtually all of their earnings to investors. These
restrictions can cause permanent reductions in
shadow prices to persist over time, even if a fund’s
other portfolio securities are otherwise unimpaired.
30 The value of this economic incentive is
determined in part by the volatility of the fund’s
underlying assets, which is, in turn, affected by the
volatility of interest rates, the likelihood of default,
and the maturities of the underlying assets. Since
the risk limiting conditions imposed by rule 2a–7
require funds to hold high quality assets with short
maturities, the volatility of the underlying assets is
very low (which implies that the corresponding
value of this economic incentive is low), except
when the fund is under stress.
31 We recognize that, absent the fund breaking the
buck, arbitraging fluctuations in a money market
fund’s shadow price would require some effort and
may not be compelling in many cases given the
small dollar value that could be captured. See, e.g.,
Money Market Fund Reform, Investment Company
Act Release No. 28807 (June 30, 2009) [74 FR 32688
(July 8, 2009)] (‘‘2009 Proposing Release’’), at
nn.304–305 and accompanying text (discussing
how to arbitrage around price changes from rising
interest rates, investors would need to sell money
market fund shares for $1.00 and reinvest the
proceeds in equivalent short-term debt securities at
then-current interest rates).
32 See generally RSFI Study, supra note 21, at
section 4.A.
33 See generally infra section II.C.
34 FSOC, in formulating possible money market
reform recommendations, solicited and received
comments from the public (FSOC Comment File,
File No. FSOC–2012–0003, available at https://
www.regulations.gov/#!docketDetail;D=FSOC-20120003), some of which have made similar
observations about the concentration and size of
money market fund holdings. See, e.g., Harvard
Business School FSOC Comment Letter, supra note
24 (noting that ‘‘prime MMFs mainly invest in
money-market instruments issued by large, global
banks’’ and providing information about the size of
the holdings of ‘‘the 50 largest non-government
issuers of money market instruments held by prime
MMFs as of May 2012’’).
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if the fund experiences no further
losses.
To illustrate the incentive for
investors to redeem shares early,
consider a money market fund that has
one million shares outstanding and
holds a portfolio worth exactly $1
million. Assume the fund’s stable share
price and shadow price are both $1.00.
If the fund recognizes a $4,000 loss, the
fund’s shadow price will fall below
$1.00 as follows:
If investors redeem one quarter of the
fund’s shares (250,000 shares), the
redeeming shareholders are paid $1.00.
Because redeeming shareholders are
paid more than the shadow price of the
fund, the redemptions further
concentrate the loss among the
remaining shareholders. In this case, the
amount of redemptions is sufficient to
cause the fund to ‘‘break the buck.’’
2. Incentives Created by Money Market
Funds’ Liquidity Needs
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The market value of a money market
fund’s portfolio securities also may
experience relatively large changes if a
portfolio asset defaults or its credit
profile deteriorates.28 Today differences
within the tolerance defined by rule 2a–
7 are reflected only in a fund’s shadow
price, and not the share price at which
the fund satisfies purchase and
redemption transactions.
Deviations that arise from changes in
interest rates and credit risk are
temporary as long as securities are held
to maturity, because amortized cost
values and market-based values
converge at maturity. If, however, a
portfolio asset defaults or an asset sale
results in a realized capital gain or loss,
deviations between the stable $1.00
share price and the shadow price
become permanent. For example, if a
portfolio experiences a 25 basis point
loss because an issuer defaults, the
fund’s shadow price falls from $1.0000
to $0.9975. Even though the fund has
not broken the buck, this reduction is
permanent and can only be rebuilt
Federal Register / Vol. 78, No. 118 / Wednesday, June 19, 2013 / Proposed Rules
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by liquidity concerns. Money market
funds, by definition and like all other
mutual funds, offer investors the ability
to redeem shares upon demand.
A money market fund has three
sources of internal liquidity to meet
redemption requests: cash on hand, cash
from investors purchasing shares, and
cash from maturing securities. If these
internal sources of liquidity are
insufficient to satisfy redemption
requests on any particular day, money
market funds may be forced to sell
portfolio securities to raise additional
cash.35 Since the secondary market for
many portfolio securities is not deeply
liquid (in part because most money
market fund securities are held to
maturity), funds may have to sell
securities at a discount from their
amortized cost value, or even at fire-sale
prices,36 thereby incurring additional
losses that may have been avoided if the
funds had sufficient liquidity.37 This,
itself, can cause a fund’s portfolio to
lose value. In addition, redemptions that
deplete a fund’s most liquid assets can
35 Although the Act permits a money market fund
to borrow money from a bank, such loans, assuming
the proceeds of which are paid out to meet
redemptions, create liabilities that must be reflected
in the fund’s shadow price, and thus will contribute
to the stresses that may force the fund to ‘‘break the
buck.’’ See section 18(f) of the Investment Company
Act.
36 Money market funds normally meet
redemptions by disposing of their more liquid
assets, rather than selling a pro rata slice of all their
holdings, which typically include less liquid
securities such as certificates of deposit,
commercial paper, or term repurchase agreements
(‘‘repo’’). See Harvard Business School FSOC
Comment Letter, supra note 24 (‘‘MMFs forced to
liquidate commercial paper and bank certificates of
deposits are likely to sell them at heavily
discounted, ‘fire sale’ prices. This creates run risk
because early investor redemptions can be met with
the sale of liquid Treasury bills, which generate
enough cash to fully pay early redeemers. In
contrast, late redemptions force the sale of illiquid
assets at discounted prices, which may not generate
enough revenue to fully repay late redeemers. Thus,
each investor benefits from redeeming earlier than
others, setting the stage for runs.’’); Jonathan
Witmer, Does the Buck Stop Here? A Comparison
of Withdrawals from Money Market Mutual Funds
with Floating and Constant Share Prices, Bank of
Canada Working Paper 2012–25 (Aug. 2012)
(‘‘Witmer’’), available at https://
www.bankofcanada.ca/wp-content/uploads/2012/
08/wp2012-25.pdf. ‘‘Fire sales’’ refer to situations
when securities deviate from their informationefficient values typically as a result of sale price
pressure. For an overview of the theoretical and
empirical research on asset ‘‘fire sales,’’ see Andrei
Shleifer & Robert Vishny, Fire Sales in Finance and
Macroeconomics, 25 Journal of Economic
Perspectives, Winter 2011, at 29–48 (‘‘Fire Sales’’).
37 The RSFI Study examined whether money
market funds are more resilient to redemptions
following the 2010 reforms and notes that, ‘‘As
expected, the results show that funds with a 30
percent [weekly liquid asset requirement] are more
resilient to both portfolio losses and investor
redemptions’’ than those funds without a 30
percent weekly liquid asset requirement. RSFI
Study, supra note 21, at 37.
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have incremental adverse effects
because they leave the fund with fewer
liquid assets, making it more difficult to
avoid selling less liquid assets,
potentially at a discount, to meet further
redemption requests.
3. Incentives Created by Imperfect
Transparency, Including Sponsor
Support
Lack of investor understanding and
complete transparency concerning the
risks posed by particular money market
funds can exacerbate the concerns
discussed above. If investors do not
know a fund’s shadow price and/or its
underlying portfolio holdings (or if
previous disclosures of this information
are no longer accurate), investors may
not be able to fully understand the
degree of risk in the underlying
portfolio.38 In such an environment, a
default of a large-scale commercial
paper issuer, such as a bank holding
company, could accelerate redemption
activity across many funds because
investors may not know which funds (if
any) hold defaulted securities and
initiate redemptions to avoid potential
rather than actual losses in a ‘‘flight to
transparency.’’ 39 Since many money
market funds hold securities from the
same issuer, investors may respond to a
lack of transparency about specific fund
holdings by redeeming assets from
funds that are believed to be holding
highly correlated positions.40
38 See, e.g., RSFI Study, supra note 21, at 31
(stating that although disclosures on Form N–MFP
have improved fund transparency, ‘‘it must be
remembered that funds file the form on a monthly
basis with no interim updates,’’ and that ‘‘[t]he
Commission also makes the information public
with a 60-day lag, which may cause it to be stale’’);
Comment Letter of the Presidents of the 12 Federal
Reserve Banks (Feb. 12, 2013) (available in File No.
FSOC–2012–0003) (‘‘Federal Reserve Bank
Presidents FSOC Comment Letter’’) (stating that
‘‘[e]ven more frequent and timely disclosure may be
warranted to increase the transparency of MMFs’’
and noting that ‘‘[d]uring times of stress, [. . .]
uncertainty regarding portfolio composition could
heighten investors’ incentives to redeem in between
reporting periods [of money market funds’ portfolio
information], as they will not be able to determine
if their fund is exposed to certain stressed assets’’);
see also infra section III.H where we request
comment on whether we should require money
market funds to file Form N–MFP more frequently.
39 See Nicola Gennaioli, Andrei Shleifer & Robert
Vishny, Neglected Risks, Financial Innovation, and
Financial Fragility, 104 J. Fin. Econ. 453 (2012) (‘‘A
small piece of news that brings to investors’ minds
the previously unattended risks catches them by
surprise and causes them to drastically revise their
valuations of new securities and to sell them. . . .
When investors realize that the new securities are
false substitutes for the traditional ones, they fly to
safety, dumping these securities on the market and
buying the truly safe ones.’’).
40 See infra notes 65–67 and accompanying text.
Based on Form N–MFP data as of February 28,
2013, there were 27 different issuers whose
securities were held by more than 100 prime money
market funds.
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36839
Money market funds’ sponsors on a
number of occasions have voluntarily
chosen to provide financial support for
their money market funds 41 for various
reasons, including to keep a fund from
re-pricing below its stable value, but
also, for example, to protect the
sponsors’ reputations or brands.
Considering that instances of sponsor
support are not required to be disclosed
outside of financial statements, and thus
were not particularly transparent to
investors, voluntary sponsor support
has played a role in helping some
money market funds maintain a stable
value and, in turn, may have lessened
investors’ perception of the risk in
money market funds.42 Even those
investors who were aware of sponsor
support could not be assured it would
be available in the future.43 Instances of
discretionary sponsor support were
relatively common during the financial
crisis. For example, during the period
from September 16, 2008 to October 1,
2008, a number of money market fund
sponsors purchased large amounts of
portfolio securities from their money
market funds or provided capital
support to the funds (or received staff
no-action assurances in order to provide
41 Rule 17a–9 currently allows for discretionary
support of money market funds by their sponsors
and other affiliates.
42 See, e.g., Comment Letter of Occupy the SEC
(Feb. 15, 2013) (available in File No. FSOC–2012–
0003) (‘‘Occupy the SEC FSOC Comment Letter’’)
(‘‘The current strategies for maintaining a stable
NAV—rounding and discretionary fund sponsor
support—both serve to conceal important market
signals of mounting problems within the fund’s
portfolio.’’). See also Federal Reserve Bank
Presidents FSOC Comment Letter, supra note 38
(warning that ‘‘[g]iven the perception of stability
that discretionary support creates, this practice may
attract investors that are not willing to accept the
underlying risks in MMFs and who therefore are
more prone to run in times of potential stress.’’)
43 See, e.g., U.S. Securities and Exchange
Commission, Roundtable on Money Market Funds
and Systemic Risk, unofficial transcript (May 10,
2011), available at https://www.sec.gov/spotlight/
mmf-risk/mmf-risk-transcript-051011.htm
(‘‘Roundtable Transcript’’) (Bill Stouten, Thrivent
Financial) (‘‘I think the primary factor that makes
money funds vulnerable to runs is the marketing of
the stable NAV. And I think the record of money
market funds and maintaining the stable NAV has
largely been the result of periodic voluntary
sponsor support. I think sophisticated investors that
understand this and doubt the willingness or ability
of the sponsor to make that support know that they
need to pull their money out before a declining
asset is sold.’’); (Lance Pan, Capital Advisors Group)
(‘‘over the last 30 or 40 years, [investors] have relied
on the perception that even though there is risk in
money market funds, that risk is owned somehow
implicitly by the fund sponsors. So once they
perceive that they are not able to get that additional
assurance, I believe that was one probable cause of
the run’’); see also Federal Reserve Bank Presidents
FSOC Comment Letter, supra note 38 (stating that
‘‘[t]hough [sponsor support] creates a perception of
stability, it may not truly provide stability in times
of stress. Indeed, events of 2008 showed that
sponsor support cannot always be relied upon.’’);
infra section III.F.1.
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support).44 Commission staff provided
no-action assurances to 100 money
market funds in 18 different fund
groups so that the fund groups could
enter into such arrangements.45
Although a number of advisers to
money market funds obtained staff noaction assurances in order to provide
sponsor support, several did not
subsequently provide the support
because it was no longer necessary.46
The 2007–2008 financial crisis is not
the only instance in which some money
market funds have come under strain,
although it is unique in the amount of
money market funds that requested or
received sponsor support.47 Interest rate
changes, issuer defaults, and credit
rating downgrades can lead to
significant valuation losses for
individual funds. Table 1 documents
that since 1989, in addition to the 2007–
2008 financial crisis, 11 events were
deemed to have been sufficiently
negative that some fund sponsors chose
to provide support or to seek staff noaction assurances in order to provide
support.48 The table indicates that these
events potentially affected 158 different
money market funds. This finding is
consistent with estimates provided by
Moody’s that at least 145 U.S. money
market funds received sponsor support
to maintain either price stability or
share liquidity before 2007.49 Note that
although these events affected money
market funds and their sponsors, there
is no evidence that these events caused
systemic problems, most likely because
the events were isolated either to a
single entity or class of security. Table
1 is consistent with the interpretation
that outside a crisis period, these events
did not propagate risk more broadly to
the rest of the money market fund
industry. However, a caveat that
prevents making a strong inference
about the impact of sponsor support on
investor behavior from Table 1 is that
sponsor support generally was not
immediately disclosed, and was not
required to be disclosed by the
Commission, and so investors may have
been unaware that their money market
fund had come under stress.50
TABLE 1
Number of money
market funds from
2013 ICI mutual
fund fact book 51
Estimated number
of money market
funds supported
by affiliate or for
which no-action
assurances
obtained
1989 .......
673
4
1990 .......
741
11
1990 .......
1991 .......
741
820
10
10
1994 .......
963
40
1994 .......
1997 .......
963
1,103
43
3
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Year
44 See Steffanie A. Brady et al., The Stability of
Prime Money Market Mutual Funds: Sponsor
Support from 2007 to 2011, Federal Reserve Bank
of Boston Risk and Policy Analysis Unit Working
Paper No. 12–3 (Aug. 13, 2012), available at
https://www.bos.frb.org/bankinfo/qau/wp/2012/
qau1203.pdf. Staff in the Federal Reserve Bank of
Boston’s Risk and Policy Analysis Unit examine
341 money market funds and find that 78 of the
funds disclosed sponsor support on Form N–CSR
between 2007 and 2011 (some multiple times). This
analysis excludes Capital Support Agreements and/
or Letters of Credit that were not drawn upon. Large
sponsor support (in aggregate) representing over
0.5% of assets under management occurred in 31
money market funds, and the primary reasons
disclosed for such support include losses on
Lehman Brothers, AIG, and Morgan Stanley
securities. Moody’s Investors Service Special
Comment, Sponsor Support Key to Money Market
Funds (Aug. 9, 2010) (‘‘Moody’s Sponsor Support
Report’’), reported that 62 money market funds
required sponsor support during 2007–2008.
45 Our staff estimated that during the period from
August 2007 to December 31, 2008, almost 20% of
all money market funds received some support (or
staff no-action assurances concerning support) from
their money managers or their affiliates. We note
that not all of such support required no-action
assurances from Commission staff (for example,
fund affiliates were able to purchase defaulted
Lehman Brothers securities from fund portfolios
under rule 17a–9 under the Investment Company
Act without the need for any no-action assurances).
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Event
Default of Integrated Resources commercial paper (rated A–2 by Standard & Poor’s until
shortly prior to default).52
Default of Mortgage & Realty Trust commercial paper (rated A–2 by Standard & Poor’s
until shortly prior to default).53
MNC Financial Corp. commercial paper downgraded from being a second tier security.54
Mutual Benefit Life Insurance (‘‘MBLI’’) seized by state insurance regulators, causing it to
fail to honor put obligations after those holding securities with these features put the obligations en masse to MBLI.55
Rising interest rates damaged the value of certain adjustable rate securities held by
money market funds.56
Orange County, California bankruptcy.57
Mercury Finance Corp. defaults on its commercial paper.
See, e.g., https://www.sec.gov/divisions/investment/
im-noaction.shtml#money.
46 See, e.g., Comment Letter of The Dreyfus
Corporation (Aug. 7, 2012) (available in File No. 4–
619) (stating that no-action relief to provide sponsor
support ‘‘was sought by many money funds as a
precautionary measure’’).
47 See Moody’s Sponsor Support Report, supra
note 44.
48 The table does not comprehensively describe
every instance of sponsor support of a money
market fund or request for no-action assurances to
provide support, but rather summarizes some of the
more notable instances of sponsor support.
49 See Moody’s Sponsor Support Report, supra
note 44, noting in particular 13 funds requiring
support in 1990 due to credit defaults or
deterioration at MNC Financial, Mortgage & Realty
Trust, and Drexel Burnham; 79 funds requiring
support in 1994 due to the Orange County
bankruptcy and holdings of certain floating rate
securities when interest rates increased; and 25
funds requiring support in 1999 after the credit of
certain General American Life Insurance securities
deteriorated.
50 Note that we are proposing changes to our rules
and forms to require more comprehensive and
timely disclosure of such sponsor support. See infra
sections III.F.1 and III.G.
51 The estimated total numbers of money market
funds are from Table 38 of the Investment Company
Institute’s 2013 Fact Book, available at https://
www.ici.org/pdf/2013_factbook.pdf. The numbers
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of money market funds are as of the end of the
relevant year, and not necessarily as of the date that
any particular money market fund received support
(or whose sponsor received no-action assurances in
order to provide support).
52 See Jack Lowenstein, Should the Rating
Agencies be Downgraded?, Euromoney (Feb. 1,
1990) (noting that Integrated Resources had been
rated A–2 by Standard & Poor’s until two days
before default); Jonathan R. Laing, Never Say
Never—Or, How Safe Is Your Money-Market Fund?,
Barron’s (Mar. 26, 1990) (‘‘Laing’’), at 6; Randall W.
Forsyth, Portfolio Analysis of Selected FixedIncome Funds—Muni Money-Fund Risks, Barron’s
(July 2, 1990) (‘‘Forsyth’’), at 33; Georgette Jasen,
SEC Is Accelerating Its Inspections of Money Funds,
Wall St. J. (Dec. 4, 1990) (‘‘Jasen’’), at C1. One $630
million money market fund held a 3.5% position
in Integrated Resources when it defaulted. See
Linda Sandler, Cloud Cast on ‘Junk’ IOUs By
Integrated Resources, Wall St. J. (June 28, 1989).
53 See Laing, supra note 52; Forsyth, supra note
52; Jasen, supra note 52.
54 See Revisions to Rules Regulating Money
Market Funds, Investment Company Act Release
No. 19959 (Dec. 17, 1993) [58 FR 68585 (Dec. 28,
1993)] at n.12 (‘‘1993 Proposing Release’’). See also
Leslie Eaton, Another Close Call—An Adviser Bails
Out Its Money Fund, Barron’s (Mar. 11, 1991), at 42
(noting that Mercantile Bancorp bought out $28
million of MNC Financial notes from its affiliated
money market fund, which had accounted for 3%
of the money market fund’s assets).
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TABLE 1—Continued
Number of money
market funds from
2013 ICI mutual
fund fact book 51
Estimated number
of money market
funds supported
by affiliate or for
which no-action
assurances
obtained
1999 .......
1,045
25
2001 .......
1,015
6
2007 .......
2008 .......
805
783
51
109
2010 .......
652
3
2011 .......
632
3
Year
It also is important to note that, as
discussed above, fund sponsors may
provide financial support for a number
of different reasons. Sponsors may
support funds to protect their
reputations and their brands or the
credit rating of the fund.60 Support also
may be used to keep a fund from
breaking a buck or to increase a fund’s
shadow price if its sponsor believes
investors avoid funds that may have low
shadow prices. We note that the fact
that no-action assurances were obtained
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55 At
the time of its seizure, MBLI debt was rated
in the highest short-term rating category by
Standard & Poor’s. See 1993 Proposing Release,
supra note 54, at n.28 and accompanying text. The
money market fund sponsors either repurchased the
MBLI-backed instruments from the funds at their
amortized cost or obtained a replacement guarantor
in order to prevent shareholder losses. Id.
56 See Money Market Fund Prospectuses,
Investment Company Act Release No. 21216 (July
19, 1995) [60 FR 38454, (July 26, 1995)], at n.17;
Investment Company Institute, Report of the Money
Market Working Group (Mar. 17, 2009), available at
https://www.ici.org/pdf/ppr_09_mmwg.pdf (‘‘ICI
2009 Report’’), at 177; Leslie Wayne, Investors Lose
Money in ‘Safe’ Fund, N.Y. Times, Sept. 28, 1994;
Leslie Eaton, New Caution About Money Market
Funds, N.Y. Times, Sept. 29, 1994.
57 See ICI 2009 Report, supra note 56, at 178; Tom
Petruno, Orange County in Bankruptcy: Investors
Weigh Their Options: Muni Bond Values Slump but
Few Trade at Fire-Sale Prices, L.A. Times, Dec. 8,
1994.
58 See Sandra Ward, Money Good? How some
fund managers sacrificed safety for yield, Barron’s
(Aug. 23, 1999), at F3.
59 See Aaron Lucchetti & Theo Francis, Parents
Take on Funds’ Risks Tied to Utilities, Wall St. J.
(Feb. 28, 2001), at C1; Lewis Braham, Commentary:
Money Market Funds Enter the Danger Zone,
Businessweek (Apr. 8, 2001).
60 See, e.g., Marcin Kacperczyk & Philipp
Schnabl, How Safe are Money Market Funds?, 128
Q. J. Econ. (forthcoming Aug. 2013) (‘‘Kacperczyk
& Schnabl’’) (‘‘. . . fund sponsors with more nonmoney market fund business expect to incur large
costs if their money market funds fail. Such costs
are typically reputational in nature, in that an
individual fund’s default generates negative
spillovers to the fund’s sponsor[’s] other business.
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Credit rating downgrade of General American Life Insurance Co. triggered a wave of demands for repayment on its funding contracts, leading to liquidity problems and causing
it to be placed under administrative supervision by state insurance regulators.58
Pacific Gas & Electric Co. and Southern California Edison Co. commercial paper went
from being first tier securities to defaulting in a 2-week period.59
Investments in SIVs.
Investments in Lehman Brothers, America International Group, Inc. (‘‘AIG’’) and other financial sector debt securities.
British Petroleum Gulf oil spill affects price of BP debt securities held by some money
market funds.
Investments in Eksportfinans, which was downgraded from being a first tier security to
junk-bond status.
or sponsor support was provided does
not necessarily mean that a money
market fund would have broken the
buck without such support or
assurances.
Finally, the government assistance
provided to money market funds during
2007–2008 financial crisis, discussed in
more detail below, may have
contributed to investors’ perceptions
that the risk of loss in money market
funds is low.61 If investors perceive
In practice, these costs could be outflows from other
mutual funds managed by the same sponsor or a
loss of business in the sponsor’s commercial
banking, investment banking, or insurance
operations.’’); Patrick E. McCabe, The Cross Section
of Money Market Fund Risks and Financial Crises,
Federal Reserve Board Finance and Economic
Discussion Series Paper No. 2010–51 (2010) (‘‘Cross
Section’’) (‘‘Nothing required these sponsors to
provide support, but because allowing a fund to
break the buck would have been destructive to a
sponsor’s reputation and franchise, sponsors
backstopped their funds voluntarily.’’); Value Line
Posts Loss for 1st Period, Cites Charge of $7.5
Million, Wall St. J. (Sept. 18, 1989) (‘‘In discussing
the charge in its fiscal 1989 annual report [for
buying out defaulted commercial paper from its
money market fund], Value Line said it purchased
the fund’s holdings in order to protect its reputation
and the continuing income from its investment
advisory and money management business.’’);
Comment Letter of James J. Angel (Feb. 6, 2013)
(available in File No. FSOC–2012–0003) (‘‘Angel
FSOC Comment Letter’’) (‘‘Sponsors have a strong
commercial incentive to stand behind their funds.
Breaking the buck means the immediate and
catastrophic end of the sponsor’s entire asset
management business.’’).
61 See, e.g, Marcin Kacperczyk & Philipp Schnabl,
Money Market Funds: How to Avoid Breaking the
Buck, in Regulating Wall St: The Dodd-Frank Act
and the New Architecture of Global Finance (Viral
V. Acharya, et al., eds., 2011), at 313 (‘‘Given that
money market funds provide both payment services
to investors and refinancing to financial
intermediaries, there is a strong case for the
government to support money market funds during
a financial crisis by guaranteeing the value of
money market fund investments. As a result of such
support, money market funds have an ex ante
incentive to take on excessive risk, similarly to
other financial institutions with explicit or implicit
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money market funds as having an
implicit government guarantee in times
of crisis, any potential instability of a
money market fund’s NAV could be
mis-estimated. Investors will form
expectations about the likelihood of a
potential intervention to support money
market funds, either by the U.S.
government or fund sponsors. To the
extent these forecasts are based on
inaccurate information, investor
estimates of potential losses will be
biased.
4. Incentives Created by Money Market
Funds Investors’ Desire To Avoid Loss
In addition to the incentives
described above, other characteristics of
money market funds create incentives to
redeem in times of stress. Investors in
money market funds have varying
investment goals and tolerances for risk.
Many investors use money market funds
for principal preservation and as a cash
management tool, and, consequently,
these funds can attract investors who
are unable or unwilling to tolerate even
small losses. These investors may seek
to minimize possible losses, even at the
cost of forgoing higher returns.62 Such
government guarantees . . . after the [government]
guarantees were provided in September 2008 [to
money market funds], most investors will expect
similar guarantees during future financial crises.
. . .’’). But see Comment Letter of Fidelity (Apr. 26,
2012) (available in File No. 4–619) (‘‘Fidelity April
2012 PWG Comment Letter’’) (citing a survey of
Fidelity’s retail customers in which 75% of
responding customers did not believe that money
market funds are guaranteed by the government and
25% either believed that they were guaranteed or
were not sure whether they were guaranteed). We
note that investor belief that money market funds
are not guaranteed by the government does not
necessarily mean that investors do not believe that
the government will support money market funds
if there is another run on money market funds.
62 See, e.g., Comment Letter of Investment
Company Institute (Apr. 19, 2012) (available in File
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investors may be very loss averse for
many reasons, including general risk
tolerance, legal or investment
restrictions, or short-term cash needs.63
These overarching considerations may
create incentives for money market
investors to redeem and would be
expected to persist, even if valuation
and pricing incentives were addressed.
The desire to avoid loss may cause
investors to redeem from money market
funds in times of stress in a ‘‘flight to
quality.’’ For example, as discussed in
the RSFI Study, one explanation for the
heavy redemptions from prime money
market funds and purchases in
government money market fund shares
during the financial crisis may be a
flight to quality, given that most of the
assets held by government money
market funds have a lower default risk
than the assets of prime money market
funds.64
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5. Effects on Other Money Market
Funds, Investors, and the Short-Term
Financing Markets
The analysis above generally
describes how potential losses may
create shareholder incentives to redeem
at a specific money market fund. We
now discuss how stress at one money
market fund can be positively correlated
across funds in at least two ways. Some
market observers have noted that if a
money market fund suffers a loss on one
of its portfolio securities—whether
because of a deterioration in credit
quality, for example, or because the
fund sold the security at a discount to
its amortized-cost value—other money
market funds holding the same security
may have to reflect the resultant
discounts in their shadow prices.65 Any
No. 4–619) (‘‘ICI Apr 2012 PWG Comment Letter’’)
(enclosing a survey commissioned by the
Investment Company Institute and conducted by
Treasury Strategies, Inc. finding, among other
things. that 94% of respondents rated safety of
principal as an ‘‘extremely important’’ factor in
their money market fund investment decision and
64% ranked safety of principal as the ‘‘primary
driver’’ of their money market fund investment).
63 See, e.g., Comment Letter of County
Commissioners Assoc. of Ohio (Dec. 21, 2012)
(available in File No. FSOC–2012–0003) (‘‘County
governments in Ohio operate under legal
constraints or other policies that limit them from
investing in instruments without a stable value.’’).
64 One study documented that investors
redirected assets from prime money market funds
into government money market funds during
September 2008. See Russ Wermers et al., Runs on
Money Market Funds (Jan. 2, 2013), available at
https://www.rhsmith.umd.edu/cfp/pdfs_docs/
papers/WermersMoneyFundRuns.pdf (‘‘Wermers
Study’’). Another study found that redemption
activity in money market funds during the financial
crisis was higher for riskier money market funds.
See Cross Section, supra note 60.
65 See generally Douglas W. Diamond & Raghuram
G. Rajan, Fear of Fire Sales, Illiquidity Seeking, and
Credit Freezes, 126 Q. J. Econ. 557 (May 2011); Fire
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resulting decline in the shadow prices
of other funds could, in turn, lead to a
contagion effect that could spread even
further.66 For example, a number of
commenters have observed that many
money market fund holdings tend to be
highly correlated, making it more likely
that multiple money market funds will
experience contemporaneous decreases
in share prices.67
As discussed above, in times of stress
if investors do not wish to be exposed
to a distressed issuer (or correlated
issuers) but do not know which money
market funds own these distressed
securities at any given time, investors
may redeem from any money market
funds that could own the security (e.g.,
redeeming from all prime funds).68 A
fund that did not own the security and
was not otherwise under stress could
nonetheless experience heavy
redemptions which, as discussed above,
could themselves ultimately cause the
fund to experience losses if it does not
have adequate liquidity.
As was experienced during the
financial crisis, the potential for
liquidity-induced contagion may have
negative effects on investors and the
markets for short-term financing of
corporations, banks, and governments.
This is in large part because of the
significance of money market funds’
Sales, supra note 36; Markus Brunnermeier et al.,
The Fundamental Principles of Financial
Regulation, in Geneva Reports on the World
Economy 11 (2009).
66 For example, supra Table 1, which identifies
certain instances in which money market fund
sponsors supported their funds or sought staff noaction assurances to do so, tends to show that
correlated holdings across funds resulted in
multiple funds experiencing losses that appeared to
motivate sponsors to provide support or seek staff
no-action assurances in order to provide support.
67 See, e.g., Comment Letter of Better Markets,
Inc. (Feb. 15, 2013) (available in File No. FSOC–
2012–0003) (‘‘Better Markets FSOC Comment
Letter’’) (agreeing with FSOC’s analysis and stating
that ‘‘MMFs tend to have similar exposures due to
limits on the nature of permitted investments. As
a result, losses creating instability and a crisis of
confidence in one MMF are likely to affect other
MMFs at the same time.’’); Comment Letter of
Robert Comment (Dec. 31. 2012) (available in File
No. FSOC–2012–0003) (‘‘Robert Comment FSOC
Comment Letter’’) (discussing correlation in money
market funds’ portfolios and stating, among other
things, that ‘‘now that bank-issued money market
instruments have come to comprise half the
holdings of the typical prime fund, the SEC should
acknowledge correlated credit risk by requiring that
prime funds practice sector diversification (in
addition to issuer diversification)’’); Occupy the
SEC FSOC Comment Letter, supra note 42
(discussing concentration of risk across money
market funds).
68 See, e.g., Wermers Study, supra note 64 (based
on an empirical analysis of data from the 2008 run
on money market funds, finding that, during 2008,
‘‘[f]unds that cater to institutional investors, which
are the most sophisticated and informed investors,
were hardest hit,’’ and that ‘‘investor flows from
money market funds seem to have been driven both
by strategic externalities . . . and information.’’).
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role in such short-term financing
markets.69 Indeed, money market funds
had experienced steady growth before
the financial crisis, driven in part by
growth in the size of institutional cash
pools,70 which grew from under $100
billion in 1990 to almost $4 trillion just
before the 2008 financial crisis.71
Money market funds’ suitability for cash
management operations also has made
them popular among corporate
treasurers, municipalities, and other
institutional investors, some of whom
rely on money market funds for their
cash management operations because
the funds provide diversified cash
management more efficiently due both
to the scale of their operations and their
expertise.72 For example, according to
69 See infra Panels A, B, and C in section III.E for
statistics on the types and percentages of
outstanding short-term debt obligations held by
money market funds.
70 See Zoltan Pozsar, Institutional Cash Pools and
the Triffin Dilemma of the U.S. Banking System,
IMF Working Paper 11/190 (Aug. 2011) (‘‘Pozsar’’);
Gary Gorton & Andrew Metrick, Securitized
Banking and the Run on Repo, 104 J. Fin. Econ. 425
(2012) (‘‘Gorton & Metrick’’); Jeremy C. Stein,
Monetary Policy as Financial Stability Regulation,
127 Q. J. Econ. 57 (2012); Nicola Gennaioli, Andrei
Shleifer & Robert W. Vishny, A Model of Shadow
Banking, J. Fin. (forthcoming 2013). The Pozsar
paper defines institutional cash pools as ‘‘large,
centrally managed, short-term cash balances of
global non-financial corporations and institutional
investors such as asset managers, securities lenders
and pension funds.’’ Pozsar, at 4.
71 See Pozsar, supra note 70, at 5–6. These
institutional cash pools can come from
corporations, bank trust departments, securities
lending operations of brokerage firms, state and
local governments, hedge funds, and other private
funds. The rise in institutional cash pools increased
demand for investments that were considered to
have a relatively low risk of loss, including, in
addition to money market funds, Treasury bonds,
insured deposit accounts, repurchase agreements,
and asset-backed commercial paper. See Ben S.
Bernanke, Carol Bertaut, Laurie Pounder DeMarco
& Steven Kamin, International Capital Flows and
the Returns to Safe Assets in the United States,
2003–2007, Board of Governors of the Federal
Reserve System International Finance Discussion
Paper No. 1014 (Feb. 2011); Pozsar, supra note 70;
Gorton & Metrick, supra note 70; Daniel M. Covitz,
Nellie Liang & Gustavo A. Suarez, The Evolution of
a Financial Crisis: Collapse of the Asset-Backed
Commercial Paper Market, J. Fin. (forthcoming
2013) (‘‘Covitz’’). The incentive among these cash
pools to search for alternate ‘‘safe’’ investments was
only heightened by factors such as limits on deposit
insurance coverage and historical bans on banks
paying interest on institutional demand deposit
accounts, which limited the utility of deposit
accounts for large pools of cash. See Pozsar, supra
note 70; Gary Gorton & Andrew Metrick, Regulating
the Shadow Banking System, Brookings Papers on
Economic Activity (Fall 2010), at 262–263 (‘‘Gorton
Shadow Banking’’).
72 See, e.g., Roundtable Transcript, supra note 43
(Travis Barker, Institutional Money Market Funds
Association) (‘‘[money market funds are] there to
provide institutional investors with greater
diversification than they could otherwise achieve’’);
(Lance Pan, Capital Advisors Group) (noting
diversification benefits of money market funds and
investors’ need for a substitute to bank products to
mitigate counterparty risk); (Kathryn L. Hewitt,
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one survey, approximately 19% of
organizations’ short-term investments
were allocated to money market funds
(and, according to this observer, this
figure is down from almost 40% in 2008
due in part to the reallocation of cash
investments to bank deposits following
temporary unlimited Federal Deposit
Insurance Corporation deposit
insurance for non-interest bearing bank
transaction accounts, which recently
expired).73
Money market funds’ size and
significance in the short-term markets,
together with their features that can
create an incentive to redeem as
discussed above, have led to concerns
that money market funds may
contribute to systemic risk. Heavy
redemptions from money market funds
during periods of financial stress can
remove liquidity from the financial
system, potentially disrupting the
Government Finance Officers Association) (‘‘Most
of us don’t have the time, the energy, or the
resources at our fingertips to analyze the credit
quality of every security ourselves. So we’re in
essence, by going into a pooled fund, hiring that
expertise for us . . . it gives us diversification, it
gives us immediate cash management needs where
we can move money into and out of it, and it
satisfies much of our operating cash investment
opportunities.’’); (Brian Reid, Investment Company
Institute) (‘‘there’s a very clear stated demand out
there on the part of investors for a non-bank
product that creates a pooled investment in shortterm assets . . . banks can’t satisfy this because an
undiversified exposure to a single bank is
considered to be far riskier. . . .’’); (Carol A.
DeNale, CVS Caremark) (‘‘I think that it would be
very small investment [in] deposits in banks. I don’t
think there’s—you know, the ratings of some of the
banks would make me nervous, also; [sic] they’re
not guaranteed. I’m not going to put a $20 million
investment in some banks.’’).
73 See 2012 Association for Financial
Professionals Liquidity Survey, at 15, available at
https://www.afponline.org/liquidity (subscription
required) (‘‘2012 AFP Liquidity Survey’’). The size
of this allocation to money market funds is down
substantially from prior years. For example, prior
AFP Liquidity Surveys show higher allocations of
organizations’ short-term investments to money
market funds: Almost 40% in the 2008 survey,
approximately 25% in the 2009 and 2010 surveys,
and almost 30% in the 2011 survey. This shift has
largely reflected a re-allocation of cash investments
to bank deposits, which rose from representing 25%
of organizations’ short-term investment allocations
in the 2008 Association for Financial Professionals
Liquidity Survey, available at https://
www.afponline.org/pub/pdf/
2008_Liquidity_Survey.pdf (‘‘2008 AFP Liquidity
Survey’’), to 51% of organizations’ short-term
investment allocations in the 2012 survey. The 2012
survey notes that some of this shift has been driven
by the temporary unlimited FDIC deposit insurance
coverage for non-interest bearing bank transaction
accounts (which expired at the end of 2012) and the
above-market rate that these bank accounts are able
to offer in the low interest rate environment through
earnings credits. See 2012 AFP Liquidity Survey,
this note. As of August 14, 2012, approximately
66% of money market fund assets were held in
money market funds or share classes intended to be
sold to institutional investors according to
iMoneyNet data. All of the AFP Liquidity Surveys
are available at https://www.afponline.org.
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secondary market. Issuers may have
difficulty obtaining capital in the shortterm markets during these periods
because money market funds are
focused on meeting redemption requests
through internal liquidity generated
either from maturing securities or cash
from subscriptions, and thus may be
purchasing fewer short-term debt
obligations.74 To the extent that
multiple money market funds
experience heavy redemptions, the
negative effects on the short-term
markets can be magnified. Money
market funds’ experience during the
2007–2008 financial crisis illustrates the
impact of heavy redemptions, as we
discuss in more detail below.
Heavy redemptions in money market
funds may disproportionately affect
slow-moving shareholders because, as
discussed further below, redemption
data from the 2007–2008 financial crisis
show that some institutional investors
are likely to redeem from distressed
money market funds more quickly than
other investors and to redeem a greater
percentage of their prime fund
holdings.75 Slower-to-redeem
shareholders may be harmed because, as
discussed above, redemptions at a
money market fund can concentrate
existing losses in the fund or create new
losses if the fund must sell assets at a
discount. In both cases, redemptions
leave the fund’s portfolio more likely to
lose value, to the detriment of slowerto-redeem investors.76 Retail investors—
who tend to be slower moving—also
could be harmed if market stress begins
at an institutional money market fund
and spreads to other funds, including
funds composed solely or primarily of
retail investors.77
74 See supra text preceding and accompanying
n.35. Although money market funds also can build
liquidity internally by retaining (rather than
investing) cash from investors purchasing shares,
this is not likely to be a material source of liquidity
for a distressed money market fund experiencing
heavy redemptions.
75 This likely is because some institutional
investors generally have more capital at stake,
sophisticated tools, and professional staffs to
monitor risk. See 2009 Proposing Release, supra
note 31, at nn.46–48 and 178 and accompanying
text.
76 See, e.g., RSFI Study, supra note 21, at 10
(‘‘Investor redemptions during the 2008 financial
crisis, particularly after Lehman’s failure, were
heaviest in institutional share classes of prime
money market funds, which typically hold
securities that are illiquid relative to government
funds. It is possible that sophisticated investors
took advantage of the opportunity to redeem shares
to avoid losses, leaving less sophisticated investors
(if co-mingled) to bear the losses.’’).
77 As discussed further below, retail money
market funds experienced a lower level of
redemptions in 2008 than institutional money
market funds, although the full predictive power of
this empirical evidence is tempered by the
introduction of the Treasury Department’s
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36843
C. The 2007–2008 Financial Crisis
There are many possible explanations
for the redemptions from money market
funds during the 2007–2008 financial
crisis.78 Regardless of the cause (or
causes), money market funds’
experience in the 2007–2008 financial
crisis demonstrates the harm that can
result from such rapid heavy
redemptions in money market funds.79
As explained in the RSFI study, on
September 16, 2008, the day after
Lehman Brothers Holdings Inc.
announced its bankruptcy, The Reserve
Fund announced that as of that
afternoon, its Primary Fund—which
held a $785 million (or 1.2% of the
fund’s assets) position in Lehman
Brothers commercial paper—would
‘‘break the buck’’ and price its securities
at $0.97 per share.80 At the same time,
there was turbulence in the market for
financial sector securities as a result of
the bankruptcy of Lehman Brothers and
the near failure of American
International Group (‘‘AIG’’), whose
commercial paper was held by many
prime money market funds. In addition
to Lehman Brothers and AIG, there were
other stresses in the market as well, as
discussed in greater detail in the RSFI
Study.81
Redemptions in the Primary Fund
were followed by redemptions from
other Reserve money market funds.82
Prime institutional money market funds
more generally began experiencing
heavy redemptions.83 During the week
of September 15, 2008, investors
withdrew approximately $300 billion
temporary guarantee program for money market
funds, which may have prevented heavier
shareholder redemptions among generally slower
moving retail investors. See infra n.91.
78 See generally RSFI Study, supra note 21, at
section 3.
79 See generally RSFI Study, supra note 21, at
section 3. See also 2009 Proposing Release supra
note 31, at section I.D; infra section II.D.2
(discussing the financial distress in 2011 caused by
the Eurozone sovereign debt crisis and U.S. debt
ceiling impasse and money market funds’
experience during that time).
80 See also 2009 Proposing Release, supra note 31,
at n.44 and accompanying text. We note that the
Reserve Primary Fund’s assets have been returned
to shareholders in several distributions made over
a number of years. We understand that assets
returned constitute approximately 99% of the
fund’s assets as of the close of business on
September 15, 2008, including the income earned
during the liquidation period. Any final
distribution to former Reserve Primary Fund
shareholders will not occur until the litigation
surrounding the fund is complete. See Consolidated
Class Action Complaint, In Re The Reserve Primary
Fund Sec. & Derivative Class Action Litig., No. 08–
CV–8060–PGG (S.D.N.Y. Jan. 5, 2010).
81 See generally RSFI Study, supra note 21, at
section 3.
82 See 2009 Proposing Release, supra note 31, at
Section I.D.
83 See RSFI Study, supra note 21, at section 3.
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institutional share classes of prime
money market funds, which typically
hold securities that are less liquid and
of lower credit quality than those
typically held by government money
market funds. The figure shows that
institutional share classes of
government money market funds, which
include Treasury and government
funds, experienced heavy inflows.88
The aggregate level of retail investor
redemption activity, in contrast, was not
particularly high during September and
October 2008, as shown in Figure 1.89
shares of money market funds, and the
Board of Governors of the Federal
Reserve System authorized the
temporary extension of credit to banks
to finance their purchase of high-quality
asset-backed commercial paper from
money market funds.90 These programs
successfully slowed redemptions in
prime money market funds and
provided additional liquidity to money
market funds. The disruptions to the
short-term markets detailed above could
have continued for a longer period of
time but for these programs.91
84 See INVESTMENT COMPANY INSTITUTE,
REPORT OF THE MONEY MARKET WORKING
GROUP, at 62 (Mar. 17, 2009), available at
https://www.ici.org/pdf/ppr_09_mmwg.pdf (‘‘ICI
REPORT’’) (analyzing data from iMoneyNet). The
latter figure describes aggregate redemptions from
all prime money market funds. Some money market
funds had redemptions well in excess of 14% of
their assets. Based on iMoneyNet data (and
excluding the Reserve Primary Fund), the
maximum weekly redemptions from a money
market fund during the 2008 financial crisis was
over 64% of the fund’s assets.
85 See Philip Swagel, ‘‘The Financial Crisis: An
Inside View,’’ Brookings Papers on Economic
Activity, at 31 (Spring 2009) (conference draft),
available at https://www.brookings.edu/economics/
bpea/∼/media/Files/Programs/ES/BPEA/
2009_spring_bpea_papers/
2009_spring_bpea_swagel.pdf; Christopher Condon
& Bryan Keogh, Funds’ Flight from Commercial
Paper Forced Fed Move, BLOOMBERG, Oct. 7,
2008, available at https://www.bloomberg.com/apps/
news?pid=newsarchive&sid=a5hvnKFCC_pQ.
86 See, e.g., ICI Jan. 24 FSOC Comment Letter,
supra note 25.
87 See 2009 Proposing Release, supra note 31, at
nn.51–53 & 65–68 and accompanying text (citing to
minutes of the Federal Open Market Committee,
news articles, Federal Reserve Board data on
commercial paper spreads over Treasury bills, and
books and academic articles on the financial crisis).
88 As discussed in section III.A.3, government
money market funds historically have faced
different redemption pressures in times of stress
and have different risk characteristics than other
money market funds because of their unique
portfolio composition, which typically has lower
credit default risk and greater liquidity than nongovernment portfolio securities typically held by
money market funds.
89 We understand that iMoneyNet differentiates
retail and institutional money market funds based
on factors such as minimum initial investment
amount and how the fund provider self-categorizes
the fund.
90 See 2009 Proposing Release, supra note 31, at
nn.55–59 and accompanying text for a fuller
description of the various forms of governmental
assistance provided to money market funds during
this time.
91 Treasury used the $50 billion Exchange
Stabilization Fund to fund the Temporary
Guarantee Program, but legislation has since been
enacted prohibiting Treasury from using this fund
again for guarantee programs for money market
funds. See Emergency Economic Stabilization Act
of 2008 § 131(b), 12 U.S.C. § 5236 (2008). The $50
billion Exchange Stabilization Fund was never
drawn upon by money market funds under this
program and the Temporary Guarantee Program
expired on September 18, 2009. The Federal
Reserve Board also established the Asset-Backed
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term financing markets froze, impairing
access to credit, and those who were
still able to access short-term credit
often did so only at overnight
maturities.87
Figure 1, below, provides context for
the redemptions that occurred during
the financial crisis. Specifically, it
shows daily total net assets over time,
where the vertical line indicates the
date that Lehman Brothers filed for
bankruptcy, September 15, 2008.
Investor redemptions during the 2008
financial crisis, particularly after
Lehman’s failure, were heaviest in
On September 19, 2008, the U.S.
Department of the Treasury
(‘‘Treasury’’) announced a temporary
guarantee program (‘‘Temporary
Guarantee Program’’), which would use
the $50 billion Exchange Stabilization
Fund to support more than $3 trillion in
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from prime money market funds or 14%
of the assets in those funds.84 During
that time, fearing further redemptions,
money market fund managers began to
retain cash rather than invest in
commercial paper, certificates of
deposit, or other short-term
instruments.85 Commenters have stated
that money market funds were not the
only investors in the short-term
financing markets that reduced or halted
investment in commercial paper and
other riskier short-term debt securities
during the 2008 financial crisis.86 Short-
Federal Register / Vol. 78, No. 118 / Wednesday, June 19, 2013 / Proposed Rules
D. Examination of Money Market Fund
Regulation Since the Financial Crisis
1. The 2010 Amendments
In March 2010, we adopted a number
of amendments to rule 2a–7.92 These
amendments were designed to make
money market funds more resilient by
reducing the interest rate, credit, and
liquidity risks of fund asset portfolios.
More specifically, the amendments
decreased money market funds’ credit
risk exposure by further restricting the
amount of lower quality securities that
funds can hold.93 The amendments, for
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Commercial Paper Money Market Mutual Fund
Liquidity Facility (‘‘AMLF’’), through which credit
was extended to U.S. banks and bank holding
companies to finance purchases of high-quality
asset-backed commercial paper (‘‘ABCP’’) from
money market funds, and it may have mitigated fire
sales to meet redemptions requests. See Burcu
Duygan-Bump et al., How Effective Were the
Federal Reserve Emergency Liquidity Facilities?
Evidence from the Asset-Backed Commercial Paper
Money Market Mutual Fund Liquidity Facility, 68 J.
Fin. 715 (Apr. 2013) (‘‘Our results suggest that the
AMLF provided an important source of liquidity to
MMMFs and the ABCP market, as it helped to
stabilize MMMF asset flows and to reduce ABCP
yields.’’). The AMLF expired on February 1, 2010.
Given the significant decline in money market
investments in ABCP since 2008, reopening the
AMLF would provide little benefit to money market
funds today. For example, ABCP investments
accounted for over 20% of Moody’s-rated U.S.
prime money market fund assets at the end of
August 2008, but accounted for less than 10% of
those assets by the end of August 2011. See
Moody’s Investors Service, Money Market Funds:
ABCP Investments Decrease, Dec. 7, 2011, at 2.
Form N–MFP data shows that as of February 28,
2013, prime money market funds held 6.9% of their
assets in ABCP.
92 Money Market Fund Reform, Investment
Company Act Release No. 29132 (Feb. 23, 2010) [75
FR 10060 (Mar. 4, 2010)] (‘‘2010 Adopting
Release’’).
93 Specifically, the amendments placed tighter
limits on a money market fund’s ability to acquire
‘‘second tier’’ securities by (1) restricting a money
market fund from investing more than 3% of its
assets in second tier securities (rather than the
previous limit of 5%), (2) restricting a money
market fund from investing more than 1⁄2 of 1% of
its assets in second tier securities issued by any
single issuer (rather than the previous limit of the
greater of 1% or $1 million), and (3) restricting a
money market fund from buying second tier
securities that mature in more than 45 days (rather
than the previous limit of 397 days). See rule 2a–
7(c)(3)(ii) and (c)(4)(i)(C). Second tier securities are
eligible securities that, if rated, have received other
than the highest short-term term debt rating from
the requisite NRSROs or, if unrated, have been
determined by the fund’s board of directors to be
of comparable quality. See rule 2a–7(a)(24)
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the first time, also require that money
market funds maintain liquidity buffers
in the form of specified levels of daily
and weekly liquid assets.94 These
liquidity buffers provide a source of
internal liquidity and are intended to
help funds withstand high redemptions
during times of market illiquidity.
Finally, the amendments reduce money
market funds’ exposure to interest rate
risk by decreasing the maximum
weighted average maturities of fund
portfolios from 90 to 60 days.95
In addition to reducing the risk profile
of the underlying money market fund
portfolios, the reforms increased the
amount of information that money
market funds are required to report to
the Commission and the public. Money
market funds are now required to
submit to the SEC monthly information
on their portfolio holdings using Form
N–MFP.96 This information allows the
Commission, investors, and third parties
to monitor compliance with rule 2a–7
and to better understand and monitor
the underlying risks of money market
fund portfolios. Money market funds are
now required to post portfolio
information on their Web sites each
month, providing investors with
important information to help them
make better-informed investment
decisions and helping them impose
market discipline on fund managers.97
Finally, money market funds must
undergo stress tests under the direction
of the board of directors on a periodic
basis.98 Under this stress testing
requirement, each fund must
periodically test its ability to maintain
a stable NAV per share based upon
(defining ‘‘second tier security’’); rule 2a–7(a)(12)
(defining ‘‘eligible security’’); rule 2a–7(a)(23)
(defining ‘‘requisite NRSROs’’).
94 The requirements are that, for all taxable
money market funds, at least 10% of assets must be
in cash, U.S. Treasury securities, or securities that
convert into cash (e.g., mature) within one day and,
for all money market funds, at least 30% of assets
must be in cash, U.S. Treasury securities, certain
other Government securities with remaining
maturities of 60 days or less, or securities that
convert into cash within one week. See rule 2a–
7(c)(5)(ii) and (iii).
95 The 2010 amendments also introduced a
weighted average life requirement of 120 days,
which limits the money market fund’s ability to
invest in longer-term floating rate securities. See
rule 2a–7(c)(2)(ii) and (iii).
96 See rule 30b1–7.
97 See rule 2a–7(c)(12).
98 See rule 2a–7(c)(10)(v).
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certain hypothetical events, including
an increase in short-term interest rates,
an increase in shareholder redemptions,
a downgrade of or default on portfolio
securities, and widening or narrowing of
spreads between yields on an
appropriate benchmark selected by the
fund for overnight interest rates and
commercial paper and other types of
securities held by the fund. This reform
was intended to provide money market
fund boards and the Commission a
better understanding of the risks to
which the fund is exposed and give
fund managers a tool to better manage
those risks.99
2. The Eurozone Debt Crisis and U.S.
Debt Ceiling Impasse of 2011
One way to evaluate the efficacy of
the 2010 reforms is to examine
redemption activity during the summer
of 2011. Money market funds
experienced substantial redemptions
during this time as the Eurozone
sovereign debt crisis and impasse over
the U.S. debt ceiling unfolded. As a
result of concerns about exposure to
European financial institutions, prime
money market funds began experiencing
substantial redemptions.100 Assets held
by prime money market funds declined
by approximately $100 billion (or 6%)
during a three-week period beginning
June 14, 2011.101 Some prime money
market funds had redemptions of almost
20% of their assets in each of June, July,
and August 2011, and one fund lost
23% of its assets during that period after
articles began to appear in the financial
press that warned of indirect exposure
of money market funds to Greece.102
Figures 2 and 3 below show the
redemptions from prime money market
funds during this time, and also show
that investors purchased shares of
government money market funds in late
June and early July in response to these
concerns, but then began redeeming
government money market fund shares
in late July and early August, likely as
a result of concerns about the U.S. debt
ceiling impasse and possible ratings
downgrades of government securities.103
99 See 2009 Proposing Release, supra note 31, at
section II.C.3.
100 See RSFI Study, supra note 21, at 32.
101 Id.
102 Id.
103 See also id. at 33.
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While it is difficult to isolate the
effects of the 2010 amendments, these
events highlight the potential increased
resilience of money market funds after
the reforms were adopted. Most
significantly, no money market fund
had to re-price below its stable $1.00
share price. As discussed in greater
detail in the RSFI Study, unlike
September 2008, money market funds
did not experience significant capital
losses that summer, and the funds’
shadow prices did not deviate
significantly from the funds’ stable
share prices; also unlike in 2008, money
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market funds in the summer of 2011 had
sufficient liquidity to satisfy investors’
redemption requests, which were made
over a longer period than in 2008,
suggesting that the 2010 amendments
acted as intended to enhance the
resiliency of money market funds.104
The redemptions in the summer of 2011
also did not take place against the
backdrop of a broader financial crisis,
and therefore may have reflected more
targeted concerns by investors (concern
about exposure to the Eurozone and
104 Id.
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U.S. government securities as the debt
ceiling impasse unfolded). Money
market funds’ experience in 2008, in
contrast, may have reflected a broader
range of concerns as reflected in the
RSFI Study, which discusses a number
of possible explanations for
redemptions during the financial
crisis.105
Although money market funds’
experiences differed in 2008 and the
summer of 2011, the heavy redemptions
money market funds experienced in the
105 Id.
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summer of 2011 appear to have
negatively affected the markets for
short-term financing. Academics
researching these issues have found, as
detailed in the RSFI Study, that
‘‘creditworthy issuers may encounter
financing difficulties because of risk
taking by the funds from which they
raise financing’’; ‘‘local branches of
foreign banks reduced lending to U.S.
entities in 2011’’; and that ‘‘European
banks that were more reliant on money
funds experienced bigger declines in
dollar lending.’’ 106 Thus, while such
redemptions often exemplify rational
risk management by money market fund
investors, they can also have certain
contagion effects on the short-term
financing markets.
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3. Our Continuing Consideration of the
Need for Additional Reforms
When we proposed and adopted the
2010 amendments, we acknowledged
that money market funds’ experience
during the 2007–2008 financial crisis
raised questions of whether more
fundamental changes to money market
funds might be warranted.107 We
solicited and received input from a
number of different sources analyzing
whether or not additional reforms may
be necessary, and we began to solicit
and evaluate potential options for
additional regulation of money market
funds to address these vulnerabilities. In
the 2009 Proposing Release we
requested comment on certain options,
including whether money market funds
should be required to move to the
‘‘floating net asset value’’ used by all
other mutual funds or satisfy certain
redemptions in-kind.108 We received
106 See id. at 34–35 (‘‘It is important to note,
however, investor redemptions has a direct effect
on short-term funding liquidity in the U.S.
commercial paper market. Chernenko and
Sunderam (2012) report that ‘creditworthy issuers
may encounter financing difficulties because of risk
taking by the funds from which they raise
financing.’ Similarly, Correa, Sapriza, and Zlate
(2012) finds U.S. branches of foreign banks reduced
lending to U.S. entities in 2011, while Ivashina,
Scharfstein, and Stein (2012) document European
banks that were more reliant on money funds
experienced bigger declines in dollar lending.’’)
(internal citations omitted); Sergey Chernenko &
Adi Sunderam, Frictions in Shadow Banking:
Evidence from the Lending Behavior of Money
Market Funds, Fisher College of Business Working
Paper No. 2012–4 (Sept. 2012); Ricardo Correa et
al., Liquidity Shocks, Dollar Funding Costs, and the
Bank Lending Channel During the European
Sovereign Crisis, Federal Reserve Board
International Finance Discussion Paper No. 2012–
1059 (Nov. 2012); Victoria Ivashina et al., Dollar
Funding and the Lending Behavior of Global Banks,
National Bureau of Economic Research Working
Paper No. 18528 (Nov. 2012).
107 See 2009 Proposing Release, supra note 31, at
section III; 2010 Adopting Release, supra note 92,
at section I.
108 See 2009 Proposing Release, supra note 31, at
section III.A.
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over 100 comments on this aspect of the
2009 Proposing Release.109 In adopting
the 2010 amendments, we noted that we
would continue to explore more
significant regulatory changes in light of
the comments we received.110 At the
time, we stated that we had not had the
opportunity to fully explore possible
alternatives and analyze the potential
costs, benefits, and consequences of
those alternatives.
Our subsequent consideration of
money market funds has been informed
by the work of the President’s Working
Group on Financial Markets, which
published a report on money market
fund reform options in 2010 (the ‘‘PWG
Report’’).111 We solicited comment on
the features of money market funds that
make them susceptible to heavy
redemptions and potential options for
reform both through our request for
comment on the PWG Report and by
hosting a May 2011 roundtable on
Money Market Funds and Systemic Risk
(the ‘‘2011 Roundtable’’).112
The potential financial stability risks
associated with money market funds
also have attracted the attention of the
Financial Stability Oversight Council
(‘‘FSOC’’), which has been tasked with
monitoring and responding to threats to
the U.S. financial system and which
superseded the PWG.113 On November
13, 2012, FSOC proposed to recommend
that we implement one or a combination
of three reforms designed to address
risks to financial companies and
markets that money market funds may
pose.114 The first option would require
money market funds to use floating
NAVs.115 The second option would
require money market funds to have a
NAV buffer with a tailored amount of
assets of up to 1% (raised through
various means) to absorb day-to-day
fluctuations in the value of the funds’
portfolio securities and allow the funds
to maintain a stable NAV.116 The NAV
buffer would be paired with a
requirement that 3% of a shareholder’s
highest account value in excess of
$100,000 during the previous 30 days—
a ‘‘minimum balance at risk’’ (‘‘MBR’’)—
be made available for redemption on a
delayed basis. These requirements
would not apply to certain money
market funds that invest primarily in
U.S. Treasury obligations and
repurchase agreements collateralized
with U.S. Treasury securities. The third
option would require money market
funds to have a risk-based NAV buffer
of 3%. This 3% NAV buffer potentially
could be combined with other measures
aimed at enhancing the effectiveness of
the buffer and potentially increasing the
resiliency of money market funds, and
109 Comments on the 2009 Proposing Release can
be found at https://www.sec.gov/comments/s7-11-09/
s71109.shtml.
110 See 2010 Adopting Release, supra note 92, at
section I.
111 Report of the President’s Working Group on
Financial Markets, Money Market Fund Reform
Options (Oct. 2010) (‘‘PWG Report’’), available at
https://www.treasury.gov/press-center/pressreleases/Documents/
10.21%20PWG%20Report%20Final.pdf. The
members of the PWG included the Secretary of the
Treasury Department (as chairman of the PWG), the
Chairman of the Board of Governors of the Federal
Reserve System, the Chairman of the SEC, and the
Chairman of the Commodity Futures Trading
Commission.
112 See President’s Working Group Report on
Money Market Fund Reform, Investment Company
Act Release No. 29497 (Nov. 3, 2010) [75 FR 68636
(Nov. 8, 2010)]. See also Roundtable Transcript,
supra note 43.
113 The Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (the ‘‘Dodd-Frank
Act’’) established the FSOC: (A) To identify risks to
the financial stability of the United States that
could arise from the material financial distress or
failure, or ongoing activities, of large,
interconnected bank holding companies or nonbank
financial companies, or that could arise outside the
financial services marketplace; (B) to promote
market discipline, by eliminating expectations on
the part of shareholders, creditors, and
counterparties of such companies that the
Government will shield them from losses in the
event of failure; and (C) to respond to emerging
threats to the stability of the United States financial
system. The ten voting members of the FSOC
include the Treasury Secretary (who serves as
Chairman of the FSOC), the Chairmen of the
Commission, the Board of Governors of the Federal
Reserve System, the Commodity Futures Trading
Commission, the Federal Deposit Insurance
Corporation, and the National Credit Union
Administration Board, the Directors of the Bureau
of Consumer Financial Protection and the Federal
Housing Finance Agency, the Comptroller of the
Currency, and an independent insurance expert
appointed by the President of the United States. See
Dodd-Frank Act, Public Law 111–203, 124 Stat.
1376 §§ 111–112 (2010).
114 See Proposed Recommendations Regarding
Money Market Mutual Fund Reform, Financial
Stability Oversight Council [77 FR 69455 (Nov. 19,
2012)] (the ‘‘FSOC Proposed Recommendations’’).
Under section 120 of the Dodd-Frank Act, if the
FSOC determines that the conduct, scope, nature,
size, scale, concentration, or interconnectedness of
a financial activity or practice conducted by bank
holding companies or nonbank financial companies
could create or increase the risk of significant
liquidity, credit, or other problems spreading
among bank holding companies and nonbank
financial companies, the financial markets of the
United States, or low-income, minority or underserved communities, the FSOC may provide for
more stringent regulation of such financial activity
or practice by issuing recommendations to primary
financial regulators, like the Commission, to apply
new or heightened standards or safeguards. FSOC
has proposed to issue a recommendation to the
Commission under this authority concerning money
market funds. If FSOC issues a final
recommendation to the Commission, the
Commission, under section 120, would be required
to impose the recommended standards, or similar
standards that FSOC deems acceptable, or explain
in writing to FSOC why the Commission has
determined not to follow FSOC’s recommendation.
115 See FSOC Proposed Recommendations, supra
note 114, at section V.A.
116 See id. at section V.B.
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thereby justifying a reduction in the
level of the required NAV buffer.117
Finally, in addition to proposing to
recommend these three reform options,
FSOC requested comment on other
potential reforms, including standby
liquidity fees and temporary restrictions
on redemptions (‘‘gates’’), which would
be implemented during times of market
stress to reduce money market funds’
vulnerability to runs.118
In its proposed recommendation
FSOC stated that the Commission, ‘‘by
virtue of its institutional expertise and
statutory authority, is best positioned to
implement reforms to address the risk
that [money market funds] present to
the economy,’’ and that if the
Commission ‘‘moves forward with
meaningful structural reforms of [money
market funds] before [FSOC] completes
its Section 120 process, [FSOC] expects
that it would not issue a final Section
120 recommendation.’’ 119 We strongly
agree that the Commission is best
positioned to consider and implement
any further reforms to money market
funds, and we have considered FSOC’s
analysis of its proposed recommended
reform options and the public
comments that FSOC has received in
formulating the money market reforms
we are proposing today.
The RSFI Study, discussed
throughout this Release, also has
informed our consideration of the risks
that may be posed by money market
funds and our formulation of today’s
proposals. The RSFI Study contains,
among other things, a detailed analysis
of our 2010 amendments to rule 2a–7
and some of the amendments’ effects to
date, including changes in some of the
characteristics of money market funds,
the likelihood that a fund with the
maximum permitted weighted average
maturity (‘‘WAM’’) would ‘‘break the
buck’’ before and after the 2010 reforms,
money market funds’ experience during
the 2011 Eurozone sovereign debt crisis
and the U.S. debt-ceiling impasse, and
how money market funds would have
performed during September 2008 had
the 2010 reforms been in place at that
time.120
In particular, the RSFI Study found
that under certain assumptions the
expected probability of a money market
fund breaking the buck was lower with
the additional liquidity required by the
2010 reforms.121 In addition, funds in
2011 had sufficient liquidity to
117 See
id. at section V.C.
id. at section V.D.
119 See id. at section III.B.
120 See generally RSFI Study, supra note 21, at
section 4.
121 Id. at 30.
118 See
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withstand investors’ redemptions
during the summer of 2011.122 The fact
that no fund experienced a credit event
during that time also contributed to the
evidence that funds’ were able to
withstand relatively heavy redemptions
while maintaining a stable $1.00 share
price. Finally, using actual portfolio
holdings from September 2008, the RSFI
Study analyzed how funds would have
performed during the financial crisis
had the 2010 reforms been in place at
that time. While funds holding 30%
weekly liquid assets are more resilient
to portfolio losses, funds will ‘‘break the
buck’’ with near certainty if capital
losses of the fund’s non-weekly liquid
assets exceed 1%.123 The RSFI Study
concludes that the 2010 reforms would
have been unlikely to prevent a fund
from breaking the buck when faced with
large credit losses like the ones
experienced in 2008.124 The inferences
that can be drawn from the RSFI Study
lead us to conclude that while the 2010
reforms were an important step in
making money market funds better able
to withstand heavy redemptions when
there are no portfolio losses (as was the
case in the summer of 2011), they are
not sufficient to address the incentive to
redeem when credit losses are expected
to cause fund’s portfolios to lose value
or when the short-term financing
markets more generally are expected to,
or do, come under stress. Accordingly,
we preliminarily believe that the
alternative reforms proposed in this
Release could lessen money market
funds’ susceptibility to heavy
redemptions, improve their ability to
manage and mitigate potential contagion
from high levels of redemptions, and
increase the transparency of their risks,
while preserving, as much as possible,
the benefits of money market funds.
III. Discussion
We are proposing alternative
amendments to rule 2a–7, and related
rules and forms, that would either (i)
require money market funds (other than
government and retail money market
funds) 125 to ‘‘float’’ their NAV per share
122 Id.
at 34.
at 38, Table 5. In fact, even at capital losses
of only 0.75% of the fund’s non-weekly liquid
assets and no investor redemptions, funds are
already more likely than not (64.6%) to ‘‘break the
buck.’’ Id.
124 To further illustrate the point, the RSFI Study
noted that the Reserve Primary Fund ‘‘would have
broken the buck even in the presence of the 2010
liquidity requirements.’’ Id. at 37.
125 Our proposed exemptions for government and
retail money market funds (including our proposed
definition for a retail money market fund) are
discussed in sections III.A.3 and III.A.4,
respectively. The exemptive amendments we are
proposing are within the Commission’s broad
authority under section 6(c) of the Act. Section 6(c)
123 Id.
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or (ii) require that a money market fund
(other than a government fund) whose
weekly liquid assets fall below 15% of
its total assets be required to impose a
liquidity fee of 2% on all redemptions
(unless the fund’s board determines that
the liquidity fee is not in the best
interest of the fund). Under the second
alternative, once the money market fund
crosses this threshold, the fund’s board
also would have the ability to
temporarily suspend redemptions (or
‘‘gate’’) the fund for a limited period of
time if the board determines that doing
so is in the fund’s best interest.126 We
discuss each of these alternative
proposals in this section, along with
potential tax, accounting, operational,
and economic implications. We also
discuss a potential combination of our
floating NAV proposal and liquidity fees
and gates proposal, as well as the
potential benefits, drawbacks, and
operational issues associated with such
a potential combination. We also
discuss various alternative approaches
that we have considered for money
market fund reform.
In addition, we are proposing a
number of other amendments that
would apply under either alternative
proposal to enhance the disclosure of
money market fund operations and
risks. Certain of our proposed disclosure
requirements would vary depending on
the alternative proposal adopted (if any)
as they specifically relate to the floating
NAV proposal or the liquidity fees and
gates proposal. In addition, we are
proposing additional disclosure reforms
to improve the transparency of risks
present in money market funds,
including daily Web site disclosure of
funds’ daily and weekly liquid assets
and market-based NAV per share and
historic instances of sponsor support.
We also are proposing to establish a new
current event disclosure form that
would require funds to make prompt
public disclosure of certain events,
including portfolio security defaults,
sponsor support, a fall in the funds’
weekly liquid assets below 15% of total
authorizes the Commission to exempt by rule,
conditionally or unconditionally, any person,
security, or transaction (or classes of persons,
securities, or transactions) from any provision of the
Act ‘‘if and to the extent that such exemption is
necessary or appropriate in the public interest and
consistent with the protection of investors and the
purposes fairly intended by the policy and
provisions’’ of the Act. 15 U.S.C. 80a–6(c). For the
reasons discussed throughout this Release, the
Commission preliminarily believes that the
proposed amendments to rules 2a–7, 12d3–1, 18f–
3, and 22e–3 meet these standards.
126 In the text of the proposed rules and forms
below we refer to our floating NAV alternative as
‘‘Alternative 1,’’ and our liquidity fees and gates
alternative as ‘‘Alternative 2.’’
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assets, and a fall in the market-based
price of the fund below $0.9975.
We are proposing to amend Form N–
MFP to provide additional information
relevant to assessing the risk of funds
and make this information public
immediately upon filing. In addition,
we are proposing to require that a large
liquidity fund adviser that manages a
private liquidity fund provide securitylevel reporting on Form PF that are
substantially the same as those currently
required to be reported by money
market funds on Form N–MFP.127
Our proposed amendments also
would tighten the diversification
requirements of rule 2a–7 by requiring
consolidation of certain affiliates for
purposes of the 5% issuer
diversification requirement, requiring
funds to presumptively treat the
sponsors of asset-backed securities
(‘‘ABSs’’) as guarantors subject to rule
2a–7’s diversification requirements, and
removing the so-called ‘‘twenty-five
percent basket.’’ 128 Finally, we are
proposing to amend the stress testing
provision of rule 2a–7 to enhance how
funds stress test their portfolios and
require that money market funds stress
test against the fund’s level of weekly
liquid assets falling below 15% of total
assets.
We note finally that we are not
rescinding our outstanding 2011
proposal to remove references to credit
ratings from two rules and four forms
under the Investment Company Act,
including rule 2a–7 and Form N–MFP,
under section 939A of the Dodd-Frank
Act, and on which we welcome
additional comments.129 The
Commission intends to address this
matter at another time and, therefore,
this Release is based on rule 2a–7 and
Form N–MFP as amended and adopted
in 2010.130
127 See
infra section III.I.
‘‘twenty-five percent basket’’ currently
allows money market funds to only comply with
the 10% guarantee concentration limit with respect
to 75% of the fund’s total assets. See infra section
III.J.
129 See References to Credit Ratings in Certain
Investment Company Act Rules and Forms,
Investment Company Act Release No. 29592 (Mar.
3, 2011) [76 FR 12896 (Mar. 9, 2011)] (proposing to
also eliminate references to credit ratings from rule
5b–3 and Forms N–1A, N–2, and N–3, and establish
new rule 6a–5 to replace a reference to credit
ratings in section 6(a)(5) that the Dodd-Frank Act
eliminated).
130 See 2010 Adopting Release, supra note 92. We
note that after enactment of the Dodd-Frank Act,
our staff issued a no-action letter assuring money
market funds and their managers that, in light of
section 939A of the Dodd-Frank Act, the staff would
not recommend enforcement action to the
Commission under section 2(a)(41) of the Act and
rules 2a–4 and 22c–1 thereunder if a money market
fund board did not designate NRSROs and did not
make related disclosures in its SAI before the
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A. Floating Net Asset Value
Our first alternative proposal—a
floating NAV—is designed primarily to
address the incentive of money market
fund shareholders to redeem shares in
times of fund and market stress based
on the fund’s valuation and pricing
methods, as discussed in section II.B.1
above. It should also improve the
transparency of pricing associated with
money market funds. Under this
alternative, money market funds (other
than government and retail money
market funds 131) would be required to
‘‘float’’ their net asset value. This
proposal would amend 132 rule 2a–7 to
rescind certain exemptions that have
permitted money market funds to
maintain a stable price by use of
amortized cost valuation and pennyrounding pricing of their portfolios.133
As a result, the money market funds
subject to this reform would sell and
redeem shares at prices that reflect the
value using market-based factors of their
portfolio securities and would not
penny round their prices.134 In other
words, the daily share prices of these
money market funds would ‘‘float,’’
which means that each fund’s NAV
would fluctuate along with changes, if
any, in the value using market-based
factors of the fund’s underlying
portfolio of securities.135 Money market
Commission had completed its review of rule 2a–
7 required by the Dodd-Frank Act and made any
modifications to the rule. See SEC Staff No-Action
Letter to the Investment Company Institute (Aug.
19, 2010). This staff guidance remains in effect until
such time as the Commission or its staff indicate
otherwise.
131 The definitions of government and retail
money market funds, as considered exempt under
our proposals from certain proposed reforms, are
discussed in sections III.A.3 and III.A.4. These
funds would also price their portfolio securities
using market-based factors, but would continue to
be able to maintain a stable price per share through
the use of the penny rounding method of pricing.
132 References to rule 2a–7 as amended under our
floating NAV proposal will be ‘‘proposed (FNAV)
rule’’; similarly, references to rule 2a–7 as amended
under our liquidity fees and gates proposal
discussed in section III.B will be ‘‘proposed (Fees
& Gates) rule.’’
133 We also propose to amend rule 18f–3(c)(2)(i)
to replace the phrase ‘‘that determines net asset
value using the amortized cost method permitted by
§ 270.2a–7’’ with ‘‘that operates in compliance with
§ 270.2a–7’’ because money market funds would not
use the amortized cost method to a greater extent
than mutual funds generally under either of our
core reform proposals.
134 We have not previously proposed, but have
sought comment on requiring money market funds
to use a floating NAV. See 2009 Proposing Release,
supra note 31, at section II.A. The floating NAV
alternative on which we seek comment today is
informed by the comments we received in response
to the 2009 comment request, as well as relevant
comments submitted in response to: (i) the PWG
Report and (ii) the FSOC Proposed
Recommendations.
135 See infra note 27 for a discussion of how
money market funds generally value their portfolio
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funds would only be able to use
amortized cost valuation to the extent
other mutual funds are able to do so—
where the fund’s board of directors
determines, in good faith, that the fair
value of debt securities with remaining
maturities of 60 days or less is their
amortized cost, unless the particular
circumstances warrant otherwise.136
Under this approach, the ‘‘risk
limiting’’ provisions of rule 2a–7 would
continue to apply to money market
funds.137 Accordingly, mutual funds
that hold themselves out as money
market funds would continue to be
limited to investing in short-term, highquality, dollar-denominated
instruments. We would, however,
rescind rule 2a–7’s provisions that relate
to the maintenance of a stable value for
these funds, including shadow pricing,
and would adopt the other reforms
discussed in this Release that are not
related to the discretionary standby
liquidity fees and gates alternative, as
discussed in section III.B below.
We also propose to require that all
money market funds, other than
government and retail money market
funds, price their shares using a more
precise method of rounding.138 The
proposal would require that each money
market fund round prices and transact
in its shares at the fourth decimal place
in the case of a fund with a $1.00 target
share price (i.e., $1.0000) or an
equivalent level of precision if a fund
prices its shares at a different target
level (e.g., a fund with a $10 target share
price would price its shares at $10.000).
Depending on the degree of fluctuation,
this precision would increase the
securities using market-based factors based on
estimates from models rather than trading inputs.
136 See 1977 Valuation Release, supra note 10. In
this regard, the Commission has stated that the ‘‘fair
value of securities with remaining maturities of 60
days or less may not always be accurately reflected
through the use of amortized cost valuation, due to
an impairment of the creditworthiness of an issuer,
or other factors. In such situations, it would appear
to be incumbent on the directors of a fund to
recognize such factors and take them into account
in determining ‘fair value.’ ’’ Id. Accordingly, this
guidance effectively limits the use of amortized cost
valuation to circumstances where it is the same as
valuation based on market factors. Some
commenters voiced concern about allowing an
exemption for money market funds with remaining
maturities of 60 days or less. See, e.g., Federal
Reserve Bank Presidents FSOC Comment Letter,
supra note 38. However, we believe that these
commenters misunderstood Commission guidance
in this area, which limits the use of amortized cost
valuation for these securities to circumstances
under which the amortized cost value accurately
reflects the fair value, as determined using market
factors. See 1977 Valuation Release, supra note 10.
137 See proposed (FNAV) rule 2a–7(d) (risklimiting conditions).
138 See proposed (FNAV) rule 2a–7(c) (share
price). We discuss our proposed amendment to
share pricing in infra section III.A.2.
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observed sensitivity of a fund’s share
price to changes in the market values of
the fund’s portfolio securities, and
should better inform shareholders of the
floating nature of the fund’s value.
Finally, we propose a relatively long
compliance date of 2 years to provide
time for money market funds converting
to a floating NAV on a permanent basis
to make system modifications and time
for funds to respond to redemption
requests. The extended compliance date
would also allow shareholders time to
understand the implications of any
reforms, determine if a floating NAV
money market fund is an appropriate
investment, and if not, redeem their
shares in an orderly fashion.
The financial crisis of 2007–2008 had
significant impacts on investors, money
market funds, and the short-term
financing markets. The floating NAV
alternative is designed to respond, at
least in part, to the contagion effects
from heavy redemptions from money
market funds that were revealed during
that crisis. As discussed in greater detail
below, although it is not possible to
state with certainty what would have
happened if money market funds had
operated with a floating NAV at that
time, we expect that if a floating NAV
had been in place, it could have
mitigated some of the heavy
redemptions that occurred due to the
stable share price. Many factors,
however, contributed to these heavy
redemptions, and we recognize that a
floating NAV requirement is a targeted
reform that may not ameliorate all of
those factors.
Under a floating NAV, investors
would not have had the incentive to
redeem money market fund shares to
benefit from receiving the stable share
price of a fund that may have
experienced losses, because they would
have received the actual market-based
value of their shares. The transparency
provided by the floating NAV
alternative might also have reduced
redemptions during the crisis that were
a result of investor uncertainty about the
value of the securities owned by money
market funds because investors would
have seen fluctuations in money market
fund share prices that reflect marketbased factors.
Of course, a floating NAV would not
have prevented redemptions from
money market funds that were driven by
certain other investing decisions, such
as a desire to own higher quality assets
than those that were in the portfolios of
prime money market funds, or not to be
invested in securities at all, but rather
to hold assets in another form such as
in insured bank deposits. The floating
NAV alternative is not intended to deter
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redemptions that constitute rational risk
management by shareholders or that
reflect a general incentive to avoid loss.
Instead, it is designed to increase
transparency, and thus investor
awareness, of money market fund risks
and dis-incentivize redemption activity
that can result from informed investors
attempting to exploit the possibility of
redeeming shares at their stable share
price even if the portfolio has suffered
a loss.
1. Certain Considerations Relating to the
Floating NAV Proposal
a. A Reduction in the Incentive To
Redeem Shares
As discussed above, when a fund’s
shadow price is less than the fund’s
$1.00 share price, money market fund
shareholders have an incentive to
redeem shares ahead of other investors
in times of fund and market stress.
Given the size of institutional investors’
holdings and their resources for
monitoring funds, institutions have both
the motivation and ability to act on this
incentive. Indeed, as discussed above
and in the RSFI Study, institutional
investors redeemed shares more heavily
than retail investors from prime money
market funds in both September 2008
and June 2011.
Some market observers have
suggested that the valuation and pricing
techniques permitted by rule 2a–7 may
exacerbate the incentive to redeem in
money market funds if investors expect
that the value of the fund’s shares will
fall below $1.00.139 Our floating NAV
139 See, e.g., Roundtable Transcript, supra note
43. (Bill Stouten, Thrivent Financial) (‘‘I think the
primary factor that makes money funds vulnerable
to runs is the marketing of the stable value.’’); (Gary
Gensler, U.S. Commodity Futures Trading
Commission (‘‘CFTC’’)) (‘‘But one thing comes
along with the money market funds, which is the
stable value, or if I can say as an old market guy,
it’s a ‘free put.’ You can put back an instrument and
get 100 cents on the dollar. And it’s that free put
that I think causes some structural challenges.’’);
Comment Letter of Federal Reserve Bank of
Richmond (Jan. 10, 2011) (available in File No. 4–
619) (‘‘Richmond Fed PWG Comment Letter’’). See
also supra section II.B (discussing the structural
features of money market funds that can make them
vulnerable to runs); Statement 309 of the Shadow
Financial Regulatory Committee, Systemic Risk and
Money Market Mutual Funds (Feb. 14, 2011)
(available in File No. 4–619), (‘‘[I]f fund valuations
were marked to market immediately using the full
NAV approach—as required for other types of
mutual funds—this type of run [the September 2008
run on money market funds] would not have
occurred, and there would not have been a strong
economic incentive for money market mutual funds
to liquidate positions.’’); Gorton Shadow Banking,
supra note 71, at 269–270 (explaining that money
market funds’ ability to transact at a stable $1.00 per
share distinguishes them from other mutual funds,
allows them to compete with bank demand
deposits, and ‘‘may have instilled a false sense of
security in investors who took the implicit promise
as equivalent to the explicit insurance offered by
deposit accounts’’).
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proposal is designed to lower this risk
by reducing investors’ incentive to
redeem shares in times of fund and
market stress. Under our floating NAV
proposal, money market funds would
transact at share prices that reflect
current market-based factors (not
amortized cost or penny rounding) and
thus investor incentives to redeem early
to take advantage of transacting at a
stable value are ameliorated.140
b. Improved Transparency
Our floating NAV proposal also is
designed to increase the transparency of
money market fund risk. Money market
funds are investment products that have
the potential for the portfolio to deviate
from a stable value. Although many
investors understand that money market
funds are not guaranteed, survey data
shows that some investors are unsure
about the amount of risk in money
market funds and the likelihood of
government assistance if losses occur.141
Similarly, many institutional investors
use money market funds for liquidity
purposes and are extremely loss averse;
that is, they are unwilling to suffer any
losses on money market fund
investments.142 Money market funds’
stable share price, combined with the
practice of fund management companies
providing financial support to money
market funds when necessary, may have
140 As discussed supra in Section II, we recognize
that incentives other than those created by money
market fund’s stable share price exist for money
market fund shareholders to redeem in times of
stress, including avoidance of loss and the tendency
of investors to engage in flights to quality, liquidity,
and transparency.
141 See Fidelity April 2012 PWG Comment Letter,
supra note 61. For example, 41% of the retail
customers surveyed said they either would expect
the government to protect money market funds’
stable values in times of crisis (10%) or were unsure
about whether the government would do so (31%).
47% of the retail customers thought money market
funds present comparable risks to ‘‘bank products,’’
which in context appears to refer to insured
deposits, 12% thought money market funds posed
less risk than bank products, while 36% of the retail
customers thought money market funds posed more
risk than bank products.
142 See, e.g., Roundtable Transcript, supra note 43
(Lance Pan, Capital Advisors Group) (‘‘I would like
to add that money fund investors do view money
funds as liquidity vehicles, not as investment
vehicles. What I mean by that is they will take zero
loss, and they’re loss averse as opposed to risk
averse. So to the extent that they own that risk [i.e.,
investors, rather than fund sponsors, may be
exposed to a loss], at a certain point they started
to own that risk, then the run would start to
develop.’’); Comment Letter of Treasury Strategies,
Inc. (Jan. 10, 2011) (available in File No. 4–619)
(‘‘The added risk [in The Reserve Primary Fund
resulting from its taking on more risk] produced
higher yields, and as a result attracted substantial
‘hot money’ from highly sophisticated, institutional
investors. These investors were fully knowledgeable
of the risks they were taking, and assumed they
would be the first to be able to sell their
investments if the Reserve Fund’s bet on a
government bailout of Lehman Brothers failed.’’).
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implicitly encouraged investors to view
these funds as ‘‘risk-free’’ cash.143
However, the stability of money market
fund share prices has been due, in part,
to the willingness of fund sponsors to
support the stable value of the fund. As
discussed in section II.B.3 above,
sponsor support has not always been
transparent to investors, potentially
causing investors to underestimate the
investment risk posed by money market
funds. As a result, money market fund
investors, who were not accustomed to
seeing their funds lose value, may have
increased their redemptions of shares
when values fell in recent times.144
Our floating NAV proposal is
designed to increase the transparency of
risks present in money market funds. By
making gains and losses a more regular
and observable occurrence in money
market funds, a floating NAV could alter
investor expectations by making clear
that money market funds are not risk
free and that the funds’ share price will
fluctuate based on the value of the
funds’ assets.145 Investors in money
market funds with floating NAVs should
become more accustomed to, and
tolerant of, fluctuations in money
market funds’ NAVs and thus may be
less likely to redeem shares in times of
stress. The proposal would also treat
money market fund shareholders more
equitably than the current system by
requiring redeeming shareholders to
receive the fair value of their shares.146
143 See also, e.g., Better Markets FSOC Comment
Letter, supra note 67, at 11–12 (‘‘a fluctuating NAV
would correct the basic misconception among many
investors that their investment is guaranteed’’).
144 See, e.g., PWG Report, supra note 111, at 10
(‘‘Investors have come to view MMF shares as
extremely safe, in part because of the funds’ stable
NAVs and sponsors’ record of supporting funds that
might otherwise lose value. MMFs’ history of
maintaining stable value has attracted highly riskaverse investors who are prone to withdraw assets
rapidly when losses appear possible.’’); Comment
Letter of Capital Advisers (Apr. 2, 2012) (available
in File No. 4–619) (stating that institutional money
market fund investors ‘‘derive their risk-free
assumptions from the fact that very few (a total of
two) funds have experienced losses and in all other
‘near miss’ instances fund sponsors have provided
voluntary capital or liquidity support to cover
potential losses’’ and that the ‘‘Treasury Department
further reinforced these assumptions when it
announced the Temporary Guarantee Program for
Money Market Funds on September 29, 2008’’)
(emphasis in original).
145 For a more detailed discussion of a floating
NAV and investors’ expectations, see PWG Report,
supra note 111, at 19–22; 2009 Proposing Release,
supra note 31, at section III.A.
146 See, e.g., Comment Letter of Deutsche
Investment Management Americas Inc. (Jan. 10,
2011) (available in File No. 4–619) (‘‘Deutsche PWG
Comment Letter’’) (noting that a ‘‘variable NAV
fund . . . will treat all investors fairly during times
of stress’’; that ‘‘large and sudden redemptions runs
[are] a phenomenon exacerbated by the fact that
amortized cost accounting rules can embed realized
losses in the fund that are not reflected in the
NAV’’; and that ‘‘[t]o avoid having to absorb these
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To further enhance transparency, we
also are proposing to require a number
of new disclosures related to fund
sponsor support (see section III.F
below). As discussed further in section
III.E below, investors unwilling to bear
the risk of a floating NAV would likely
move to other products, such as
government or retail money market
funds (which we propose would be
exempt from our floating NAV proposal
and permitted to maintain a stable
price).
We seek comment on this aspect of
our proposal.
• Do commenters agree that floating a
money market fund’s NAV would lessen
the incentive to redeem shares in times
of fund and market stress that can result
from use of amortized cost valuation
and penny rounding pricing by money
market funds today?
• What would be the effect of the
other incentives to redeem that would
remain under a floating NAV with basis
point pricing requirement?
• Would floating a money market
fund’s NAV provide sufficient
transparency to cause investors to
estimate more accurately the investment
risks of money market funds? Do
commenters believe that daily
disclosure of shadow prices on fund
Web sites would accomplish the same
goal without eliminating the stable
share price at which fund investors
purchase and redeem shares? Why or
why not? Is daily disclosure of a fund’s
shadow price without transacting at that
price likely to lead to higher or lower
risks of large redemptions in times of
stress? If the enhanced disclosure
requirements proposed elsewhere in
this Release were in place, what would
be the incremental benefit of the
enhanced transparency of a floating
NAV?
• Are there other places to disclose
the shadow price that would make the
disclosure more effective in enhancing
transparency?
• If the fluctuations in money market
funds’ NAVs remained relatively small
even with a $1.0000 share price, would
investors become accustomed only to
experiencing small gains and losses, and
therefore be inclined to redeem heavily
if a fund experienced a loss in excess of
investors’ expectations?
• Would investors in a floating NAV
money market fund that appears likely
to suffer a loss be less inclined to
embedded losses, investors have the incentive to
redeem early’’); Comment Letter of TDAM USA Inc.
(Sept. 8, 2009) (available in File No. S7–11–09)
(agreeing that ‘‘requiring money market funds to
issue and redeem their shares at market value, or
to float their NAVs, would in certain respects
advance shareholder fairness’’).
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redeem because the loss would be
shared pro rata by all shareholders?
Would a floating NAV make investors in
a fund more likely to redeem at the first
sign of potential stress because any loss
would be immediately reflected in the
floating NAV?
• Would floating NAV money market
funds treat non-redeeming shareholders,
and particularly slower-to-redeem
shareholders, more equitably in times of
stress?
• To the extent that some investors
choose not to invest in money market
funds due to the prospect of even a
modest loss through a floating NAV,
would the funds’ resiliency to
heightened redemptions be improved?
• Would money market fund
sponsors voluntarily make cash
contributions or use other available
means to support their money market
funds and thereby prevent their NAVs
from actually floating? 147 Would larger
fund sponsors or those sponsors with
more access to capital have a
competitive advantage over other fund
sponsors?
c. Redemptions During Periods of
Illiquidity
We recognize that a floating NAV may
not eliminate investors’ incentives to
redeem fund shares, particularly when
financial markets are under stress and
investors are engaging in flights to
quality, liquidity, or transparency.148 As
discussed above, the RSFI Study noted
that the incentive for investors to
redeem ahead of other investors is
heightened by liquidity concerns–when
liquidity levels are insufficient to meet
redemption requests, funds may be
forced to sell portfolio securities into
illiquid secondary markets at
147 In section III.A.5.a we discuss the economic
implications of sponsor support under our floating
NAV proposal. We are not proposing any changes
that would prohibit fund sponsors from supporting
money market funds under our floating NAV
proposal. Our proposal also includes new
disclosure requirements related to sponsor support.
See infra section III.F.
148 See, e.g., PWG Report, supra note 111, at 20
(‘‘To be sure, a floating NAV itself would not
eliminate entirely MMFs’ susceptibility to runs.
Rational investors still would have an incentive to
redeem as fast as possible the shares of any MMF
that is at risk of depleting its liquidity buffer before
that buffer is exhausted, because subsequent
redemptions may force the fund to dispose of lessliquid assets and incur losses.’’); 2009 Proposing
Release, supra note 31, at 106 (‘‘We recognize that
a floating net asset value would not necessarily
eliminate the incentive to redeem shares during a
liquidity crisis—shareholders still would have an
incentive to redeem before the portfolio quality
deteriorated further from the fund selling securities
into an illiquid market to meet redemption
demands.’’). See also supra notes 36–37 and
accompanying text.
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discounted or even fire-sale prices.149
Because the potential cost of liquidity
transformation is not reflected in
market-based pricing until after the
redemption has occurred, this liquidity
pressure may create an additional
incentive for investors to redeem shares
in times of fund and market stress.150 In
addition, market-based pricing does not
capture the likely increasing illiquidity
of a fund’s portfolio as it sells its more
liquid assets first during a period of
market stress to defer liquidity pressures
as long as possible. As discussed in
section II.D.1 above, our 2010
amendments, including new daily and
weekly liquid asset requirements,
strengthened the resiliency of money
market funds to both portfolio losses
and investor redemptions as compared
with 2008. We note, however, that other
financial intermediaries that engage in
maturity transformation, including
banks, also have liquidity mismatches to
some degree.
We request comment on the incentive
to redeem that exists in a liquidity
crisis.
• Do commenters believe that a
floating NAV is sufficient to address the
incentive to redeem caused by liquidity
concerns in times of market stress?
Would other tools, such as redemption
gates or liquidity fees, also be
necessary?
• Do commenters believe that money
market funds as currently structured
present unique risks as compared with
other mutual funds, all of which may
face some degree of liquidity pressure
during times of market stress? Would
the floating NAV proposal suffice to
address those risks?
• Did the 2010 amendments,
including new daily and weekly liquid
asset requirements, address sufficiently
the incentive to redeem in periods of
illiquidity?
d. Empirical Evidence in Other Floating
NAV Cash Management Vehicles
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Commenters have cited to the fact that
some floating value money market funds
in other jurisdictions and U.S. ultrashort bond mutual funds also suffered
heavy redemptions during the 2007–
149 See RSFI Study, supra note 21, at 4 (noting
that most money market fund portfolio securities
are held to maturity, and secondary markets in
these securities are not deeply liquid).
150 Although we recognize that managers of
certain other mutual funds, and not just money
market funds, generally sell the most liquid
portfolio securities first to satisfy redemptions that
exceed available cash, non-money market mutual
funds generally are not as susceptible to heightened
redemptions as are money market funds for a
variety of reasons, including that non-money
market mutual funds generally are not used for cash
management.
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2008 financial crisis.151 These
commenters suggest, therefore, that
money market fund floating NAVs
would likely not stop investors from
redeeming shares. One qualification in
considering these experiences is that
many of the European floating NAV
products that experienced heavy
shareholder redemptions were priced
and managed differently than our
proposal and that U.S. ultra-short bond
mutual funds are not subject to rule 2a–
7’s risk-limiting conditions.152
Europe, for example, has several
different types of money market funds,
all of which can take on more risk than
U.S. money market funds as they are not
currently subject to regulatory
restrictions on their credit quality,
liquidity, maturity, and diversification
as stringent as those imposed under rule
2a–7, among other differences in
151 See, e.g., Statement of the Investment
Company Institute, SEC Open Meeting of the
Investor Advisory Committee, May 10, 2010, at 4,
available at www.ici.org/pdf/24289.pdf (stating that
‘‘[u]ltra-short bond funds lost more than 60% of
their assets from mid-2007 to the end of 2008, and
French floating NAV dynamic money funds lost
about 40% of their assets in a three-month time
span from July 2007 to September 2007’’ and that
‘‘[s]hareholders in fixed-income funds [including
those with floating NAVs] also tend to be more risk
adverse and more likely to redeem shares quickly
when fixed-income markets show any signs of
distress’’); Comment Letter of the European Fund
and Asset Management Association (Jan. 10, 2011)
(available in File No. 4–619) (‘‘EFAMA PWG
Comment Letter’’) (noting that ‘‘[i]n a matter of
weeks, EUR 70 billion were redeemed from these
[enhanced money market] funds, predominantly by
institutional investors; around 15–20 suspended
redemptions for a short period, and 4 of them were
[definitively] closed.’’).
152 Many European floating NAV money market
funds, not all of which suffered heavy redemptions,
price their shares differently than floating NAV
money market funds would under our proposal by
accumulating rather than distributing dividends.
The shares of accumulating dividend funds
therefore generally will exceed one euro, and a loss
in these funds would be a small reduction in the
excess value above one euro as opposed to a drop
in value below a single euro. This kind of floating
NAV money market fund may not have affected
shareholders’ expectations of and tolerance for
losses to the same extent as would our proposal.
See, e.g., Deutsche PWG Comment Letter, supra
note 146 (stating that ‘‘drawing parallels to the
return or redemption experiences within [European
money market funds and ultra-short bond funds]
and those in the proposed variable NAV rule 2a–
7 money market funds is not entirely accurate due
to the differences in the duration of time and the
magnitude of the redemption experiences’’ and
noting that (i) ‘‘the variable NAV structure
prevalent in many European money market funds
is based on a system of accumulating dividends, not
the use of a mark to market accounting system’’ and
(ii) ‘‘one of the weaknesses addressed through the
European Fund and Asset Management Association
(‘‘EFAMA’’) and the Committee of European
Securities Regulators (‘‘CESR’’) in the European
style of money market funds was the lack of
standardization in the definition of money market
funds and the broad investment policies across EU
member states’’). See also Witmer, supra note 36.
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regulation.153 One commenter observed
that the financial crisis was first felt in
Europe when ‘‘so-called ‘enhanced
money market funds,’ which used the
‘money market’ fund label in their
marketing strategies while taking on
more risk than traditional money market
funds, [ran] into problems.’’ 154 The
difficulties experienced by these funds,
the commenter asserted, ‘‘created
confusion for investors about the
definition, classification and risk
characteristics of money market
funds.’’ 155 In contrast, French
´
monetaire funds, which are managed
more conservatively than ‘‘enhanced
money market funds’’ and thus resemble
more closely the floating NAV money
market funds contemplated by our
proposal, generally did not experience
heavy redemptions.156 The experience
´
of French monetaire funds would be
consistent with another commenter’s
observation that ‘‘one could reach the
opposite conclusion that a variable NAV
structure can, and in fact has, operated
as intended during times of market
stress in a manner consistent with
minimizing systemic risk.’’ 157
U.S ultra-short bond funds also
experienced redemptions in this period.
U.S. ultra-short bond funds are not
subject to rule 2a–7’s risk-limiting
conditions and although their NAVs
float, pose more risk of loss to investors
than most U.S. money market funds,
including floating NAV money market
funds under our proposal.158 One
reason that investors redeemed shares in
ultra-short bond funds during the 2007–
2008 financial crisis may have been
because they did not fully understand
the riskiness or liquidity of ultra-short
153 For a discussion of the regulation of European
money market funds, see infra Table 2, notes E and
H; Common Definition of European Money Market
Funds (Ref. CESR/10–049).
154 See EFAMA PWG Comment Letter, supra note
151 (emphasis in original).
155 Id. (noting that ‘‘[i]n a matter of weeks, EUR
70 billion were redeemed from these [enhanced
money market] funds, predominantly by
institutional investors; around 15–20 suspended
redemptions for a short period, and 4 of them were
[definitively] closed’’).
156 See Comment Letter of HSBC Global Asset
Management on the European Commission’s Green
Paper on Shadow Banking (May 28, 2012) (‘‘HSBC
EC Letter’’), available at https://ec.europa.eu/
internal_market/consultations/2012/shadow/
individual-others/hsbc_en.pdf (comparing inflows
and outflows of European money market funds);
EFAMA PWG Comment Letter, supra note 151
(describing the outflows from European enhanced
money market funds).
157 Deutsche PWG Comment Letter, supra note
146 (emphasis in original).
158 See, e.g., Witmer, supra note 36, at 23 (noting
that ultra-short bond funds in the U.S. and
enhanced money market funds in Europe both
maintain a floating NAV structure, but are not
subject to the same liquidity, credit, and maturity
restrictions as money market funds).
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bond funds. That some ultra-short bond
funds experienced heavy redemptions
during the financial crisis, therefore,
does not necessarily suggest that
investors in the floating NAV money
market funds contemplated by our
proposal also would experience
redemptions in a financial crisis.
Empirical analysis in this area also
yields different opinions.159
Having pointed out these differences,
we recognize that the data is consistent
with certain commenters’ view that
other incentives may lead to heavy
redemptions of floating NAV funds in
times of stress.160 We seek comment on
the performance of other floating NAV
investment products during the 2007–
2008 financial crisis.
• Do commenters agree with the
preceding discussion of what may have
caused investors to heavily redeem
shares in some floating value money
market funds in other jurisdictions and
in U.S. ultra-short bond funds during
the 2007–2008 financial crisis? Are
there other possible factors that we
should consider?
• Do commenters agree with the
distinctions we identified between
money market funds under our
proposed floating NAV and money
market funds in other jurisdictions and
U.S. ultra-short bond funds? Are there
similarities or differences we have not
identified?
• Do commenters believe that the risk
limiting requirements of rule 2a–7
would deter heavy redemptions in
money market funds with a floating
NAV because of the restrictions on the
underlying assets?
• Do commenters believe that money
market funds attract very risk averse
investors? If so, are these investors more
or less likely to rapidly redeem in times
of stress to avoid even small losses?
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2. Money Market Fund Pricing
We are proposing that money market
funds, other than government and retail
money market funds, price their shares
using a more precise method of
valuation that would require funds to
price and transact in their shares at an
159 See, e.g., Witmer, supra note 36 (empirically
testing whether floating NAVs (as compared with
constant NAVs) provide a benefit in reducing runlike behavior by examining flow and withdrawal
behavior (from 2006 through 2011) of money market
mutual funds in the United States and Europe and
concluding that the variable NAV fund structure is
less susceptible to run-like behavior relative to
constant NAV money market funds). But see
Comment Letter of Jeffrey Gordon (Feb. 28, 2013)
(available in File No. FSOC–2012–0003) (‘‘Gordon
FSOC Comment Letter’’).
160 See, e.g., Comment Letter of Treasury
Strategies, Inc. (Alternative One: Floating Net Asset
Value) (Jan. 15, 2013) (available in File No. FSOC–
2012–0003).
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NAV that is calculated to the fourth
decimal place for shares with a target
NAV of one dollar (e.g., $1.0000). Funds
with a current share price other than
$1.00 would be required to price their
shares at an equivalent level of
precision (e.g., a fund with a $10 target
share price would price its shares at
$10.000).161 The proposed change to
money market fund pricing under our
floating NAV proposal would change
the rounding convention for money
market funds—from penny rounding
(i.e., to the nearest one percent) to ‘‘basis
point’’ rounding (to the nearest 1/100th
of one percent).162 ‘‘Basis point’’
rounding is a significantly more precise
standard than the 1/10th of one percent
currently required for most mutual
funds.163 For the reasons discussed
below, we believe that our proposal
provides the level of precision necessary
to convey the risks of money market
funds to investors.
Market-based valuation with penny
rather than ‘‘basis point’’ rounding
effectively provides the same rounding
convention as exists in money market
funds today—the underlying valuation
based on market-based factors may
161 See proposed (FNAV) rule 2a–7(c). In its
proposed recommendations the FSOC proposed
that money market funds re-price their shares to
$100.00, which is the mathematical equivalent of
our $1.0000 proposed share price. See FSOC
Proposed Recommendations, supra note 114, at 31.
FSOC commenters generally opposed the $100.00
per share re-pricing, stating that the Investment
Company Act does not require that a registered
investment company offer its shares at a particular
price. See, e.g., Comment Letter of Federated
Investors, Inc. (Re: Alternative One) (Jan. 25. 2013)
(available in File No. FSOC–2012–0003)
(‘‘Federated Investors Alternative 1 FSOC Comment
Letter’’); ICI Jan. 24 FSOC Comment Letter, supra
note 25. While our proposed pricing is
mathematically the same as that proposed by the
FSOC, pricing fund shares using $1.00 extended to
four decimal places reduces other potential costs,
including, for example, the possibility that funds
would require corporate actions (e.g., reverse stock
splits) to re-price their shares at $100.00. Our
proposed pricing does not mandate that funds
establish a particular share price, but rather amends
the precision by which a fund prices its shares.
162 Money market funds are permitted to use
penny rounding under rule 2a–7(c) and therefore,
a money market fund priced at $1.00 per share may
round its NAV to the nearest penny.
163 Currently, money market funds priced at $1.00
may round their NAV to the nearest penny ($1.00).
See rule 2a–7(c). Mutual funds other than money
market funds must calculate the fund’s NAV to the
nearest 1/10th of 1% (i.e., for funds with shares
priced at $1.00, the funds should price their shares
to the third decimal place, or $1.000). See 1977
Valuation Release, supra note 10. Many mutual
funds typically price their shares at an initial NAV
of $10 and round their NAV to the nearest penny.
See rule 2a–4. Because floating NAV money market
funds, under our proposal, would continue to
adhere to rule 2a–7s’s risk-limiting conditions and
generally seek principal stability, we are proposing
that money market funds with a floating NAV value
their shares to the nearest 1/100th of 1%, a more
precise standard than that required of most mutual
funds today.
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36853
deviate by as much as 50 basis points
before the fund breaks the buck.
Accordingly, it is unlikely to change
investor behavior.
A $1.0000 share price, however,
would reflect small fluctuations in value
more than a $1.00 price, which may
more effectively inform investor
expectations. For example, the value of
a $1.00 per share fund’s portfolio
securities would have to change by 50
basis points for investors to currently
see a one-penny change in the NAV;
under our proposal, the share price at
which investors purchase and redeem
shares would reflect single basis point
variations.164 We do not anticipate
significant operational difficulties or
overly burdensome costs arising from
funds pricing shares using ‘‘basis point’’
rounding: A number of money market
funds recently elected to voluntarily
report daily shadow NAVs at this level
of precision.165
‘‘Basis point’’ rounding should
enhance many of the potential
advantages of having a floating NAV. It
should allow funds to reflect gains and
losses more precisely. In addition, it
should help reduce incentives for
investors to redeem shares ahead of
other investors when the shadow price
is less than $1.0000 as investors would
sell shares at a more precise and
equitable price than under the current
rules. At the same time, it should help
reduce penalties for investors buying
shares when shadow prices are less than
$1.0000. ‘‘Basis point’’ rounding should
therefore help stabilize funds in times of
market stress by deterring redemptions
from investors that would otherwise
seek to take advantage of less precise
pricing to redeem at a higher value than
a more precise valuation would provide
164 We expect that floating $100.00 NAVs (which
is the mathematical equivalent of our proposed
$1.0000 NAV) would change by a penny or more
during all but the shortest investment horizons.
Commission staff compared reported shadow prices
on Form N–MFP between November 2010 and
March 2012 over consecutive one-, three-, and sixmonth periods. Staff estimated that there would
have been no penny change over a one-month
period in 98% of the months using a $10.00 NAV
but only 69% of the months using a $100 NAV.
Staff estimated that there would have been no
penny change over a three-month period in 98% of
the time using a $10 NAV but only 59% of the time
using a $100.00 NAV. Staff estimates that there
would have been no penny change over a six-month
period in 96% of the time using a $10 NAV but only
43% of the time using a $100.00 NAV. No money
market fund had a support agreement in place
during this time period.
165 Many large fund complexes have begun (or
plan) to disclose daily money market fund market
valuations (i.e., shadow prices) of at least some of
their money market funds, rounded to four decimal
places (‘‘basis point’’ rounding), for example,
BlackRock, Fidelity Investments, and J.P. Morgan.
See, e.g., Money Funds’ New Openness Unlikely to
Stop Regulation, Wall St. J. (Jan. 30, 2013).
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and thus dilute the value of the fund for
remaining shareholders.
Our proposed amendment to require
that money market funds use ‘‘basis
point’’ rounding should provide
shareholders with sufficient price
transparency to better understand the
tradeoffs between risk and return across
competing funds, and become more
accustomed to fluctuations in market
value of a fund’s portfolio securities.166
It should allow them to appreciate that
some money market funds may
experience greater price volatility than
others, and thus that there are variations
in the risk profiles of different money
market funds.
We also considered whether to
require that money market funds price
to three decimal places (for a fund with
a target share price of $1.000), as other
mutual funds do. We are concerned,
however, that such ‘‘10 basis point’’
rounding may not be sufficient to ensure
that investors do not underestimate the
investment risks of money market
funds, particularly if funds manage
themselves in such a way that their
NAVs remain constant or nearly
constant. Fund investment managers
may respond to a floating NAV with ‘‘10
basis point’’ rounding by managing their
portfolios more conservatively to avoid
volatility that would require them to
price fund shares at something other
than $1.000. It is possible that managers
would be able to avoid this volatility for
quite some time, even with a floating
NAV.167 Although a floating NAV with
‘‘basis point’’ rounding may discourage
risk taking in funds, a floating NAV
with ‘‘10 basis point’’ rounding may
mask small deviations in the marketbased value of the fund’s portfolio
securities.
We seek comment on this aspect of
our proposal.
• What level of precision in
calculating a fund’s share price would
166 Similar to other mutual funds, our proposed
pricing of money market fund shares would
continue to allow shareholders to purchase and
redeem fractional shares, and therefore would not
affect the ability of shareholders to purchase and
redeem shares with round or precise dollar amounts
as they do today.
167 See, e.g., PWG Report, supra note 111, at 22
(‘‘Investors’ perceptions that MMFs are virtually
riskless may change slowly and unpredictably if
NAV fluctuations remain small and rare. MMFs
with floating NAVs, at least temporarily, might even
be more prone to runs if investors who continue to
see shares as essentially risk-free react to small or
temporary changes in the value of their shares.’’);
Comment Letter of Federated Investors, Inc. (May
19, 2011) (available in File No. 4–619) (stating that
‘‘managers would employ all manners of techniques
to minimize the fluctuations in their funds’ NAVs’’
and, therefore, ‘‘[i]nvestors would then expect the
funds to exhibit very low volatility, and would
redeem their shares if the volatility exceeded their
expectations’’).
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best convey to investors that floating
NAV funds are different from stable
price funds? Is ‘‘basis point’’ rounding
too precise? Would ‘‘10 basis point
rounding’’ ($1.000 for a fund with a
$1.00 target share price) provide
sufficient price transparency? Or
another measure?
• Would requiring funds to price
their shares at $1.0000 per share
effectively alter investor expectations
regarding a fund’s NAV gains and
losses? Would this in turn make
investors less likely to redeem heavily
when faced with potential or actual
losses?
• Would ‘‘basis point’’ rounding
better reflect gains and losses? Would it
help eliminate incentives for investors
to redeem shares ahead of other
investors when prices are less than
$1.0000?
• Should we require that all money
market funds price their shares at
$1.0000, including those funds that
currently price their shares at an initial
value other than $1.00? Do commenters
agree that, regardless of a fund’s initial
share price, under our proposal all
money market funds would be required
to price fund shares to an equivalent
level of precision (e.g., ‘‘basis point’’
rounding)?
• What would be the cost of
implementing ‘‘basis point’’ rounding?
Would funds require corporate actions
or shareholder approval to price fund
shares at $1.0000? What operational
changes and related costs would be
involved?
3. Exemption to the Floating NAV
Requirement for Government Money
Market Funds
We are proposing an exemption to the
floating NAV requirement for
government money market funds–
money market funds that maintain at
least 80% of their total assets in cash,
government securities, or repurchase
agreements that are collateralized
fully.168 We believe that a government
money market fund that maintains 80%
of its total assets in cash and
government securities fits within the
typical risk profile of government
money market funds as understood by
investors, and is the portfolio holdings
test used today for determining the
accuracy of a fund’s name.169 Under the
168 Proposed
(FNAV) rule 2a–7(c)(2).
example, some government money market
funds limit themselves to holding mostly Treasury
securities and Treasury repos and are referred to as
‘‘Treasury money market funds.’’ To comply with
the investment company names rule, funds that
hold themselves out as Treasury money market
funds must hold at least 80% of their portfolio
assets in U.S. Treasury securities and for Treasury
169 For
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proposal, government money market
funds would not be subject to the basis
point rounding aspect of the floating
NAV requirement and instead would be
permitted to use the penny rounding
method of pricing fund shares to
maintain a stable price.170
As discussed above, government
money market funds face different
redemption pressures and have different
risk characteristics than other money
market funds because of their unique
portfolio composition.171 The securities
primarily held by government money
market funds typically have even a
lower credit default risk than
commercial paper and are highly liquid
in even the most stressful market
scenario.172 The primary risk that these
funds bear is interest rate risk; that is,
the risk that changes in interest rates
result in a change in the market value
of portfolio securities. Even the interest
rate risk of government money market
funds, however, is generally mitigated
because they typically hold assets that
have short maturities and hold those
assets to maturity.173
Nonetheless, it is possible that a
government money market fund could
undergo such stress that it results in a
significant decline in a fund’s shadow
price. Government money market funds
may invest up to 20% of their portfolio
in non-government securities, and a
credit event in that 20% portion of the
portfolio or a shift in interest rates could
trigger a drop in the shadow price,
thereby creating incentives for
shareholders to redeem shares ahead of
other investors.
repos. See rule 35d–1 (a materially deceptive and
misleading name of a fund (for purposes of section
35(d) of the Investment Company Act (Unlawful
representations and names)) includes a name
suggesting that the fund focuses its investments in
a particular type of investment or in investments in
a particular industry or group of industries, unless,
among other requirements, the fund has adopted a
policy to invest, under normal circumstances, at
least 80% of the value of its assets in the particular
type of investments or industry suggested by the
fund’s name).
170 As discussed in greater detail below, money
market funds that take advantage of an exemption
to the floating NAV requirement would not be able
to use the amortized cost method of valuation, but
would instead be required to only use the penny
rounding method of pricing to facilitate a stable
price per share.
171 See, e.g., Comment Letter of Charles Schwab
(Jan. 17, 2013) (available in File No. FSOC–2012–
0003) (‘‘Schwab FSOC Comment Letter’’); FSOC
Proposed Recommendations, supra note 114, at 9.
172 See, e.g., RSFI Study, supra note 21, at 8–9;
Comment Letter of Vanguard (Jan. 15, 2013)
(available in File No. FSOC–2012–0003)
(‘‘Vanguard FSOC Comment Letter’’).
173 See, e.g., ICI Jan. 24 FSOC Comment Letter,
supra note 25 (‘‘Given the short duration of
[government] money market fund portfolios, any
interest rate movements have a modest and
temporary effect on the value of the fund’s
securities’’).
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Despite these risks, we believe that
requiring government money market
funds to float their NAV may be
unnecessary to achieve policy goals.174
As discussed below, shifting to a
floating NAV could impose potentially
significant costs on both a fund and its
investors. In light of the evidence of
investor behavior during previous
crises, it does not appear that
government money market funds are as
susceptible to the risks of mass investor
redemptions as other money market
funds.175 Investors have frequently
noted the benefits of having a stable
money market fund option, and
exempting government money market
funds from a floating NAV would allow
us to preserve this option at a minimal
risk.176 On balance, we believe the
benefits of retaining a stable share price
money market fund option and the
relative safety in a government money
market fund’s 80% bucket appropriately
counterbalances the risks associated
with the 20% portion of a government
money market fund’s portfolio that may
be invested in securities other than
cash, government securities, or
repurchase agreements.
Under the proposal, funds taking
advantage of the government fund
exemption (as well as funds using the
retail exemption discussed in the next
section) would no longer be permitted
to use the amortized cost method of
valuation to facilitate a stable NAV, but
would continue to be able to use the
penny rounding method of pricing.
While today virtually all money market
funds use both amortized cost valuation
and penny rounding pricing together to
maintain a stable value, either method
alone effectively provides the same 50
basis points of deviation from a fund’s
shadow price before the fund must
‘‘break the buck’’ and re-price its shares.
174 Many commenters have agreed with this
position, suggesting that a floating NAV proposal
should exempt government money market funds.
See, e.g., Comment Letter of The Dreyfus
Corporation (Feb. 11, 2013) (available in File No.
FSOC–2012–0003) (‘‘Dreyfus FSOC Comment
Letter’’); Comment Letter of Northern Trust (Feb.
14, 2013) (available in File No. FSOC–2012–0003)
(‘‘Northern Trust FSOC Comment Letter’’); ICI Jan.
24 FSOC Comment Letter, supra note 25.
175 See RSFI Study, supra note 21, at 12–13
(examining the change in daily assets of different
types of money market funds and highlighting
abnormally large inflows into institutional and
retail government funds during September 2008).
176 See, e.g., Comment Letter of Allegheny
Conference on Community Development (Jan. 4,
2013) (available in File No. FSOC–2012–0003)
(‘‘Many nonprofit institutions are required, by law
or by investment policy, to invest cash only in
products offering a stable value’’); Comment Letter
of New Jersey Association of Counties (Dec. 21,
2012) (available in File No. FSOC–2012–0003) (‘‘We
thus strongly support maintaining the ability of
money market funds to offer a stable $1.00 pershare value’’).
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Accordingly, today the principal benefit
from money market funds being able to
use amortized cost valuation in addition
to basis point rounding is that it
alleviates the burden of the money
market fund having to value each
portfolio security each day using market
factors.177 However, as described in
section III.F.3 below, we are proposing
that all money market funds be required
to disclose on a daily basis their share
price with portfolios valued using
market factors and applying basis point
rounding. As a result, money market
funds—including those exempt from the
floating NAV requirement—would have
to value their portfolio assets using
market factors instead of amortized cost
each day. Accordingly, in line with this
increased transparency on the valuation
of money market funds’ portfolios, and
in light of the fact that this increased
transparency renders penny rounding
alone an equal method of achieving
price stability in money market funds,
we are proposing that the government
exemption permit penny rounding
pricing alone and not also amortized
cost valuation for all portfolio securities.
The government money market fund
exemption to the floating NAV
requirement would not be limited solely
to Treasury money market funds, but
also would extend to money market
funds that invest at least 80% of their
portfolio in cash, ‘‘government
securities’’ as defined in section 2(a)(16)
of the Act, and repurchase agreements
collateralized with government
securities. Allowable securities would
include securities issued by
government-sponsored entities such as
the Federal Home Loan Banks,
government repurchase agreements, and
those issued by other
‘‘instrumentalities’’ of the U.S.
government.178 It would exclude,
however, securities issued by state and
municipal governments, which do not
generally share the same credit and
liquidity traits as U.S. government
securities.179
Today, government money market
funds hold approximately $910 billion
in assets, or around 40% of all money
market fund assets.180 Fund groups that
wish to focus on offering stable price
177 Rule 2a–7 currently requires a money market
fund’s board of directors to review the amount of
deviation between the fund’s market-based NAV
per share and the fund’s amortized cost per share
‘‘periodically.’’ Rule 2a–7(c)(8)(ii)(A)(2).
178 Section 2(a)(16) of the Investment Company
Act.
179 See, e.g., RSFI Study, supra note 21; Schwab
FSOC Comment Letter, supra note 171 (‘‘There may
be slightly higher risk in municipal money market
funds, but these funds tend to be more liquid than
most prime funds.’’).
180 Based on iMoneyNet data.
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36855
products could offer government and
retail money market funds. We also note
that our proposed retail money market
fund exemption discussed in the next
section would likely cover most
municipal (or tax-exempt) funds,
because the tax advantages that these
funds offer are only enjoyed by
individuals and thus most of these
funds could continue to offer a stable
share price.181 Similarly, investors who
prefer a stable price fund or are unable
to invest in a floating NAV fund could
choose to invest in government money
market funds. These investors could
continue to use these money market
funds as a cash management tool
without incurring any costs or other
effects associated with floating NAV
investment vehicles.
We request comment on this aspect of
our proposal.
• Do commenters agree with our
assumption that money market funds
with at least 80% of their total assets in
cash, government securities, and
government repos are unlikely to suffer
losses due to credit quality problems
correct? Is our assumption that they are
unlikely to be subject to significant
shareholder redemptions during a
financial crisis correct?
• Should government money market
funds be exempt from the floating NAV
requirement? Why or why not? Are
there other risks, such as interest rate or
liquidity risks, about which we should
be concerned if we adopt this proposed
exemption to the floating NAV
requirement? If so, what are they and
how should they be addressed?
• Would the costs imposed on
government money market funds if we
required them to price at a floating NAV
be different from the costs discussed
below?
• Are the proposed criteria for
qualifying for the government money
market funds exemption to the floating
NAV requirement appropriate? Should
government money market funds be
required to hold more or fewer than
80% of total assets in cash, government
securities, and government repos? If so,
what should it be and why?
• What kinds of risks are created by
exempting government money market
funds from a floating NAV requirement
where the funds are permitted to
maintain 20% of their portfolio in
securities other than cash, government
securities, and government repos?
Should there be additional limits or
181 We note that there are some tax-exempt money
market funds that self-classify as institutional funds
to private reporting services such as iMoneyNet. We
understand that these funds’ shareholder base
typically is comprised of omnibus accounts, with
underlying individual investors.
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requirements on the 20%? Would
investors have incentives to redeem
shares ahead of other investors if they
see a material downgrade in securities
held in the 20% basket? Would such an
incentive create a significant risk of
runs?
• Is penny rounding sufficient to
allow government money market funds
to maintain a stable price? Should we
also permit these funds to use amortized
cost valuation? If so, why? Should we
permit money market funds to continue
using amortized cost valuation for
certain types of securities, such as
government securities? Why?
• If the Commission does not adopt
this exemption, how many investors in
government money market funds might
reallocate assets to non-government
money market fund alternatives? How
many assets in government money
market funds might be reallocated to
alternatives? To what non-government
money market fund alternatives are
these investors likely to reallocate their
investments?
• Should we provide other
exemptions to the floating NAV
requirement based on the characteristics
of a fund’s portfolio assets, such as
funds that hold heightened daily or
weekly liquid assets? If so, why and
what threshold should we use?
• Should money market funds that
invest primarily in municipal securities
be exempted from the floating NAV
requirement? Why or why not? To what
extent would such funds expect to
qualify for the retail exemption?
4. Exemption to the Floating NAV
Requirement for Retail Money Market
Funds
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a. Overview
We are also proposing to exempt
money market funds that are limited to
retail investors from our floating NAV
proposal by allowing them to use the
penny rounding method of pricing
instead of basis point rounding.182
Under this proposal, retail funds would
still generally be required to value
portfolio securities using market-based
factors rather than amortized cost. As
discussed in detail below, retail
investors historically have behaved
differently from institutional investors
in a crisis, being much less likely to
make large redemptions quickly in
response to the first sign of market
stress. Thus, prime money market funds
182 Much like under the government fund
proposal, funds that take advantage of the retail
exemption would not be able to use the amortized
cost method of valuation to facilitate a stable NAV
for the same reasons as discussed in section III.A.3
above.
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that are limited to retail investors in
general have not been subject to the
same pressures as institutional or mixed
funds.183 Under the proposed
exemption, we would define a retail
fund as a money market fund that does
not permit a shareholder to redeem
more than $1 million in a single
business day. We would permit retail
funds to continue to maintain a stable
price. As of February 28, 2013, funds
that self-report as retail money market
funds currently hold nearly $695 billion
in assets, which is approximately 26%
of all assets held in money market
funds.184
As noted above in section II, during
the 2007–2008 financial crisis,
institutional prime money market funds
had substantially greater redemptions
than retail prime money market
funds.185 For example, approximately
4–5% of prime retail money market
funds had outflows of greater than 5%
on each of September 17, 18, and 19,
2008, compared to 22–30% of prime
institutional money market funds.186
Similarly, in late June 2011,
institutional prime money market funds
experienced heightened redemptions in
response to concerns about their
potential exposure to the Eurozone debt
crisis, whereas retail prime money
market funds generally did not
experience a similar increase.187 Studies
of money market fund redemption
patterns in times of market stress also
183 See, e.g., Comment Letter of United Services
Automobile Association (Feb. 15. 2013) (available
in File No. FSOC–2012–0003) (‘‘USAA FSOC
Comment Letter’’) (‘‘Retail MMFs do not need
additional or more stringent regulation to prevent
runs because retail investors are inherently (and
historically) less likely to cause runs.’’).
184 Based on iMoneyNet data. Of these assets,
approximately $497 billion are held by prime
money market funds and another $198 billion are
in government funds. Because we are proposing to
exempt government funds from the floating NAV
requirement, the proposed retail exemption would
only be relevant to the investors holding the $497
billion in retail prime funds.
185 See RSFI Study, supra note 21, at 8. We note
that the RSFI Study used a definition of retail fund
based on fund self-classification, which does not
entirely correspond with the definition of retail
fund that we are proposing today.
186 Based on iMoneyNet data. iMoneyNet
classifies retail and institutional money market
funds according to who is eligible to purchase fund
shares, minimum initial investment amount in the
fund, and to whom the fund is marketed. However,
as discussed infra, there is currently no regulatory
distinction that reliably distinguishes these types of
investors, and the iMoneyNet method uses a
different method of classification than the method
we are proposing.
187 Based on iMoneyNet data. Retail money
market funds suffered net redemptions of less than
1% between June 14, 2011 and July 5, 2011, and
only 27 retail money market funds had redemptions
in excess of 5% during that period (and of these
funds only 7 had redemptions in excess of 10%
during this period), far fewer redemptions than
those incurred by institutional funds.
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have noted this difference.188 As
discussed above, institutional
shareholders tend to respond more
quickly than retail shareholders to
potential market stresses because
generally they have greater capital at
risk and may be better informed about
the fund through sophisticated tools to
monitor and analyze the portfolio
holdings of the funds in which they
invest.
Given the tendency of retail investors
to continue to hold money market fund
shares in times of market stress, it
appears to be unnecessary to impose a
floating NAV requirement on retail
funds to address the risk that a fund
would be unable to manage heavy
redemptions in times of crisis.189 We
understand that funds designed for
retail investors generally do not have a
concentrated shareholder base and are
therefore less likely to experience large
and unexpected redemptions that would
put a strain on the fund’s liquidity.190
Some commenters have therefore
suggested providing an exemption for
retail funds to preserve the current
benefits of money market funds for
these investors, and as a consequence,
reduce the macroeconomic effects that
may be associated with a floating NAV
requirement.191 A retail exemption may
also reduce the operational burdens of
implementing a floating NAV, because
retail funds and their intermediaries
may not need to undertake the
operational costs of transitioning
188 See, e.g., RSFI Study, supra note 21, at 8;
Cross Section, supra note 60, at 9 (noting that
institutional prime money market funds suffered
net redemptions of $410 billion (or 30% of assets
under management) in the four weeks beginning
September 10, 2008, based on iMoneyNet data,
while retail prime money market funds suffered net
redemptions of $40 billion (or 5% of assets under
management) during this same time period);
Kacperczyk & Schnabl, supra note 60, at 31;
Wermers Study, supra note 64.
189 See Comment Letter of Reich & Tang (Feb. 14,
2013) (available in File No. FSOC–2012–0003)
(‘‘Reich & Tang FSOC Comment Letter’’) (‘‘As a
general rule, retail investors’ use of money market
funds tends to be stable and countercyclical. . . .
This is in direct contrast to the general behavior of
institutional investors.’’).
190 See Comment Letter of John M. Winters (Dec.
18, 2012) (available in File No. FSOC–2012–0003)
(‘‘Winters FSOC Comment Letter’’) (‘‘Retail MMFs
and institutional government MMFs do not have a
liquidity problem due to the nature of the investor
type or portfolio securities. . . .’’).
191 See, e.g., USAA FSOC Comment Letter, supra
note 183 (‘‘Bifurcation would allow retail MMFs to
continue to play the same vital role they do today,
provide retail investors with professional
investment management services, portfolio
diversification and liquidity, while also acting as a
key provider of financing in the broader capital
markets’’); Reich & Tang FSOC Comment Letter,
supra note 189 (‘‘A departure of this nature would
diminish and endanger the benefits [of MMFs] to
retail investors and cause these same individuals to
seek potentially less appropriate or riskier
alternatives.’’). See also infra section III.E.
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systems or managing potential tax and
accounting issues associated with a
floating NAV. However, other
commenters have opposed a retail
exemption, citing the difficulty of
distinguishing retail and institutional
investors, operational issues, and other
concerns.192
In 2009, similar considerations led us
to propose lower requirements for the
amount of daily and weekly liquid
assets that retail money market funds
would need to hold compared with
institutional funds.193 We noted that
retail prime money market funds
experienced significantly fewer
outflows when compared with
institutional prime money market funds
in the fall of 2008.194 Although we have
not adopted that proposal, in part
because we recognize significant
difficulties in distinguishing retail from
institutional funds for purposes of that
reform, we continue to consider
whether retail and institutional money
market funds should be subject to
different requirements.
It is important to note that some
commenters on our 2009 money market
fund reforms proposal suggested that
not all retail and institutional
shareholders behave the same way as
their peers.195 Also, although retail
shareholders during recent financial
crises have not redeemed from money
market funds in large numbers in
response to market stress, this does not
necessarily mean that in the future they
will not eventually exhibit increased
redemption activity if stress on one or
more money market funds persists.196
192 See, e.g., Comment Letter of Invesco Ltd. (Feb.
15, 2013) (available in File No. FSOC–2012–0003)
(‘‘Invesco FSOC Comment Letter’’) (‘‘While we
acknowledge that the disruptions experienced by
MMFs during the 2008 financial crisis were largely
attributable to prime MMF redemptions by large
investors, we believe that efforts to characterize
MMFs or their investors as either ‘‘institutional’’ or
‘‘retail’’ are misplaced and impractical due to the
difficulty of establishing a litmus test that can be
used consistently to identify those investors most
likely to trigger a MMF run.’’); Comment Letter of
Federated Investors, Inc. (Feb. 15. 2013) (available
in File No. FSOC–2012–0003) (‘‘Federated Investors
Feb. 15 FSOC Comment Letter’’).
193 In 2009, we proposed to define a retail money
market fund as a money market fund that was not
an institutional fund, and to define an institutional
fund as a money market fund whose board of
directors, considering a number of factors,
determines that is ‘‘intended to be offered to
institutional investors.’’ See 2009 Proposing
Release, supra note 31, at section II.C.2.
194 Id. at n.185 and accompanying text.
195 See, e.g., Comment Letter of Invesco Aim
Advisors, Inc. (Sept. 4, 2009) (available in File No.
S7–11–09) (‘‘Invesco 2009 Comment Letter’’);
Comment Letter of Federated Investors, Inc. (Sept.
8, 2009) (available in File No. S7–11–09).
196 See, e.g., Comment Letter of HSBC Global
Asset Management Ltd (Feb. 15, 2013) (available in
File No. FSOC–2012–0003) (‘‘HSBC FSOC
Comment Letter’’) (‘‘Whilst the credit crisis of 2008
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Empirical analyses of retail money
market fund redemptions during the
2007–2008 financial crisis show that at
least some retail investors eventually
began redeeming shares.197 The
introduction of the Treasury Temporary
Guarantee Program on September 19,
2008 (a few days after institutional
prime money market funds experienced
heavy redemptions) may have prevented
shareholder redemptions from
accelerating in retail money market
funds. Commenters on the FSOC
Proposed Recommendations also have
questioned whether the behavior of
retail investors during the 2008 crisis
should be regarded as definitive.198
The evidence, however, suggests that
retail investors tend to redeem shares
slowly in times of fund and market
stress or do not redeem shares at all. As
indicated in the RSFI study, such lower
redemptions may be more readily
managed without adverse effects on the
fund, in part because of the
Commission’s enhanced liquidity
requirements adopted in 2010.199
However, we recognize that by
providing a retail exemption to the
floating NAV, we would be leaving in
place for those investors the existing
incentive to redeem that can result from
the use of a stable price, and some retail
investors could potentially benefit from
redeeming shares ahead of other retail
is an important data point to compare investor
behavior, there are other data points in history that
show that retail investors do ‘‘run’’ from
investments (banks, other types of mutual fund)
during times of market crisis.’’).
197 See, e.g., Cross Section, supra note 60, at 25–
26 (finding that net redemptions from retail prime
money market funds in September 2008 indicates
that higher risk money market funds did have
greater net outflows but only late in the run and that
outflows from retail money market funds peaked
later than those from institutional funds); Wermers
Study, supra note 64, at 3 (analysis of money
market fund redemption data from the 2007–2008
financial crisis showed that ‘‘prime institutional
funds exhibited much larger persistence in outflows
than retail funds, although retail investors also
exhibited some run-like behavior.’’).
198 See, e.g., Federated Investors Feb 15 FSOC
Comment Letter, supra note 192 (‘‘The oft-repeated
point that some funds labeled ‘‘institutional’’
experienced higher redemptions than some funds
labeled ‘‘retail’’ during the financial crisis is not
sufficient. Many so-called institutional funds
experienced the same or even lower levels of
redemptions as so-called [retail money market]
funds during the period of high redemptions during
the financial crisis, and many funds included both
retail and institutional investors.’’).
199 See supra section II.D.2 for a discussion of
how these enhanced liquidity requirements were
more effective in providing stability in the face of
the slower pace of redemptions in institutional
prime money market funds in June and July of 2011
in response to the Eurozone debt crisis compared
with the very rapid heavy redemptions that
occurred in September 2008. But see RSFI study,
supra at note 21, at 37 (noting that The Reserve
Primary Fund would have broken the buck even in
the presence of the 2010 liquidity requirements).
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investors in times of fund and market
stress.200
The retail exemption would take the
same form as the government exemption
in allowing these money market funds
to price using penny rounding instead
of basis point rounding. For the reasons
described in section III.A.3 above, we do
not believe that allowing continued use
of amortized cost valuation for all
securities in these funds’ portfolios is
appropriate given that these funds will
be required to value their securities
using market factors on a daily basis due
to new Web site disclosure requirements
described in section III.F.3 and given
that penny rounding otherwise achieves
the same level of price stability.
We request comment on whether we
should provide a retail money market
fund exemption to the floating NAV.
• Are we correct in our
understanding that retail investors are
less likely to redeem money market
fund shares in times of market stress
than institutional investors? Or are they
just slower to participate in heavy
redemptions?
• Does the evidence showing that
retail investors behave differently than
institutional investors justify a retail
exemption? Is this difference in
behavior likely to continue in the
future?
• Would a retail exemption reduce
the operational effects of implementing
the floating NAV requirement, such as
systems changes and tax and accounting
issues? If so, to what extent and how?
• If the Commission does not adopt
an exemption to the floating NAV
requirement for retail funds, how many
investors in retail prime money market
funds might reallocate assets to nonprime money market fund alternatives?
How many assets in retail prime money
market funds might be reallocated to
alternatives? To what non-prime money
market alternatives are retail investors
likely to reallocate their investments? 201
• Are we correct that retail investors
would prefer an exemption from the
floating NAV requirement? Would they
instead prefer to invest in floating NAV
funds? If so, why?
• Is penny rounding sufficient to
allow retail money market funds to
maintain a stable price? Should we also
permit these funds to use amortized cost
valuation? If so, why?
• Should we consider requiring retail
funds that rely on an exemption from
200 See Dreyfus FSOC Comment Letter, supra note
174 (‘‘Thus while it can be expected that different
kinds of prime money market funds may experience
different levels of redemption activity, it may not
be the case that different kinds of prime money
market funds have different credit risk profiles.’’).
201 See infra section III.E.
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the floating NAV requirement to be
subject to the liquidity fees and gates
requirement described in section III.B?
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b. Operation of the Retail Fund
Exemption
The operational challenges of
implementing an exemption for retail
investor funds are numerous and
complex. Currently, many money
market funds are owned by both retail
and institutional investors, although
many are separated into retail and
institutional share classes.202 With the
retail exemption to the floating NAV
requirement, funds with separate share
classes for different types of investors
(as well as funds that mix different
types of investors together) that wish to
offer a stable price would need to
reorganize, offering separate money
market funds to retail and institutional
investors.203 We recognize that any
distinction could result in ‘‘gaming
behavior’’ whereby investors having the
general attributes of an institution might
attempt to fit within the confines of
whatever retail exemption we craft.204
It can be difficult to distinguish
objectively between retail and
institutional money market funds, given
that funds generally self-report this
designation, there are no clear or
consistent criteria for classifying funds
and there is no common regulatory or
industry definition of a retail investor or
a retail money market fund.205 Many of
202 Several of the largest prime money market
funds have both institutional and retail share
classes. For example, see Vanguard Money Market
Reserves, Vanguard Prime Money Market Fund
Investor Shares (VMMXX), Registration Statement
(Form N–1A) (Dec. 28, 2012); Vanguard Money
Market Reserves, Vanguard Prime Money Market
Fund Institutional Shares (VMRXX), Registration
Statement (Form N–1A) (Dec. 28, 2012); J.P. Morgan
Money Market Funds, JPMorgan Prime Money
Market Fund Institutional Class Shares (JINXX),
Registration Statement (Form N–1A) (July 1, 2012);
J.P. Morgan Money Market Funds, JPMorgan Prime
Money Market Fund Morgan Class Shares
(VMVXX), Registration Statement (Form N–1A)
(July 1, 2012).
203 Alternatively, funds might choose to be treated
as institutional (and not eligible for the proposed
retail exemption to the floating NAV requirement).
204 See Comment Letter of BlackRock, Inc. (Dec.
13, 2012) (available in File No. FSOC–2012–0003)
(‘‘BlackRock FSOC Comment Letter’’) (‘‘A twotiered approach to MMFs based on a distinction
between ‘‘retail’’ and ‘‘institutional’’ funds would
be difficult to implement and may lead to gaming
behavior by investors.’’); HSBC FSOC Comment
Letter, supra note 196 (‘‘There are also practical
challenges such as defining and identifying
different types of investors and preventing the
‘‘gaming’’ of any regulation.’’).
205 Commenters have suggested a number of ways
to distinguish retail funds from institutional funds.
See, e.g., Comment Letter of Fidelity Investments,
Comments on Response to Questions Posed by
Commissioners Aguilar, Paredes, and Gallagher,
(Jan. 24, 2013), available at https://www.sec.gov/
comments/mms-response/mms-response.shtml
(‘‘Fidelity RSFI Comment Letter’’); Schwab FSOC
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the issues that we discuss below
regarding distinguishing between types
of investors were raised by our 2009
proposed money market fund reforms in
which we proposed to establish
different liquidity requirements for
institutional and retail money market
funds.206 Many commenters then
asserted that distinguishing between
retail and institutional money market
funds would be difficult given the
extent to which shares of money market
funds are held by investors through
omnibus accounts and other financial
intermediaries.207
Some commenters at the time,
however, suggested possible approaches
we might take.208 We have since
received more comments suggesting
other methods for distinguishing
between investor types.209 The daily
redemption limit method we are
proposing today is an objective criterion
intended to encourage self-identification
of retail investors, because we
understand that institutional investors
generally would not be able to tolerate
such redemption limits and they would
accordingly self-select into institutional
money market funds designed for them,
while we anticipate that the limit would
not constrain how most retail investors
typically use money market funds. We
also discuss several alternate methods
Comment Letter, supra note 171. All of these
methods involve some degree of subjectivity and
risk of over or under inclusion.
206 We proposed but did not adopt a requirement
that a money market fund’s board determine at least
once each calendar year whether the fund is an
institutional fund based on the nature of the record
owner of the fund’s shares, minimum initial
investment requirements, and cash flows from
purchases and redemptions. See 2009 Proposing
Release, supra note 31, at nn.195–197 and
accompanying text.
207 See 2010 Adopting Release, supra note 92, at
nn.220–228 and accompanying text. Many
commenters also expressed concern with requiring
fund boards to make such a determination. See
2010 Adopting Release, supra note 92, at n.222 and
accompanying text. See also section III.A.4.b of this
Release.
208 For example, one commenter suggested that
we treat as institutional a fund that has any class
that offers same-day liquidity to shareholders.
Comment Letter of Fidelity Investments (Aug. 24,
2009) (available in File No. S7–11–09) (‘‘Fidelity
2009 Comment Letter’’). We expressed concern
regarding this proposal and whether institutional
investors would be willing to migrate to funds that
offer next-day liquidity to avoid the more restrictive
requirements. See 2010 Adopting Release, supra
note 92. We expressed similar concerns about
others’ suggestion that retail funds be distinguished
based on minimum initial account sizes or
maximum expense ratios. See, e.g., Comment Letter
of HighMark Capital Management, Inc. (Sept. 8,
2009) (available in File No. S7–11–09); Comment
Letter of T. Rowe Price Associates, Inc. (Sept. 8,
2009) (available in File No. S7–11–09) (‘‘T. Rowe
Price 2009 Comment Letter’’).
209 See, e.g., Fidelity RSFI Comment Letter, supra
note 205; Schwab FSOC Comment Letter, supra
note 171.
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we could use to make such a distinction
below.
i. Daily Redemption Limit
We are proposing to define a retail
money market fund as a money market
fund that restricts a shareholder of
record from redeeming more than
$1,000,000 in any one business day.210
We believe that this approach would be
relatively simple to implement, since it
would only require a retail money
market fund to establish a one-time,
across-the-board redemption policy,211
and unlike other approaches discussed
below, it would not depend on a fund’s
ability to monitor the dollar amounts
invested in shareholders’ accounts,
shareholder concentrations, or other
shareholder characteristics. A daily
redemption limitation approach also
should reduce the risk that a retail fund
will experience heavier redemption
requests than it can effectively manage
in a crisis, because it will limit the total
amount of redemptions a fund can
experience in a single day, allowing the
fund time to better predict and manage
its liquidity.212
A redemption limitation approach to
defining retail funds should also lead
institutions to self-select into
institutional floating money market
funds, since retail money market funds
with redemption limitations would
typically not meet their operational
needs.213 This incentive to self-select
may help mitigate (but cannot
eliminate) ‘‘gaming’’ by investors with
institutional characteristics who
otherwise might be tempted to try and
invest in stable price retail funds,
compared to the other methods of
distinguishing investors discussed
below. Even if an institutional investor
purchased shares in a stable price fund,
the institutional investor would be
subject to the $1 million daily
redemption limit. Retail investors rarely
need the ability to redeem such a
significant amount on a daily basis, and
if they do anticipate needing to make
210 See
proposed (FNAV) rule 2a–7(c)(3).
proposed retail exemption would provide
exemptive relief from the Investment Company Act
and its rules to permit a retail money market fund
to restrict daily redemptions as provided for in the
proposed rule. See proposed (FNAV) rule 2a–
7(c)(3)(iii).
212 See USAA FSOC Comment Letter, supra note
183 (‘‘This approach would reduce large money
movement from retail MMFs in any given day, and
therefore retail MMFs would be less likely to
experience large scale runs resulting from a lack of
liquidity.’’).
213 See id. (noting that if the Commission were to
define a fund as retail through a daily redemption
limitation approach ‘‘[l]arge individual investors
and institutions will self-select into institutional
MMFs because retail MMFs will not meet their
operational needs.’’).
211 The
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large redemptions quickly, they would
be able to choose to invest in a
government money market fund, a
floating NAV fund, or plan to make
several redemptions over time.
Applying the daily redemption
limitation method to omnibus accounts
may pose difficulties. In order for the
fund to impose its redemption limit
policies on the underlying shareholders,
intermediaries with omnibus accounts
would need to provide some form of
transparency regarding underlying
shareholders, such as account sizes of
underlying shareholders (showing that
each was below the $1 million
redemption limit). Alternatively, the
fund could arrange with the
intermediary to carry out the fund’s
policies and impose the redemption
limitation, or else impose redemption
limits on the omnibus account as a
whole. We discuss omnibus account
issues further below.
We have selected $1,000,000 as the
appropriate daily redemption threshold
because we expect that such a daily
limit is high enough that it should
continue to make money market funds
a viable and desirable cash management
tool for retail investors,214 but is low
enough that it should not suit the
operational needs of institutions. We
recognize that typical retail investors
rarely make redemptions that approach
$1,000,000 in a single day. Nonetheless,
retail investors’ net worth and
investment choices can differ
significantly, and they may on occasion
engage in large transactions. For
example, a retail investor may make
large redemption requests when closing
out their account, rebalancing their
investment portfolio, paying their tax
bills, or making a large purchase such as
the down payment on a house. In
selecting the appropriate redemption
limit, we sought to find a threshold that
is low enough that institutions would
self-select out of retail funds, but high
enough that it would not impose
unnecessary burdens on retail investors,
even when they engage in atypical
redemptions. One commenter suggested
a lower redemption threshold of
$250,000,215 but we are concerned that
214 The staff understands that for at least one large
fund group, significantly less than 1% of the
number of redemption transactions in money
market funds intended for retail investors exceed
$1,000,000, and that more than 97% of retail
transactions were under $25,000. Nonetheless, the
fund group received redemption request exceeding
$250,000 from some retail investors on a daily
basis.
215 See USAA FSOC Comment Letter, supra note
183 (suggesting that a $250,000 cap on daily
redemptions is a natural dollar limit because it is
consistent with rule 18f–1 (exemption for mutual
funds that allows funds to commit to pay certain
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such a threshold may be too low to meet
the cash management needs of retail
investors that engage in occasional large
transactions. We also considered a
higher threshold, such as a $5,000,000
daily redemption limit instead, but are
concerned that such a higher limit
might not provide sufficient limitation
on heightened redemptions in times of
stress.
As mentioned previously, setting an
appropriate redemption threshold for
retail money market funds is
complicated by the fact that retail
investors may, however, on occasion
need to redeem relatively large amounts
from a money market fund, for example,
in connection with the purchase of a
home, and that some institutions may
have small enough cash balances that
they may find that a $1,000,000 daily
redemption threshold still suits their
operational needs. A retail fund’s
prospectus and advertising materials
would need to provide information to
shareholders about daily redemption
limitations to shareholders.216 This
should provide sufficient information to
potential investors, both retail and
institutional, to allow them to make
informed decisions about whether
investing in the fund would be
appropriate. Any money market fund
that takes advantage of the retail
exemption would also need to
effectively describe that it is intended
for retail investors. Retail investors who
may need to make large (i.e., in excess
of $1,000,000) immediate redemptions
would thus know that they should not
invest in a retail money market fund
with daily redemption limitations, and
that they should instead use an alternate
cash management tool. Alternatively,
since it is likely that retail investors
would have advance notice of the need
to redeem in excess of the fund’s limits,
they could manage the redemption
request over a period of several days.
We request comment on our proposed
method of distinguishing between retail
and institutional money market funds
based on a daily redemption limitation
of $1,000,000.
• Would a daily redemption limit
effectively distinguish retail from
institutional money market funds? Are
we correct in assuming that institutional
investors would self-select out of retail
redemptions in cash, rather than in-kind) and the
current FDIC account guarantee limit).
216 Prospectus disclosure regarding any
restrictions on redemptions is currently required by
Form N–1A, and we do not believe that any
amendments to the current disclosure requirements
would be necessary to require additional fund
disclosure regarding the daily redemption
restrictions of the proposed retail exemption. See
Item 6 and Item 11(c)(1) of Form N–1A.
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funds with such redemption limits?
Would a daily redemption limit help
reduce the risk that a fund might not be
able to manage heavy shareholder
redemptions in times of stress? Would
this method of distinguishing between
retail and institutional money market
funds appropriately reflect the relative
risks faced by these two types of funds?
• If we classify funds as retail or
institutional based on an investor’s
permitted daily redemptions, should we
limit a retail fund investor’s daily
redemptions to $1,000,000, or some
other dollar amount such as $250,000 or
$5,000,000? Should we provide a means
to increase the dollar amount limit to
keep pace with inflation? If so, what
method should we use?
• How large are institutional
investors’ typical account balances and
daily redemptions? Would institutional
investors be willing to break large
investments into smaller pieces so they
can spread them across multiple retail
funds?
• Are current disclosure requirements
sufficient to inform current and
potential shareholders of the operations
and risks of redemption limitations?
Should we consider additional
disclosure requirements? If so, what
kinds of disclosures should be required?
• We ask commenters to provide
empirical justification for any comments
on a redemption limitation approach to
distinguishing retail and institutional
money market funds. We also request
that commenters with access to
shareholder redemption data provide us
with detailed information about the size
of individual redemptions in normal
market periods but especially in
September 2008 and summer 2011.
• In particular, we request that
commenters submit data on the size and
frequency of retail and institutional
redemptions in money market funds
today, including breakdowns of the
typical number and dollar volume of
transactions in funds intended for retail
and institutional shareholders. We also
request empirical data on the size and
frequency of retail investors outlier
redemption activity, such as when
closing out their accounts or making
other atypical transactions.
• Should the exemption have a
weekly redemption limit as an
alternative to, or in addition to, the
daily redemption limit? If so, what
should that limit be?
We have discussed above why we
believe a daily redemption limit may
effectively distinguish between retail
and institutional investors and may also
serve to help a retail fund manage the
redemption requests it receives. In some
cases, retail investors may still want to
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redeem more than $1 million in a single
day. To help accommodate such
requests, but at the same time allow a
retail fund to effectively manage its
redemptions, a retail exemption also
could include a provision permitting an
investor to redeem in excess of the
fund’s daily redemption limit, provided
the investor gives advance notice of
their intent to redeem in excess of the
limit. Permitting higher redemptions
with advance notice may serve the
interests of retail investors, while also
giving a fund manager sufficient time to
prepare to meet the redemption request
without adverse consequences to the
fund. We request comment on whether
we should include a provision allowing
retail funds to permit redemption
requests in excess of their daily limit if
the investor provides advance notice.
• Should we include a provision
permitting retail investors to redeem
more than the daily redemption limit if
they gave advance notice? How
frequently are retail investors likely to
need to redeem more than the daily
redemption limit, and also know that
they would need to make such a
redemption in advance? Would such an
advance notice provision encourage
‘‘gaming behavior,’’ for example if an
institution invested in a retail fund and
gave notice that every Friday it would
redeem a large position to make payroll?
Should we be concerned with such
‘‘gaming behavior’’ provided that the
fund was given sufficient notice that it
could effectively manage the
redemptions?
• If we were to include an advance
notice provision, what should the terms
be? Should a retail investor be permitted
to redeem any amount provided that
they gave sufficient notice? A limited
amount, such as $5 or $10 million? How
much advance notice would be
required, 2 days, 5 days, more or less?
Should the amount that an investor be
permitted to redeem be tied to the
amount of advance notice given? For
example, should an investor be
permitted to redeem $3 million in a
single day if they give 3 days’ notice,
but $10 million in a single day if they
gave 10 days’ notice?
• Should an advance notice provision
include requirements regarding the
method of how the notice is submitted
to the fund, or for fund recordkeeping
of the notices it receives? Should such
a provision include requirements on
intermediary communications, (for
example, if the notice is provided to the
intermediary rather than the fund,
should we require that the advance
notice clock begin counting once the
fund receives the notice, not when it is
given to the intermediary) or should it
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leave such details to be worked out
between the parties?
• What operational costs would be
associated with providing such an
advance notice provision? Would funds
be able to effectively communicate to
investors the terms of such an advance
notice provision?
We note that most money market
funds that invest in municipal securities
(tax-exempt funds) are intended for
retail investors, because the tax
advantages of those securities are only
applicable to individual investors, and
accordingly, a retail exemption would
likely result in most such funds seeking
to qualify for the proposed exemption.
Our 2010 reforms exempted tax-exempt
funds from the requirement to maintain
10% daily liquid assets because, at the
time, we understood that the supply of
tax-exempt securities with daily
demand features was extremely
limited.217 Because tax-exempt money
market funds are not required to
maintain 10% daily liquid assets, these
funds may be less liquid than other
retail money market funds, which could
raise concerns that tax-exempt retail
funds might not be able to manage even
the lower level of redemptions expected
in a retail fund. Based on information
received through Form N–MFP, we now
understand that many tax-exempt funds
can and do maintain more than 10% of
their portfolio in daily liquid assets, and
thus complying with a 10% daily liquid
asset requirement may be feasible for
these funds.218 We request comment on
whether we should require tax-exempt
funds that wish to take advantage of the
proposed retail exemption to also meet
the 10% daily liquid asset requirements.
• Would tax-exempt funds that rely
on the proposed retail exemption be
able to manage redemptions in time of
stress without such a daily liquid asset
requirement? What level of daily liquid
assets do tax-exempt money market
funds typically maintain today? Should
we require tax-exempt money market
funds to meet the daily liquid asset
requirement if they are to rely on the
proposed retail exemption to the
floating NAV?
There are different ways a money
market fund could comply with the
exemption’s daily redemption limitation
if a shareholder seeks to redeem more
217 See 2010 Adopting Release, supra note 92, at
nn.240–243 and accompanying text; rule 2a–
7(c)(5)(ii).
218 Based on a review of Form N–MFP filings, we
understand that as of the end of February 2013,
51% of tax-exempt funds maintain daily liquid
assets in excess of 10%, and that another 29%
maintain daily liquid assets of between 5% and
10% of their portfolios. The average daily liquid
assets held across all tax-exempt funds was
approximately 9.9% of their total portfolios.
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than $1 million on any given day
notwithstanding the fund’s policy not to
honor such requests. The fund could
treat the entire order as not in ‘‘good
order’’ and reject the order in its
entirety. Alternatively, the fund could
treat the order as a request to redeem $1
million and reject the remainder of the
order (or treat it as if it were received
on the next business day). Any of those
approaches would allow the money
market fund to meet the daily
redemption limitation and neither
would provide an incentive for a
shareholder to submit a redemption
request in excess of $1 million on any
one day. A fund would also need to
disclose how it handles such excessive
redemption requests in its
prospectus.219 We request comment on
these approaches.
• Should we specify in rule 2a–7 the
way that a money market fund must
comply with the exemption’s daily
redemption limitation? Is either of the
ways we discuss above easier or less
costly to implement than the other?
• Are there any other approaches,
other than the ones discussed above,
that funds may use to meet the daily
redemption limitation? If so, what are
the benefits and costs of those
alternatives?
ii. Omnibus Account Issues
Today, most money market funds do
not have the ability to look through
omnibus accounts to determine the
characteristics and redemption patterns
of their underlying investors. An
omnibus account may consist of
holdings of thousands of small investors
in retirement plans or brokerage
accounts, just one or a few institutional
accounts, or a mix of the two. Omnibus
accounts typically aggregate all the
customer orders they receive each day,
net purchases and redemptions, and
they often present a single buy and
single sell order to the fund. Because the
omnibus account holder is the
shareholder of record, to qualify as a
retail fund under a direct application of
our daily redemptions limitation
proposal, a fund would be required to
restrict daily redemptions by omnibus
accounts to no more than $1,000,000.
Because omnibus accounts can
represent hundreds or thousands of
beneficial owners and their transactions,
they would often have daily activity that
exceeds this limit. This combined
activity would result in omnibus
accounts often having daily
redemptions that exceed the limit even
though no one beneficial owner’s
219 See
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transaction exceeds the limit.220
Accordingly, to implement a retail
exemption, our proposal needs to also
address retail investors that purchase
money market shares through omnibus
accounts.
To address this issue, the proposed
retail exemption would also permit a
fund to allow a shareholder of record to
redeem more than $1,000,000 in a single
day, provided that the shareholder of
record is an ‘‘omnibus account
holder’’ 221 that similarly restricts each
beneficial owner in the omnibus
account to no more than $1,000,000 in
daily redemptions.222 Under the
proposed exemption, a fund would not
be required to impose its redemption
limits on an omnibus account holder,
provided that the fund has policies and
procedures reasonably designed to
allow the conclusion that the omnibus
account holder does not permit any
beneficial owner from ‘‘directly or
indirectly’’ redeeming more than
$1,000,000 in a single day.223
The restriction on ‘‘direct or indirect’’
redemptions is designed to manage
issues related to ‘‘chains of
intermediaries,’’ such as when an
investor purchases fund shares through
one intermediary, for example, an
introducing broker or retirement plan,
which then purchases the fund shares
through a second intermediary, such as
a clearing broker.224 The proposed
exemption would require that a retail
fund’s policies and procedures be
reasonably designed to allow the
conclusion that the fund’s redemption
limit is applied to beneficial owners all
the way down any chain of
intermediaries. If a fund cannot
reasonably conclude that such policies
220 See, e.g., Invesco FSOC Comment Letter, supra
note 192 (‘‘These [omnibus] accounts, due to their
size, might well be regarded as ‘institutional’
despite the fact that the aggregate of assets belong
largely to investors who would be considered
‘retail’ if they invested in the MMF directly.’’).
221 Omnibus account holder would be defined in
the proposed rule as ‘‘a broker, dealer, bank, or
other person that holds securities issued by the
fund in nominee name.’’ See proposed (FNAV) rule
2a–7(c)(3) (ii).
222 See proposed (FNAV) rule 2a–7(c)(3) (ii).
223 See id.
224 For purposes of imposing redemption
limitations on beneficial owners, we would expect
that funds seek to ensure as part of their policies
and procedures that an intermediary would make
reasonable efforts consistent with applicable
regulatory requirements to aggregate multiple
accounts held with it that are owned by a single
beneficial owner. We would not expect that a fund
would seek to ensure that an intermediary
reasonably be able to identify that a single
beneficial owner owns fund shares through
multiple accounts if the shareholder has an account
with the intermediary, and also owns shares
through another intermediary that does not already
share account information with the first
intermediary.
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are enforced by intermediaries at each
step of the chain, then the fund must
apply its redemption limit at the
aggregate omnibus account holder level
(or rely on a cooperating intermediary to
apply the fund’s redemption limits to
any uncooperative intermediaries
further down the chain). Accordingly, to
redeem more than $1,000,000 daily, a
fund’s policies and procedures must be
designed to conclude that an omnibus
account holder that is the shareholder of
record with the fund reasonably
concludes that all beneficial owners in
the omnibus account, even if invested
through another intermediary, comply
with the redemption limit. If the fund
cannot reasonably conclude that
intermediaries that have omnibus
accounts with it also do not permit
beneficial owners to redeem more than
$1,000,000 in a single day, the fund’s
policies must be reasonably designed to
allow the conclusion that the omnibus
account holder applies the fund’s
redemption limit to the other
intermediaries’ transactions on an
aggregate level.225
We note that the challenges of
managing implementation of fund
policies through omnibus accounts are
not unique to a retail exemption. For
example, funds frequently rely on
intermediaries to assess, collect, and
remit redemption fees charged pursuant
to rule 22c–2 on beneficial owners that
invest through omnibus accounts.
Funds and intermediaries face similar
issues when managing compliance with
other fund policies, such as account size
limits, breakpoints, rights of
accumulation, and contingent deferred
sales charges.226 Service providers also
offer services designed to facilitate
compliance and evaluation of
intermediary activities.
The proposed rule would not require
retail money market funds to enter into
explicit agreements or contracts with
omnibus account holders at any stage in
the chain, but would instead allow
funds to manage these relations in
whatever way that best suits their
circumstances. We would expect that in
some cases, funds may enter into
agreements with omnibus account
holders to reasonably conclude that
their policies are complied with. In
other cases, funds may have sufficient
transparency into the activity of
omnibus account holders, or use other
verification methods (such as
certifications), that funds could
225 See
proposed (FNAV) rule 2a–7(c)(3)(ii).
rule 38a–1, funds are required to have
policies and procedures reasonably designed to
prevent violation of the federal securities laws by
the fund and certain service providers.
226 Under
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reasonably conclude that their policies
are being followed without an explicit
agreement. If a fund could not verify or
reasonably conclude that an omnibus
account holder is applying the
redemption limit to underlying
beneficial owner transactions, we would
expect that a fund would treat that
omnibus account holder like any other
shareholder of record, and impose the
$1,000,000 daily redemption limit on
that omnibus account. Retail money
market funds will need to monitor
compliance and implement policies and
procedures to address the implications
of potential exceptions, for example, if
an intermediary improperly permitted a
redemption in excess of the fund’s
limits. Finally, the rule would also
prohibit a fund from allowing an
omnibus account holder to redeem more
than $1,000,000 for its own account in
a single day.227 This restriction is
intended to prevent an omnibus account
holder from exceeding the fund’s
redemption limits under the exemption
when trading for its own account.
As proposed, the omnibus account
holder provision does not provide for
any different treatment of intermediaries
based on their characteristics and
instead applies the redemption limits
equally to all beneficial owners.
However, in some circumstances such
treatment may not be consistent with
the intent of the exemption. For
example, an intermediary with
investment discretion, such as a
defined-contribution pension plan that
allows the plan sponsor to remove a
money market fund from its offerings,
could unilaterally liquidate in one day
a quantity of fund shares that greatly
exceeds the fund’s redemption limit,
even if no one beneficial owner had an
account balance that exceeds the limit.
Intermediaries might also pose different
risks, for example, the risks associated
with a sweep account might be different
than the risks posed by a retirement
plan. Also, certain intermediaries may
not be able to offer funds with
redemption restrictions to investors,
even if the underlying beneficial owners
are retail investors. We understand that
identical treatment of intermediaries
under the proposal may not precisely
reflect the risks of intermediaries with
different characteristics, but recognize
that this is a cost of our attempt to keep
the retail exemption simple to
implement.
A shareholder may own fund shares
through multiple accounts, either
directly with a fund, or through an
intermediary. In some cases, such as
when one account is held directly with
227 See
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a fund and another account is held
through an intermediary, the fund
would not be able to identify that the
same shareholder has multiple accounts
with the fund, and may not be able to
effectively restrict that shareholder from
redeeming fund shares from those
accounts, that in aggregate, may exceed
the proposed daily redemption limit.
The proposed retail exemption would
not restrict such redemptions, because
the shareholder with multiple accounts
would not be a ‘‘shareholder of record’’
for all of the accounts.228 In other cases,
a fund may be able to identify that a
shareholder holds multiple accounts
with the fund, such as if a shareholder
owns fund shares in an account held
directly with the fund, and also owns
shares through an individual retirement
account (‘‘IRA’’) held with the fund. In
those cases, the shareholder with
multiple accounts would be the
shareholder of record for both accounts,
and the fund should be able to identify
the shareholder as such.229 If a fund
receives redemption orders exceeding
the $1,000,000 limit from a shareholder
of record through multiple accounts in
a single day, the fund would need to
aggregate the redemption requests from
all accounts held by that shareholder of
record, and impose the daily
redemption limit on the shareholder of
record’s total redemptions, not just on
an account-by-account basis.230
We request comment on the proposed
treatment of omnibus account holders
under the retail exemption to the
floating NAV alternative.
• Does our proposed treatment of
omnibus accounts under the retail
exemption appropriately address the
operation of such accounts? What types
of policies and procedures would funds
develop to confirm that omnibus
account holders are able to reasonably
prevent beneficial owners that invest
through the account from violating a
retail money market fund’s redemption
limit policies and procedures?
• The proposed rule does not require
funds to enter into agreements with
omnibus account holders, nor does it
prescribe any other mechanism for
requiring a fund to verify that its
228 See id.. An intermediary would be the
shareholder of record for the omnibus accounts they
hold.
229 We note that we do not expect funds to
collapse such accounts, but rather match such
accounts where there is reasonably available
identifying information on hand at the fund or its
transfer agent that the accounts have the same
record owner.
230 Similar issues may arise if a shareholder holds
an account jointly with another person, such as a
spouse. A fund’s policies and procedures should
establish methods of managing redemptions from
joint accounts.
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redemption limits are effectively
enforced. Should we require such
agreements? What difficulties would
arise in implementing such agreements?
Instead of agreements, should we
consider prescribing some other type of
verification or compliance procedure to
prevent a fund’s limit from being
breached, such as certifications from
omnibus account holders?
• Should the rule require a fund to
obtain periodic certifications regarding
the redemptions of beneficial owners in
an omnibus account? If so, should we
require a specific periodicity of
certifications, such as every month, or
every quarter?
• Should we differentiate between
intermediaries that invest through
omnibus accounts? For example, should
we require that an intermediary that has
investment discretion over a number of
beneficial owners’ accounts be treated
as a single beneficial owner for purposes
of the daily redemption limit? Should
we treat certain intermediaries
differently than others, perhaps
allowing higher or unlimited
redemptions for investors who invest
through certain types of intermediaries
such as retirement plans? What
operational difficulties would arise if
we were to provide for such differential
treatment of intermediaries?
• Can funds accurately identify
multiple accounts in a fund that are
owned by a single shareholder of
record? If not, what costs would be
incurred in building such systems? How
should the redemption limit apply to
accounts that are owned by multiple
investors? Should we be concerned
about investors opening accounts
through multiple intermediaries and
multiple accounts in an attempt to
circumvent the daily redemption limits?
As discussed above, we understand
that today many money market funds
are unable to determine the
characteristics or redemption patterns of
their shareholders that invest through
omnibus accounts. This lack of
transparency can not only hinder a fund
from effectively applying a retail
exemption but can also lead to
difficulties in managing the liquidity
levels of a fund’s portfolio, if a fund
cannot effectively anticipate when it is
likely to receive significant shareholder
redemptions through examination of its
shareholder base. We request comment
on whether we should consider
requiring additional transparency into
money market fund omnibus accounts
to enable funds to understand better
their respective shareholder base and
relevant redemption patterns.
• Should we consider any other
methods of generally providing more
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transparency into omnibus accounts for
money market funds so that funds could
better manage their portfolios in light of
their respective shareholder base? If so,
what methods should we consider?
c. Consideration of Other Distinguishing
Methods
As discussed above, as part of the
retail exemption that we are proposing
today, we are proposing a method of
distinguishing between retail and
institutional money market funds based
on daily redemption limits. This is not
the only method by which we could
attempt to distinguish types of funds.
Below we discuss several alternate
methods of making such a distinction,
and request comment on whether we
should adopt one of these methods
instead.
i. Maximum Account Balance
A different method of distinguishing
retail funds would be to define a retail
fund as a fund that does not permit
account balances of more than a certain
size. For example, we could define a
fund as retail if the fund does not permit
investors to maintain accounts with a
balance that exceeds $250,000,
$1,000,000, $5,000,000, or some other
amount.231 If an investor’s account
balance were to exceed the threshold
dollar amount, the fund could
automatically direct additional
investments to shares of a government
money market fund or a fund subject to
the floating NAV requirement.232 Such
an approach would require a retail fund
to update the disclosure in its
prospectus and advertising materials to
inform investors how their investments
would be handled in such
circumstances. Much like the
redemption limitation method, omnibus
accounts may pose difficulties that
would need to be addressed through
certifications, transparency, or some
other manner.233 A maximum account
balance approach may also create
operational issues in other ways, such
231 A variation on this approach might prohibit
further investment in a retail fund at the end of a
calendar quarter if the average account size exceeds
a threshold dollar amount during the quarter.
232 If a fund were part of a fund group that does
not include an affiliated institutional fund, the fund
would not allow further investments from an
investor whose account balance reaches (or, if the
account receives dividends or otherwise increases
in value, exceeds) the threshold amount.
233 We also expect that there may be significant
differences in costs depending on how such an
exemption was structured, and that it could be
significantly less costly to test whether an investor
investing through an omnibus account has
exceeded a maximum account balance periodically
rather than on a trade-by-trade basis. See also infra
section III.A.4.d for a discussion of operational
costs of the retail exemption.
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as managing what happens if a buy and
hold investor’s account exceeded the
limits due to appreciation in value.
Determining the proper maximum
account balance that would effectively
distinguish between retail and
institutional investors may also prove
difficult.
Defining a retail fund based on the
maximum permitted account balance
would be relatively simple to explain to
investors through disclosure in the
fund’s prospectus and advertising
materials. This approach could,
however, disadvantage funds that do not
have an affiliated government or
institutional money market fund into
which investors’ ‘‘spillover’’
investments in excess of the maximum
amount could be directed and could
encourage ‘‘gaming behavior,’’ if
institutional investors were to open
multiple accounts through different
intermediaries with balances under the
maximum amount in order to evade any
maximum investment limit we might
set.234
We request comment on the approach
of distinguishing between retail and
institutional money market funds based
on investors’ account balances:
• If we were to classify funds as retail
or institutional based on an investor’s
account balance, what maximum
account size would appropriately
distinguish a retail account from an
institutional account: $250,000,
$1,000,000, $5,000,000, or some other
dollar amount? Would this method of
distinguishing between retail and
institutional money market funds
appropriately reflect the relative risks
faced by these two types of funds? How
would funds or other parties, such as
intermediaries and omnibus
accountholders, be able to enforce
account balance limitations?
• Would shareholders with
institutional characteristics be likely to
open multiple retail money market fund
accounts under the maximum amount,
for example by going through
intermediaries, to circumvent the
account size requirement, and if so,
would retail funds be subject to greater
risk during periods of stress? What
disclosure would be necessary to inform
current and potential shareholders of
the operations and risks of account
balance limitations?
• We ask commenters to provide
empirical justification for any comments
on an account balance approach to
distinguishing retail and institutional
money market funds. We also request
234 See BlackRock FSOC Comment Letter, supra
note 204; Federated Investors Feb. 15 FSOC
Comment Letter, supra note 192.
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information on composition and
distribution of individual account sizes
to assist the Commission in considering
this approach.
ii. Shareholder Concentration
Another approach to distinguishing
retail and institutional money market
funds might be to base the distinction
on the fund’s shareholder concentration
characteristics. Under this approach, a
fund would be able to qualify for a retail
exemption if the fund’s largest
shareholders owned less than a certain
percentage of the fund. This type of
‘‘concentration’’ method of
distinguishing funds would be a test for
identifying funds whose shareholders
are more concentrated, and thus have a
limited number of shareholders whose
redemption choices could affect the
fund more significantly during periods
of stress. A heavily concentrated fund
may indicate that the fund has a smaller
number of large shareholders, who are
likely institutions. In addition, funds
whose shareholders are less
concentrated, and thereby that are less
subject to heavy redemption pressure
from a limited number of investors, may
be able to withstand stress more
effectively and thus could maintain a
stable price.
Commenters have suggested several
methods for defining the appropriate
concentration level for a fund. One test
for determining if a fund is institutional
might be whether the top 20
shareholders own more than 15% of the
fund’s assets,235 or the top 100
shareholders own more than 25% of
fund assets, or some other similar
measure. Another method to test
concentration might be to define a fund
as institutional if any shareholder owns
more than 0.1% of the fund,236 or 1%
of the fund, or some other percentage.
Distinguishing between retail and
institutional money market funds based
on shareholder concentration could
more accurately reflect the relative risks
that funds face than distinguishing retail
and institutional money market funds
based on the maximum balance of
shareholders’ accounts, since an
individual shareholder’s account value
does not necessarily reflect the risks of
concentrated heavy redemptions.
However it may be less accurate at
distinguishing types of investors (and at
reducing the risks of heavy redemptions
associated with certain types of
investors) than the redemption
235 See Fidelity RSFI Comment Letter, supra note
205. This commenter suggested that the test would
apply regardless of whether underlying
shareholders are individuals or institutions.
236 See Schwab FSOC Comment Letter, supra note
171.
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limitation discussed above, because the
redemption limitation would likely
cause investors to self-select into the
appropriate fund.
One benefit of the concentration
method of distinguishing retail funds is
that it may lessen operational issues
related to omnibus accounts. If funds
were required to count an intermediary
with omnibus accounts as one
shareholder for concentration purposes
(e.g., like any other shareholder), there
may be no need for transparency into
omnibus accounts.237 However, if we
did not require such treatment of
omnibus accounts, this concentration
method would raise the same issues
associated with managing omnibus
accounts as the other methods discussed
above.
This concentration method of
distinguishing retail funds would also
pose a number of difficulties in
implementation and operation. For
example, it may be over-inclusive and a
fund may be wrongly classified as an
institutional money market fund if
many of its large shareholders of record
are intermediaries or sweep accounts,238
even though the underlying beneficial
owners may be retail investors. The
method may also create difficulties for
funds that have limited assets or
investors (for example, new funds with
only a few investors), because those
small and start-up funds may have a
concentrated investor base even though
their investors may be primarily
retail.239 Similarly, this method may not
effectively distinguish retail and
institutional money market funds if the
fund is so large that even institutional
accounts do not trigger the
concentration limits. An institutional
fund that is not heavily concentrated
may be subject to the same risks as a
more concentrated fund, because
institutional investors tend to be more
sensitive to changing market conditions.
Finally, this method could create
significant operational issues for funds
if shareholder concentration levels were
to change temporarily, or to fluctuate
periodically.240 For example, if we were
to provide a retail exemption that
237 See
supra note 235.
e.g., Dreyfus FSOC Comment Letter,
supra note 174 (noting that sweep accounts
behaved more like retail accounts rather than
institutional ones during the 2008 financial crisis).
239 See Invesco FSOC Comment Letter, supra note
192 (‘‘Proposals to designate as ‘‘institutional’’ any
account holding more than a given percentage of a
MMF would provide an unfair competitive
advantage to larger funds, which could continue to
classify larger investors as ‘‘retail.’’).
240 See Schwab FSOC Comment Letter, supra note
171 (discussing issues related to temporary changes
in ownership percentages that may cause violations
of such a concentration test).
238 See,
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depended on a fund’s top 20 investors
not owning more than 15% of the fund,
this would require a fund to constantly
monitor the size of its investor base and
reject investments that would push the
fund over the concentration limit in real
time. Constant monitoring and order
rejection may be costly and difficult to
implement, not only for the fund but
also for the affected shareholders who
may have their purchase orders rejected
unexpectedly by the fund. Shareholders
may also have issues understanding
whether a fund is institutional or retail,
and because concentration may
frequently change, it may be difficult to
provide clear guidelines regarding
whether a shareholder could or could
not invest in a fund.
We request comment on the approach
of distinguishing between retail and
institutional money market funds based
on shareholder concentration:
• If we classify funds as retail or
institutional based on shareholder
concentration, what thresholds should
we use? Would criteria such as whether
the top 20 investors make up more than
15% of the fund, or some other
threshold, effectively distinguish
between types of funds? Would such a
concentration test pose operational
difficulties? How would funds enforce
such limits? How should funds treat
omnibus accounts if they were to use
such a test?
• Would investors who are likely to
redeem shares when market-based
valuations fall below the stable price per
share be willing and able to spread their
investment across enough funds to
avoid being too large in any one of
them?
• Would shareholder concentration
limits result in further consolidation in
the industry, as funds seek to grow in
order to accommodate large investors?
• We ask commenters to provide
empirical justification for any comments
on a shareholder concentration
approach to distinguishing retail and
institutional money market funds.
iii. Shareholder Characteristics
Money market funds could also look
at certain characteristics of the
investors, such as whether they use a
social security number or a taxpayer
identification number to register their
accounts or whether they demand sameday settlement, to distinguish between
retail and institutional money market
funds. Such a characteristics test could
be used either alone, or in combination
with one of the other methods discussed
above to distinguish retail funds.
However, this approach also has
significant drawbacks. While
institutional money market funds
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primarily offer same-day settlement and
retail money market funds primarily do
not, this is not always the case.241
Likewise, social security numbers do
not necessarily correlate to an
individual, and taxpayer identification
numbers do not necessarily correlate to
a business. For instance, many
businesses are operated as pass-through
entities for tax purposes. In addition,
funds may not be aware of whether their
investors have a SSN or a TIN if the
investments are held through an
omnibus account.
The Commission requests comment
on shareholder characteristics that
could effectively distinguish between
types of investors, as well as other
methods of distinguishing between
retail and institutional money market
funds.
• What types of shareholder
characteristics would effectively
distinguish between types of investors?
Social security numbers and/or taxpayer
identification numbers? Whether the
fund provides same-day settlement?
Some other characteristic(s)?
• Besides the approaches discussed
above, are there other ways we could
effectively distinguish retail from
institutional money market funds?
Should we combine any of these
approaches? Should we adopt more
than one of these methods of
distinguishing retail funds, so that a
fund could use the method that is
lowest cost and best fits their investor
base?
• We ask commenters to provide
empirical justification for any comments
on a shareholder characteristics
approach to distinguishing retail and
institutional money market funds.
d. Economic Effects of the Proposed
Retail Exemption
In addition to the costs and benefits
of a retail exemption discussed above,
implementing any retail exemption to
the floating NAV requirement may have
effects on efficiency, competition, and
capital formation. A retail exemption to
the floating NAV requirement could
make retail money market funds more
241 Some institutional money market funds do not
offer same-day settlement. See, e.g., Money Market
Obligations Trust, Federated New York Municipal
Cash Trust (FNTXX), Registration Statement (Form
N–1A) (Feb. 28, 2013) (stating that redemption
proceeds normally are wired or mailed within one
business day after receiving a request in proper
form). Some retail money market funds do offer
same-day settlement. See, e.g., Dreyfus 100% U.S.
Treasury Money Market Fund (DUSXX),
Registration Statement (Form N–1A) (May 1, 2012)
(stating that if a redemption request is received in
proper form by 3:00 p.m., Eastern time, the
proceeds of the redemption, if transfer by wire is
requested, ordinarily will be transmitted on the
same day).
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attractive to investors than floating NAV
funds without a retail exemption,
assuming that retail investors prefer
such funds. If so, we anticipate a retail
exemption could reduce the impact we
expect on the number of funds and
assets under management, discussed in
section III.E below. However, these
positive effects on capital formation
could be reversed to the extent that the
costs funds incur in implementing a
retail exemption are passed on to
shareholders, or shareholders give up
potentially higher yields. As discussed
above, a retail exemption to the floating
NAV requirement could involve
operational costs, with the extent of
those costs likely being higher for funds
sold primarily through intermediaries
than for funds sold directly to investors.
These operational costs, depending on
their magnitude, might affect capital
formation and also competition
(depending on the different ability of
funds to absorb these costs).
A retail exemption to the floating
NAV requirement could have negative
effects on competition by benefitting
fund groups with large percentages of
retail investors, especially where those
retail investors invest directly in the
funds rather than through
intermediaries, relative to other
funds.242 A retail exemption could have
a negative effect on competition to the
extent that it favors fund groups that
already offer separate retail and
institutional money market funds and
thus might not need to reorganize an
existing money market fund into two
separate funds to implement the
exemption. On the other hand, as
discussed above, we believe that the
majority of money market funds
currently are owned by both retail and
institutional investors (although many
funds are separated into retail and
institutional classes), and therefore
relatively few funds would benefit from
this competitive advantage. Fund
groups that can offer multiple retail
funds will have a competitive advantage
over those that cannot if investors with
large liquidity needs are willing to
spread their investments across multiple
retail funds to avoid the redemption
threshold.
242 Fund groups with large percentages of retail
investors, and in particular, direct investors, may be
better positioned to satisfy growing demand if we
were to adopt the proposed retail exemption to our
floating NAV proposal. See Invesco FSOC Comment
Letter, supra note 192 (‘‘Imposing a distinction
between ‘retail’ versus ‘institutional’ funds would
therefore unduly favor those MMF complexes with
a preponderance of direct individual investors or
affiliated omnibus account platforms over those
with a more diverse investor basis and those with
using unaffiliated intermediaries.’’).
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A retail exemption may promote
efficiency by tying the floating NAV
requirement to the shareholders that are
most likely to redeem from a fund in
response to deviations between its
stable share price and market-based
NAV per share. However, to the extent
that a retail exemption fails to
distinguish effectively institutional from
retail shareholders, it may have negative
effects on efficiency by permitting
‘‘gaming behavior’’ by shareholders with
institutional characteristics who
nonetheless invest in retail funds. It
may also negatively affect fund
efficiency to the extent that, to take
advantage of a retail exemption, a fund
that currently separates institutional
and retail investors through different
classes instead would need to create
separate and distinct funds, which may
be less efficient. The costs of such a reorganization are discussed in this
Release below.
We request comment on the effects of
a retail exemption to the floating NAV
proposed on efficiency, competition,
and capital formation.
• Would implementing a retail
exemption have an effect on efficiency,
competition, or capital formation?
Which methods of distinguishing retail
and institutional investors discussed
above, if any, would result in the most
positive effects on efficiency,
competition, and capital formation?
• Would the floating NAV proposal
have less of a negative impact on capital
formation with a retail exemption than
without? Would it provide competitive
advantages to fund groups that have
large percentages of retail investors,
especially where those retail investors
invest directly in the funds rather than
through intermediaries, relative to other
funds that have lower percentages of
retail investors?
• Would a retail exemption better
promote efficiency by tying the floating
NAV requirement to institutional
shareholders instead of retail
shareholders? Why or why not?
The qualitative costs and benefits of
any retail exemption to the floating
NAV proposal are discussed above.
Because we do not know how attractive
such funds would be to retail investors,
we cannot quantify these qualitative
benefits or costs. However, we can
quantify the operational costs that
money market funds, intermediaries,
and money market fund service
providers might incur in implementing
and administering the retail exemption
to the floating NAV requirement that we
are proposing today.243
243 The costs estimated in this section would be
spread amongst money market funds,
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Although we do not have the
information necessary to provide a point
estimate 244 of the potential costs
associated with a retail exemption, our
staff has estimated the ranges of hours
and costs that may be required to
perform activities typically involved in
making systems modifications,
implementing fund policies and
procedures, and performing related
activities. These estimates include onetime and ongoing costs to establish
separate funds if necessary, modify
systems and related procedures and
controls, update disclosure in a fund’s
prospectus and advertising materials to
reflect any investment or redemption
restrictions associated with the retail
exemption, as well as ongoing
operational costs. All estimates are
based on the staff’s experience and
discussions with industry
representatives. We first discuss the
different categories of operational costs
that might be incurred in implementing
a retail exemption, and then we provide
a total cost estimate that captures all of
the categories of costs discussed below.
We expect that only funds that
determine that the benefits of taking
advantage of the proposed retail
exemption would be justified by the
costs would take advantage of it and
bear these costs. Otherwise, they would
incur the costs of implementing a
floating NAV generally.
Many money market funds are
currently owned by both retail and
institutional investors, although they are
often separated into retail and
institutional share classes. A fund
relying on the proposed retail
exemption would need to be structured
to accept only retail investors as
determined by the daily redemption
limit, and thus any money market fund
that currently has both retail and
institutional shareholders would need
to be reorganized into separate retail
and institutional money market funds.
One-time costs associated with this
intermediaries, and money market fund service
providers (e.g., transfer agents). For ease of
reference, we refer only to money market funds and
intermediaries in our discussion of these costs. As
with other costs we estimate in this Release, our
staff has estimated the costs that a single affected
entity would incur. We anticipate, however, that
many money market funds and intermediaries may
not bear the estimated costs on an individual basis.
The costs of systems modifications, for example,
likely would be allocated among the multiple users
of the systems, such as money market fund
members of a fund group, money market funds that
use the same transfer agent, and intermediaries that
use systems purchased from the same third party.
Accordingly, we expect that the cost for many
individual entities may be less than the estimated
costs.
244 We are using the term ‘‘point estimate’’ to
indicate a specific single estimate as opposed to a
range of estimates.
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reorganization would include costs
incurred by the fund’s counsel to draft
appropriate organizational documents
and costs incurred by the fund’s board
of directors to approve such documents.
One-time costs also would include the
costs to update the fund’s registration
statement and any relevant contracts or
agreements to reflect the reorganization,
as well as costs to update prospectuses
and to inform shareholders of the
reorganization. Funds and
intermediaries may also incur one-time
costs in training staff to understand the
operation of the fund and effectively
implement the redemption restrictions.
The daily redemption limitation
method of distinguishing retail and
institutional investors that we are
proposing today would also require
funds to have policies and procedures
reasonably designed to allow the
conclusion that omnibus account
holders apply the fund’s redemption
limits to beneficial owners invested
through the omnibus accounts.
Adopting such policies and procedures
and building systems to implement
them would also involve one-time costs
for funds and intermediaries. Funds
could either conclude that their policies
are enforced by obtaining information
regarding underlying investors in
omnibus accounts (transparency), or use
some other sort of method to reasonably
verify that omnibus account holders are
implementing the fund’s redemption
policies, such as entering into an
agreement or getting certifications from
the omnibus account holder. In
preparing the following cost estimates,
the staff assumed that funds would
generally rely on financial
intermediaries to implement
redemption policies without undergoing
the costs of entering into an agreement,
because funds and intermediaries would
typically take the approach that is the
least expensive. However, some funds
may undertake the costs of obtaining an
explicit agreement despite the expense.
Our staff estimates that the one-time
costs necessary to implement the retail
exemption to the floating NAV proposal,
including the various organizational,
operational, training, and other costs
discussed above, would range from
$1,000,000 to $1,500,000 for each fund
that chooses to take advantage of the
retail exemption.245
245 Staff estimates that these costs would be
attributable to the following activities: (i) Planning,
coding, testing, and installing system modifications;
(ii) drafting, integrating, and implementing related
procedures and controls; and (iii) preparing training
materials and administering training sessions for
staff in affected areas. Our staff’s estimates of these
operational and related costs, and those discussed
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Funds that choose to take advantage
of the retail exemption would also incur
ongoing costs. These ongoing costs
would include the costs of operating
two separate funds (retail and
institutional) instead of separate classes
of a single fund, such as additional
transfer agent, accounting, and other
similar costs. Funds and intermediaries
would also incur ongoing costs related
to enforcing the daily redemption
limitation on an ongoing basis and
monitoring to conclude that the limits
are being effectively enforced. Other
ongoing costs may include systems
maintenance, periodic review and
updates of policies and procedures, and
additional staff training. Accordingly,
our staff estimates that money market
funds and intermediaries administering
a retail exemption likely would incur
ongoing costs of 20%–30% of the onetime costs, or between $200,000 and
$450,000 per year.246
• Are the staff’s cost estimates too
high or too low, and, if so, by what
amount and why? Are there operational
or other costs associated with
segregating retail investors other than
those discussed above?
• Do commenters believe that the
proposed retail exemption would
involve expenses beyond those
estimated? To what extent would the
costs vary depending on how a retail
exemption is structured? Which of the
staff’s assumptions would most
significantly affect the costs? Has our
staff identified the assumptions that
most significantly influence the cost of
a retail exemption?
throughout this Release, are based on, among other
things, staff experience implementing, or overseeing
the implementation of, systems modifications and
related work at mutual fund complexes, and
included analyses of wage information from
SIFMA’s Management & Professional Earnings in
the Securities Industry 2012, see infra note 996, for
the various types of professionals staff estimates
would be involved in performing the activities
associated with our proposals. The actual costs
associated with each of these activities would
depend on a number of factors, including variations
in the functionality, sophistication, and level of
automation of existing systems and related
procedures and controls, and the complexity of the
operating environment in which these systems
operate. Our staff’s estimates generally are based on
the use of internal resources because we believe
that a money market fund (or other affected entity)
would engage third-party service providers only if
the external costs were comparable, or less than, the
estimated internal costs. The total operational costs
discussed here include the costs that are
‘‘collections of information’’ that are discussed in
section IV of this Release.
246 We recognize that adding new capabilities or
capacity to a system (including modifications to
related procedures and controls and related
training) will entail ongoing annual maintenance
costs and understand that those costs generally are
estimated as a percentage of the initial costs of
building or modifying a system.
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• What kinds of ongoing activities
would be required to administer the
proposed retail exemption to the
floating NAV requirement, and to what
extent? Would it be less costly for some
funds (e.g., those that are directly sold
to investors) to make use of a retail
investor exemption? If so, how much
would those funds save?
5. Effect on Other Money Market Fund
Exemptions
a. Affiliate Purchases
Rule 17a–9 provides an exemption
from section 17(a) of the Act to permit
affiliated persons of a money market
fund to purchase portfolio securities
from the fund under certain
circumstances, and it is designed to
provide a means for an affiliated person
to provide liquidity to the fund and
prevent it from breaking the buck.247
Under our floating NAV proposal,
however, money market funds’ share
prices would ‘‘float,’’ and funds thus
could not ‘‘break the buck.’’
Notwithstanding the inability of funds
to ‘‘break the buck’’ under our floating
NAV proposal, for the reasons discussed
below, we propose to retain rule 17a–9
with the amendments, discussed below,
for all money market funds (including
government and retail money market
funds that would be exempt from our
floating NAV proposal).
Funds with a floating NAV would still
be required to adhere to rule
2a–7’s risk-limiting conditions to reduce
247 Absent a Commission exemption, section
17(a)(2) of the Act prohibits any affiliated person or
promoter of or principal underwriter for a fund (or
any affiliated person of such a person), acting as
principal, from knowingly purchasing securities
from the fund. For convenience, in this Release, we
refer to all of the persons who would otherwise be
prohibited by section 17(a)(2) from purchasing
securities of a money market fund as ‘‘affiliated
persons.’’ ‘‘Affiliated person’’ is defined in section
2(a)(3) of the Act.
Rule 17a–9, as adopted in 1996, provides an
exemption from section 17(a) of the Act to permit
affiliated persons of a money market fund to
purchase a security from a money market fund that
is no longer an eligible security (as defined in rule
2a–7), provided that the purchase price is (i) paid
in cash; and (ii) equals the greater of amortized cost
of the security or its market price (in each case
including accrued interest). See Revisions to Rules
Regulating Money Market Funds, Investment
Company Act Release No. 21837 (Mar. 21, 1996) [61
FR 13956 (Mar.28, 1996)] (the ‘‘1996 Adopting
Release’’). As part of the 2010 money market fund
reforms (discussed in supra section II.D.1), we
expanded the exemptive relief in rule 17a–9 to
permit affiliates to purchase from a money market
fund (i) a portfolio security that has defaulted, but
that continues to be an eligible security (subject to
the purchase conditions described); and (ii) any
other portfolio security (subject to the purchase
conditions described above), for any reason,
provided the affiliated person remits to the fund
any profit it realizes from the later sale of the
security (‘‘clawback provision’’). See rule 17a–9(a),
(b).
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the likelihood that portfolio securities
experience losses from credit events and
interest rate changes. Even with a
floating NAV and limited risk, as
specified by the provisions of rule 2a–
7, money market funds face potential
liquidity, credit and reputational issues
in times of fund and market stress and
the resultant incentives for shareholders
to redeem shares.
In normal market conditions, that
shareholders may request immediate
redemptions from a fund with a
portfolio that does not hold securities
that mature in the same time frame
generally is no cause for concern
because funds typically can sell
portfolio securities to satisfy
shareholder redemptions without
negatively affecting prices. In times of
crisis when the secondary markets for
portfolio assets become illiquid, funds
might be unable to sell sufficient assets
without causing large price movements
that affect not only the non-redeeming
shareholders but also investors in other
funds that hold similar assets.
Therefore, to provide fund sponsors
with flexibility to protect shareholder
interests, we are proposing to allow
fund sponsors to continue to support
money market fund operations through,
for example, affiliate purchases (in
reliance on rule 17a–9), provided such
support is thoroughly and consistently
disclosed.248
As exists today, money market fund
sponsors that have a greater capacity to
support their funds may have a
competitive advantage over other fund
sponsors that do not. The value of this
competitive advantage depends on the
extent to which fund sponsors choose to
support their funds and may be reduced
by the proposed enhanced disclosure
requirements discussed in this Release
which may disincentivize fund sponsors
from supporting their funds. The value
of potential sponsor support also will
depend on whether investors view
support as good news (because, for
example, the sponsor stands behind the
fund) or bad news (because, for
248 Commenters have noted the importance of
sponsor support under rule 17a–9 as a tool that
funds can use as a support mechanism. See, e.g.,
Comment Letter of U.S. Chamber of Commerce (Jan.
23, 2013) (available in File No. FSOC–2012–0003)
(‘‘U.S. Chamber Jan. 23, 2013 FSOC Comment
Letter’’), Federated Investors Alternative 1 FSOC
Comment Letter, supra note 161. We are proposing
amendments to require that money market funds
disclose the circumstances under which a fund
sponsor may offer any form of support to the fund
(e.g., capital contributions, capital support
agreements, letters of indemnity), any limits on
such support, past instances of support provided to
the fund, and public notification to the Commission
regarding current instances of support provided.
See infra section III.F for a more detailed
discussion.
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example, the sponsor does not
adequately monitor the portfolio
manager). The decision to leave rule
17a–9 in place should not, in our
opinion, impose any additional costs on
money market funds, their shareholders,
or others, or change the effects on
efficiency or capital formation. We
recognize, however, that permitting
sponsor support (through rule 17a–9
transactions) may allow money market
fund sponsors to prevent their fund
from deviating from its stable share
price, potentially undercutting our goal
to increase the transparency of money
market fund risks.
We request comment on retaining the
rule 17a–9 exemption.
• Do commenters believe affiliated
person support is important to funds,
investors, or the securities markets even
under our floating NAV proposal? Do
commenters agree with our assumptions
that liquidity concerns are likely to
remain significant even with a floating
NAV and that fund sponsors should
continue to have this flexibility to
protect shareholder interests? We note
that rule 17a–9 was established and
then expanded in 2010, in the context
of stable values. If money market funds
are required to float their NAVs, should
we limit further the circumstances
under which fund sponsors or advisers
can use rule 17a–9? If so, how?
• Does permitting affiliated purchases
for floating NAV money market funds
reduce the transparency of fund risks
that our floating NAV proposal is
designed, in part, to achieve? If so, does
the additional disclosure we are
proposing mitigate such an effect? Are
there additional ways we can mitigate
such an effect?
• Should we allow only certain types
of support or should we prohibit certain
types of support? For example, should
we allow sponsors to purchase under
rule 17a–9 only liquidity-impaired
assets, or should we prohibit sponsors
from purchasing defaulted securities?
Why or why not? If yes, what types of
support should be permitted and what
types should be prohibited? Why?
• Would the ability of fund sponsors
to support the NAV of floating funds
affect the way in which money market
funds are structured and marketed? If
so, how? Would it affect the competitive
position of fund sponsors that are more
or less likely to have available capital to
support their funds?
• Do commenters agree that our
proposed amendment would not impose
additional costs on funds or
shareholders or impact efficiency or
capital formation?
• Instead of retaining 17a–9, should
we instead repeal the rule and thereby
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prohibit certain types of sponsor
support of money market funds? If so,
why?
conjunction with our other proposals,
may not be sufficient to eliminate the
incentive for shareholders to redeem
shares in times of fund and market
b. Suspension of Redemptions
stress. As such, floating NAV money
Rule 22e–3 exempts money market
market funds may still face liquidity
funds from section 22(e) of the Act to
issues that could force them to want to
permit them to suspend redemptions
suspend redemptions and liquidate.
and postpone payment of redemption
Commenters have noted the benefits of
proceeds to facilitate an orderly
rule 22e–3, including that the rule
liquidation of the fund.249 Rule 22e–3
prevents a lengthy and disorderly
250 Rule
replaced temporary rule 22e–3T.
liquidation process, like that
22e–3 is designed to allow funds to
experienced by the Reserve Primary
suspend redemptions before actually
Fund.254 Therefore, despite a floating
breaking the buck, reduce the
NAV fund’s inability to break a buck,
vulnerability of investors to the harmful we believe the benefits of rule 22e–3
effects of heavy redemptions on funds,
should be preserved. Accordingly,
and minimize the potential for
under our proposed amendment, all
disruption to the securities markets.251
floating NAV money market funds
Rule 22e–3 currently requires that a
would be permitted to suspend
fund’s board of directors, including a
redemptions, when, among other
majority of disinterested directors,
requirements, the fund, at the end of a
determine that the deviation between
business day, has less than 15% of its
the fund’s amortized cost price per
total assets in weekly liquid assets.255
share and the market-based net asset
As discussed below in our discussion of
value per share may result in material
the liquidity fees and gates alternative
dilution or other unfair results before it
proposal, we believe that when a fund’s
suspends redemptions.252 We recognize weekly liquid assets are at least 50%
that, under our floating NAV proposal,
below the minimum required weekly
money market funds (including those
liquidity (i.e., weekly liquid assets have
exempt from the floating NAV
fallen from 30% to 15%), the fund is
requirement) generally would no longer under sufficient stress to warrant that
be able to use amortized cost valuation
the fund’s board be permitted to
for their portfolio holdings.253 Instead,
suspend redemptions in light of a
government and retail money market
decision to liquidate the fund (and
funds would use the penny rounding
therefore facilitate an orderly
method of pricing to maintain a stable
liquidation).
share price and other money market
Government money market funds and
funds would have a floating NAV per
retail money market funds, which
share. Accordingly, for all money
would be exempt from the floating NAV
market funds, the current threshold
requirement, would be able to suspend
under rule 22e–3 for suspending
redemptions and liquidate if either (1)
redemptions would need modification
the fund, at the end of a business day,
to conform to the new regulatory
has less than 15% of its total assets in
regime.
weekly liquid assets or (2) the fund’s
As discussed above, we recognize that price per share as computed for
our floating NAV proposal, in
purposes of distribution, redemption,
and repurchase is no longer equal to its
249 Rule 22e–3(a)(1).
stable share price or the fund’s board
250 Rule 22e–3 was first adopted as an interim
(including a majority of disinterested
final temporary final shortly after the Temporary
directors) determines that such a change
Guarantee Program was established. See Temporary
Exemption for Liquidation of Certain Money Market is likely to occur.256 This would allow
Funds, Investment Company Act Release No. 28487
those funds to suspend redemptions and
(Nov. 20, 2008) [73 FR 71919 (Nov. 26, 2008)]
liquidate if the fund came under
(establishing rule 22e–3T to facilitate compliance
liquidity stress or if the fund was about
for those money market funds that elected to
participate in the Temporary Guarantee Program
to ‘‘break the buck.’’
and were therefore required to promptly suspend
Because money market funds already
redemptions if the fund broke the buck). The
comply with rule 22e–3, we do not
temporary rule expired on expired October 18,
believe that retaining the rule in the
2009. Id. See also infra section II.C (discussing the
Temporary Guarantee Program).
251 See 2010 Adopting Release, supra note 92, at
section II.H (noting that the rule is designed only
to facilitate the permanent termination of the fund
in an orderly manner). See also rule 22e–3(a)(2)
(requiring the fund’s board to irrevocably approve
the fund’s liquidation).
252 Rule 22e–3(a)(1).
253 As discussed above, money market funds
would continue to be permitted to use amortized
cost to value portfolio securities with a remaining
maturity of 60 days or less.
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254 See, e.g., ICI Jan. 24 FSOC Comment Letter,
supra note 25; Comment Letter of Federated
Investors, Inc. (Re: Alternative 2) (Jan. 25. 2013)
(available in File No. FSOC–2012–0003)
(‘‘Federated Alternative 2 FSOC Comment Letter’’).
255 See proposed (FNAV) rule 22e–3(a) (requiring
that the fund’s board, including a majority of
directors who are not interested persons of the
fund, irrevocably has approved the liquidation of
the fund).
256 See id.
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context of our floating NAV proposal
would impose any additional costs on
money market funds, their shareholders,
or others, nor have any effects on
competition, efficiency, or capital
formation.257
We request comment on this proposed
amendment.
• Do commenters believe that the
ability to suspend redemptions (under
the circumstances we propose) would
be important to floating NAV funds,
their investors, and the securities
markets?
• Would this ability be important to
a retail or government money market
fund even though we are proposing to
exempt these funds from the floating
NAV requirement, in part, because they
are less likely to face heavy redemptions
in times of stress?
• Is it appropriate to allow a money
market fund to suspend redemptions
and liquidate if its level of weekly
liquid assets falls below 15% of its total
assets? Is there a different threshold
based on daily or weekly assets that
would better protect money market fund
shareholders? What is that threshold,
and why is it better? Is there a threshold
based on different factors that would
better protect money market fund
shareholders? What are those factors,
and why are they better? If so, is such
suspension then appropriate only in
connection with liquidation, or should
it be broader?
• Is our conclusion correct that it will
impose no costs nor have any effects on
competition, efficiency, or capital
formation?
6. Tax and Accounting Implications of
Floating NAV Money Market Funds
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a. Tax Implications
Money market funds’ ability to
maintain a stable value per share
simplifies tax compliance for their
shareholders. Today, purchases and
sales of money market fund shares at a
stable $1.00 share price generate no
gains or losses, and money market fund
shareholders therefore generally need
not track the timing and price of
purchase and sale transactions for
capital gains or losses.
i. Realized Gains and Losses
If we were to require some money
market funds to use floating NAVs,
taxable investors in those money market
funds, like taxable investors in other
types of mutual funds, would
257 The Commission considered rule 22e–3’s
costs, benefits, and effects on competition,
efficiency, and capital formation, which this
amendment would preserve, when it adopted the
rule. See 2010 Adopting Release, supra note 92, at
sections II.H, V, and VI.
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experience gains and losses.
Shareholders in floating NAV money
market funds, therefore, could owe tax
on any gains on sales of their money
market fund shares, could have tax
benefits from any losses, and would
have to determine those amounts.258
Because it is not possible to predict the
timing of shareholders’ future
transactions and the amount of NAV
fluctuations, we are not able to estimate
the amount of any increase or decrease
in shareholders’ tax burdens. But, given
the relatively small fluctuations in value
that we anticipate would occur in
floating NAV money market funds and
our proposed exemption of certain
funds from the floating NAV
requirement, any changes in tax burdens
likely would be minimal.
Commenters also have asserted that
taxable investors in floating NAV money
market funds, like taxable investors in
other types of mutual funds, would be
required to track the timing and price of
purchase and sale transactions to
determine the amounts of gains and
losses realized.259 For mutual funds
other than stable-value money market
funds, tax rules now generally require
the funds or intermediaries to report to
the IRS and the shareholders certain
information about sales of shares,
including sale dates and gross
proceeds.260 If the shares sold were
acquired after January 1, 2012, the fund
or intermediary must also report cost
basis and whether any gain or loss is
long or short term.261 These new basis
reporting requirements and the pre-2012
reporting requirements are collectively
referred to as ‘‘information reporting.’’
Mutual funds and intermediaries,
258 In its proposed recommendation, the FSOC
recognized the potential increased tax-compliance
burdens associated with a floating NAV for both
money market funds and shareholders. FSOC
Proposed Recommendations, supra note 114, at 33–
34.
259 See, e.g., Comment Letter of Investment
Company Institute (Feb. 16, 2012) (available in File
No. 4–619) (‘‘ICI Feb. 2012 PWG Comment Letter’’)
(enclosing a submission by the Investment
Company Institute Working Group on Money
Market Fund Reform Standing Committee on
Investment Management International Organization
of Securities Commissions) (‘‘To be sure, investors
already face these burdens [tracking purchases and
sales for tax purposes] in connection with
investments in long-term mutual funds. But most
investors make fewer purchases and sales from
long-term mutual funds because they are used for
long-term saving, not cash management.’’).
260 Regulations exclude sales of stable-value
money market funds from this reporting obligation.
See 26 CFR 1.6045–1(c)(3)(vi).
261 The new reporting requirements (often
referred to as ‘‘basis reporting’’) were instituted by
section 403 of the Energy Improvement and
Extension Act of 2008 (Division B of Pub. L. 110–
343) (codified at 26 U.S.C. 6045(g), 6045A, and
6045B); see also 26 CFR 1.6045–1; Internal Revenue
Service Form 1099–B.
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however, are not currently required to
make reports to certain shareholders
(including most institutional investors).
The regulations call these shareholders
‘‘exempt recipients.’’ 262
We understand, based on discussions
by our staff with staff at the Treasury
Department and the IRS, that, by
operation of the current tax regulations,
if our floating NAV proposal is adopted,
money market funds that float their
NAV per share would no longer be
excluded from the information reporting
requirements currently applicable to
mutual funds and intermediaries.263
Because retail money market funds
would not be required to use floating
NAVs, the vast majority of floating NAV
money market fund shareholders are
expected to be exempt recipients (with
respect to which information reporting
is not required). Such exempt recipients
would thus be required to track gains
and losses, similar to the current
treatment of exempt recipient holders of
other mutual fund shares. If there are
any money market fund shareholders for
which information reporting is made,
those shareholders would be able to
make use of such reports in determining
and reporting their tax liability. We also
understand that the Treasury
Department and the IRS are considering
alternatives for modifying forms and
guidance (1) to include net information
reporting by the funds of realized gains
and losses for sales of all mutual fund
shares; and (2) to allow summary
income tax reporting by shareholders.264
We anticipate that these
modifications, if effected, could reduce
burdens and costs to shareholders when
reporting annual realized gains or losses
from transactions in a floating NAV
money market fund. We recognize that
if these modifications are not made, the
tax reporting effects of a floating NAV
could be quite burdensome for money
market fund investors that typically
engage in frequent transactions.
Regardless of the applicability of net
information reporting or of summary
income tax reporting, however, all
shareholders of floating NAV money
market funds would be required to
recognize and report taxable gains and
losses with respect to redemptions of
fund shares, which does not occur today
262 See
26 CFR 1.6045–1(c)(3).
supra note 260.
264 For 2012, the IRS allowed certain taxpayers to
include summary totals in their Federal income tax
returns, adding ‘‘Available upon request’’ where
transaction details might otherwise have been
required. See 2012 Instructions for Form 8949—
Sales and Other Dispositions of Capital Assets,
p. 3, col. 1, ‘‘Exception 2,’’ available at https://
www.irs.gov/pub/irs-pdf/i8949.pdf.
263 See
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with respect to shares of stable-value
money market funds.265
We request comment on the burdens
of tax compliance for money market
fund shareholders (the impact on funds
is discussed in the operational costs
section below).
• If any shareholders of a floating
NAV money market fund are not exempt
recipients (and thus receive the
information reporting that other nonexempt-recipient shareholders of other
mutual funds currently receive), how
difficult would it be for those
shareholders to use that information to
determine and report taxable gains and
losses? Would it be any more difficult
for floating NAV money market fund
shareholders than other mutual fund
shareholders? What kinds of costs, by
type and amount, would be involved?
• In the case of floating NAV fund
shareholders that are exempt recipients
(which are not required recipients of
information reporting), what types and
amounts of costs would those
shareholders incur to track their share
purchases and sales and report any
taxable gains or losses?
• As discussed above, mutual funds
and intermediaries are not required to
provide information reporting for
exempt recipients, including virtually
all institutional investors. Do mutual
funds and intermediaries provide this
information to shareholders even if tax
law does not require them to do so? If
not, would money market funds and
intermediaries be able to use their
existing systems and processes to access
this information if investors request it as
a result of our floating NAV proposal?
Would doing so involve systems
modifications or other costs in addition
to those we estimate in section III.A.7,
below? Would institutions or other
exempt recipients find it useful or more
efficient to receive this information from
funds rather than to develop it
themselves?
• Would exempt-recipient investors
continue to invest in floating NAV
funds if there continues to be no
information reporting with respect to
them?
• Would exempt-recipient investors
invest in floating NAV money market
funds if there is no administrative relief
related to summary reporting of capital
gains and losses, as discussed above?
What would be the effect on the utility
of floating NAV money market funds if
the anticipated administrative relief is
not provided? Would investors be able
265 Money market funds also would incur costs in
gathering and transmitting this information to
money market fund shareholders that they would
not incur absent our proposal, but these costs are
discussed in the operational costs discussed below.
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to use floating NAV money market
funds in the same way or for the same
purposes absent the anticipated
administrative relief?
ii. Wash Sales
In addition to the tax obligations that
may arise through daily fluctuations in
purchase and redemption prices of
floating NAV money market funds
(discussed above), special ‘‘wash sale’’
rules apply when shareholders sell
securities at a loss and, within 30 days
before or after the sale, buy substantially
identical securities.266 Generally, if a
shareholder incurs a loss from a wash
sale, the loss cannot be deducted, and
instead must be added to the basis of the
new, substantially identical securities,
which effectively postpones the loss
deduction until the shareholder
recognizes gain or loss on the new
securities.267 Because many money
market fund investors automatically
reinvest their dividends (which are
often paid monthly), virtually all
redemptions by these investors would
be within 30 days of a dividend
reinvestment (i.e., purchase). Under the
wash sale rules, the losses realized in
those redemptions would be disallowed
in whole or in part until an investor
disposed of the replacement shares (or
longer, if that disposition is also a wash
sale). We understand that the Treasury
Department and IRS are actively
considering administrative relief under
which redemptions of floating NAV
money market fund shares that generate
losses below a de minimis threshold
would not be subject to the wash sale
rules. We recognize, however, that
money market funds would still incur
operational costs to establish systems
with the capability of identifying wash
sale transactions, assessing whether
they meet the de minimis criterion, and
adjusting shareholder basis as needed
when they do not.268
We request comment on the tax
implications related to our floating NAV
proposal.
• Would investors continue to invest
in floating NAV money market funds
absent administrative relief from the
Treasury Department and IRS relating to
wash sales? What would be the effect on
the utility of floating NAV money
market funds if the anticipated
administrative relief is not provided?
Would investors be able to use floating
NAV money market funds in the same
way or for the same purposes absent the
anticipated administrative relief?
266 See
26 U.S.C. 1091.
267 Id.
268 These operational costs are discussed in infra
section III.A.7.
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36869
b. Accounting Implications
If we were to adopt our floating NAV
proposal, some money market fund
shareholders may question whether they
would be able to treat their fund shares
as ‘‘cash equivalents’’ on their balance
sheets. We understand that classifying
money market fund investments as cash
equivalents is important because, among
other things, investors may have debt
covenants that mandate certain levels of
cash and cash equivalents.269
Current U.S. GAAP defines cash
equivalents as ‘‘short-term, highly liquid
investments that are readily convertible
to known amounts of cash and that are
so near their maturity that they present
insignificant risk of changes in value
because of changes in interest rates.’’ 270
In addition, U.S. GAAP includes an
investment in a money market fund as
an example of a cash equivalent.271
Notwithstanding, some shareholders
may be concerned given this guidance
came before money market funds using
floating NAVs.272
Except as noted below, the
Commission believes that an investment
in a money market fund with a floating
NAV would meet the definition of a
‘‘cash equivalent.’’ We believe the
adoption of floating NAV alone would
not preclude shareholders from
classifying their investments in money
market funds as cash equivalents
because fluctuations in the amount of
cash received upon redemption would
likely be insignificant and would be
consistent with the concept of a ‘known’
amount of cash. The RSFI Study
supports our belief by noting that
floating NAV money market funds are
not likely to experience significant
fluctuations in value.273 The floating
NAV requirement is also not expected to
change the risk profile of money market
fund portfolio investments. Rule 2a–7’s
risk-limiting conditions should result in
fluctuations in value from changes in
interest rates and credit risk being
insignificant.
As is the case today with stable share
price money market funds, events may
occur that give rise to credit and
liquidity issues for money market funds
and shareholders would need to
reassess if their investments continue to
meet the definition of a cash equivalent.
For example, during the financial crisis,
269 In addition, some corporate investors may
perceive cash and cash equivalents on a company’s
balance sheet as a measure of financial strength.
270 See Financial Accounting Standards Board
Accounting Standards Codification (‘‘FASB ASC’’)
paragraph 305–10–20.
271 Id.
272 See, e.g., ICI Jan. 24 FSOC Comment Letter,
supra note 25.
273 See RSFI Study, supra note 21.
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certain money market funds
experienced unexpected declines in the
fair value of their investments due to
deterioration in the creditworthiness of
their assets and as a result, portfolios of
money market funds became less liquid.
Investors in these money market funds
would have needed to determine
whether their investments continued to
meet the definition of a cash equivalent.
If events occur that cause shareholders
in floating NAV money market funds to
determine their shares are not cash
equivalents, the shares would need to be
classified as investments, and
shareholders would have to treat them
either as trading securities or availablefor-sale securities.274
Do commenters believe using a
floating NAV would preclude money
market funds from being classified as
cash equivalents under GAAP?
• Would shareholders be less likely to
invest in floating NAV money market
funds if the shares held were classified
for financial statement purposes as an
‘‘investment’’ rather than ‘‘cash and
cash equivalent?’’
• Are there any other accountingrelated costs or burdens that money
market fund shareholders would incur if
we require money market funds to use
floating NAVs?
c. Implications for Local Government
Investment Pools
We also recognize that many states
have established local government
investment pools (‘‘LGIPs’’), money
market fund-like investment pools that
invest in short-term securities,275 that
are required by law or investment
policies to maintain a stable NAV per
share.276 The Government Accounting
Standards Board (‘‘GASB’’) states that
LGIPs that are operated in a manner
consistent with rule 2a–7 (i.e., a ‘‘2a7like pool’’) may use amortized cost to
274 See
FASB ASC paragraph 320–10–25–1.
tend to emulate typical money market
funds by maintaining a stable NAV per share
through investments in short-term securities. See
infra III.E.1, Table 2, note N.
276 See, e.g., U.S. Chamber of Commerce Letter to
the Hon. Elisse Walter (Feb. 13, 2013), available at
https://www.centerforcapitalmarkets.com/wpcontent/uploads/2010/04/2013-2.13-Floating-NAVQs-Letter.pdf. See also, e.g., Virginia’s Local
Government Investment Pool Act, which sets
certain prudential investment standards but leaves
it to the state treasury board to formulate specific
investment policies for Virginia’s LGIP. See Va.
Code Ann. § 2.2–4605(A)(3). Accordingly, the
treasury board instituted a policy of managing
Virginia’s LGIP in accordance with ‘‘certain risk
limiting provisions to maintain a stable net asset
value at $1.00 per share’’ and ‘‘GASB ‘2a–7 like’
requirements.’’ Virginia LGIP’s Investment Circular,
June 30, 2012, available at https://
www.trs.virginia.gov/cash/lgip.aspx. Not all LGIPs
are currently managed to maintain a stable NAV,
however, see infra section III.E.1, Table 2, note N.
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275 LGIPs
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value securities (and presumably,
facilitate maintaining a stable NAV per
share).277 Our floating NAV proposal, if
adopted, may have implications for
LGIPs. In order to continue to manage
LGIPs, state statutes and policies may
need to be amended to permit the
operation of investment pools that
adhere to rule 2a–7 as we propose to
amend it.278 Because we are unable to
predict how various state legislatures
and other market participants will react
to our floating NAV proposal, we do not
have the information necessary to
provide a reasonable estimate of the
impact on LGIPs or the potential effects
on efficiency, competition, and capital
formation. We note, however, that it is
possible that states could amend their
statutes or policies to permit the
operation of LGIPs that comply with
rule 2a–7 as we propose to amend it. We
request comment on this aspect of our
proposal.
• Would our floating NAV proposal
affect LGIPs as described above? Are
there other ways in which LGIPs would
be affected? If so, please describe.
• Are there other costs that we have
not considered?
• How do commenters think states
and other market participants would
react to our floating NAV proposal? Do
commenters believe that states would
amend their statutes or policies to
permit LGIPs to have a floating NAV per
share provided the fund complies with
rule 2a–7, as we propose to amend it?
If so, what types and amounts of costs
would states incur? If not, would there
be any effect on efficiency, competition,
or capital formation?
7. Operational Implications of Floating
NAV Money Market Funds
Money market funds (or their transfer
agents) are required under rule 2a–7 to
have the capacity to redeem and sell
fund shares at prices based on the
funds’ current net asset value per share
pursuant to rule 22c–1 rather than
$1.00, i.e., to transact at the fund’s
floating NAV.279 Intermediaries,
although not subject to rule 2a–7,
typically have separate obligations to
investors with regard to the distribution
of proceeds received in connection with
investments made or assets held on
277 See GASB, Statement No. 31, Accounting and
Financial Reporting for Certain Investments and for
External Investment Pools (Mar. 1997).
278 See, e.g., Comment Letter of American Public
Power Assoc., et al., File No. FSOC–2012–0003
(Feb. 13, 2013) (‘‘If the SEC rules are changed to
adopt a daily floating NAV, states would have to
alter their own statutes in order to comply, as many
state statues cite rule 2a–7 as the model for their
management of the LGIPs’’).
279 See rule 2a–7(c)(13). See also 2010 Adopting
Release, supra note 92, at nn.362–363.
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behalf of investors.280 Prior to adopting
these amendments to rule 2a–7, the ICI
submitted a comment letter detailing the
modifications that would be required to
permit funds to transact at the fund’s
floating NAV.281 Accordingly, we
expect that money market funds and
transfer agents already have laid the
foundation required to use floating
NAVs.
We recognize, however, that funds,
transfer agents, intermediaries, and
others in the distribution chain may not
currently have the capacity to process
transactions at floating NAVs
constantly, as would be required under
our proposal.282 Accordingly, we expect
that sub-transfer agents, fund
accounting departments, custodians,
intermediaries, and others in the
distribution chain would need to
develop and overlay additional controls
and procedures on top of existing
systems in order to implement a floating
NAV on a continual basis. In each case,
the controls and procedures for the
accounting systems at these entities
would have to be modified to permit
those systems to calculate a money
280 See, e.g., 2010 Adopting Release, supra note
92, at nn.362–363. Examples of intermediaries that
offer money market funds to their customers
include broker-dealers, portals, bank trust
departments, insurance companies, and retirement
plan administrators. See Investment Company
Institute, Operational Impacts of Proposed
Redemption Restrictions on Money Market Funds,
at 13 (2012), available at https://www.ici.org/pdf/
ppr_12_operational_mmf.pdf (‘‘ICI Operational
Impacts Study’’).
281 See, e.g., Comment Letter of the Investment
Company Institute (Sept. 8, 2009) (available in File
No. S7–11–09) (‘‘ICI 2009 Comment Letter’’)
(describing the modifications that would be
necessary if the Commission adopted the
requirement, currently reflected in rule 2a–7(c)(13),
that money market funds (or their transfer agents)
have the capacity to transact at a floating NAV, to:
(i) Fund transfer agent recordkeeping systems (e.g.,
special same-day settlement processes and systems,
customized transmissions, and reporting
mechanisms associated with same-day settlement
systems and proprietary systems used for next-day
settlement); (ii) a number of essential ancillary
systems and related processes (e.g., systems changes
for reconciliation and control functions,
transactions accepted via the Internet and by phone,
modifying related shareholder disclosures and
phone scripts, education and training for transfer
agent employees and changes to the systems used
by fund accountants that transmit net asset value
data to fund transfer agents); and (iii) sub-transfer
agent/recordkeeping arrangements (explaining that
similar modifications likely would be needed at
various intermediaries).
282 Even though a fund complex’s transfer agent
system is the primary recordkeeping system, there
are a number of additional subsystems and ancillary
systems that overlay, integrate with, or feed to or
from a fund’s primary transfer agent system,
incorporate custom development, and may be
proprietary or vendor dependent (e.g., print vendors
to produce trade confirmations). See ICI
Operational Impacts Study at 20, supra note 280.
The systems of sub-transfer agents and other parties
may also require modifications related to our
floating NAV proposal.
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market fund’s floating NAV each
business day and to communicate that
value to others in the distribution chain
on a permanent basis. In addition, we
understand that, under our floating
NAV proposal, money market funds and
other recordkeepers would incur
additional costs to track portfolio
security gains and losses, provide ‘‘basis
reporting,’’ and monitor for potential
wash-sale transactions, as discussed
above in section III.A.6. We believe,
however, that funds, in many cases,
should be able to leverage existing
systems that track this information for
other mutual funds.
We understand that the costs to
modify a particular entity’s existing
controls and procedures would vary
depending on the capacity, function and
level of automation of the accounting
systems to which the controls and
procedures relate and the complexity of
those systems’ operating
environments.283 Procedures and
controls that support systems that
operate in highly automated operating
environments would likely be less
costly to modify while those that
support complex operations with
multiple fund types or limited
automation or both would be more
costly to change.284 Because each
system’s capabilities and functions are
different, an entity would likely have to
perform an in-depth analysis of our
proposed rules to calculate the costs of
modifications required for its own
system. While we do not have the
information necessary to provide a point
estimate of the potential costs of
modifying procedures and controls, we
expect that each entity would bear onetime costs to modify existing procedures
and controls in the functional areas that
are likely to be impacted by our
proposal. Our staff has estimated that
the one-time costs of implementation for
an affected entity would range from $1.2
million (for entities requiring less
extensive modifications) to $2.3 million
(for entities requiring more extensive
modifications).285 Staff also estimates
283 See, e.g., ICI Operational Impacts Study at 37,
supra note 280 (noting that the modifications
necessary to transact at a floating NAV would
‘‘require in some cases minor and other instances
major modifications—depending on the complexity
of the systems and the types of intermediaries and
investors’’ involved).
284 See, e.g., id. at 41 (reporting that half of the
respondents in its survey reported that their transfer
agent systems ‘‘already had the capability to process
money market trades’’ at a floating value, while the
other respondents would need to modify their
transfer agent systems to comply with the
requirement to have the capacity to transact at a
floating NAV).
285 Staff estimates that these costs would be
attributable to the following activities: (i) Drafting,
integrating, and implementing procedures and
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that the annual costs to keep procedures
and controls current and to provide
continuing training would range from
5% to 15% of the one-time costs.286
We anticipate, however, that many
money market funds, transfer agents,
custodians, and intermediaries in the
distribution chain may not bear the
estimated costs on an individual basis
and therefore experience economies of
scale. For example, the costs would
likely be allocated among the multiple
users of affected systems, such as money
market funds that are members of a fund
group, money market funds that use the
same transfer agent or custodian, and
intermediaries that use systems
purchased from the same third party.
Accordingly, we expect that the cost for
many individual entities that would
have to process transactions at floating
NAVs may be less than the estimated
costs.
We request comment on this analysis
and our range of estimated costs to
money market funds, transfer agents,
custodians, and intermediaries.
• To what extent would transfer
agents, fund accounting departments,
custodians, and intermediaries need to
develop and implement additional
controls and procedures or modify
existing ones under our floating NAV
proposal?
• To what extent do intermediaries,
as a result of their separate obligations
to investors regarding distribution of
proceeds, have the capacity to process
(on a continual basis) transactions at a
fund’s floating NAV?
• Do money market funds and others
expect they would incur costs in
addition to those we estimate above or
that they would incur different costs? If
so, what are these costs?
• Would the costs incurred by money
market funds and others in the
distribution chain discussed above be
passed on to retail (and other) investors
in the form of higher fees?
• If a number of money market funds
already report daily shadow prices
using ‘‘basis point’’ rounding, are there
additional operational costs that funds
would incur to price their shares to four
decimal places? If so, please describe.
Are there means by which these
operational costs can be reduced while
controls; (ii) preparation of training materials; and
(iii) training. See also supra note 245 (discussing
the bases of our staff’s estimates of operational and
related costs).
286 As noted throughout this Release, we
recognize that adding new capabilities or capacity
to a system (including modifications to related
procedures and controls) will entail ongoing annual
maintenance costs and understand that those costs
generally are estimated as a percentage of initial
costs of building or expanding a system.
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still providing sufficient price
transparency?
• Do all funds have the ready
capability to price their shares to four
decimal places? For those funds that do
so already, we seek comment on the
costs involved in developing this
capability. For funds that do not have
the capability, what types and amounts
of costs would be incurred?
• What type of ongoing maintenance
and training would be necessary, and to
what extent? Do commenters agree that
such costs would likely range between
5% and 15% of one-time costs? If not,
is there a more accurate way to estimate
these costs?
• To what extent would money
market funds or others experience
economies of scale?
• We request that intermediaries and
others provide data to support the costs
they expect they would incur and an
explanation of the work they have
already undertaken as a result of rule
2a–7’s current requirement that money
market funds (or their transfer agents)
have the capacity to transact at a
floating NAV.
In addition, funds would incur costs
to communicate with shareholders the
change to a floating NAV per share.
Although funds (and their
intermediaries that provide information
to beneficial owners) already have the
means to provide shareholders the
values of their money market fund
holdings, our staff anticipates that they
would incur additional costs associated
with programs and systems
modifications necessary to provide
shareholders with access to that
information online, through automated
phone systems, and on shareholder
statements under our floating NAV
proposal and to explain to shareholders
that the value of their money market
funds shares will fluctuate.287
Our staff anticipates that these
communication costs would vary among
funds (or their transfer agents) and fund
intermediaries depending on the current
capabilities of the entity’s Web site,
automated or manned phone systems,
systems for processing shareholder
statements, and the number of investors.
We believe that money market funds
themselves would need to perform an
in-depth analysis of our proposed rules
in order to estimate the necessary
systems modifications. While we do not
have the information necessary to
provide a point estimate of the potential
costs of systems modifications, our staff
287 Staff expects these costs would include
software programming modifications, as well as
personnel costs that would include training and
scripts for telephone representatives to enable them
to respond to investor inquiries.
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has estimated that the costs for a fund
(or its transfer agent) or intermediary
that may be required to perform these
activities would range from $230,000 to
$490,000.288 Staff also estimates that
funds (or their transfer agents) and their
intermediaries would have ongoing
costs to maintain automated phone
systems and systems for processing
shareholder statements, and to explain
to shareholders that the value of their
money market fund shares will
fluctuate, and that these costs would
range from 5% to 15% of the one-time
costs.289 We request comment on this
aspect of our proposal.
• Do commenters agree with our
estimated range of costs to funds (or
their transfer agents) and fund
intermediaries to communicate with
shareholders the change to a floating
NAV per share? If not, we request
detailed estimates of the types and
amounts of costs.
Money market funds’ ability to
maintain a stable value also facilitates
the funds’ role as a cash management
vehicle and provides other operational
efficiencies for their shareholders.290
Money market fund shareholders
generally are able to transact in fund
shares at a stable value known in
advance. This permits money market
fund transactions to settle on the same
day that an investor places a purchase
or sell order, and allows a shareholder
to determine the exact value of his or
her money market fund shares (absent a
liquidation event) at any time.291 These
288 Staff estimates that these costs would be
attributable to the following activities: (i) Project
assessment and development; (ii) project
implementation and testing; and (iii) written and
telephone communication. See also supra note 245
(discussing the bases of our staff’s estimates of
operational and related costs).
289 As noted throughout this Release, we
recognize that adding new capabilities or capacity
to a system will entail ongoing annual maintenance
costs and understand that those costs generally are
estimated as a percentage of initial costs of building
or expanding a system.
290 See, e.g., Federated Investors Alternative 1
FSOC Comment Letter, supra note 161; Comment
Letter of Steve Fancher, et al. (Jan. 22, 2013)
(available in File No. FSOC–2012–0003); Comment
Letter of Steve Morgan, et al. (Jan. 22, 2013)
(available in File No. FSOC–2012–0003) (‘‘Steve
Morgan FSOC Comment Letter’’); Comment Letter
of Edward Jones (Feb. 15, 2013) (available in File
No. FSOC–2012–0003) (‘‘Edward Jones FSOC
Comment Letter’’) (citing cash management benefits
for individual investors in particular); Comment
Letter of T. Rowe Price (Jan. 30, 2013) (available in
File No. FSOC–2012–0003) (‘‘T. Rowe Price FSOC
Comment Letter’’).
291 See, e.g., ICI Jan. 24 FSOC Comment Letter,
supra note 25 (noting how same-day settlement is
vitally important to many investors and describing
how such same-day settlement is facilitated by a
stable NAV). We note, however, that not all money
market fund transactions settle on the same day.
See, e.g., ICI 2009 Comment Letter, supra note 281
(describing the systems and processes involved to
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features have made money market funds
an important component of systems for
processing and settling various types of
transactions.292
Commenters have asserted that money
market funds with floating NAVs would
be incompatible with these systems
because, among other things,
transactions in shares of these money
market funds, like other types of mutual
fund transactions, would generally not
settle on the same day that an order is
placed, and the value of the shares of
these money market funds could not be
determined precisely before that day’s
NAV had been calculated.293 Requiring
money market funds to use floating
NAVs, the commenters assert, would
require money market fund
shareholders and service providers to
reprogram their systems or manually
reconcile transactions, increasing
staffing costs.294 Others have asserted
that similar considerations could affect
permit same-day settlement and those involved for
next-day settlement).
292 See, e.g., Comment Letter of John D. Hawke
(Dec. 15, 2011) (available in File No. 4–619)
(‘‘Hawke Dec 2011 PWG Comment Letter’’)
(identifying various types of systems, including
among others trust accounting systems at bank trust
departments; corporate payroll processing systems
and processing systems used to manage
corporations’ cash balances; processing systems
used by federal, state, and local governments to
manage their cash balances; and municipal bond
trustee cash management systems).
293 Hawke Dec 2011 PWG Comment Letter, supra
note 292 (‘‘The net result of a floating NAV would
be to make Money Funds not useful to hold the
large, short-term cash balances used in these
automated transaction processing systems across a
wide variety of businesses and applications.’’);
Comment Letter of Cachematrix Holdings LLC (Dec.
12, 2011) (available in File No. 4–619)
(‘‘Cachematrix PWG Comment Letter’’) (‘‘A stable
share price is critical to same-day and next-day
processing, shortened settlement times, float
management, and mitigation of counterparty risk
among firms.’’); Comment Letter of State Street
Global Advisors (Sept. 8, 2009) (available in File
No. S7–11–09) (‘‘[T]he stable NAV simplifies
transaction settlement, which permits money
market funds to offer shareholders same day
settlement options, as well as ATM access, check
writing, and ACH/FedWire transfers.’’).
294 See, e.g., Hawke Dec 2011 PWG Comment
Letter, supra note 292 (stating that ‘‘[m]anual
processing [required to reconcile the day-to-day
fluctuations in the value of money market funds
with a floating NAV] would mean more staffing
requirement, more costs associated with staffing the
function, and errors and delays in completing the
process’’ and that reprogramming systems would
‘‘take many years and hundreds of millions of
dollars to complete across a wide range of
businesses and applications for which stable value
money funds currently are used to hold short-term
liquidity’’); Cachematrix PWG Comment Letter,
supra note 293 (‘‘[A]n entire industry has
programmed accounting, trading and settlement
systems based on a stable share price. The cost for
each bank to retool their sub-accounting systems to
accommodate a fluctuating NAV could be in the
millions of dollars. This does not take into account
the costs that each bank would then pass on to the
thousands of corporations that use money market
trading systems.’’).
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features that are particularly appealing
to retail investors, such as ATM access,
check writing, electronic check payment
processing services and products, and
U.S. Fedwire transfers.295 We note that
we are proposing an exemption for retail
funds which we expect would
significantly alleviate any such concerns
about the costs of altering those features,
because funds that take advantage of the
retail exemption would be able to
maintain a stable price, and accordingly,
such features would be unaffected.
Nonetheless, not all funds with these
features may choose to take advantage of
the proposed retail exemption, and
therefore, some funds may need to make
additional modifications to continue
offering these features. We have
included estimates of the costs to make
such modifications below. We seek
comment on the extent to which these
features may be affected by our proposal
and the proposed retail exemption.
• Would money market funds and
financial intermediaries continue to
provide the retail-focused services
discussed above if we were to require
money market funds to use floating
NAVs? If not, why not?
• Would investors reduce or
eliminate their money market fund
investments if these services were no
longer available or if the cost of these
services increases?
Commenters also assert that requiring
money market funds to use floating
NAVs would extend the settlement
cycle from same-day settlement to nextday settlement, which would expose
parties to transactions to increased risk
(e.g., during a day in which a
transaction to be paid by proceeds from
a sale of money market fund shares is
still open, one party to the transaction
could default).296 But a money market
295 See, e.g., Comment Letter of Fidelity
Investments (Feb. 14, 2013) (available in File No.
FSOC–2012–0003) (‘‘Fidelity FSOC Comment
Letter’’). ([B]roker-dealers offer clients a variety of
features that are available generally only to
accounts with a stable NAV, including ATM access,
check writing, and ACH and Fedwire transfers. A
floating NAV would force MMFs that offer same
day settlement on shares redeemed through wire
transfers to shift to next day settlement or require
fund advisers to modify their systems to
accommodate floating NAV MMFs.’’); Edward Jones
FSOC Comment Letter, supra note 290; ICI Feb
2012 PWG Comment Letter, supra note 259
(‘‘[E]limination of the stable NAV for money market
funds would likely force brokers and fund sponsors
to consider how or whether they could continue to
provide such services to money market fund
investors.’’).
296 See, e.g., Hawke Dec 2011 PWG Comment
Letter, supra note 292 (‘‘Both parties would carry
the unsettled transaction as an open position for
one extra day and each party would be exposed for
that time to the risk that its counterparty would
default during the extra day, or that the bank
holding the cash overnight (or over the weekend)
would fail. For a bank involved in making a
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fund with a floating NAV could still
offer same-day settlement. The fund
could price its shares each day and
provide redemption proceeds that
evening. Indeed, we are aware of two
floating NAV money market funds that
normally operate this way.297
Alternatively, funds could price their
shares periodically (e.g., at noon and 4
p.m. each day) to provide same-day
settlement.298 We recognize that pricing
services may incur operational costs to
modify their systems (and pass these
costs along to funds) to provide pricing
multiple times each day and seek
comment on the nature and amounts of
these costs.
• Do commenters expect to incur the
types of costs described above (e.g.,
increased staffing costs to manually
reconcile transactions)? Are there
additional costs we have not identified?
• What kinds of costs, specifically, do
commenters expect to incur? What
kinds of employee costs would be
involved?
• Would an extended settlement
cycle impose costs on money market
fund investors? If so, what kinds of costs
and how much?
• Would money market funds extend
the settlement cycle or would they
exercise either of those other options?
• Would exercising either of the two
options discussed above impose costs
on money market funds? If so, how
payment in anticipation of an incoming funds
transfer as part of these processing systems, this
change from same-day to next-day processing of
money fund redemptions would turn intra-day
overdrafts into overnight overdrafts, resulting in
much greater default and funding risks to the bank.
This extra day’s float would mean more risk in the
system and a larger average float balance that each
party must carry and finance.’’); Cachematrix PWG
Comment Letter, supra note 293 (‘‘A stable share
price is critical to same-day and next-day
processing, shortened settlement times, float
management, and mitigation of counterparty risk
among firms.’’).
297 See, e.g., the prospectus for the DWS Variable
NAV Money Fund, dated December 1, 2011,
available at https://www.sec.gov/Archives/edgar/
data/863209/000008805311001627/nb120111ictvnm.txt (‘‘If the fund receives a sell request prior
to the 4:00 p.m. Eastern time cut-off, the proceeds
will normally be wired on the same day. However,
the shares sold will not earn that day’s dividend.’’);
prospectus for the Northern Funds, dated December
7, 2012, available at https://www.sec.gov/Archives/
edgar/data/916620/000119312512495705/
d449473d485apos.htm (‘‘Redemption proceeds
normally will be sent or credited on the next
Business Day or, if you are redeeming your shares
through an authorized intermediary, up to three
Business Days, following the Business Day on
which such redemption request is received in good
order by the deadline noted above, unless payment
in immediately available funds on the same
Business Day is requested.’’).
298 We understand that pricing vendors may not
provide continual pricing throughout the day.
Instead, money market funds could establish
periodic times at which the fund would price its
shares.
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much? Are there options that we have
not identified that money market funds
could use to provide same-day
settlement?
• Would extending the settlement
cycle cause investors to leave or not
invest in money market funds?
• Do commenters agree that a delay in
settlement for some money market fund
transactions could expose parties to the
transactions to increased counterparty
risk? To what extent would this occur,
and how does the nature of this risk
differ from counterparty risk that arises
in other aspects of a money market fund
shareholder’s business?
• Do commenters agree that money
market funds generally could still offer
same-day settlement if required to use a
floating NAV?
• Do fund pricing services have the
capacity to provide pricing multiple
times each day? If not, what types and
amounts of costs would pricing services
incur to develop this capacity? Would
pricing services pass these costs down
to funds?
• Are the money market funds that
currently same-day settle with a floating
NAV representative of what a broader
industry of floating NAV money market
funds could achieve? Are there
additional costs or complications in
conducting such same-day settlement
for larger funds than smaller funds?
In addition to money market funds
and other entities in the distribution
chain, each money market fund
shareholder would also likely be
required to perform an in-depth analysis
of our floating NAV proposal and its
own existing systems, procedures, and
controls to estimate the systems
modifications it would be required to
undertake. Because of this, and the
variation in systems currently used by
institutional money market fund
shareholders, we do not have the
information necessary to provide a point
estimate of the potential costs of
systems modifications. Nevertheless,
our staff has attempted to describe the
types of activities typically involved in
making systems modifications and
estimated a range of hours and costs that
may be required to perform these
activities. In addition, the Commission
requests from commenters information
regarding the potential costs of system
modifications for money market fund
shareholders.
Our staff has prepared ranges of
estimated costs, taking into account
variations in the functionality,
sophistication, and level of automation
of money market fund shareholders’
existing systems and related procedures
and controls, and the complexity of the
operating environment in which these
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systems operate.299 In deriving its
estimates, our staff considered the need
to modify systems and related
procedures and controls related to
recordkeeping, accounting, trading, cash
management, and bank reconciliations,
and to provide training concerning these
modifications.
Staff estimates that a shareholder
whose systems (including related
procedures and controls) would require
less extensive or labor-intensive
modifications would incur one-time
costs ranging from $123,000 to
$253,000.300 Staff estimates that a
shareholder whose systems (including
related procedures and controls) would
require more extensive or laborintensive modifications would incur
one-time costs ranging from $1.4 million
to $2.9 million.301 In addition, staff
estimates the annual maintenance costs
to these systems and procedures and
controls, and the costs to provide
continuing training, would range from
5% to 15% of the one-time
implementation costs.302 We request
comment on our analysis and the nature
and extent of the costs money market
fund shareholders anticipate they would
incur as a result of our floating NAV
proposal.
• Are shareholder systems in fact
unable to accommodate a floating NAV,
even if the NAV typically fluctuates
very little (a fraction of a penny) on a
day-to-day basis?
• If shareholder systems are unable to
accommodate a floating NAV, what
kinds of programming costs would
shareholders incur in reprogramming
the systems and how do they compare
to our staff’s estimates above?
• Do shareholders have other systems
they use to manage their investments
that fluctuate in value? If so, could these
systems be used for money market
funds? If not, why not?
• How much would it cost to adapt
existing shareholder systems (currently
used to accommodate investments that
fluctuate in value) to accommodate
money market funds with floating NAVs
and how do these costs compare to our
staff’s estimates above?
299 Some money market fund shareholders do not
use systems and would not use them under this
proposal (e.g., many retail investors), and these
shareholders of course would not incur any systems
modifications costs.
300 Staff estimates that these costs would be
attributable to the following activities: (i) Planning,
coding, testing, and installing system modifications;
(ii) drafting, integrating, implementing procedures
and controls; (iii) preparation of training materials;
and (iv) training. See also supra note 245
(discussing the bases of our staff’s estimates of
operational and related costs).
301 Id.
302 See supra note 286.
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8. Disclosure Regarding Floating NAV
We are proposing disclosure-related
amendments to rule 482 under the
Securities Act 303 and Form N–1A in
connection with the floating NAV
alternative. We anticipate that the
proposed rule and form amendments
would provide current and prospective
shareholders with information regarding
the operations and risks of this reform
alternative. In keeping with the
enhanced disclosure framework we
adopted in 2009,304 the proposed
amendments are intended to provide a
layered approach to disclosure in which
key information about the proposed new
features of money market funds would
be provided in the summary section of
the statutory prospectus (and,
accordingly, in any summary
prospectus, if used) with more detailed
information provided elsewhere in the
statutory prospectus and in the
statement of additional information
(‘‘SAI’’).
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a. Disclosure Statement
The move to a floating NAV would be
designed to change the investment
expectations and behavior of money
market fund investors. As a measure to
achieve this change, we propose to
require that each money market fund,
other than a government or retail fund,
include a bulleted statement disclosing
the particular risks associated with
investing in a floating NAV money
market fund on any advertisement or
sales material that it disseminates
(including on the fund Web site). We
also propose to include wording
designed to inform investors about the
primary risks of investing in money
303 Rule 482 applies to advertisements or other
sales materials with respect to securities of an
investment company registered under the
Investment Company Act that is selling or
proposing to sell its securities pursuant to a
registration statement that has been filed under the
Investment Company Act. See rule 482(a). This rule
describes the information that is required to be
included in an advertisement, including a
disclosure statement that must be used on money
market fund advertisements. See rule 482(b).
Our proposal would also affect fund
supplemental sales literature (i.e., sales literature
that is preceded or accompanied by a statutory
prospectus). Rule 34b–1 under the Investment
Company Act prescribes the requirements for
supplemental sales literature. Because rule 34b–1(a)
cross-references the requirements of rule 482(b)(4),
any changes made to that provision will affect the
requirements for fund supplemental sales literature.
304 See Enhanced Disclosure and New Prospectus
Delivery Option for Registered Open-End
Management Investment Companies, Investment
Company Act Release No. 28584 (Jan. 13, 2009) [74
FR 4546 (Jan. 26, 2009)] (‘‘Summary Prospectus
Adopting Release’’) at paragraph preceding section
III (adopting rules permitting the use of a summary
prospectus, which is designed to provide key
information that is important to an informed
investment decision).
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market funds generally in this bulleted
disclosure statement. While money
market funds are currently required to
include a similar disclosure statement
on their advertisements and sales
materials,305 we propose amending this
disclosure statement to emphasize that
money market fund sponsors are not
obligated to provide financial support,
and that money market funds may not
be an appropriate investment option for
investors who cannot tolerate losses.306
Specifically, we would require
floating NAV money market funds to
include the following bulleted
disclosure statement on their
advertisements and sales materials:
• You could lose money by investing
in the Fund.
• You should not invest in the Fund
if you require your investment to
maintain a stable value.
• The value of shares of the Fund will
increase and decrease as a result of
changes in the value of the securities in
which the Fund invests. The value of
the securities in which the Fund invests
may in turn be affected by many factors,
including interest rate changes and
defaults or changes in the credit quality
of a security’s issuer.
• An investment in the Fund is not
insured or guaranteed by the Federal
Deposit Insurance Corporation or any
other government agency.
• The Fund’s sponsor has no legal
obligation to provide financial support
to the Fund, and you should not expect
that the sponsor will provide financial
support to the Fund at any time.307
We also propose to require a
substantially similar bulleted disclosure
statement in the summary section of the
statutory prospectus (and, accordingly,
in any summary prospectus, if used).308
305 See supra note 303. Rule 482(b)(4) (which
currently requires a money market fund to include
the following disclosure statement on its
advertisements and sales materials: An investment
in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund).
306 See infra note 607 and accompanying text
(discussing the extent to which discretionary
sponsor support has the potential to confuse money
market fund investors); supra note 141 and
accompanying text (noting that survey data shows
that some investors are unsure about the amount of
risk in money market funds and the likelihood of
government assistance if losses occur).
307 See proposed (FNAV) rule 482(b)(4)(i). If an
affiliated person, promoter, or principal
underwriter of the fund, or an affiliated person of
such person, has entered into an agreement to
provide financial support to the fund, the fund
would be permitted to omit the last bulleted
sentence from the disclosure statement for the term
of the agreement. See Note to paragraph (b)(4),
proposed (FNAV) rule 482(b)(4).
308 See proposed (FNAV) Item 4(b)(1)(ii)(A) of
Form N–1A. Item 4(b)(1)(ii) currently requires a
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With respect to money market funds
that are not government or retail funds,
we propose to remove current
requirements that money market funds
state that they seek to preserve the value
of shareholder investments at $1.00 per
share.309 This disclosure, which was
adopted to inform investors in money
market funds that a stable net asset
value does not indicate that the fund
will be able to maintain a stable
NAV,310 will not be relevant once funds
are required to ‘‘float’’ their net asset
value.
As discussed above, the floating NAV
proposal would provide exemptions to
the floating NAV requirement for
government and retail money market
funds.311 Accordingly, the proposed
amendments to rule 482 and Form N–
1A would require government and retail
money market funds to include a
bulleted disclosure statement on the
fund’s advertisements and sales
materials and in the summary section of
the fund’s statutory prospectus (and,
accordingly, in any summary
prospectus, if used) that does not
discuss the risks of a floating NAV, but
that would be designed to inform
investors about the risks of investing in
money market funds generally.312 We
propose to require each government and
retail fund to include the following
bulleted disclosure statement in the
summary section of its statutory
prospectus (and, accordingly, in any
summary prospectus, if used), and on
any advertisement or sales material that
it disseminates (including on the fund
Web site):
• You could lose money by investing
in the Fund.
• The Fund seeks to preserve the
value of your investment at $1.00 per
money market fund to include the following
statement in its prospectus: An investment in the
Fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
309 See Item 4(b)(1)(ii) of Form N–1A; proposed
(FNAV) Item 4(b)(1)(ii)(A) of Form N–1A.
310 See Registration Form Used by Open-End
Management Investment Companies, Investment
Company Act Release No. 23064 (Mar. 13, 1998) [63
FR 13916 (Mar. 23, 1998)] (release amending
disclosure) (‘‘Registration Statement Adopting
Release’’); Revisions to Rules Regulating Money
Market Funds, Investment Company Act Release
No. 18005 (Feb. 20, 1990) [56 FR 8113 (Feb. 27,
1991)] (adopting release); Revisions to Rules
Regulating Money Market Funds, Investment
Company Act Release No. 17589 (July 17, 1990) [55
FR 30239 (July 25, 1990)] (‘‘1990 Proposing
Release’’).
311 See supra sections III.A.3 and III.A.4 and
proposed (FNAV) rules 2a–7(c)(2) and (c)(3).
312 See supra notes 305–306 and accompanying
text.
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share, but cannot guarantee such
stability.
• An investment in the Fund is not
insured or guaranteed by the Federal
Deposit Insurance Corporation or any
other government agency.
• The Fund’s sponsor has no legal
obligation to provide financial support
to the Fund, and you should not expect
that the sponsor will provide financial
support to the Fund at any time.313
The proposed disclosure statements
are intended to be one measure to
change the investment expectations and,
therefore, the behavior of money market
fund investors. The risk-limiting
conditions of rule 2a–7 and past
experiences of money market fund
investors have created expectations of a
stable, cash-equivalent investment. As
discussed above, one reason for such
expectation may have been the role of
sponsor support in maintaining a stable
net asset value for money market
funds.314 In addition, we are concerned
that investors, under the floating NAV
proposal, will not be fully aware that
the value of their money market fund
shares will increase and decrease as a
result of the changes in the value of the
underlying portfolio securities.315 In
proposing the disclosure statement, we
have taken into consideration investor
preferences for clear, concise, and
understandable language.316 We also
considered whether language that was
313 See proposed (FNAV) rule 482(b)(4)(ii) and
proposed (FNAV) item 4(b)(1)(ii)(B) of Form N–1A;
see also supra notes 305 and 308 (discussing the
current corresponding disclosure requirements for
money market funds). If an affiliated person,
promoter, or principal underwriter of the fund, or
an affiliated person of such person, has entered into
an agreement to provide financial support to the
fund, the fund would be permitted to omit the last
bulleted sentence from the disclosure statement that
appears on a fund advertisement or fund sales
material, for the term of the agreement. See Note to
paragraph (b)(4), proposed (FNAV) rule 482(b)(4).
Likewise, if an affiliated person, promoter, or
principal underwriter of the fund, or an affiliated
person of such person, has entered into an
agreement to provide financial support to the fund,
and the term of the agreement will extend for at
least one year following the effective date of the
fund’s registration statement, the fund would be
permitted to omit the last bulleted sentence from
the disclosure statement that appears on the fund’s
registration statement. See Instruction to proposed
(FNAV) item 4(b)(1)(ii) of Form N–1A.
314 See supra section II.B.3.
315 See Fidelity FSOC Comment Letter, supra note
295 (finding, from its study, that 81% of its retail
money market fund investors understood that
securities held by these funds have some small dayto-day fluctuations). However, the study did not
address the extent to which these investors
understood that these fluctuations could impact the
value of their shares of money market funds, rather
than the value of the underlying portfolio securities.
316 See Study Regarding Financial Literacy
Among Investors, a study by staff of the U.S.
Securities and Exchange Commission (Aug. 2012),
available at https://www.sec.gov/news/studies/2012/
917-financial-literacy-study-part1.pdf, at vi.
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stronger in conveying potential risks
associated with money market funds
would be effective for investors.317 In
addition, we considered whether the
proposed disclosure statement should
be limited to only money market fund
advertisements and sales materials, as
discussed above. Although we
acknowledge that the summary section
of the prospectus must contain a
discussion of key risk factors associated
with a floating NAV money market
fund, we believe that the importance of
the disclosure statement merits its
placement in both locations, similar to
how the current money market fund
legend is required in both money market
fund advertisements and sales materials
and the summary section of the
prospectus.318
We request comment on the
disclosure statements 319 proposed to be
required on any money market fund
advertisements or sales materials, as
well as in the summary section of a
fund’s statutory prospectus (and,
accordingly, in any summary
prospectus, if used).
• Would the disclosure statement
proposed to be used by floating NAV
funds adequately alert investors to the
risks of investing in a floating NAV
fund, and would investors understand
the meaning of each part of the
proposed disclosure statement? Will
investors be fully aware that the value
of their money market fund shares will
increase and decrease as a result of the
changes in the value of the underlying
portfolio securities? If not, how should
the proposed disclosure statement be
amended?
• Would the disclosure statement
proposed to be used by government and
retail money market funds, which are
not subject to the floating NAV
requirement, adequately alert investors
to the risks of investing in those types
of funds, and would investors
understand the meaning of each part of
the proposed disclosure statement? If
not, how should the proposed
disclosure statement be amended?
• Would different shareholder groups
or different types of funds benefit from
317 See Molly Mercer et al., Worthless Warnings?
Testing the Effectiveness of Disclaimers in Mutual
Fund Advertisements, 7 J. Empirical Legal Stud. 429
(2010) (evaluating the usefulness of legends in
mutual fund advertisements regarding performance
advertising).
318 See supra notes 305 and 308.
319 In the questions that follow, we use the term
‘‘disclosure statement’’ to mean the new disclosure
statement that we propose to require floating NAV
funds to incorporate into their prospectuses and
advertisements and sales materials or, alternatively
and as appropriate, the new disclosure statement
that we propose to require government or retail
funds to incorporate into their prospectuses and
advertisements and sales materials.
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different disclosure statements? For
example, should retail and institutional
investors receive different disclosure
statements, or should funds that offer
cash management features such as check
writing provide different disclosure
statements from funds that do not? Why
or why not? If yes, how should the
disclosure statement be tailored to
different shareholder groups and fund
types?
• Will the proposed disclosure
statement respond effectively to investor
preferences for clear, concise, and
understandable language?
• Would the following variations on
the proposed disclosure statement be
any more or less useful in alerting
shareholders to the risks of investing in
a floating NAV fund (as applicable) and/
or the risks of investing in money
market funds generally?
Æ Removing or amending the
following bullet point in the proposed
disclosure statement: ‘‘The Fund’s
sponsor has no legal obligation to
provide financial support to the Fund,
and you should not expect that the
sponsor will provide financial support
to the Fund at any time.’’
Æ Removing or amending the
following bullet point in the proposed
disclosure statement: ‘‘The value of the
securities in which the Fund invests
may in turn be affected by many factors,
including interest rate changes and
defaults or changes in the credit quality
of a security’s issuer.’’
Æ Amending the final bullet point in
the proposed disclosure statement to
read: ‘‘Your investment in the Fund
therefore may experience losses.’’
Æ Amending the final bullet point in
the proposed disclosure statement to
read: ‘‘Your investment in the Fund
therefore may experience gains or
losses.’’
• Would investors benefit from
requiring the proposed disclosure
statement also to be included on the
front cover page of a money market
fund’s prospectus (and on the cover
page or beginning of any summary
prospectus, if used)?
• Would investors benefit from any
additional types of disclosure in the
summary section of the statutory
prospectus or on the prospectus’ cover
page? If so, what else should be
included?
• Should we provide any instruction
or guidance in order to highlight the
proposed disclosure statement on fund
advertisements and sales materials
(including the fund’s Web site) and/or
lead investors efficiently to the
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disclosure statement? 320 For example,
with respect to the fund’s Web site,
should we instruct that the proposed
disclosure statement be posted on the
fund’s home page or be accessible in no
more than two clicks from the fund’s
home page?
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b. Disclosure of Tax Consequences and
Effects on Fund Operations
The proposed requirement that money
market funds transition to a floating
NAV would entail certain additional
tax- and operations-related disclosure,
which disclosure requirements would
not necessitate rule and form
amendments.321 As discussed above, if
we were to require certain money
market funds to use a floating NAV,
taxable investors in money market
funds, like taxable investors in other
types of mutual funds, may experience
taxable gains and losses.322 Currently,
funds are required to describe in their
prospectuses the tax consequences to
shareholders of buying, holding,
exchanging, and selling the fund’s
shares.323 Accordingly, we expect that,
pursuant to current disclosure
requirements, floating NAV money
market funds would include disclosure
in their prospectuses about the tax
consequences to shareholders of buying,
holding, exchanging, and selling the
shares of the floating NAV fund. In
addition, we expect that a floating NAV
money market fund would update its
prospectus and SAI disclosure regarding
the purchase, redemption, and pricing
of fund shares, to reflect any procedural
changes resulting from the fund’s use of
a floating NAV.324 As discussed below,
if we were to adopt the floating NAV
alternative, the compliance date would
be 2 years after the effective date of the
adoption with respect to any
amendments specifically related to the
floating NAV proposal, including
related amendments to disclosure
requirements.325
We request comment on the
disclosure that we expect floating NAV
money market funds would include in
320 Such instruction or guidance would
supplement current requirements for the
presentation of the disclosure statement required by
rule 482(b)(4). See supra note 305; rule 482(b)(5).
321 Prospectus disclosure regarding the tax
consequences of these activities is currently
required by Form N–1A. See Item 11(f) of Form N–
1A.
322 See supra section III.A.6 (discussing the tax
and economic implications of floating NAV money
market funds).
323 See Item 11(f) of Form N–1A.
324 We expect that a money market fund would
include this disclosure (as appropriate) in response
to, for example, Item 11(‘‘Shareholder Information’’)
and Item 23 (‘‘Purchase, Redemption, and Pricing
of Shares’’) of Form N–1A.
325 See infra section III.N.1.
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their prospectuses about the tax
consequences to shareholders of buying,
holding, exchanging, and selling the
shares of the fund, as well as the effects
(if any) on fund operations resulting
from the transition to a floating NAV.
• Should Form N–1A or its
instructions be amended to more
explicitly require any of the disclosure
we discuss above, or any additional
disclosure, to be included in a fund’s
prospectus and/or SAI?
• Is there any additional information
about a floating NAV fund’s operations
that shareholders should be aware of
that is not discussed above? If so, would
such additional information already be
covered under existing Form N–1A
requirements, or would we need to
make any amendments to the form or its
instructions?
c. Disclosure of Transition to Floating
NAV
A fund must update its registration
statement to reflect any material
changes by means of a post-effective
amendment or a prospectus supplement
(or ‘‘sticker’’) pursuant to rule 497 under
the Securities Act.326 We would expect
that, to meet this requirement, at the
time that a stable NAV money market
fund transitions to a floating NAV (or
adopts a floating NAV in the course of
a merger or other reorganization),327 it
would update its registration statement
to include relevant related disclosure, as
discussed in this section of the Release,
by means of a post-effective amendment
or a prospectus supplement. We request
comment on this requirement.
• Besides requiring a fund that
transitions to a floating NAV to update
its registration statement by filing a
post-effective amendment or prospectus
supplement, should we also require
that, when a fund transitions to a
floating NAV, it must notify
shareholders individually about the
risks and operational effects of a floating
NAV on the fund, such as a separate
mailing or email notice? Would
shareholders be more likely to
understand and appreciate these risks
and operational effects (disclosure of
which would be included in the fund’s
registration statement, as discussed
above) if they were to receive such
individual notification? If so, what
information should this individual
notification include? What would be an
appropriate time frame for this
notification? How would such
notification be accomplished, and what
costs would be incurred in providing
such notification?
326 See
327 See
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d. Request for Comment on Money
Market Fund Names
As discussed above, our floating NAV
proposal would provide exemptions to
the floating NAV requirements for
government money market funds and
retail money market funds. We request
comment on whether we should require
new terminology in money market fund
names 328 to reduce the risk of investor
confusion that might result from
permitting some types of funds to
maintain a stable price, while requiring
others types of funds to use a floating
NAV.
• Given that, under our floating NAV
proposal, some funds’ share prices
would increase and decrease as a result
of changes in the value of the securities
in which the fund invests, should we
require new terminology in money
market fund names to reduce any risk of
investor confusion that might result
from both stable price money market
funds and floating NAV money market
funds using the same term ‘‘money
market fund’’ in their names? For
example, should we require money
market funds to use either the term
‘‘stable money market fund’’ or ‘‘floating
money market fund,’’ as appropriate, in
their names? Why or why not?
e. Economic Analysis
The floating NAV proposal makes
significant changes to the nature of
money market funds as an investment
vehicle. The proposed disclosure
requirements in this section are
intended to communicate to
shareholders the nature of the risks that
follow from the floating NAV proposal.
In section III.E, we discussed how the
floating NAV proposal might affect
shareholders’ use of money market
funds and the resulting effects on the
short-term financing markets. The
factors and uncertain effects of those
factors discussed in that section would
influence any estimate of the
incremental effects that the proposed
disclosure requirements might have on
either shareholders or the short-term
financing markets. However, we believe
that the proposed disclosure will better
inform shareholders about the changes,
which should result in shareholders
making investment decisions that better
match their investment preferences. We
expect that this will have similar effects
on efficiency, competition, and capital
formation as those that are outlined in
328 See rule 2a–7(b)(3) (setting forth the
conditions for a fund to use a name that suggests
that it is a money market fund or the equivalent,
including using terms such as ‘‘cash,’’ ‘‘liquid,’’
‘‘money,’’ ‘‘ready assets,’’ or similar terms in a
fund’s name).
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section III.E rather than introduce new
effects. We further believe that the
effects of the proposed disclosure
requirements will be small relative to
the effects of the floating NAV proposal.
The Commission staff cannot estimate
the quantitative benefits of these
proposed requirements at this time
because of uncertainty about how
increased transparency may affect
different investors’ understanding of the
risks associated with money market
funds.329 We request additional data
from commenters below to enable us to
effectively calculate these effects.
We anticipate that all money market
funds would incur costs to update their
registration statements, as well as their
advertising and sales materials
(including the fund Web site), to
include the proposed disclosure
statement, and that floating NAV funds
additionally would incur costs to
update their registration statements to
incorporate tax- and operations-related
disclosure relating to the use of a
floating NAV. We expect these costs
generally would be incurred on a onetime basis. Our staff estimates that the
average costs for a floating NAV money
market fund to comply with these
proposed disclosure amendments would
be approximately $1,480 and that the
compliance costs for a government or
retail money market fund would be
approximately $592.330 Each money
market fund in a fund group might not
incur these costs individually.
We request comment on this
economic analysis:
• Are any of the proposed disclosure
requirements unduly burdensome, or
would they impose any unnecessary
costs?
329 Likewise, uncertainty regarding how the
proposed disclosure may affect different investors’
behavior would make it difficult for the SEC staff
to measure the quantitative benefits of the proposed
requirements. With respect to the proposed
disclosure statement, there are many possible
permutations on specific wording that would
convey the specific concerns identified in this
Release, and the breadth of these permutations
makes it difficult for SEC staff to test how investors
would respond to each wording variation.
330 Staff estimates that these costs would be
attributable to amending the fund’s disclosure
statement and updating the fund’s advertising and
sales materials. See supra note 245 (discussing the
bases of our staff’s estimates of operational and
related costs). The costs associated with these
activities are all paperwork-related costs and are
discussed in more detail in infra section IV.A.7.
We expect the new required disclosure would
add minimal length to the current required
prospectus disclosure, and thus would not increase
the number of pages in, or change the printing costs
of, a fund’s prospectus. Based on conversations
with fund representatives, the Commission
understands that, in general, unless the page count
of a prospectus is changed by at least four pages,
printing costs would remain the same.
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• We request comment on the staff’s
estimates of the operational costs
associated with the proposed disclosure
requirements.
• We request comment on our
analysis of potential effects of these
proposed disclosure requirements on
efficiency, competition, and capital
formation.
9. Transition
The PWG Report suggests that a
transition to a floating NAV could itself
result in significant redemptions.331
Money market fund investors could seek
to redeem shares ahead of other
investors to avoid realizing losses when
their money market funds switch to a
floating NAV. Investors may anticipate
their funds’ NAVs per share being less
than $1.00 when the switch occurs or
they may fear their funds might incur
liquidity costs from heavy redemptions
resulting from the behavior of other
investors.
To avoid large numbers of preemptive
redemptions by shareholders and allow
sufficient time for funds and
intermediaries to cost-effectively adapt
to the new requirements, we propose to
delay compliance with this aspect of the
proposed rules for a period of 2 years
from the effective date of our proposed
rulemaking. Accordingly, money market
funds subject to our floating NAV
proposal could continue to price their
shares as they do today for up to 2 years
following this date. On or before the
compliance date, all stable value money
market funds not exempted from the
floating NAV proposal would convert to
a floating NAV. However, we note that,
under our floating NAV proposal,
investors who prefer a stable price
product also could invest in a
government or retail money market
fund. We request comment on the
proposed transition.
If we were to adopt the floating NAV
proposal, money market funds and their
shareholders would have 2 years to
understand the implications of and
implement our reform. We believe this
would benefit money market funds and
their shareholders by allowing money
market funds to make this transition at
the optimal time and potentially not at
the same time as all other money market
funds (which may be more likely to
have a disruptive effect on the short331 PWG Report, supra note 111, at 22. Other
commenters have voiced additional concern that
redemptions as a result of the transition to a floating
NAV could be destabilizing to the financial
markets. See, e.g., ICI Jan. 24 FSOC Comment
Letter, supra note 25; Comment Letter from
American Association of State Colleges and
Universities (Jan. 21, 2011) (available in File No. 4–
619).
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36877
term financing markets, and thus not be
perceived as optimal by funds). It would
also provide time for investors such as
corporate treasurers to modify their
investment guidelines or seek changes
to any statutory or regulatory constraints
to which they are subject to permit them
to invest in a floating NAV money
market fund or other investments as
appropriate.
Giving fund shareholders ample time
to dispose of their investments in an
orderly fashion also should benefit
money market funds and their other
shareholders because it would give
funds additional time to respond
appropriately to the level and timing of
redemption requests.332 We recognize,
however, that shareholders might still
preemptively redeem shares at or near
the time that the money market fund
converts from a stable value to a floating
NAV if they believe that the market
value of their shares will be less than
$1.00. We expect, however, that money
market fund sponsors would use the
relatively long compliance period to
select an appropriate conversion date
that would minimize this risk. We
therefore expect that providing
shareholders, funds, and others a
relatively long time to assess the effects
of the regulatory change if adopted
would mitigate the risk that the
transition to a floating NAV, itself,
could prompt significant
redemptions.333
We considered an even longer
transition period, including the 5-year
period in FSOC’s proposed floating
NAV recommendation.334 FSOC’s
332 Comment Letter of Thrivent Mutual Funds
(Jan. 10, 2011) (available in File No. 4–619) (‘‘Any
change [to a floating NAV] could be implemented
with sufficient advanced notice to allow
institutional investors to modify their investment
guidelines to permit investment in a floating NAV
fund, where appropriate. A mass exodus assumes
that investors have a clear alternative, which they
do not, and come to the same conclusion in tandem,
which is improbable given the lack of clear
alternatives.’’); Richmond Fed PWG Comment
Letter, supra note 139 (‘‘If informed well ahead of
a change [to a floating NAV], investors are more
likely to move gradually, mitigating the
disruption.’’). In addition, a relatively long
compliance period would provide money market
funds sufficient time to modify and/or establish the
systems necessary to transact permanently at a
floating NAV.
333 In its proposal, FSOC suggested a transition
period of 5 years. FSOC Proposed
Recommendations, supra note 114, at 31.
334 See FSOC Proposed Recommendations, supra
note 114, at 31 (‘‘To reduce potential disruptions
and facilitate the transition to a floating NAV for
investors and issuers, existing MMFs could be
grandfathered and allowed to maintain a stable
NAV for a phase-out period, potentially lasting five
years. Instead of requiring these grandfathered
funds to transition to a floating NAV immediately,
the SEC would prohibit any new share purchases
in the grandfathered stable-NAV MMFs after a
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proposed recommendation, however,
would have required money market
funds to re-price their shares at $100 per
share, and would have grandfathered
existing money market funds (which
could continue to maintain a stable
value) but required investments after a
specified date to be made in floating
NAV money market funds. Money
market fund sponsors therefore would
have had to take a corporate action to
re-price their shares and, if they chose
to rely on the grandfathering, to form
new floating NAV money market funds
to accept new investments after the
specified date. Money market funds and
others in the distribution chain may be
better able to implement basis point
rounding as we propose, and therefore
may not need a 5-year transition period.
Indeed, some commenters on FSOC’s
proposed recommendation, which could
require a longer transition period than
our proposal, supported a 2-year
transition period.335
We request comment on our proposed
compliance date.
• Would our proposed transition
period mitigate operational or
significant redemption risks that could
result from requiring money market
funds to use floating NAVs?
• If not, how much time would be
sufficient to allow money market fund
shareholders that do not wish to remain
in a money market fund with a floating
NAV to identify alternatives without
posing operational or significant
redemption risk?
• Do commenters agree that a
compliance period of 2 years is
sufficient to address operational issues
associated with converting funds to
floating NAVs? Should the compliance
period be shorter or longer? Why?
Would a 5-year transition period,
consistent with FSOC’s proposed
floating NAV recommendation, be more
appropriate?
• Do fund sponsors anticipate
converting (at an appropriate time)
existing stable value money market
funds to floating NAV funds or would
sponsors establish new funds? If
sponsors expect to establish new funds,
predetermined date, and any new investments
would have to be made in floating-NAV MMFs.’’).
335 See BlackRock FSOC Comment Letter, supra
note 204 (‘‘We agree that a transition period is
extremely important to avoid market disruption.
Assuming existing funds are grandfathered as
CNAV funds and no new shares are purchased, a
transition period of two years from the effective
date of a new rule should suffice.’’); HSBC FSOC
Comment Letter, supra note 196 (‘‘[W]e believe a 2–
3 year transition period should be sufficient for the
industry, investors and regulators to prepare for any
required changes to products, systems etc.’’). But
see U.S. Chamber Jan. 23, 2013 FSOC Comment
Letter, supra note 248 (suggesting a transition
period of up to 5 years could be necessary).
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are there costs other than those we
describe below (related to a potential
grandfathering provision)?
• Are there other measures we could
take that would minimize the risks that
could arise from investors seeking
preemptively to redeem their shares in
advance of a fund’s adoption of a
floating NAV?
• Should we provide a grandfathering
provision, in addition to, or in lieu of,
a relatively long compliance date? If we
adopted a grandfathering provision,
how long should the grandfathering
period last? Would a grandfathering
provision better achieve our objective of
facilitating an orderly transition?
B. Standby Liquidity Fees and Gates
As an alternative to the floating NAV
proposal discussed above, we are
proposing to continue to allow money
market funds to transact at a stable share
price under normal conditions but to (1)
require money market funds to institute
a liquidity fee in certain circumstances
and (2) permit money market funds to
impose a gate in certain circumstances.
In particular, this fees and gates
alternative proposal would require that
if a money market fund’s weekly liquid
assets fell below 15% of its total assets
(the ‘‘liquidity threshold’’), the fund
must impose a liquidity fee of 2% on all
redemptions unless the board of
directors of the fund (including a
majority of its independent directors)
determines that imposing such a fee
would not be in the best interest of the
fund. The board may also determine
that a lower fee would be in the best
interest of the fund.336
We also are proposing that when a
money market fund’s weekly liquid
assets fall below 15% of total assets, the
money market fund board would also
have the ability to impose a temporary
suspension of redemptions (also
referred to as a ‘‘gate’’) for a limited
period of time if the board determines
that doing so is in the fund’s best
interest. Such a gate could be imposed,
for example, if the liquidity fees were
not proving sufficient in slowing
redemptions to a manageable level.
Under this option, rule 2a–7 would
continue to permit money market funds
to use the penny rounding method of
pricing so long as the funds complied
with the conditions of the rule, but
would not permit use of the amortized
cost method of valuation. We would
eliminate the use of the amortized cost
336 We would not require, but would permit,
government funds to impose fees and gates, as
discussed below. Unlike under the floating NAV
alternative, we are not proposing to exempt retail
funds from our fees and gates proposal. See infra
section III.B.5 of this Release.
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method of valuation for money market
funds under the fees and gates
alternative for the same reasons we are
proposing to do so under the retail and
government exemptions to the floating
NAV alternative.337 We do not believe
that allowing continued use of
amortized cost valuation for all
securities in money market funds’
portfolios is appropriate given that these
funds will already be valuing their
securities using market factors on a
daily basis due to new Web site
disclosure requirements and given that
penny rounding otherwise achieves the
same level of price stability.
As previously discussed, the financial
crisis of 2007–2008 exposed contagion
effects from heavy redemptions in
money market funds that had significant
impacts on investors, funds, and the
markets. We have designed the fees and
gates alternative to address certain of
these issues. Although it is impossible
to know what exactly would have
happened if money market funds had
operated with fees and gates at that
time, we expect that if money market
funds were armed with such tools, they
would have been able to better manage
the heavy redemptions that occurred
and to limit the spread of contagion,
regardless of the reason for the
redemptions.
During the crisis, some investors
redeemed at the first sign of market
stress, and could do so without bearing
any costs even if their actions imposed
costs on the fund and the remaining
shareholders. As discussed in greater
detail below, if money market funds had
imposed liquidity fees during the crisis,
it could have resulted in those investors
re-assessing their redemption decisions
because they would have been required
to pay for the costs of their redemptions.
Based on the level of redemption
activity that occurred during the crisis,
we expect that many money market
funds would have faced liquidity
pressures sufficient to cross the
liquidity thresholds we are proposing
today that would trigger the use of fees
and gates. If funds therefore had
imposed fees, this might have caused
some investors to choose not to redeem
because the direct costs of the liquidity
fee may have been more tangible than
the uncertain possibility of potential
future losses. In addition, funds that
imposed fees would likely have been
able to better manage the impact of the
redemptions that investors submitted,
and any contagion effects may have
been limited, because the fees would
have helped offset the costs of the
liquidity provided to redeeming
337 See
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shareholders, and any excess could have
been used to repair the NAV of the fund,
if necessary. Regardless of the
incentives to redeem, a liquidity fee
would make redeeming investors pay
for the costs of liquidity and, even if
investors redeem from a fund, gates can
directly respond to a run by halting
redemptions.
If a fund had been able to impose a
redemption gate at the time, it also
would have been able to stop mounting
redemptions and possibly generate
additional internal liquidity in the fund
while the gate was in place. However,
fees and gates do not address all of the
factors that may lead to heavy
redemptions in money market funds.338
For example, they do not eliminate the
incentive to redeem in times of stress to
receive the $1.00 stable share price
before the fund breaks the buck, or
prevent investors from seeking to
redeem to obtain higher quality
securities, better liquidity, or increased
transparency. Nonetheless, for the
reasons discussed above, they provide
tools that should serve to address many
of the types of issues that arose during
the crisis by allocating more explicitly
the costs of liquidity and stopping runs.
As discussed in section III.C, we also
request comment on whether we should
combine this option with our floating
NAV alternative. This reform would be
intended to achieve our goals of
preserving the benefits of stable share
price money market funds for the widest
range of investors and the availability of
short-term financing for issuers, while
enhancing investor protection and risk
transparency, making funds more
resilient to mass redemptions, and
improving money market funds’ ability
to manage and mitigate potential
contagion from high levels of
redemptions, as further discussed
below.
1. Analysis of Certain Effects of
Liquidity Fees and Gates
As discussed in the RSFI Study and
in section II above, shareholders may
redeem money market fund shares for
several reasons under stressed market
conditions.339 One of these incentives
relates to the current rounding
convention in money market fund
valuation and pricing that can allow
early redeeming shareholders to redeem
for $1.00 per share, even when the
market-based NAV per share of the fund
is lower than that price. As discussed in
section III.A above, the floating NAV
proposal is principally focused on
338 See
infra nn 361 and 362 and accompanying
text.
339 See
RSFI Study, supra note 21, at 2–4.
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mitigating this incentive by causing
redeeming shareholders to receive the
market value of redeemed shares.
However, as the RSFI Study details,
there are a variety of other factors that
may motivate shareholders to redeem
assets from money market funds in
times of stress. Adverse economic
events or financial market conditions
can cause shareholders to engage in
flights to quality, liquidity, or
transparency (or combinations
thereof).340 When money market funds
may have to absorb, suddenly, high
levels of redemptions that are expected
to be in excess of the fund’s internal
sources of liquidity, investors may
expect that fund managers will deplete
the fund’s most liquid assets first to
meet redemptions and may have to sell
securities at a loss (because of transitory
liquidity costs) or even ‘‘fire sale’’
prices.341 Accordingly, shareholder
redemptions during such periods can
impose expected future liquidity costs
on the money market fund that are not
reflected in a $1.00 share price based on
current amortized cost valuation.
Because the circumstances under
which liquidity becomes expensive
historically have been infrequent, we
expect that liquidity fees only will be
imposed when the fund’s board of
directors considers the fund’s liquidity
costs to be at a premium and the
340 See
id. at 7–14; Qi Chen et al., Payoff
Complementarities and Financial Fragility:
Evidence from Mutual Fund Outflows, 97 J. Fin.
Econ. 239–262 (2010). Prime money market funds
can be particularly susceptible to redemptions in a
flight to quality, liquidity or transparency because
they hold similar portfolios and thus can present a
correlated risk of loss of quality or loss of liquidity
(and particularly when the financial system is
strained because most of their non-governmental
assets are short-term debt obligations of large
banks.) See infra section III.J. See also Harvard
Business School FSOC Comment Letter, supra note
24; Angel FSOC Comment Letter, supra note 60.
341 See, e.g., Comment Letter of Americans for
Financial Reform (Feb. 20, 2012) (available in File
No. FSOC–2012–0003); BlackRock FSOC Comment
Letter, supra note 204; Philip E. Strahan & Basak
Tanyeri, Once Burned, Twice Shy: Money Market
Fund Responses to a Systemic Liquidity Shock,
Boston College Working Paper (July 2012) (finding
that in response to the September 2008 run on
money market funds, the funds first responded by
selling their safest and most liquid holdings). See
also Stephan Jank & Michael Wedow, Sturm und
Drang in Money Market Funds: When Money
Market Funds Cease to be Narrow, Deutsche
Bundesbank Discussion Paper No. 20/2008 (finding
that German money market funds enhanced their
yield by investing in less liquid securities in the
lead up to the 2007–2008 subprime crisis, but then
experienced runs during the crisis, while more
liquid money market funds functioned as a safe
haven). We note that other mutual funds also may
tend to deplete their most liquid assets first to meet
redemptions, but the incentive to redeem because
of the potential for declining fund liquidity may be
stronger in money market funds because of their use
as a cash management vehicle and the resulting
heightened sensitivity to potential losses.
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36879
liquidity fee, if imposed, will apply only
to those shareholders who redeem and
cause the fund to incur that cost. Under
normal market conditions, fund
shareholders would continue to enjoy
unfettered liquidity for money market
fund shares.342 As such, liquidity fees
are designed to preserve the current
benefits of principal stability, liquidity,
and a market yield under most market
conditions, but reduce the likelihood
that ‘‘when markets are dislocated, costs
that ought to be attributed to a
redeeming shareholder are externalized
on remaining shareholders and on the
wider market.’’ 343
In addition to liquidity fees, our
proposal also would allow money
market funds to impose redemption
gates after the liquidity threshold is
reached. Our proposal on liquidity fees
and gates, however, could affect
shareholders by potentially limiting the
full, unfettered redeemability of money
market fund shares under certain
conditions, a principle embodied in the
Investment Company Act.344 Currently,
a money market fund generally can
suspend redemptions only 345 after
obtaining an exemptive order from the
Commission or in accordance with rule
22e–3, which requires the fund’s board
of directors to determine that the fund
is about to ‘‘break the buck’’
342 See Comment Letter of J.P. Morgan Asset
Management (Jan. 14, 2013) (available in File No.
FSOC–2012–0003) (‘‘J.P. Morgan FSOC Comment
Letter’’) (‘‘the standby character of [fees and gates]
proposals appropriately balances the goal of
allowing MMFs to operate normally when not
under stress, yet promote stability, flexibility and
reasonable fairness when stressed.’’); Comment
Letter of Wells Fargo Funds Management, LLC (Jan.
17, 2013) (available in File No. FSOC–2012–0003)
(‘‘Wells Fargo FSOC Comment Letter’’) (stating that
standby fees and gates are narrowly tailored,
‘‘imposed to address [run risk] while preserving
money market funds’ key attributes’’).
343 HSBC Global Asset Management, Liquidity
Fees; a proposal to reform money market funds
(Nov. 3, 2011) (‘‘HSBC 2011 Liquidity Fees Paper’’).
344 Section III.B.3 infra discusses the rationale for
the exemptions from the Investment Company Act
and related rules proposed to permit money market
funds to impose standby liquidity fees and gates.
345 There are limited exceptions specified in
section 22(e) of the Act in which a money market
fund (and any other mutual fund) may suspend
redemptions, such as (i) for any period (A) during
which the New York Stock Exchange is closed other
than customary week-end and holiday closings or
(B) during which trading on the New York Stock
Exchange is restricted, or (ii) during any period in
which an emergency exists as a result of which (A)
disposal by the fund of securities owned by it is not
reasonably practical or (B) it is not reasonably
practical for the fund to determine the value of its
net assets. The Commission also has granted orders
in the past allowing funds to suspend redemptions.
See, e.g., In the Matter of The Reserve Fund,
Investment Company Act Release No. 28386 (Sept.
22, 2008) [73 FR 55572 (Sept. 25, 2008)] (order);
Reserve Municipal Money-Market Trust, et al.,
Investment Company Act Release No. 28466 (Oct.
24, 2008) [73 FR 64993 (Oct. 31, 2008)] (order).
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(specifically, that the extent of deviation
between the fund’s amortized cost price
per share and its current market-based
net asset value per share may result in
material dilution or other unfair results
to investors).346 Under our proposal, a
money market fund board could decide
to temporarily suspend redemptions
once it had crossed the same thresholds
that can trigger the imposition of a
liquidity fee.347 The fund could use
such a gate to assess the viability of the
fund, to create a ‘‘circuit breaker’’ giving
time for a market panic to subside, or to
create ‘‘breathing room’’ to permit more
fund assets to mature and provide
internal liquidity to the fund.348 In the
2009 Proposing Release, we requested
comment on whether we should include
a provision in rule 22e–3 that would
permit fund directors to temporarily
suspend redemptions during certain
exigent circumstances.349 Many
commenters on our 2009 Proposing
Release supported our permitting such a
temporary suspension of
redemptions.350
We are proposing a combination of
liquidity fees and gates because we
believe that liquidity fees and gates,
while both aimed at helping funds
better and more systematically manage
high levels of redemptions, do so in
different ways and thus with somewhat
346 Rule
22e–3(a)(1).
proposed (Fees & Gates) rule 2a–7(c)(2)(ii).
348 See, e.g., Angel FSOC Comment Letter, supra
note 60 (‘‘gates that limit MMMF redemptions to
the natural maturity of the MMMF portfolios can
prevent the forced selling of assets and transform
a disorderly run into an orderly walk to quality’’);
ICI Jan. 24 FSOC Comment Letter, supra note 25
(noting that a gate provides time for the fund to
rebuild its liquidity as portfolio securities mature).
349 Being able to impose a temporary suspension
of redemptions to calm instances of heightened
redemptions had been recommended by an industry
report. ICI 2009 Report, supra note 56, at 85–89
(recommending that the Commission permit a
fund’s directors to suspend temporarily the right of
redemption if the board, including a majority of its
independent directors, determines that the fund’s
net asset value is ‘‘materially impaired’’).
350 See, e.g., Comment Letter of Charles Schwab
Investment Management, Inc. (Sept. 4, 2009)
(available in File No. S7–11–09) (‘‘Schwab 2009
Comment Letter’’); Comment Letter of the Dreyfus
Corporation (Sept. 8, 2009) (available in File No.
S7–11–09) (‘‘Dreyfus 2009 Comment Letter’’);
Comment Letter of Federated Investors, Inc. (Sept.
8, 2009) (available in File No. S7–11–09); T. Rowe
Price 2009 Comment Letter, supra note 208. One
commenter opposed the Commission permitting a
temporary suspension of redemptions. See
Comment Letter of Fund Democracy and the
Consumer Federation of America (Sept. 8, 2009)
(available in File No. S7–11–09) (stating that such
a ‘‘free time-out provision would increase
incentives to run for the exits before the fund is
closed and virtually guarantee that, once the fund
was reopened, a flood of redemptions will follow.
The provision provides a potential escape valve that
will reduce fund managers’ incentives to protect the
fund’s NAV. The provision provides virtually no
benefit to shareholders while serving primarily to
protect fund managers’ interests.’’).
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347 See
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different tradeoffs. Liquidity fees are
designed to reduce shareholders’
incentives to redeem when it is
abnormally costly for the fund to
provide liquidity by requiring
redeeming shareholders to bear at least
some of the liquidity costs of their
redemption (rather than transferring
those costs to remaining
shareholders).351 To the extent that
liquidity fees paid exceed such costs,
they also can help increase the fund’s
net asset value for remaining
shareholders which would have a
restorative effect if the fund has suffered
a loss. As one commenter has said, a
liquidity fee can ‘‘provide a strong
disincentive for investors to make
further redemptions by causing them to
choose between paying a premium for
current liquidity or delaying liquidity
and benefitting from the fees paid by
redeeming investors.’’ 352 This explicit
pricing of liquidity costs in money
market funds could offer significant
benefits to such funds and the broader
short-term financing market in times of
potential stress by lessening both the
frequency and effect of shareholder
redemptions.353 Unlike liquidity fees,
gates are designed to halt a run by
stopping redemptions long enough to
allow (1) fund managers time to assess
the appropriate strategy to meet
redemptions, (2) liquidity buffers to
grow organically as securities mature,
and (3) shareholders to assess the level
of liquidity in the fund and for any
shareholder panic to subside. We also
note that gates are the one regulatory
reform discussed in this Release and the
FSOC Proposed Recommendations that
definitively stops a run on a fund (by
blocking all redemptions).
Fees and gates also may have different
levels of effectiveness under different
stress scenarios. For example, we expect
that liquidity fees will be able to reduce
the harm to non-redeeming shareholders
and the broader markets when a fund
faces heavy redemptions during periods
351 See, e.g., Wells Fargo FSOC Comment Letter,
supra note 342 (stating that a standby liquidity fee
would ‘‘provide an affirmative reason for investors
to avoid redeeming from a distressed fund’’ and
‘‘those who choose to redeem in spite of the
liquidity fee will help to support the fund’s marketbased NAV and thus reduce or eliminate the
potential harm associated with the timing of their
redemptions to other remaining investors’’).
352 See ICI Jan. 24 FSOC Comment Letter, supra
note 25.
353 We note that investors owning securities
directly—as opposed to through a money market
fund—naturally bear these liquidity costs. They
bear these costs both because they bear any losses
if they have to sell a security at a discount in times
of stress to obtain their needed liquidity and
because they directly bear the risk of a less liquid
investment portfolio if they sell their most liquid
holdings first to obtain needed liquidity.
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in which its true liquidity costs are less
than the fund’s imposed liquidity fee.
Redemptions during this time will
increase the value of the fund, which, in
turn, will stabilize the fund to the extent
remaining shareholders’ incentive to
redeem shares is decreased. However, it
is possible that liquidity fees might not
be fully effective during periods of
systemic crises because, for example,
shareholders might choose to redeem
from money market funds irrespective
of the level of a fund’s true liquidity
costs and imposition of the liquidity
fee.354 In those cases, gates could
function as useful circuit breakers,
allowing the fund time to rebuild its
own internal liquidity and shareholders
to pause to reconsider whether a
redemption is warranted.
Finally, research in behavioral
economics suggests that liquidity fees
may be particularly effective in
dampening a run because, when faced
with two negative options, investors
tend to prefer possible losses over
certain losses, even when the amount of
possible loss is significantly higher than
the certain loss.355 Unlike gates, when a
liquidity fee is imposed, investors
would make an economic decision over
whether to redeem. Therefore, under
this behavioral economic theory,
investors fearing that a money market
fund may suffer losses may prefer to
stay in the money market fund and
avoid payment of the liquidity fee
(despite the possibility that the fund
might suffer a future loss) rather than
redeem and lock in payment of the
liquidity fee.
We are proposing a combination of
fees and gates, with a fee as the initial
default but with an optional ability for
a fund’s board to replace the fee with a
gate, or impose a gate immediately, in
each case as the board deems best for
the fund.356 We are proposing this
structure as the initial default (rather
than imposing a gate as the default)
because we believe that a fee has the
potential to be less disruptive to fund
shareholders and the short-term
financing markets because a fee allows
fund shareholders to continue to
transact in times of stress (although at
a cost).357 At the same time, if the board
354 See RSFI Study, supra note 21, at 7–14
(discussing different possible explanations for why
shareholders may redeem from money market funds
in times of stress).
355 See, e.g., Daniel Kahneman, Thinking, Fast
and Slow (2011), at 278–288.
356 See proposed (Fees & Gates) rule 2a–7(c)(2).
357 See, e.g., Comment Letter of UBS on the
IOSCO Consultation Report on Money Market Fund
Systemic Risk Analysis and Reform Options (May
25, 2012), available at https://www.iosco.org/library/
pubdocs/pdf/IOSCOPD392.pdf) (‘‘UBS IOSCO
Comment Letter’’) (‘‘we are convinced that [partial
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determines that a fee is insufficient to
protect the interests of non-redeeming
shareholders, it still has the option of
imposing a gate (and perhaps later
lifting the gate, but keeping in place the
fee).
Many participants in the money
market fund industry have expressed
support for imposing some form of a
liquidity fee or gate on redeeming
money market fund investors when the
fund comes under stress as a way of
reducing, in a targeted fashion, the
fund’s susceptibility to heavy
redemptions.358 Liquidity fees and gates
are known to be able to reduce
incentives to redeem,359 and they have
single swinging pricing] is more efficient than gates
as prices are more efficient signals of scarcity than
quantitative rationing’’); Comment Letter of BNP
Paribas on the IOSCO Consultation Report on
Money Market Fund Systemic Risk Analysis and
Reform Options (May 25, 2012), available at https://
www.iosco.org/library/pubdocs/pdf/
IOSCOPD392.pdf (‘‘BNP Paribas IOSCO Comment
Letter’’) (‘‘It would not make sense to restrict the
redeemer willing to pay the price of liquidity.’’).
358 See, e.g., BlackRock FSOC Comment Letter,
supra note 204; J.P. Morgan FSOC Comment Letter,
supra note 342; Northern Trust FSOC Comment
Letter, supra note 174; Comment Letter of the
Securities Industry and Financial Markets
Association (‘‘SIFMA’’) (Jan. 14, 2013) (available in
File No. FSOC–2012–0003) (‘‘SIFMA FSOC
Comment Letter’’); Vanguard FSOC Comment
Letter, supra note 172. See also David M. Geffen &
Joseph R. Fleming, Dodd-Frank and Mutual Funds:
Alternative Approaches to Systemic Risk,
Bloomberg Law Reports (Jan. 2011) (‘‘The
alternative suggested here is that, during a period
of illiquidity, as declared by a money market fund’s
board (or, alternatively, the SEC or another
designated federal regulator), a money market fund
may impose a redemption fee on a large share
redemption approximately equal to the cost
imposed by the redeeming shareholder and other
redeeming shareholders on the money market
fund’s remaining shareholders. . . . The
redemption fee causes the large redeeming
shareholder to internalize the cost of the negative
externality that the redemption otherwise would
impose on non-redeeming shareholders.’’). But see,
e.g., Comment Letter of the U.S. Chamber of
Commerce on the IOSCO Consultation Report on
Money Market Fund Systemic Risk Analysis and
Reform Options (May 24, 2012), available at https://
www.iosco.org/library/pubdocs/pdf/
IOSCOPD392.pdf (‘‘Imposing a liquidity fee is akin
to implementing a variable NAV, and as such,
would preclude a number of companies from
investing in money market mutual funds. Although
the liquidity fee may not be imposed until the
fund’s portfolio falls below a specified threshold or
when there is a high volume of redemptions,
corporate treasurers have an obligation to ensure
that ‘‘a dollar in will be a dollar out’’ and therefore,
will not risk investing cash in an investment
product that may not return 100 cents on the
dollar.’’); Comment Letter of Federated Investors,
Inc. on the IOSCO Consultation Report on Money
Market Fund Systemic Risk Analysis and Reform
Options (May 25, 2012) available at https://
www.iosco.org/library/pubdocs/pdf/
IOSCOPD392.pdf (‘‘Federated IOSCO Comment
Letter’’) (‘‘Federated believes that liquidity fees . . .
are simply a different way to break the dollar . . .
and would generate large preemptive redemptions
from MMFs’’).
359 Cf. G.W. Schwert & P.J. Seguin, Securities
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been used successfully in the past by
certain non-money market fund cash
management pools to stem redemptions
during times of stress.360
We recognize that the prospect of a
fund imposing a liquidity fee or gate
could raise a concern that shareholders
will engage in preemptive redemptions
if they fear the imminent imposition of
fees or gates (either because of the
fund’s situation or because such
redemption restrictions have been
triggered in other money market
funds).361 We expect the opportunity for
and Unresolved Questions, 49 Financial Analysts
Journal 27 (1993); K.A. Froot & J. Campbell,
International Experiences with Securities
Transaction Taxes, in The Internationalization of
Equity Markets (J. Frankel, ed., 1994), at 277–308.
360 A Florida local government investment pool
experienced a run in 2007 due to its holdings in SIV
securities. The fund suspended redemptions and
ultimately reopened but after the fund (and each
shareholder’s interest) had been split into two
separate funds: One holding the more illiquid
securities previously held by the pool (called ‘‘Fund
B’’) and one holding the remaining securities of the
fund. Fund B reopened with a 2% redemption fee
and did not generate a run upon its reopening. See
David Evans and Darrell Preston, Florida
Investment Chief Quits; Fund Rescue Approved,
Bloomberg (Dec. 4, 2007); Helen Huntley, State
Wants Fund Audit, Tampa Bay Times (Dec. 11,
2007). Some European enhanced cash funds also
successfully used fees or gates during the financial
crisis to stem redemptions. See Elias Bengtsson,
Shadow Banking and Financial Stability: European
Money Market Funds in the Global Financial Crisis
(2011) (‘‘Bengtsson’’), available at https://
papers.ssrn.com/sol3/
papers.cfm?abstract_id=1772746&download=yes;
Julie Ansidei, et al., Money Market Funds in Europe
and Financial Stability, European Systemic Risk
Board Occasional Paper No. 1, at 36 (June 2012),
available at https://www.esrb.europa.eu/pub/pdf/
occasional/20120622_occasional_paper.pdf.
361 See, e.g., FSOC Proposed Recommendations,
supra note 114, at 62–63; Harvard Business School
FSOC Comment Letter, supra note 24 (‘‘news that
one MMF has initiated redemption restrictions
could set off a system-wide run by panic-stricken
investors who are anxious to redeem their shares
before other funds also initiate restrictions’’);
Comment Letter of The Systemic Risk Council (Jan.
18, 2013) (available in File No. FSOC 2012–0003)
(‘‘Systemic Risk Council FSOC Comment Letter’’)
(stating that temporary gates or fees that come down
in a crisis do not address the structural problem of
the $1.00 NAV and would move up a run on money
market funds). Empirical evidence in the equity and
futures markets demonstrates that investors may
trade in advance of circuit breakers being triggered
so as to not be left in temporarily illiquid positions.
Investors have been found to trade ahead of
predictable market closings and price limit hits.
Empirical studies document trading pressure before
trading halts. See Y. Amihud & H. Mendelson,
Trading Mechanisms and Stock Returns: An
Empirical Investigation, 42 J. Fin. 533–553 (1987);
Y. Amihud & H. Mendelson, Volatility, Efficiency
and Trading: Evidence from the Japanese Stock
Market, 46 J. Fin. 1765–1789 (1991); H.R. Stoll &
R. E. Whaley, Stock Market Structure and Volatility,
3 Review of Financial Studies 37–71 (1990); M.S.
Gerety & J.H. Mulherin, Trading Halts and Market
Activity: An Analysis of Volume at the Open and
the Close, 47 J. Fin. 1765–1784 (1992). Empirical
studies show trading volume accelerates before a
price limit hits. See Y. Du, et al., An Analysis of
the Magnet Effect under Price Limits, 9
International Review of Fin. 83–110 (2009); G.J.
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preemptive redemptions will decrease
as a result of the amount of discretion
fund boards would have in imposing
liquidity fees and gates, because
shareholders would not be able to
accurately predict when, and under
what circumstances, fees and gates may
be imposed.362 Shareholders also might
rationally choose to follow other
shareholders’ redemptions even when
those other shareholders’ decisions are
not necessarily based on superior
private information.363 General stress in
the short-term markets or fears of stress
at a particular fund could trigger
redemptions as shareholders try to
avoid the fee.
While we acknowledge that liquidity
fees may not always preclude
redemptions, fees are designed so that
as redemptions begin to increase, if
liquidity costs exceed the prescribed
threshold for imposing a fee and the
fund imposes a fee, the run will be
halted. The fees, once imposed, should
both curtail the level of redemptions,
and fees paid by those that do redeem
should, at least partially, cover liquidity
costs incurred by funds and may even
potentially repair the NAV of any funds
that have suffered losses. One
Kuserk & P.R. Locke, Market Making With Price
Limits, 16 J. Futures Markets 677–696 (1996). An
experimental study finds that mandated market
closures accelerate trading activity when an
interruption is imminent. See L.F. Ackert, et al., An
Experimental Study of Circuit Breakers: The Effects
of Mandated Market Closures and Temporary Halts
on Market Behavior, 4 J. Financial Markets 185–208
(2001). Empirical studies report trading volume
increases following trading halts and price limit
hits. See, e.g., S.A. Corwin & M.L. Lipson, Order
Flow and Liquidity around NYSE Trading Halts, 55
J. Fin. 1771–1801 (2000); W.G. Christie, et al.,
Nasdaq Trading Halts: The Impact of Market
Mechanisms on Prices, Trading Activity, and
Execution Costs, 57 J. Fin. 1443–1478 (2002); and
C.M.C. Lee, et al., Volume, Volatility, and New York
Stock Exchange Trading Halts, 49 J. Fin. 183–213
(1994). See also K.A. Kim & S.G. Rhee, Price Limit
Performance: Evidence from the Tokyo Stock
Exchange, 52 J. Fin. 885–901 (1997).
362 See A. Subrahmanyam, On Rules Versus
Discretion in Procedures to Halt Trade, 47 J.
Economics and Business 1–16 (1995); A.
Subrahmanyam, The Ex-Ante Effects of Trade
Halting Rules on Informed Trading Strategies and
Market Liquidity, 6 Rev. Financial Economics 1–14
(1997).
363 Theoretical models show investors may
rationally follow others’ actions, even though these
other investors’ decisions are not necessarily based
on superior private information. See S.
Bikhchandani, et al., A Theory of Fads, Fashion,
Custom, and Cultural Change as Informational
Cascades, 100 J. Pol. Econ. 992–1026 (1992); I.
Welch, Sequential Sales, Learning, and Cascades,
47 J. Fin. 695–732 (1992). Experimental data
demonstrates investors may overreact to
uninformative trades. See C. Camerer & K. Weigelt,
Information Mirages in Experimental Asset Markets,
64 J. Bus. 463–493 (1991). Price limits, which are
loosely akin to trading suspensions, may help to
protect markets from destabilizing trades. See F.
Westerhoff, Speculative markets and the
effectiveness of price limits, 28 J. Econ. Dynamics
and Control 493–508 (2003).
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circumstance under which liquidity fees
would not self-correct is if the amount
of the fee is less than or exactly equal
to the fund’s realized liquidity costs.
Gates would not be self-correcting in the
event of realized portfolio losses, but
they can help the fund preserve assets
and generate more internal liquidity as
assets mature. Some commenters have
considered whether liquidity fees and
gates might precipitate a run. For
example, some commenters have
expressed their view that a liquidity fee
or gate would not accelerate a run,
stating that such redemptions would
likely trigger the fee or gate and that,
once triggered, the fee or gate would
then lessen or halt redemptions.364 Even
if investors have an incentive to redeem,
their redemptions eventually will cause
a fee or gate to come down and halt the
run.
Under this proposal, money market
funds would have the benefit of being
able to use the penny rounding method
of pricing for their portfolios. As
discussed further below in section
III.F.4 and III.F.5, they would also have
to provide much fuller transparency of
the market-based NAV per share of the
funds and the marked-based value of the
funds’ portfolio securities. This
increased transparency is designed to
allow better shareholder understanding
of deviations between the fund’s value
using market-based factors and its stable
price. It also is aimed at helping
investors better understand any risk
involved in money market fund
investments as a result of rule 2a–7’s
364 See, e.g., HSBC EC Letter, supra note 156
(‘‘Some commentators have objected that a triggerbased liquidity fee would cause investors to seek to
redeem prior to the imposition of the fee. We
disagree with this argument, which misunderstands
the cause of investor redemptions. . . . A liquidity
fee would be imposed as a consequence of
investors’ loss of confidence/flight to quality. It
could not, therefore, be the cause of investors’ loss
of confidence/flight to quality.’’) (emphasis in
original); J.P. Morgan FSOC Comment Letter, supra
note 342 (standby liquidity fees ‘‘do not prevent an
initial run, but they do provide a useful tool to slow
a run after one has begun’’); SIFMA FSOC Comment
Letter, supra note 358 (‘‘the operation of the
proposed gate and liquidity fee themselves will
stem any exodus and damper its effect’’); Wells
Fargo FSOC Comment Letter, supra note 342 (‘‘To
the extent that investor redemptions made for the
purpose of avoiding a liquidity fee have the effect
of accelerating a run . . . the redemption gate and
liquidity fee apply an equally strong
countermeasure. First, the redemption gate would
halt the run, and second, the ensuing imposition of
liquidity fees would either cause further
redemption activity to cease or monetize further
redemptions into transactions that are accretive,
rather than dilutive, to a fund’s market-to-market
NAV. The redemption gate and liquidity fee operate
to effectively reverse and repair any accelerated
redemption activity the existence of the liquidity
fee might otherwise induce. Redemption gates and
liquidity fee mechanisms applying to all other
money market funds would also mitigate any
contagion risk.’’).
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rounding convention. However,
retaining these valuation and pricing
methods for money market funds does
not eliminate the ability of investors to
redeem ahead of other investors from a
money market fund that is about to
‘‘break the buck’’ and consequently may
permit those early redeemers to receive
$1.00 per share instead of its market
value as discussed in section III.A
above. Nevertheless, in times of fund or
market stress the fund is likely to
impose either liquidity fees or gates,
which will limit the ability of
redeeming shareholders to receive more
than their pro-rata share of the marketbased value of the fund’s assets.
Requiring that boards impose
liquidity fees absent a finding that the
fee is not in the best interest of the fund,
and permitting them to impose gates
once the fund has crossed certain
thresholds could offer advantages to the
fund in addition to better and more
systematically managing liquidity and
redemption activity. They could provide
fund managers with a powerful
incentive to carefully monitor
shareholder concentration and
shareholder flow to lessen the chance
that the fund would have to impose
liquidity fees or gates in times of market
stress (because larger redemptions are
more likely to cause the fund to breach
the threshold). Such a requirement also
could encourage portfolio managers to
increase the level of daily and weekly
liquid assets in the fund, as that would
tend to lessen the likelihood of a
liquidity fee or gate being imposed.365
Further, because our proposal provides
the board discretion not to impose the
liquidity fee (or to impose a lower
liquidity fee) and gives boards the
option to impose gates, the boards of
directors can impose fees or gates when
the board determines that it is in the
best interest of the fund to do so.
The prospect of facing fees and gates
when a fund is under stress serves to
make the risk of investing in a money
market fund more transparent and to
better inform and sensitize investors to
the inherent risks of investing in money
market funds. Fees and gates also could
encourage shareholders to monitor and
exert market discipline over the fund to
reduce the likelihood that either the
imposition of fees or gates will become
365 See, e.g., Vanguard FSOC Comment Letter,
supra note 172 (a standby liquidity fee along with
daily disclosure of the fund’s liquidity levels ‘‘will
serve as an effective tool to force investment
advisors, particularly those managing funds with
highly concentrated shareholder bases, to manage
their funds with adequate liquidity to prevent the
[standby liquidity fee] from ever being triggered’’).
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necessary in that fund.366 An additional
benefit to the board’s determination of
liquidity fees and gates is that they
create an incentive for money market
fund managers to better and more
systemically manage redemptions in all
market conditions.367
Our proposal on liquidity fees and
gates, however, could affect
shareholders by potentially limiting the
full, unfettered redeemability of money
market fund shares under certain
conditions, a principle embodied in the
Investment Company Act.368 Thus, this
alternative, if adopted, could result in
some shareholders redeeming their
money market fund shares and moving
their assets to alternative products (or
government money market funds) out of
concern that the potential imposition of
a liquidity fee or gate could make
investment in a money market fund less
attractive due to less certain
liquidity.369 We also recognize that the
imposition of a gate may affect the
efficiency of money market fund
shareholders’ investment allocations
and have corresponding impacts on
capital formation if the redemption
366 See, e.g., Vanguard FSOC Comment Letter,
supra note 172 (a standby liquidity fee ‘‘will
encourage advisors and investors to self-police to
avoid triggering the fee’’).
367 See, e.g., HSBC 2011 Liquidity Fees Letter,
supra note 343 (a liquidity fee ‘‘will result in more
effective pricing of risk (in this case, liquidity risk)
. . . [and] act as a market-based mechanism for
improving the robustness and fairness’’ of money
market funds); BlackRock FSOC Comment Letter,
supra note 204 (‘‘A fund manager will focus on
managing both assets and liabilities to avoid
triggering a gate. On the liability side, a fund
manager will be incented to know the underlying
clients and model their behavior to anticipate cash
flow needs under various scenarios. In the event a
fund manager sees increased redemption behavior
or sees reduced liquidity in the markets, the fund
manager will be incented to address potential
problems as early as possible.’’)
368 Section III.B.3 infra discusses the rationale for
the exemptions from the Investment Company Act
and related rules proposed to permit money market
funds to impose standby liquidity fees and gates.
369 See infra section III.E for a discussion of the
potential effects on money market fund investments
and capital formation as a result of this alternative,
if adopted. See also Comment Letter of Fidelity
(Feb. 3, 2012) (available in File No. 4–619) (finding
in a survey of their retail money market fund
customers that 43% would stop using a money
market fund with a 1% non-refundable redemption
fee charged if the fund’s NAV per share fell below
$0.9975 and 27% would decrease their use of such
a fund); Federated IOSCO Comment Letter, supra
note 358 (stating that they anticipate ‘‘that many
investors will choose not to invest in MMFs that are
subject to liquidity fees, and will redeem existing
investments in MMFs that impose a liquidity fee’’
but noting that ‘‘[s]hareholder attitudes to
redemption fees on MMFs are untested’’). But see
HSBC EC Letter, supra note 156 (‘‘A liquidity fee
[triggered by a fall in the fund’s market-based NAV]
should also be acceptable to investors, because it
can be rationalized in terms of investor protection.
(When we’ve presented the case for a liquidity fee
in these terms to our investors, they have generally
been receptive.)’’).
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restriction prevents shareholders from
moving cash invested in money market
funds to other investment alternatives
that might be preferable at the time.
We request comment on our
discussion of the economic basis and
tradeoffs for this alternative.
• Would our proposal on liquidity
fees and gates achieve our goals of
preserving the benefits of stable share
price money market funds for the widest
range of investors and the availability of
short-term financing for issuers while
enhancing investor protection and risk
transparency, making funds more
resilient to mass redemptions and
improving money market funds’ ability
to manage and mitigate potential
contagion from high levels of
redemptions? Are there other benefits
that we have not identified and
discussed?
• Would a liquidity fee provide many
of the same potential benefits as the
proposed floating NAV? If not, what are
the differences in potential benefits?
Would it result in a more effective
pricing of liquidity risk into the funds’
share prices and a fairer allocation of
that cost among shareholders? Would a
liquidity fee that potentially restores the
fund’s shadow price reduce some
remaining shareholders incentive to
redeem?
• Would the prospect of a fee or gate
encourage investors to limit their
concentration in a particular fund?
Would an appropriately structured
threshold for liquidity fees and gates
provide an incentive for fund managers
to monitor shareholder concentration
and flows as well as portfolio
composition to minimize the possibility
of a fund applying a fee or gate? Would
it encourage better board monitoring of
the fund? Would it encourage
shareholders to monitor and exert
appropriate discipline over the fund?
Would shareholders underestimate
whether a fee or gate would ever be
imposed by the board? How would the
prospect of a fee or gate affect
shareholder behavior?
• How will the liquidity fees or gates
affect the fund’s portfolio choices? Will
it affect the way funds manage their
weekly liquid assets?
• Funds currently have the ability to
delay the payment of redemption
proceeds for up to seven days.370 Are
there considerations that make funds
hesitant to impose this delay that would
also make funds hesitant to impose fees
or gates? What are those factors?
• Would the expected imposition of a
liquidity fee or gate increase redemption
370 See
section 22(e) of the Investment Company
Act.
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activity as the fund’s liquidity levels
near the threshold? Would the prospect
of a liquidity fee or gate create an
incentive to redeem during times of
potential stress by shareholders fearing
that such a fee or gate might be
imposed, thus inciting a run? If so, do
commenters agree that in such a case
the redemptions would trigger a fee or
gate and slow or halt redemptions? If
not, are there ways in which we could
modify our proposed threshold for
liquidity fees and gates such that a run
could not arise without triggering fees or
gates? What information would be
needed for investors to reliably predict
that a fund is on the verge of imposing
fees or gates? Would the necessary
information be readily available under
our proposal?
• Are some types of shareholders
more likely than other types of
shareholders to attempt to redeem in
anticipation of the imposition of the fee
or gate? Are there ways that we could
reduce the risk of pre-emptive
redemptions? Would imposition of a fee
or gate as a practical matter lead to
liquidation of that fund? If so, should
this be a concern?
• Is penny rounding sufficient to
allow government money market funds
to maintain a stable price? Should we
also permit these funds to use amortized
cost valuation? If so, why?
• Should we prohibit advisers to
money market funds from charging
management fees while the fund is
gated? How might this affect advisers’
incentives to make recommendations to
the board when it is considering
whether to not impose a liquidity fee or
gate?
We note that we are not proposing to
repeal or otherwise modify rule 17a–9
(permitting sponsors to support money
market funds through portfolio
purchases in some circumstances) under
this proposal. Therefore, money market
fund sponsors would be able to
continue to support the money market
funds they manage by purchasing
securities from money market fund
portfolios at their amortized cost value
(or market price, if greater). Instead, we
are requiring greater and more timely
disclosure of any sponsor support of a
money market fund, as further described
in section III.F.1 below. We note that
some sponsors could use such support
to prevent a money market fund from
breaching a threshold that would
otherwise require the board to consider
imposition of a liquidity fee. Such
support could benefit fund shareholders
by preventing them from incurring the
costs or loss of liquidity that a liquidity
fee or gate may entail. However, because
such support would be discretionary, its
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possibility may create uncertainty about
whether fund investors will have to bear
the costs and burdens of a liquidity fee
or gate in times of stress, which could
lead to unpredictable shareholder
behavior and inefficient shareholder
allocation of investments if their
expectations of risk turn out to be
misplaced. Our continuing to permit
sponsor support of money market funds,
albeit with greater transparency,371 also
could favor money market fund groups
with a well-capitalized sponsor that is
better able to provide discretionary
support to its affiliated money market
funds and thus avoid the imposition of
fees or gates. Nonetheless, even the
expectation of possible discretionary
sponsor support may tend to slow
redemptions. We request comment on
the retention of rule 17a–9 under this
proposal.
• Should we continue to allow this
type of sponsor support of money
market funds, given the enhanced
transparency requirements? Would
allowing sponsor support prevent or
limit this proposal from achieving the
goal of enhancing investor protection
and improving money market funds’
ability to manage high levels of
redemptions? If so, how? Should we
instead prohibit sponsor support under
this option? If so, why? If we prohibited
sponsor support, how would this
advance investor protection if such
support would protect the value or
liquidity of the fund? Should we modify
rule 17a–9 to limit or condition sponsor
support?
• Would sponsors provide support to
prevent a money market fund from
breaching a liquidity threshold? Would
sponsors be more willing and able to
provide support to stabilize the fund
under the liquidity fees and gates
proposal than they were to support
money market funds before the 2007–
2008 financial crisis? Why or why not?
As discussed further below, we also
are proposing to require that money
market funds disclose their marketbased NAVs and levels of daily and
weekly liquid assets on a daily basis on
the funds’ Web sites.372
2. Terms of the Liquidity Fees and Gates
We are proposing that if a money
market fund’s weekly liquid assets fall
or remain below 15% of its total assets
at the end of any business day, the next
business day it must impose a 2%
liquidity fee on each shareholder’s
redemptions, unless the fund’s board of
directors (including a majority of its
independent directors) determines that
371 See
372 See
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such a fee would not be in the best
interest of the fund or determines that
a lower fee would be in the best interest
of the fund.373 Any fee imposed would
be lifted automatically once the money
market fund’s level of weekly liquid
assets had risen to or above 30%, and
it could be lifted at any time by the
board of directors (including a majority
of its independent directors) if the board
determines to impose a different fee or
if it determines that imposing the fee is
no longer in the best interest of the
fund.374
In addition, once the fund had
crossed below the 15% threshold, the
fund’s board of directors (including a
majority of its independent directors)
would be able to temporarily suspend
redemptions and gate the fund if the
board determines that doing so is in the
best interest of the fund.375 Any gate
imposed also would be automatically
lifted once the fund’s weekly liquid
assets had risen back to or above 30%
of its total assets (although the board of
directors (including a majority of its
independent directors) could lift the
gate earlier.376 Any money market fund
that imposes a gate would need to lift
that gate within 30 days and a money
market fund could not impose a gate for
more than 30 days in any 90-day
period.377 Under this proposal, we also
would amend rule 22e–3 to permit the
suspension of redemptions and
liquidation of a money market fund if
the fund’s level of weekly liquid assets
falls below 15% of its total assets.378
373 Proposed (Fees & Gates) rule 2a–7(c)(2)(i). A
‘‘business day,’’ defined in rule 2a–7 as ‘‘any day,
other than Saturday, Sunday, or any customary
business holiday,’’ would end after 11:59 p.m. on
that day. See rule 2a–7(a)(4). If the shareholder of
record making the redemption was a direct
shareholder (and not a financial intermediary), we
would expect the fee to apply to that shareholder’s
net redemptions for the day. In order to provide the
money market fund flexibility, if a liquidity fee
were in place for more than one business day, the
fund’s board could vary the level of the liquidity
fee (subject to the 2% limit) if the board determined
that a different fee level was in the best interest of
the fund. Proposed (Fees & Gates) rule 2a–
7(c)(2)(i)(A). The new fee level would take effect the
next business day following the board’s
determination. Id.
374 Proposed (Fees & Gates) rule 2a–7(c)(2)(i)(B).
375 The fund must reject any redemption requests
it receives while the fund is gated. See proposed
(Fees & Gates) rule 2a–7(c)(2)(ii).
376 Proposed (Fees & Gates) rule 2a–7(c)(2)(ii).
377 Proposed (Fees & Gates) rule 2a–7(c)(2)(ii). We
also note that an adviser to a money market fund
could seek an exemptive order from the
Commission to allow for continued gating beyond
30 days if such gating would be necessary or
appropriate in the public interest and consistent
with the protection of investors and the purposes
fairly intended by the policy and provisions of the
Investment Company Act.
378 See proposed (Fees & Gates) rule 22e–3.
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a. Discretionary Versus Mandatory
Liquidity Fees and Gates
We are proposing a default liquidity
fee that the money market fund’s board
of directors can modify or remove if it
is in the best interest of the fund,
because this structure offers the
possibility of achieving many of the
benefits of both fully discretionary and
automatic (regulatory mandated)
redemption restriction triggers. A purely
discretionary trigger allows a fund board
the flexibility to determine when a
restriction is necessary, and thus allows
tailoring of the triggering of the fee to
the market conditions at the time, and
the specific circumstances of the fund.
However, a purely discretionary trigger
creates the risk that a fund board may
be reluctant to impose restrictions, even
when they would benefit the fund and
the short-term financing markets. They
may not impose such restrictions out of
fear that doing so signals trouble for the
individual fund or fund complex (and
thus may incur significant business and
reputational effects) or could incite
redemptions in other money market
funds in anticipation that fees may be
imposed in those funds as well. Fully
discretionary triggers also provide
shareholders with little advance
knowledge of when such a restriction
might be triggered and fund boards
could end up applying them in a very
disparate manner. Fully discretionary
triggers also may present operational
difficulties for fund managers who
suddenly may need to implement a
liquidity fee and may not have systems
in place that can rapidly institute a fee
whose trigger and size was previously
unknown.
Automatic triggers set by the
Commission may mitigate these
potential concerns, but they create a risk
of imposing costs on shareholders when
funds are not truly distressed or when
liquidity is not abnormally costly.
Establishing thresholds that result in the
imposition of a fee, unless the board
makes a finding that such a fee is not
in the best interest of the fund, balances
these tradeoffs by providing some
transparency to shareholders on
potential fee or gate triggers and giving
some guidance to boards on when a fee
or gate might be appropriate. At the
same time, it also allows boards to avoid
imposing a fee or gate when it would be
inappropriate in light of the
circumstances of the fund and the
conditions in the market.
Our proposed rule essentially creates
a default liquidity fee of a predetermined size, imposed when the
fund’s weekly liquid assets have
dropped below a certain threshold.
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However, it provides the fund’s board
flexibility to alter the default option—
for example, by imposing a gate instead
of a fee or by imposing a fee at a
different threshold or imposing a lower
percentage fee—as long as it determines
that doing so is in the best interest of the
fund.
We request comment on our proposed
default structure for the liquidity fees
and gates.
• Should the imposition of a liquidity
fee or gate be fully discretionary or
should it have a completely automatic
trigger? Why?
• Would a money market fund’s
board of directors impose a fully
discretionary fee or gate during times of
stress on the money market fund despite
its possible unpopularity with investors
and potential competitive disadvantage
for the fund or fund group if other funds
are not imposing a liquidity fee or gate?
On the other hand, would a fund’s
board of directors be able to best
determine when a fee or gate should be
imposed rather than an automatic
trigger?
• What operational complexities
would be involved in a fully
discretionary liquidity fee? Would fund
complexes and their intermediaries be
able to program systems in advance to
accommodate the immediate imposition
of a liquidity fee whose trigger and size
were unknown in advance?
b. Threshold for Liquidity Fees and
Gates
We are proposing that a liquidity fee
automatically be imposed on money
market fund redemptions if the fund’s
weekly liquid assets fall below 15% of
its total assets, unless the fund’s board
of directors (including a majority of its
independent directors) determines that
a fee would not be in the best interest
of the fund.379 We also are proposing
that, once the fund has crossed below
this threshold, the money market fund
board also would have the ability to
impose a temporary gate for a limited
period of time provided that the board
of directors (including a majority of its
independent directors) determines that
imposing a gate is in the fund’s best
interest.380 Any fee or gate imposed
would be automatically lifted when the
fund’s weekly liquid assets had risen
back to or above 30% of its total assets
(although the board of directors
(including a majority of its independent
directors) could lift the fee or gate
earlier if the board determined it was in
the best interest of the fund.381
379 See
proposed (Fees & Gates) rule 2a–7(c)(2)(i).
proposed (Fees & Gates) rule 2a–7(c)(2)(ii).
381 Proposed (Fees & Gates) rule 2a–7(c)(2).
380 See
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Our proposed 15% weekly liquid
asset threshold is a default for money
market funds imposing liquidity fees
that requires the board to consider
taking action. Fund boards of directors
have the flexibility to impose a liquidity
fee or gate if weekly liquid assets fall
below this threshold (or they may
determine not to impose a liquidity fee
or gate at all), and can continue to
reconsider their decision in light of new
events as long as the fund is below this
liquidity threshold.382 Several industry
commenters have recommended basing
imposition of a liquidity fee on the
money market fund’s level of weekly
liquid assets, with their proposed
thresholds ranging from 7.5% to 15% of
weekly liquid assets.383 As shown in the
chart below, our staff’s analysis of Form
N–MFP data shows that, between March
2011 and October 2012, there were two
months in which funds reported weekly
liquid assets below 15% (one fund in
May 2011, and four funds in June 2011)
and there were two months in which
funds reported weekly liquid assets of at
least 15% but below 20% (one fund in
March 2011, and one fund in February
2012).
Fees and gates are a tool to mitigate
problems in funds, so we selected a
threshold that would indicate distress in
a fund, but also one that few funds
would cross in the ordinary course of
business, allowing funds and their
36885
boards to avoid the costs of frequent
unnecessary consideration of fees and
gates. The analysis below shows that if
the triggering threshold was between
25–30% weekly liquid assets, funds
would have crossed this threshold every
month except one during the period,
and if it was set at between 20–25%
weekly liquid assets, some funds would
have crossed it nearly every other
month. However, the analysis shows
that funds rarely cross the threshold of
between 15–20% weekly liquid assets
during normal operations, and that
during the time period analyzed, there
were only 2 months that had any funds
below the 15% weekly liquid assets
threshold.
DISTRIBUTION OF WEEKLY LIQUID ASSETS IN PRIME MONEY MARKET FUNDS, MARCH 2011—OCTOBER 2012 384
[0.00–0.05]
[0.05–0.10]
[0.10–0.15]
[0.15–0.20]
[0.20–0.25]
[0.25–0.30]
Mar–11 .........................
Apr–11 ..........................
May–11 ........................
Jun–11 .........................
Jul–11 ...........................
Aug–11 .........................
Sep–11 .........................
Oct–11 ..........................
Nov–11 .........................
Dec–11 .........................
Jan–12 .........................
Feb–12 .........................
Mar–12 .........................
Apr–12 ..........................
May–12 ........................
Jun–12 .........................
Jul–12 ...........................
Aug–12 .........................
Sep–12 .........................
Oct–12 ..........................
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1
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2
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3
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1
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1
1
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1
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11
3
9
25
3
10
5
6
4
7
3
2
5
........................
7
4
3
4
6
2
Because the data on liquidity is
reported at the end of the month, it
could be the case that more than four
money market funds’ level of weekly
liquid assets fell below 15% on other
days of the month during our period of
study. However, this number may
overestimate the percentage of funds
that are expected to impose a fee or gate
because we expect that funds would
increase their risk management around
their level of weekly liquid assets in
response to the fees and gates
requirement to avoid breaching the
liquidity threshold. Using this
information to inform our choice of the
appropriate level for a weekly liquid
asset threshold, we are proposing a 15%
weekly liquid assets threshold to
382 See
infra text preceding n.385.
e.g., BlackRock FSOC Comment Letter,
supra note 204 (recommending an automatic trigger
of 15% weekly liquid assets); ICI Jan. 24 FSOC
383 See,
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Total
259
261
260
257
257
256
256
258
257
256
256
255
251
248
247
245
245
244
241
241
balance the desire to have such
consideration triggered while the fund
still had liquidity reserves to meet
redemptions but also not set the trigger
at a level that frequently would be
tripped by normal fluctuations in
liquidity levels that typically would not
indicate a fund under stress.
We are proposing to require that any
fee or gate be lifted automatically once
the fund’s weekly liquid assets have
risen back above 30% of the fund’s
assets—the minimum currently
mandated under rule 2a–7—and thus a
fee or gate would appear to be no longer
justified. We considered whether a fee
or gate should be lifted automatically
before the fund’s weekly liquid assets
were completely restored to their
required minimum—for example, once
they had risen to 25%. However, we
preliminarily believe that automatically
removing such a restriction before the
fund’s level of weekly liquid assets was
fully replenished may result in a fund
being unable to maintain a liquidity fee
or gate to protect the fund even when
the fund is still under stress and before
stressed market conditions have fully
subsided. We note that a fund’s board
can always determine to lift a fee or gate
before the fund’s level of weekly liquid
assets is restored to 30% of its assets.
There are a number of factors that a
fund’s board of directors may consider
in determining whether to impose a
liquidity fee once the fund’s weekly
liquid assets have fallen below 15% of
its total assets. For example, it may want
to consider why the level of weekly
Comment Letter, supra note 25 (recommending an
automatic trigger of between 7.5% and 15% weekly
liquid assets); Vanguard FSOC Comment Letter,
supra note 172 (recommending an automatic trigger
of 15% weekly liquid assets).
384 For purposes of our analysis, the monthly
distribution of prime money market funds with
weekly liquid assets above 30% is not shown.
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Federal Register / Vol. 78, No. 118 / Wednesday, June 19, 2013 / Proposed Rules
liquid assets has fallen. Is it because the
fund is experiencing mounting
redemptions during a time of market
stress or is it because a few large
shareholders unexpectedly redeemed
for idiosyncratic reasons unrelated to
current market conditions? Another
relevant factor to the fund board may be
whether the fall in weekly liquid assets
has been accompanied by a fall in the
fund’s shadow price. The fund board
also may want to consider whether the
fall in weekly liquid assets is likely to
be very short-term. For example, will
the fall in weekly liquid assets be cured
in the next day or two when securities
currently in the fund’s portfolio qualify
as weekly liquid assets? Many money
market funds ‘‘ladder’’ the maturities of
their portfolio securities, and thus it
could be the case that a fall in weekly
liquid assets will be rapidly cured by
the portfolio’s maturity structure.
We considered instead proposing a
threshold based on the shadow price of
the money market fund. For example,
one money market fund sponsor has
suggested that we require money market
funds’ boards of directors to consider
charging a liquidity fee on redeeming
shareholders if the shadow price of a
fund’s portfolio fell below a specified
threshold.385 This commenter asserted
that such a trigger would ensure that
shareholders only pay a fee when
redemptions would actually cause the
fund to suffer a loss and thus
redemptions clearly disadvantage
remaining shareholders. However, we
are concerned that a money market fund
being able to impose a fee only when
the fund’s shadow price has fallen by
some amount below $1.00 in certain
cases may come too late to mitigate the
potential consequences of heavy
redemptions and to fully protect
investors. Heavy redemptions can
impose adverse economic consequences
on a money market fund even before the
fund actually suffers a loss. They can
deplete the fund’s most liquid assets so
that the fund is in a substantially
weaker position to absorb further
redemptions or losses. In addition, our
proposed threshold is a default trigger
for the liquidity fee—the board is not
required to impose a liquidity fee when
the fund’s weekly liquid assets have
fallen below 15%. Thus, a board can
take into account whether the money
market fund’s shadow price has
deteriorated in determining whether to
impose a liquidity fee or gate when the
fund’s weekly liquid assets have fallen
below the threshold. A threshold based
385 HSBC
FSOC Comment Letter, supra note 196
(suggesting setting the market-based NAV trigger at
$0.9975).
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on shadow prices also raises questions
about whether and to what extent
shareholders differentiate between
realized (such as those from security
defaults) and market-based losses (such
as those from market interest rate
changes) when considering a money
market fund’s shadow price. If
shareholders do not redeem in response
to market-based losses (as opposed to
realized losses), it may be inappropriate
to base a fee on a fall in the fund’s
shadow price if such a fall is only
temporary. On the other hand, a
temporary decline in the shadow price
using market-based factors can lead to
realized losses from a shareholder’s
perspective if redemptions cause a fund
with an impaired NAV to ‘‘break the
buck.’’
We also considered proposing a
threshold based on the level of daily
liquid assets rather than weekly liquid
assets. We expect that a money market
fund would meet heightened
shareholder redemptions first by
depleting the fund’s daily liquid assets
and next by depleting its weekly liquid
assets, as daily liquid assets tend to be
the most liquid. Accordingly, basing
this threshold on weekly liquid assets
thus provides a deeper picture of the
fund’s overall liquidity position, as a
fund whose weekly liquid assets have
fallen to 15% has likely depleted all of
its daily liquid assets. In addition, a
fund’s levels of daily liquid assets may
be more volatile because they are one of
the first assets used to satisfy day-to-day
shareholder redemptions, and thus more
difficult to use as a gauge of true fund
distress. Finally, as noted above, funds
are able under the Investment Company
Act to delay payment of redemption
requests for up to seven days. Thus,
substantial depletion of weekly liquid
assets may be a better indicator of true
fund distress. We also considered a
trigger that would combine liquidity
and market-based NAV thresholds but
have preliminarily concluded that a
single threshold would accomplish our
goals without undue complexity and
would be easier for investors to
understand.
We request comment on our default
threshold for liquidity fees and our
threshold on when a money market
fund’s board may impose a gate.
• What should be the trigger either for
a default liquidity fee or for a board’s
ability to impose a gate? Rather than our
proposed trigger based on a fund’s level
of weekly liquid assets, should it be
based on the fund’s shadow price or its
level of daily liquid assets? Should it be
based on a certain fall in either the
fund’s weekly liquid assets or shadow
price? Why and what extent of a fall?
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Should it be based on some other factor?
Should it be based on a combination of
factors?
• If we considered a threshold based
on the fund’s shadow price, do
shareholders differentiate between
realized and market-based losses (such
as those from security defaults versus
those from market interest rate changes)
when considering a money market
fund’s shadow price? If so, how does it
affect their propensity to redeem shares
when one or more funds have losses?
• Should we permit a fund board to
impose a liquidity fee or gate even
before a fund passes the trigger
requiring the default fee to be
considered if the board determines that
an early imposition of a liquidity fee or
gate would be in the best interest of the
fund? Would that reduce the benefits
discussed above of having an automatic
default trigger? What concerns would
arise from permitting imposition of a fee
or gate before a fund passes the
thresholds we may establish?
• What extent of decline in weekly
liquid assets should trigger
consideration of a fee or gate and why?
Should it be more or less than 15%
weekly liquid assets, such as 10% or
20%?
• How do fund holdings of weekly
liquid assets vary within the calendar
month, between Form N–MFP filing
dates? How do net shareholder
redemptions vary within the calendar
month, between Form N–MFP filing
dates? How accurately can the fund
forecast the net redemptions of its
shareholders? When is the fund more
likely to make forecasting errors?
• Should a liquidity fee or gate not be
required until the fund suffers an actual
loss in value? Why or why not and if so,
how much of a loss in value?
• Is one type of threshold less
susceptible to preemptive runs? If so,
why?
• Are there other factors that a board
might consider in determining whether
to impose a fee or gate? Should we
require that boards consider certain
factors? If so, which factors and why?
c. Size of Liquidity Fee
We are proposing that the liquidity
fee be set at a default rate of 2%,
although a fund’s board could impose a
lower liquidity fee (or no fee at all) if it
determines that a lower level is in the
best interest of the fund.386 Commenters
have suggested that liquidity fee levels
ranging from 1% to 3% could be
effective.387 We selected a default fee of
386 See proposed (Fees & Gates) rule 2a–
7(c)(2)(i)(A).
387 See, e.g., Vanguard FSOC Comment Letter,
supra note 172 (recommending a fee of between 1
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2% because we believe that a liquidity
fee set at this level is high enough that
it may impose sufficient costs on
redeeming shareholders to deter
redemptions in a crisis, but is low
enough to permit investors who wish to
redeem despite the cost to receive their
proceeds without bearing unwarranted
costs.388 A 2% level should also permit
a fund to recoup the costs of liquidity
it may bear, while repairing the fund if
it has incurred losses.389 We recognize
that establishing any fixed fee level may
not precisely address the circumstances
of a particular fund in a crisis, and
accordingly are proposing to make this
2% level a default, which a fund board
may lower or eliminate in accordance
with the circumstances of any
individual fund.
We also considered whether we
should require a liquidity fee with an
amount explicitly tied to market
indicators of changes in liquidity costs
for money market funds. For example,
one fund manager suggested that the
amount of the liquidity fee charged
could be based on the anticipated
change in the market-based NAV of the
fund’s portfolio from the redemption,
assuming a horizontal slice of the fund’s
portfolio was sold to meet the
redemption request.390 This firm
asserted that such a liquidity fee would
proportionately target the extent that the
redemption was causing a material
disadvantage to remaining investors in
the fund and it would be clear to
investors how the fee would advance
investor protection.
There may be a number of drawbacks
to such a ‘‘market-sized’’ liquidity fee,
however. First, it does not provide
significant transparency in advance to
shareholders of the size of the liquidity
fee they may have to pay in times of
stress. It could also reduce the fees’
efficacy in stemming redemptions if
investors fear that the fee might go up
and 3%); BlackRock FSOC Comment Letter, supra
note 204 (recommending a standby liquidity fee of
1%); ICI Jan. 24 FSOC Comment Letter, supra note
25 (recommending a 1% fee).
388 See, e.g., Vanguard FSOC Comment Letter,
supra note 172 (‘‘We believe a fee in this amount
[1–3%] will serve as an adequate deterrent to
investors who may attempt to flee a fund out of fear,
but would still allow those investors who have a
need to access their cash the ability to redeem a
portion of their holdings.’’); ICI Jan. 24 FSOC
Comment Letter, supra note 25 (‘‘A liquidity fee set
at this level [1%] would discourage redemptions,
but allow the fund to continue to provide liquidity
to investors. . . . Investors truly in need of
liquidity would have access to it, but at a predetermined cost.’’).
389 See, e.g., ICI Jan. 24 FSOC Comment Letter,
supra note 25 (‘‘Insofar as investors choose to
redeem, the fee would benefit remaining
shareholders by mitigating liquidation costs and
potentially rebuilding NAVs.’’).
390 HSBC FSOC Comment Letter, supra note 196.
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36887
in the future. This lack of transparency
may hinder shareholders’ ability to
make well-informed decisions. It also
may be difficult for money market funds
to rapidly determine precise liquidity
costs in times of stress when the shortterm financing markets may be generally
illiquid. Indeed, our staff gave no-action
assurances to money market funds
relating to valuation during the 2008
financial crisis because determining
pricing in the then-illiquid markets was
so difficult.391 We also understand that
a liquidity fee that is not fixed in
advance and indeed may change from
day-to-day may be considerably more
difficult and expensive for money
market funds to implement and
administer from an operational
perspective. Such a fee would require
real-time inputs of pricing factors into
fund systems that would need to be
rapidly disseminated through chains of
financial intermediaries in order to
apply to daily redemptions from the
large number of beneficial owners that
hold money market fund shares through
omnibus accounts. A floating fee would
assume sale of a horizontal cross section
of assets but we do not think that is how
portfolio securities would be sold to
meet redemptions.
These factors have led us to propose
a default liquidity fee of a fixed size, but
to allow the board of directors
(including a majority of its independent
directors) to impose a smaller-sized
liquidity fee if it determines that such
a smaller fee would be in the best
interest of the fund.392 We preliminarily
believe that such a default may provide
the best combination of directing boards
of directors to a liquidity fee size that
may be appropriate in many stressed
market conditions, but providing
flexibility to boards to lower the size of
that liquidity fee if it determines that a
smaller fee would better and more fairly
estimate and allocate liquidity costs to
redeeming shareholders. Some factors
that boards of directors may want to
consider in determining whether to
impose a smaller-sized liquidity fee
than 2% include the shadow price of
the money market fund at the time,
relevant market indicators of liquidity
stress in the markets, changes in spreads
for portfolio securities (whether based
on actual sales, dealer quotes, pricing
vendor mark-to-model or matrix pricing,
or otherwise), changes in the liquidity
profile of the fund in response to
redemptions and expectations regarding
that profile in the immediate future, and
whether the money market fund and its
intermediaries are capable of rapidly
putting in place a fee of a different
amount. We are not proposing to allow
fund boards to impose a larger liquidity
fee than 2% because we understand
that, even in ‘‘fire sales’’ or other crisis
situations, money market funds
typically have not realized haircuts
greater than 2% when selling portfolio
securities, and believe that investors
should not face unwarranted costs when
redeeming their shares. In addition, the
staff has noted in the past that fees
greater than 2% raise questions
regarding whether a fund’s securities
remain ‘‘redeemable.’’ 393 If a fund
continues to be under stress even with
a 2% liquidity fee, the fund board may
consider imposing a redemption gate or
liquidating the fund pursuant to rule
22e–3.
We request comment on our proposed
default size for the liquidity fee.
• What should be the amount of the
liquidity fee? Should it be a default
amount, a fixed amount, or an amount
directly tied to the cost of liquidity in
times of stress? If as proposed, we adopt
a default fee, should it be 2%, 1%, or
some other level? Should we give
boards discretion to impose a higher fee
if the board determines that it is in the
best interest of the fund? Commenters
are requested to please provide data to
support your suggested fee level.
• If the amount of the liquidity fee is
tied to the cost of liquidity at the time
of the redemption, how would that
391 See Investment Company Institute, SEC Staff
No-Action Letter (Oct. 10, 2008) (not recommending
enforcement action through January 12, 2009, if
money market funds used amortized cost to shadow
price portfolio securities with maturities of 60 days
or less in accordance with Commission interpretive
guidance and noting: ‘‘You state that under current
market conditions, the shadow pricing provisions of
rule 2a–7 are not working as intended. You believe
that the markets for short-term securities, including
commercial paper, may not necessarily result in
discovery of prices that reflect the fair value of
securities the issuers of which are reasonably likely
to be in a position to pay upon maturity. You
further assert that pricing vendors customarily used
by money market funds are at times not able to
provide meaningful prices because inputs used to
derive those prices have become less reliable
indicators of price.’’).
392 See proposed (Fees & Gates) rule 2a–7(c)(2)(i).
393 Section 2(a)(32) of the Act [15 U.S.C. 80a–
2(a)(32)] defines the term ‘‘redeemable security’’ as
a security that entitles the holder to receive
approximately his proportionate share of the fund’s
net asset value. The Division of Investment
Management informally took the position that a
fund may impose a redemption fee of up to 2% to
cover the administrative costs associated with
redemption, ‘‘but if that charge should exceed 2
percent, its shares may not be considered
redeemable and it may not be able to hold itself out
as a mutual fund.’’ See John P. Reilly & Associates,
SEC Staff No-Action Letter (July 12, 1979). This
position is currently reflected in our rule 23c–
3(b)(1) under the Act [17 CFR 270.23c–3(b)(1)],
which permits a maximum 2% repurchase fee for
interval funds and rule 22c–2(a)(1)(i) [17 CFR
270.22c–2(a)(1)(i)] which similarly permits a
maximum 2% redemption fee to deter frequent
trading in mutual funds.
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Federal Register / Vol. 78, No. 118 / Wednesday, June 19, 2013 / Proposed Rules
amount be determined? Would a
liquidity fee that changes depending on
market circumstances provide
shareholders with sufficient
transparency on the size of the fee to be
able to affect their purchase and
redemption behavior? If the size of the
liquidity fee changed depending on
market circumstances, would money
market funds be able to determine
readily the amount of the liquidity fee
during times of market dislocation?
Would such a fee affect one type of
investor more than another type of
investor?
• Is a flat, fixed liquidity fee
preferable to a variable fee that might be
higher than the flat fee? Will the fund’s
ability to choose a lower liquidity fee
result in any conflicts of interest
between redeeming shareholders, nonredeeming shareholders, and the
investment adviser?
• How should we weigh the risk that
a flat liquidity fee may be higher or
lower than the actual liquidity costs to
the money market fund from the
redemption, against the risk that a
market-based liquidity fee may not
provide sufficient advance transparency
to shareholders and may be difficult to
set appropriately in a crisis?
• How difficult would it be for money
market funds and various intermediaries
in the distribution chain of money
market fund shares to handle from an
operational perspective a liquidity fee
that varied?
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
d. Default of Liquidity Fees
Our proposal provides that a liquidity
fee be imposed once a non-government
money market fund’s weekly liquid
assets has fallen below 15% of its total
assets (which is one-half of its required
30% minimum), unless the board of
directors determines that such a fee
would not be in the best interest of the
fund. After the fund has crossed that
15% liquidity threshold, the board
could also impose a gate. Based on this
default choice, the implicit ordering of
redemption restrictions thus would be a
liquidity fee, and if that fee is not
sufficiently slowing redemptions, a gate
(although once the liquidity fee
threshold was crossed, a board would be
able to immediately impose a gate
instead of a fee). We proposed a
liquidity fee, rather than a gate, as the
default because we believe that a fee has
the potential to be less disruptive to
fund shareholders and the short-term
financing markets because a fee allows
fund shareholders to continue to
transact in times of stress (although at
a cost). Some industry commenters
instead have suggested that money
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market funds impose a gate first.394
Such a pause in redemption activity
could provide time for any spike in
redemptions to subside before
redemptions were allowed with a fee.
We request comment on liquidity fees
being the default under this proposal.
• Should the implicit ordering in the
proposed rule be reversed, with a
default of the fund imposing a gate once
the fund has crossed the weekly liquid
asset threshold, unless or until the
board determines to re-open with a
liquidity fee? Why?
• Should there be a different
threshold for consideration of a gate if
we adopted a gate as the default? Why
or why not? Should a gate be mandatory
under certain circumstances? If so,
under what circumstances? Should any
mandatory gate have a pre-specified
window? If so, how long should that
gate be imposed?
e. Time Limit on Gates
We are proposing that a money
market fund board must lift any gate it
imposes within 30 days and that a board
could not impose a gate for more than
30 days in any 90-day period. As noted
above, a fund board could only impose
a gate if it determines that the gate is in
the best interest of the fund, and we
would expect the board would lift the
gate as soon as it determines that a gate
is no longer in the best interest of the
fund. This time limitation for the gate is
designed to balance protecting the fund
in times of stress while not unduly
limiting the redeemability of money
market fund shares, given the strong
preference embodied in the Investment
Company Act for the redeemability of
open-end investment company
shares.395 We understand that investors
use money market funds for cash
management, and that lack of access to
their money market fund investment for
a long period of time can impose
substantial costs and hardships.396
Indeed, many shareholders in The
394 See, e.g., ICI Jan. 24 FSOC Comment Letter,
supra note 25; Vanguard FSOC Comment Letter,
supra note 172.
395 See Investment Trusts and Investment
Companies: Hearings on S. 3580 Before a
Subcomm. of the Senate Comm. on Banking and
Currency, 76th Cong., 3d Sess. 291–292 (1940)
(statement of David Schenker, Chief Counsel,
Investment Trust Study, SEC).
396 See, e.g., Comment Letter of Thrivent
Financial for Lutherans (Feb. 15, 2013) (available in
File No. FSOC–2012–0003) (‘‘Thrivent FSOC
Comment Letter’’) (‘‘The proposed liquidity fees
reduce the simplicity, reduce the liquidity for the
majority of shareholders, increase the potential for
losses, and as a result, dramatically alter the
product. Money market funds’ intended purpose is
to be a liquidity product, but if the product is only
liquid for the first 15% of investors that redeem,
then it is no longer a liquidity product for the
remaining 85%.’’).
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Reserve Primary Fund informed us
about these costs and hardships during
that fund’s lengthy liquidation.397
These concerns motivated us to
propose a time period that would not
freeze shareholders’ money market fund
investments for an excessively long
period of time. On the other hand, we
do want to provide some time for
stressed market conditions to subside,
for portfolio securities to mature and
provide internal liquidity to the fund,
and for potentially distressed fund
portfolio securities to recover or be held
to maturity. As of February 28, 2013,
43% of prime money market fund assets
had a maturity of 30 days or less.398
Accordingly, within a 30-day window
for a gate, a substantial amount of a
money market fund’s assets could
mature and provide cash to the fund to
meet redemptions when the fund reopened. We also note that some
commenters suggested a 30-day time
limit on any gate.399 Balancing all of
these factors led us to propose a 30-day
time limit for any gate imposed. So that
this 30-day time limit could not be
circumvented, for example, by
reopening the fund on the 29th day for
a day before re-imposing the gate for
potentially another 30-day period, we
also are proposing that the fund cannot
impose a gate for more than 30 days in
any 90-day period. The 30-day limit is
a maximum, and a money market fund
board likely would need to meet
regularly during any period in which a
redemption gate is in place and would
lift the gate promptly when it
397 See Kevin McCoy, Primary Fund Shareholders
Put in a Bind, USA Today, Nov. 11, 2008, available
at https://usatoday30.usatoday.com/money/perfi/
funds/2008-11-11-market-fund-side_N.htm
(discussing hardships faced by Reserve Primary
Fund shareholders due to having their
shareholdings frozen, including a small business
owner who almost was unable to launch a new
business, and noting that ‘‘Ameriprise has used
‘hundreds of millions of dollars’ of its own liquidity
for temporary loans to clients who face financial
hardships while they await final repayments from
the Primary Fund’’); John G. Taft, Stewardship:
Lessons Learned from the Lost Culture of Wall
Street (2012), at 2 (‘‘Now that the Reserve Primary
Fund had suspended redemptions of Fund shares
for cash, our clients had no access to their cash.
This meant, in many cases, that they had no way
to settle pending securities purchase and therefore
no way to trade their portfolios at a time of historic
market volatility. No way to make minimum
required distributions from retirement plans. No
way to pay property taxes. No way to pay college
tuition. It meant bounced checks and, for retirees,
interruption of the cash flow distributions they
were counting on to pay their day-to-day living
expenses.’’).
398 Based on Form N–MFP data, with maturity
determined in the same manner as it is for purposes
of computing the fund’s weighted average life.
399 See, e.g., ICI Jan. 24 FSOC Comment Letter,
supra note 25.
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determines that the gate is no longer in
the best interest of the fund.400
• Does a 30-day limit appropriately
balance these objectives? Should there
be a shorter time limit, such as 10 days?
Should there be a longer time limit,
such as 45 days? Why?
• Will our proposed limit on the
number of days a fund can be gated in
any 90-day period effectively prevent
‘‘gaming’’ of the 30-day gate limitation?
Should it be a shorter window or larger
window? 60 days? 120 days?
• Should we impose additional
restrictions on a money market fund’s
use of a gate? Should we, for example,
require the board of directors of a
money market fund that has imposed a
gate to meet each day or week that the
gate is in place, and permit the gate to
remain in place only if the board makes
specified findings at these meetings? We
could provide that a gate may only
remain in place if the board, including
a majority of the independent directors,
finds that lifting the gate and meeting
shareholder redemptions could result in
material dilution or other unfair results
to investors or existing shareholders.
Would requiring the board to make such
a finding to continue to use a gate help
to prevent a fund from imposing a gate
for longer than is necessary or
appropriate? Would a different required
finding better achieve this goal? Would
fund boards be able to make such
findings accurately, particularly during
a crisis when a board may be more
likely to impose a gate? Would such a
requirement deter fund boards from
keeping a gate in place when doing so
may be in the best interest of the fund?
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f. Application of Liquidity Fees to
Omnibus Accounts
For beneficial owners holding mutual
fund shares through omnibus accounts,
we understand that, with respect to
redemption fees imposed to deter
market timing of mutual fund shares,
financial intermediaries generally
impose any redemption fees themselves
to record or beneficial owners holding
through that intermediary.401 We
understand that they do so often in
accordance with contractual
arrangements between the fund or its
transfer agent and the intermediary. We
would expect any liquidity fees to be
handled in a similar manner, although
400 The fund’s board may also consider
permanently suspending redemptions in
preparation for fund liquidation under rule 22e–3
if the fund approaches the 30 day gating limit.
401 See rule 22c–2. Our understanding of how
financial intermediaries handle redemption fees in
mutual funds is based on Commission staff
discussions with industry participants and service
providers.
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we understand that some money market
fund sponsors will want to review their
contractual arrangements with their
funds’ financial intermediaries and
service providers to determine whether
any contractual modifications would be
necessary or advisable to ensure that
any liquidity fees are appropriately
applied to beneficial owners of money
market fund shares. We also understand
that some money market fund sponsors
may seek certifications or other
assurances that these intermediaries and
service providers will apply any
liquidity fees to the beneficial owners of
money market fund shares. We also
recognize that money market funds and
their transfer agents and intermediaries
will need to engage in certain
communications regarding a liquidity
fee.
We request comment on the
application of liquidity fees and gates to
shares held through omnibus accounts.
• Do commenters agree with our view
that liquidity fees likely will be handled
by intermediaries in a manner similar to
how they currently impose redemption
fees? If not, how would liquidity fees be
applied to shares held through financial
intermediaries? Is our understanding
correct that financial intermediaries
generally apply any liquidity fees
themselves to record or beneficial
owners holding through that
intermediary? Would they do so based
on existing contractual arrangements or
would funds make contractual
modifications? What cost would be
involved in any contractual
modifications?
• Would funds in addition or instead
seek certifications from financial
intermediaries that they will apply any
liquidity fees? What cost would be
involved in any such certifications?
• What other methods might money
market funds use to gain assurances that
financial intermediaries will apply any
liquidity fees appropriately? At what
costs? Will some intermediaries not
offer prime money market funds to
avoid operational costs involved with
fees and gates?
3. Exemptions To Permit Liquidity Fees
and Gates
The Commission is proposing
exemptions from various provisions of
the Investment Company Act to permit
a fund to institute liquidity fees and
gates.402 In the absence of an exemption,
imposing gates could violate section
22(e) of the Act, which generally
prohibits a mutual fund from
suspending the right of redemption or
postponing the payment of redemption
402 See
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proceeds for more than seven days, and
imposing liquidity fees could violate
rule 22c–1, which (together with section
22(c) and other provisions of the Act)
requires that each redeeming
shareholder receive his or her pro rata
portion of the fund’s net assets. The
Commission is proposing to exercise its
authority under section 6(c) of the Act
to provide exemptions from these and
related provisions of the Act to permit
a money market fund to institute
liquidity fees and gates notwithstanding
these restrictions.403 As discussed in
more detail below, we believe that such
exemptions do not implicate the
concerns that Congress intended to
address in enacting these provisions,
and thus they are necessary and
appropriate in the public interest and
consistent with the protection of
investors and the purposes fairly
intended by the Act.
We do not believe that gates would
conflict with the purposes underlying
section 22(e), which was designed to
prevent funds and their investment
advisers from interfering with the
redemption rights of shareholders for
improper purposes, such as the
preservation of management fees.404 The
board of a money market fund would
impose gates to benefit the fund and its
shareholders by making the fund better
able to handle substantial redemptions,
as discussed above.
We also propose to provide
exemptions from rule 22c–1 to permit a
money market fund to impose liquidity
fees because a money market fund
would impose liquidity fees to benefit
the fund and its shareholders by
providing a more systematic allocation
of liquidity costs.405 Remaining
shareholders also may benefit if the fees
help repair any decline in the fund’s
shadow price or lead to an increased
403 15 U.S.C. 80a–6(c). In order to clarify the
application of liquidity fees and gates to variable
contracts, we also would amend rule 2a–7 to
provide that, notwithstanding section 27(i) of the
Act, a variable contract sold by a registered separate
account funding variable insurance contracts or the
sponsoring insurance company of such account
may apply a liquidity fee or gate to contract owners
who allocate all or a portion of their contract value
to a subaccount of the separate account that is
either a money market fund or that invests all of
its assets in shares of a money market fund. See
proposed (Fees & Gates) rule 2a–7(c)(2)(iv). Section
27(i)(2)(A) makes it unlawful for any registered
separate account funding variable insurance
contracts or the sponsoring insurance company of
such account to sell a variable contract that is not
a ‘‘redeemable security.’’
404 See 2009 Proposing Release, supra note 31, at
n.281 and accompanying text.
405 See proposed (Fees & Gates) rule 2a–7(c)
(providing that, notwithstanding rule 22c–1, among
other provisions, a money market fund may impose
a liquidity fee under the circumstances specified in
the proposed rule).
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dividend paid to remaining fund
shareholders. The amount of additional
fees that the fund might collect in this
regard would be only to further the
purpose of the provision and could only
be imposed under circumstances of
stress on the fund.
A gate would also be similarly
limited. It could only be imposed for a
limited period of time and only under
circumstances of stress on the fund.
This aspect of gates, therefore, is akin to
rule 22e–3, which also provides an
exemption from section 22(e) to permit
money market fund boards to suspend
redemptions of fund shares in order to
protect the fund and its shareholders
from the harmful effects of a run on the
fund, and to minimize the potential for
disruption to the securities markets.406
We are proposing to permit money
market funds to be able to impose fees
and gates because they may provide
substantial benefits to money market
funds and the short-term financing
markets for issuers, as discussed above.
However, because we recognize that fees
and gates may impose hardships on
investors who rely on their ability to
freely redeem shares (or to redeem
shares without paying a fee), we also
have proposed limitations on when and
for how long money market funds could
impose these restrictions.407
We request comment on our proposed
amendments allowing money market
funds to institute fees and gates.
• Would the proposed amendments
to rule 2a–7 provide sufficient
exemptive relief to permit a money
market fund to institute fees or gates
with both the requirements of rule 2a–
7 and the Investment Company Act? Are
there other provisions of the Investment
Company Act from which the
Commission should consider providing
an exemption?
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4. Amendments to Rule 22e–3
Under this proposal, we also would
amend rule 22e–3 to permit (but not
require) the permanent suspension of
redemptions and liquidation of a money
market fund if the fund’s level of weekly
liquid assets falls below 15% of its total
assets.408 This will allow a money
market fund that imposes a fee or a gate,
but determines that it would not be in
406 See 2010 Adopting Release, supra note 92, at
text following n.379.
407 See proposed (Fees & Gates) rule 2a–7(c)(2).
Cf. 2010 Adopting Release, supra note 92, at text
following n.379 (‘‘Because the suspension of
redemptions may impose hardships on investors
who rely on their ability to redeem shares, the
conditions of [rule 22e–3] limit the fund’s ability to
suspend redemptions to circumstances that present
a significant risk of a run on the fund and potential
harm to shareholders.’’)
408 See proposed (Fees & Gates) rule 22e–3.
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the best interest of the fund to continue
operating, to permanently suspend
redemptions and liquidate. As such, it
will provide an additional tool to fund
boards of directors to manage a fund in
the best interest of the fund when that
fund comes under stress regarding its
liquidity buffers. It will allow fund
boards to suspend redemptions and
liquidate a fund that the board
determines would be unable to stay
open (or, if gated, re-open) without
further harm to the fund, and prevents
such a fund from waiting until its
shadow price has declined so far that it
is about to ‘‘break the buck.’’
We considered whether a money
market fund’s level of weekly liquid
assets should have to fall further than
the 15% threshold that allows the
imposition of fees and gates for the fund
to be able to permanently suspend
redemptions and liquidate. A
permanent suspension of redemptions
could be considered more draconian
because there is no prospect that the
fund will re-open—instead the fund will
simply liquidate and return money to
shareholders. Accordingly, one could
consider a lower weekly liquid asset
threshold than 15% justified. However,
we believe such considerations must be
balanced against the risk that might be
caused by establishing a lower threshold
for enabling a permanent suspension of
redemptions. For example, a fund with
a fee or gate in place might know (based
on market conditions or discussions
with its shareholders or otherwise) that
upon lifting the fee or gate it will
experience a severe run. We would not
want to force such a fund to lift the fee
or re-open and weather enough of that
run to deplete its weekly liquid assets
below a lower threshold. We
preliminarily believe this risk is great
enough to warrant allowing money
market funds to suspend redemptions
permanently once the fund’s weekly
liquid assets fall below 15% of its total
assets.
As under existing rule 22e–3, a money
market fund also would still be able to
suspend redemptions and liquidate if it
determines that the extent of the
deviation between its shadow price and
its market-based NAV per share may
result in material dilution or other
unfair results to investors or existing
shareholders.409 Accordingly, a money
market fund that suffers a default would
still be able to suspend redemptions and
liquidate before that credit loss lead to
redemptions and a fall in its weekly
liquid assets.
409 See
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We request comment on our proposed
amendments to rule 22e–3 under this
proposal.
• Is it appropriate to allow a money
market fund to suspend redemptions
and liquidate if its level of weekly
liquid assets falls below 15% of its total
assets? Is there a different threshold
based on daily or weekly assets that
would better protect money market fund
shareholders?
• Should a fund’s ability to suspend
redemptions and liquidate be tied only
to adverse deviations in its shadow
price? If so, is our current standard
under rule 22e–3 appropriate or is there
a different level of shadow price decline
that should trigger a money market
fund’s ability to suspend redemptions
and liquidate?
5. Exemptions From the Liquidity Fees
and Gates Requirement
We are proposing that government
money market funds (including
Treasury money market funds) be
exempt from any fee or gate requirement
but that these funds be permitted to
impose such a fee or gate under the
regime we have described above if the
ability to impose such fees and gates
were disclosed in the fund’s
prospectus.410 This exemption is based
on a similar analysis to our proposed
exemption of government money market
funds from the floating NAV proposal
and also on our desire to facilitate
investor choice by providing a money
market fund investment option for an
investor who was unwilling or unable to
invest in a money market fund that
could impose liquidity fees or gates in
times of stress.
As discussed in the RSFI Study,
government money market funds
historically have experienced inflows,
rather than outflows, in times of stress
due to flights to quality, liquidity, and
transparency.411 The assets of
government money market funds tend to
appreciate in value in times of stress
rather than depreciate.412 Accordingly,
410 See proposed (Fees & Gates) rule 2a–
7(c)(2)(iii).
411 See RSFI Study, supra note 21, at 6–13.
412 Government money market funds tend to
attract significant inflows of investments during
times of broader market distress, which can
appreciate their value. See, e.g., figure 1 in supra
section I.B (showing that during the 2008 Lehman
crisis institutional share classes of government
money market funds, which include Treasury and
government funds, experienced heavy inflows).
Also see, e.g., ICI Jan. 24 FSOC Comment Letter,
supra note 25 (noting government money market
funds attracted an inflow of $192 billion during the
week following the Lehman bankruptcy in
September 2008); HSBC FSOC Comment Letter,
supra note 196 (‘‘As evidenced during the credit
crisis of 2008, Treasury and government funds
benefitted from a ‘‘flight to quality’’ during these
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the portfolio composition of government
money market funds means that these
funds are less likely to need to use these
restrictions. We also expect that some
money market fund investors may be
unwilling or unable to invest in a
money market fund that could impose a
fee or gate. For example, there could be
some types of investors, such as sweep
accounts, that may be unwilling or
unable to invest in a money market fund
that could impose a gate because such
an investor requires the ability to
immediately redeem at any point in
time, regardless of whether the fund or
the markets are distressed. Accordingly,
exempting government money market
funds from the fees and gates
requirement would allow fund sponsors
to offer a choice of money market fund
investment products that meet differing
liquidity needs, while minimizing the
risk of adverse contagion effects from
heavy money market fund redemptions.
Based on our evaluation of these
considerations and tradeoffs, and the
more limited risk of heavy redemptions
in government money market funds, we
preliminarily believe that on balance it
is preferable to exempt these funds from
this potential requirement, but permit
them to use liquidity fees and gates if
they choose.
We note that Treasury money market
funds generally would be exempt from
any liquidity fees and gates requirement
because at least 80% of their assets
generally must be Treasury securities
and overnight repurchase agreements
collateralized with Treasury securities,
each of which is a weekly liquid asset.
Accordingly, it is highly unlikely for a
Treasury money market fund to breach
the 15% weekly liquid asset threshold
that would allow imposition of a fee or
gate. Most government money market
funds similarly always would have at
least 15% weekly liquid assets because
of the nature of their portfolio, but it is
possible to have a government money
market fund with below 15% weekly
liquid assets. We also note that
government money market funds and
Treasury money market funds do not
necessarily have the same risk profile.
For example, government money market
funds generally have a much higher
portion of their portfolios invested in
securities issued by the Federal Home
Loan Mortgage Corporation (Freddie
Mac), the Federal National Mortgage
Association (Fannie Mae), and the
Federal Home Loan Banks and thus a
systemic events’’); Dreyfus FSOC Comment Letter,
supra note 174 (noting its institutional government
and institutional Treasury money market funds
generally experienced high levels of net inflows
during 2008).
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higher exposure to the home mortgage
market than Treasury money market
funds. We note that this exemption
would not apply to tax-exempt (or
municipal) money market funds. As
discussed above, because tax-exempt
money market funds are not required to
maintain 10% daily liquid assets, these
funds may be less liquid than other
money market funds, which could raise
concerns that tax-exempt retail funds
might not be able to manage even the
lower level of redemptions expected in
a retail money market fund. In addition,
municipal securities typically present
greater credit and liquidity risk than
government securities and thus could
come under pressure in times of stress.
We request comment on our proposed
exemption of government money market
funds from the proposed liquidity fees
and gates requirement.
• Is this exemption appropriate,
particularly in light of the redemptions
from government funds in late June and
early July 2011? Why or why not?
• Is it appropriate to give government
money market funds the option to have
the ability to impose fees and gates so
long as they disclose the option to
investors? Why or why not? What
factors might lead a government fund to
exercise this option?
• Should the exemption for
government money market funds be
extended to municipal money market
funds? Why or why not?
We also considered whether there
should be other exemptions from the
proposed liquidity fees and gates
requirement. For example, as discussed
in section III.A.4 above, we are
proposing an exemption for retail
money market funds from any floating
NAV requirement. We noted in that
section how retail money market funds
experienced fewer redemptions during
the 2007–2008 financial crisis and thus
may be less likely to suffer heavy
redemptions in the future. However,
unlike with government money market
funds, a retail prime money market fund
generally is subject to the same credit
and liquidity risk as an institutional
prime money market fund. In addition,
a floating NAV requirement affects a
shareholder’s experience with a money
market fund on a daily basis. Given the
costs and burdens associated with a
floating NAV requirement, and the
potential limited benefit to retail
shareholders on an ongoing basis given
that they are less likely to engage in
heavy redemptions, a retail exemption
might be more appropriate on balance
under a floating NAV requirement than
under a liquidity fees and gates
requirement. In contrast, a fee or gate
requirement would not affect a money
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36891
market fund unless the fund’s weekly
liquid assets fell below 15% of its total
assets—i.e., unless it came under stress.
Exempting retail money market funds
from this requirement thus could leave
only institutional (and not retail)
shareholders protected when the money
market fund in which they have
invested comes under stress. Given that
such an exemption would merely
relieve them in normal times of the
costs and burden on those investors
created by the prospect that the fund
could impose a fee or gate if someday
it came under stress, we preliminarily
believe that a retail exemption may not
be warranted for this alternative. We
also considered methods of exempting
some retail investors from a fee or gate
requirement. For example, we could
exempt small redemption requests, such
as those below $10,000, or $100,000 per
day, from any fee or gate requirement.
Such small redemptions are less likely
to materially impact the liquidity
position of the fund. This type of
exemption could retain the benefits of
fees and gates for retail money market
funds generally while providing some
relief from the burdens for investors
with smaller redemption needs.
However, we are concerned that
granting such exemptions could
complicate the fees and gates
requirement both as an operational
matter and in terms of ease of
shareholder understanding without
providing substantial benefits.
We also have considered whether
irrevocable redemption requests
submitted at least a certain period in
advance should be exempt as the fund
should be able to plan for such liquidity
demands and hold sufficient liquid
assets. However, we are concerned that
shareholders could try to ‘‘game’’ the fee
or gate requirement through such
exemptions, for example, by redeeming
a certain amount every week and then
reinvesting the redemption proceeds
immediately if the cash is not needed.
We also are concerned that allowing
such an exception would add
significantly to the cost and complexity
of this requirement, as fund groups
would need to be able to separately
track which shares are subject to a fee
or gate and which are not.
We request comment on other
potential exemptions from the proposed
liquidity fees and gates requirement.
• Should retail money market funds
(including tax-exempt money market
funds) or retail investors be exempt
from any liquidity fee or gate provision?
Should there be an exemption for small
redemption requests, such as
redemptions below $10,000? If so,
below what level? If a retail money
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market fund crossed the thresholds we
are proposing for board consideration of
a fee or gate, is there a reason not to
allow the fund’s board to protect the
fund and its shareholders through the
use of a liquidity fee or gate? Would
investors ‘‘game’’ such exemptions?
• Should we create an exemption for
shareholders that submit an irrevocable
redemption request at least a certain
period in advance of the needed
redemption? Why or why not? With
what period of advance notice? For each
of these exemptions, could funds track
the shares that are not subject to the fee
or gate? What operational costs would
be involved in including such an
exemption? Would shareholders ‘‘game’’
such exemptions?
• Would further exemptions
undermine the goal of the liquidity fee
or gate in deterring or stopping heavy
redemptions? Why or why not? Would
exemptions from the fee or gate
proposal make it more difficult or costly
to implement or operationalize? How
would any such difficulties compare to
the benefits that could be obtained from
such exemptions?
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
6. Operational Considerations Relating
to Liquidity Fees and Gates
Money market funds and others in the
distribution chain (depending on how
they are structured) likely would incur
some operational costs in establishing or
modifying systems to administer a
liquidity fee or gate. These costs likely
would be incurred by, or spread
amongst, a fund’s transfer agents, subtransfer agents, recordkeepers,
accountants, portfolio accounting
departments, and custodian. Money
market funds and others also may be
required to develop procedures and
controls, and may incur other costs, for
example to update systems necessary for
confirmations and account statements to
reflect the deduction of a liquidity fee
from redemption proceeds. Money
market funds and their intermediaries
may need to establish new, or modify
existing, systems or procedures that
would allow them to administer
temporary gates. Money market fund
shareholders also might be required to
modify their own systems to prepare for
possible future liquidity fees, or manage
gates, although we expect that only
some shareholders would be required to
make these changes.413 They also may
modify contracts or seek certifications
from financial intermediaries that they
will apply any liquidity fee.
413 Many shareholders use common third partycreated systems and thus would not each need to
modify their systems.
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These costs would vary depending on
how a liquidity fee or gate is structured,
including its triggering event, as well as
on the capabilities, functions, and
sophistication of the fund’s and others’
current systems. These factors will vary
among money market funds,
shareholders, and others, and
particularly because we request
comment on a number of ways in which
we could structure a liquidity fee or gate
requirement, we cannot ascertain at this
stage the systems and other
modifications any particular money
market fund or other affected entity
would be required to make to
administer a liquidity fee or manage a
gate. Indeed, we believe that money
market funds and other affected entities
themselves would need to engage in an
in-depth analysis of this alternative in
order to estimate the costs of the
necessary systems modifications. While
we do not have the information
necessary to provide a point estimate of
the potential costs of systems
modifications needed to administer a
liquidity fee or gate, our staff has
estimated a range of hours and costs that
may be required to perform activities
typically involved in making systems
modifications.414 In estimating these
hours and costs, our staff considered the
need to modify the systems described
above.
If a money market fund determines
that it would only impose a flat
liquidity fee of a fixed percentage
known in advance (e.g., it would only
impose the default 2% liquidity fee) and
have the ability to impose a gate, our
staff estimates that a money market fund
(or others in the distribution chain)
would incur one-time systems
modification costs (including
modifications to related procedures and
controls) that ranges from $1,100,000 to
$2,200,000.415 Our staff estimates that
the one-time costs for entities to
communicate with shareholders
(including systems costs related to
communications) about the liquidity fee
or gate would range from $200,500 to
414 Staff estimates that these costs would be
attributable to the following activities: (i) Planning,
coding, testing, and installing system modifications;
(ii) drafting, integrating, and implementing related
procedures and controls; and (iii) preparing training
materials and administering training sessions for
staff in affected areas. See also supra note 245
(discussing the bases of our staff’s estimates of
operational and related costs).
415 Staff estimates that these costs would be
attributable to the following activities: (i) Project
planning and systems design; (ii) systems
modification, integration, testing, installation, and
deployment; (iii) drafting, integrating,
implementing procedures and controls; and (iv)
preparation of training materials. See also supra
note 245 (discussing the bases of our staff’s
estimates of operational and related costs).
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$340,000.416 In addition, we estimate
that the costs for a shareholder mailing
would range between $1.00 and $3.00
per shareholder.417 We also recognize
that adding new capabilities or capacity
to a system will entail ongoing annual
maintenance costs and understand that
those costs generally are estimated as a
percentage of initial costs of building or
expanding a system. Our staff estimates
that the costs to maintain and modify
these systems required to administer a
liquidity fee and the ability to
administer a standby gate (to
accommodate future programming
changes), to provide ongoing training,
and to administer the liquidity fee or
gate on an ongoing basis would range
from 5% to 15% of the one-time costs.
Our staff understands that if a fund
board imposes a liquidity fee whose
amount could vary, the cost could
exceed this range, but because such
costs depend on to what extent the fee
might vary, we do not have the
information necessary to provide a
reasonable estimate of how much more
a varying fee might cost to implement.
Although our staff has estimated the
costs that a single affected entity would
incur, we anticipate that many money
market funds, transfer agents, and other
affected entities may not bear the
estimated costs on an individual basis.
Instead, the costs of systems
modifications likely would be allocated
among the multiple users of the
systems, such as money market fund
members of a fund group, money market
funds that use the same transfer agent or
custodian, and intermediaries that use
systems purchased from the same third
party. Accordingly, we expect that the
cost for many individual entities may be
less than the estimated costs due to
economies of scale in allocating costs
among this group of users.
Moreover, depending on how a
liquidity fee or gate is structured,
mutual fund groups and other affected
entities already may have systems that
could be adapted to administer a
liquidity fee or gate at minimal cost, in
which case the costs may be less than
the range we estimate above. For
example, some money market funds
may be part of mutual fund groups in
which one or more funds impose
deferred sales loads or redemption fees
416 Staff estimates that these costs would be
attributable to the following activities: (i) modifying
the Web site to provide online account information
and (ii) written and telephone communications
with investors. See also supra note 245 (discussing
the bases of our staff’s estimates of operational and
related costs).
417 Total costs of the mailing for individual funds
would vary significantly depending on the number
of shareholders that receive information from the
fund by mail (as opposed to electronically).
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under rule 22c–2, both of which require
the capacity to administer a fee upon
redemptions and may involve systems
that could be adapted to administer a
liquidity fee.
Our staff estimates that a money
market fund shareholder whose systems
(including related procedures and
controls) required modifications to
account for a liquidity fee or gate would
incur one-time costs ranging from
$220,000 to $450,000.418 Our staff
estimates that the costs to maintain and
modify these systems and to provide
ongoing training would range from 5%
to 15% of the one-time costs.
We request comment on our estimate
of operational costs associated with the
liquidity fees and gates alternative.
• Do commenters agree with our
estimates of operational costs?
• Are there operational costs in
addition to those we estimate above?
What systems would need to be
reprogrammed and to what extent?
What types of ongoing maintenance,
training, and other activities to
administer the liquidity fee or gate
would be required, and to what extent?
• Are our estimates too high or too
low and, if so, by what amount? To
what extent would the estimate vary
based on the event that would trigger
the imposition of a liquidity fee or the
manner in which the fee would be
calculated once triggered? To what
extent would the estimate vary based on
how the gate is structured?
• To what extent would money
market funds or others experience the
economies of scale that we identify?
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7. Tax Implications of Liquidity Fees
We understand that liquidity fees may
have certain tax implications for money
market funds and their shareholders.
Similar to the liquidity fee we are
proposing today, rule 22c–2 allows
mutual funds to recover costs associated
with frequent mutual fund share trading
by imposing a redemption fee on
shareholders who redeem shares within
seven days of purchase. We understand
that for tax purposes, shareholders of
these mutual funds generally treat the
redemption fee as offsetting the
shareholder’s amount realized on the
redemption (decreasing the
shareholder’s gain, or increasing the
shareholder’s loss, on redemption).419
418 Staff estimates that these costs would be
attributable to the following activities: (i) Project
planning and systems design; (ii) systems
modification, integration, testing, installation; and
(iii) drafting, integrating, implementing procedures
and controls. See also supra note 245 (discussing
the bases of our staff’s estimates of operational and
related costs).
419 Cf. 26 CFR 1.263(a)–2(e) (commissions paid in
sales of securities by persons who are not dealers
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Consistent with this characterization,
funds generally treat the redemption fee
as having no associated tax effect for the
fund. We understand that our proposed
liquidity fee, if adopted, would be
treated for tax purposes consistently
with the way that funds and
shareholders treat redemption fees
under rule 22c–2.420
If, as described above, a liquidity fee
has no direct tax consequences for the
money market fund, that tax treatment
would allow the fund to use 100% of
the fee to repair a market-based price
per share that was below $1.0000. If
redemptions involving liquidity fees
cause the money market fund’s shadow
price to reach $1.0050, however, the
fund may need to distribute to the
remaining shareholders sufficient value
to prevent the fund from breaking the
buck (and thus rounding up to $1.01 in
pricing its shares).421 We understand
that any such distribution would be
treated as a dividend to the extent that
the money market fund has sufficient
earnings and profits. Both the fund and
its shareholders would treat these
additional dividends the same as they
treat the fund’s routine dividend
distributions. That is, the additional
dividends would be taxable as ordinary
are treated as offsets against the selling price). See
also Investment Income and Expenses (Including
Capital Gains and Losses), IRS Publication 550, at
44 (‘‘fees and charges you pay to acquire or redeem
shares of a mutual fund are not deductible. You can
usually add acquisition fees and charges to your
cost of the shares and thereby increase your basis.
A fee paid to redeem the shares is usually a
reduction in the redemption price (sales price).’’),
available at https://www.irs.gov/pub/irs-pdf/
p550.pdf.
420 Referring to IRS guidance in a different
context, one commenter suggested that our
proposed liquidity fee also might be characterized
for tax purposes as an investment expense for the
shareholder and income to the fund. See ICI Jan. 24
FSOC Comment Letter, supra note 25. This
commenter noted that, if the fund were required to
treat the liquidity fee as ordinary income, the fund
would have to distribute the income to avoid
liability for the corporate level income tax and a 4%
excise tax on the amount retained. In that case, the
fund would not realize all of the benefit the
liquidity fee is designed to provide. Id. (citing IRS
Revenue Procedure 2009–10 as supporting the
position that the fee received by the fund should
be treated as a capital gain because it is being used
to offset capital losses incurred by the fund on its
portfolio in order to pay the redeeming shareholder
and noting that because the capital gain would
offset the capital loss, the fund would not have an
additional distribution requirement). This
commenter suggests that the IRS provide guidance
to this effect (noting that in Revenue Procedure
2009–10, which provided only temporary
administrative guidance, the IRS took this position
with respect to amounts paid to a money market
fund by the fund’s adviser to prevent the fund from
breaking the buck). Id. See also Arrowsmith et al.
v. Commissioner of Internal Revenue, 344 U.S. 6
(1952).
421 See proposed (Fees & Gates) rule 2a–7(g)(2).
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income to shareholders and would be
eligible for deduction by the funds.
In the absence of sufficient earnings
and profits, however, some or all of
these additional distributions would be
treated as a return of capital. Receipt of
a return of capital would reduce the
recipient shareholders’ basis (and thus
could decrease a loss, or create or
increase a gain for the shareholder in
the future when the shareholder
redeems the affected shares).422 Thus, in
the event of any return of capital
distributions, the shareholders, the
fund, and other intermediaries might
become subject to tax-payment or taxreporting obligations that do not affect
stable NAV funds currently operating
under rule 2a–7.423
Finally, we understand that the tax
treatment of a liquidity fee may impose
certain operational costs on money
market funds and their financial
intermediaries and on shareholders.
Either fund groups or their
intermediaries would need to track the
tax basis of money market fund shares
as the basis changed due to any return
of capital distributions, and
shareholders would need to report in
their annual tax filings any gains 424 or
losses upon the sale of affected money
market fund shares. We are unable to
quantify any of the tax and operational
costs discussed in this section because
we are unable to predict how often
liquidity fees will be imposed by money
market funds and how often
redemptions subject to liquidity fees
would cause the funds to make return
of capital distributions to the remaining
shareholders.
We request comment on this aspect of
our proposal.
• If liquidity fees cause the fund’s
shadow price to exceed $1.0049, will
that result cause the fund to make a
special distribution to current
shareholders?
• Do money market funds and other
intermediaries already have systems in
place to track and report the variations
in basis, and the gains and losses that
might result from imposing liquidity
fees? If not, what costs would be
422 If the payment of liquidity fees forces a money
market fund to make a return of capital distribution
to avoid re-pricing its shares above $1.00, this could
also create tax consequences for remaining
shareholders in the fund.
423 See the discussion above of the additional
obligations that would be created by gains and
losses recognized with respect to floating NAV
funds.
424 Redemptions subject to a liquidity fee would
almost always result in losses, but gains are
possible if a shareholder received a return of capital
distribution with respect to some shares and the
shareholder later redeemed the shares for $1.0000
each.
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expected to be incurred to establish this
capability? In light of the fact that it may
be necessary to establish new systems to
track this information, how does the
cost of these new systems compare with
the costs that would be incurred to
accommodate floating NAVs?
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8. Disclosure Regarding Liquidity Fees
and Gates
In connection with the liquidity fees
and gates alternative, we are also
proposing alternate disclosure-related
amendments to rule 2a–7, rule 482
under the Securities Act,425 and Form
N–1A. We anticipate that the proposed
rule and form amendments would
provide current and prospective
shareholders with information regarding
the operations and risks of this reform
alternative, as well as current and
historical information regarding the
imposition of fees and gates. In keeping
with the enhanced disclosure
framework we adopted in 2009,426 the
proposed amendments are intended to
provide a layered approach to
disclosure in which key information
about the proposed new features of
money market funds would be provided
in the summary section of the statutory
prospectus (and, accordingly, in any
summary prospectus, if used) with more
detailed information provided
elsewhere in the statutory prospectus
and in the SAI.
a. Disclosure Statement
The Commission’s liquidity fees and
gates alternative proposal would permit
funds to charge liquidity fees and
impose redemption restrictions on
money market fund investors. As a
measure to achieve this reform, we
propose to require that each money
market fund (other than government
money market funds that have chosen to
rely on the proposed rule 2a–7
exemption for government money
market funds from any fee or gate
requirements), include a bulleted
statement, disclosing the particular risks
associated with investing in a fund that
may impose liquidity fees or
redemption restrictions, on any
advertisement or sales material that it
disseminates (including on the fund
Web site). We also propose to include
wording designed to inform investors
about the primary general risks of
investing in money market funds in this
bulleted disclosure statement. While
money market funds are currently
required to include a similar disclosure
statement on their advertisements and
425 See
supra note 303.
Summary Prospectus Adopting Release,
supra note 304, at paragraph preceding section III.
426 See
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sales materials,427 we propose amending
this disclosure statement to emphasize
that money market fund sponsors are
not obligated to provide financial
support, and that money market funds
may not be an appropriate investment
option for investors who cannot tolerate
losses.428
Specifically, we would require each
money market fund (other than
government money market funds that
have chosen to rely on the proposed
rule 2a–7 exemption for government
money market funds from any fee or
gate requirements) to include the
following bulleted disclosure statement
on their advertisements and sales
materials:
• You could lose money by investing
in the Fund.
• The Fund seeks to preserve the
value of your investment at $1.00 per
share, but cannot guarantee such
stability.
• The Fund may impose a fee upon
sale of your shares when the Fund is
under considerable stress.
• The Fund may temporarily suspend
your ability to sell shares of the Fund
when the Fund is under considerable
stress.
• An investment in the Fund is not
insured or guaranteed by the Federal
Deposit Insurance Corporation or any
other government agency.
• The Fund’s sponsor has no legal
obligation to provide financial support
to the Fund, and you should not expect
that the sponsor will provide financial
support to the Fund at any time.429
427 See id. Rule 482(b)(4) currently requires a
money market fund to include to following
disclosure statement on its advertisements and sales
materials: An investment in the Fund is not insured
or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Although the Fund seeks to preserve the value of
your investment at $1.00 per share, it is possible to
lose money by investing in the Fund.
428 See infra note 607 and accompanying text
(discussing the extent to which discretionary
sponsor support has the potential to confuse money
market fund investors); supra note 141 and
accompanying text (noting that survey data shows
that some investors are unsure about the amount of
risk in money market funds and the likelihood of
government assistance if losses occur).
429 See proposed (Fees & Gates) rule 482(b)(4)(i).
Rule 482(b)(4) currently requires a money market
fund to include to following disclosure statement
on its advertisements and sales materials: An
investment in the Fund is not insured or guaranteed
by the Federal Deposit Insurance Corporation or
any other government agency. Although the Fund
seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by
investing in the Fund.
If an affiliated person, promoter, or principal
underwriter of the fund, or an affiliated person of
such person, has entered into an agreement to
provide financial support to the fund, the fund
would be permitted to omit this bulleted sentence
from the disclosure statement for the term of the
agreement. See Note to paragraph (b)(4), proposed
(Fees & Gates) rule 482(b)(4).
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We also propose to require a
substantially similar bulleted disclosure
statement in the summary section of the
statutory prospectus (and, accordingly,
in any summary prospectus, if used).430
As discussed above, the liquidity fees
and gates proposal would exempt
government money market funds from
any fee or gate requirement, but a
government money market fund would
be permitted to charge liquidity fees and
impose gates if the ability to charge
liquidity fees and impose gates were
disclosed in the fund’s prospectus.
Accordingly, the proposed amendments
to rule 482 and Form N–1A would
require government money market
funds that have chosen to rely on this
exemption to include a bulleted
disclosure statement on the fund’s
advertisements and sales materials and
in the summary section of the fund’s
statutory prospectus (and, accordingly,
in any summary prospectus, if used)
that does not include disclosure of the
risks of liquidity fees and gates, but that
includes additional detail about the
risks of investing in money market
funds generally. We propose to require
each government money market fund
that relies on the exemption to include
the following bulleted disclosure
statement in the summary section of its
statutory prospectus (and, accordingly,
in any summary prospectus, if used),
and on any advertisement or sales
material that it disseminates (including
on the fund Web site):
• You could lose money by investing
in the Fund.
• The Fund seeks to preserve the
value of your investment at $1.00 per
share, but cannot guarantee such
stability.
• An investment in the Fund is not
insured or guaranteed by the Federal
Deposit Insurance Corporation or any
other government agency.
• The Fund’s sponsor has no legal
obligation to provide financial support
to the Fund, and you should not expect
that the sponsor will provide financial
support to the Fund at any time.431
430 See proposed (Fees & Gates) Item 4(b)(1)(ii)(A)
of Form N–1A. Item 4(b)(1)(ii) currently requires a
money market fund to include the following
statement in its prospectus: An investment in the
Fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
431 See proposed (Fees & Gates) rule 482(b)(4)(ii)
and proposed (Fees & Gates) Item 4(b)(1)(ii)(B) of
Form N–1A. If an affiliated person, promoter, or
principal underwriter of the fund, or an affiliated
person of such person, has entered into an
agreement to provide financial support to the fund,
the fund would be permitted to omit this bulleted
sentence from the disclosure statement that appears
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The proposed disclosure statements
are intended to be one measure to
change the investment expectations of
money market fund investors, including
the expectation that a money market
fund is a stable, riskless investment.432
In addition, we are concerned that
investors, under the liquidity fees and
gates proposal, will not be fully aware
of potential restrictions on fund
redemptions. In proposing the
disclosure statement, we have taken into
consideration investor preferences for
clear, concise, and understandable
language and have also considered
whether language that was stronger in
conveying potential risks associated
with money market funds would be
effective for investors.433 In addition,
we considered whether the proposed
disclosure statement should be limited
to only money market fund
advertisements and sales materials, as
discussed above. Although we
acknowledge that the summary section
of the prospectus must contain a
discussion of key risk factors associated
with a money market fund, we believe
that the importance of the disclosure
statement merits its placement in both
locations, similar to how the current
money market fund legend is required
in both money market fund
advertisements and sales materials and
the summary section of the
prospectus.434
We request comment on the proposed
disclosure statement.435
• Would the proposed disclosure
statement adequately alert investors to
the risks of investing in a money market
fund, including a fund that could
impose liquidity fees or gates under
certain circumstances? Would investors
on a fund advertisement or fund sales material, for
the term of the agreement. See Note to paragraph
(b)(4), proposed (Fees & Gates) rule 482(b)(4).
Likewise, if an affiliated person, promoter, or
principal underwriter of the fund, or an affiliated
person of such person, has entered into an
agreement to provide financial support to the fund,
and the term of the agreement will extend for at
least one year following the effective date of the
fund’s registration statement, the fund would be
permitted to omit this bulleted sentence from the
disclosure statement that appears on the fund’s
registration statement. See Instruction to proposed
(Fees & Gates) Item 4(b)(1)(ii) of Form N–1A.
432 See supra section II.B.3.
433 See supra notes 316 and 317.
434 See supra notes 429 and 430.
435 In the questions that follow, we use the term
‘‘disclosure statement’’ to mean the new disclosure
statement that we propose to require money market
funds other than those exempted from the fees and
gates requirements to incorporate into their
prospectuses and advertisements and sales
materials or, alternatively and as appropriate, the
new disclosure statement that we propose to require
government funds (that choose to rely on the rule
2a–7 exemption from the fees and gates
requirements) to incorporate into their prospectuses
and advertisements and sales materials.
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understand the meaning of each part of
the proposed disclosure statement? If
not, how should the proposed
disclosure statement be amended?
Would the following variations on the
proposed disclosure statement be any
more or less useful in alerting
shareholders to potential investment
risks?
Æ Removing or amending the
following bullet in the proposed
disclosure statement: ‘‘The Fund’s
sponsor has no legal obligation to
provide financial support to the Fund,
and you should not expect that the
sponsor will provide financial support
to the Fund at any time.’’
Æ Including additional disclosure of
the possibility that a temporary
suspension of redemptions could
become permanent if the board
determines that the fund should
liquidate.
Æ Including additional disclosure to
the effect that retail shareholders should
not invest all or most of the cash that
they might need for routine expenses
(e.g., mortgage payments, credit card
bills, etc.) in any one money market
fund, on account of the possibility that
the fund could impose a liquidity fee or
suspend redemptions.
Æ Amending the final bullet in the
proposed disclosure statement to read:
‘‘Your investment in the Fund therefore
may experience losses.’’
• Will the proposed disclosure
statement respond effectively to investor
preferences for clear, concise, and
understandable language?
• Would investors benefit from
requiring this disclosure statement also
to be included on the front cover page
of a non-government money market
fund’s prospectus (and on the cover
page or beginning of any summary
prospectus, if used)?
• Should we provide any instruction
or guidance in order to highlight the
proposed disclosure statement on fund
advertisements and sales materials
(including the fund’s Web site) and/or
lead investors efficiently to the
disclosure statement? 436 For example,
with respect to the fund’s Web site,
should we instruct that the proposed
disclosure statement be posted on the
fund’s home page or be accessible in no
more than two clicks from the fund’s
home page?
b. Disclosure of the Effects of Liquidity
Fees and Gates on Redemptions
Currently, funds are required to
disclose any restrictions on fund
436 Such instruction or guidance would
supplement current requirements for the
presentation of the disclosure statement required by
rule 482(b)(4). See supra note 429; rule 482(b)(5).
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36895
redemptions in their registration
statements.437 We expect that, to
comply with these requirements, money
market funds (besides government
money market funds that have chosen to
rely on the proposed rule 2a–7
exemption from the fees and gates
requirements) would disclose in the
registration statement the effects that the
potential imposition of fees and/or gates
may have on a shareholder’s ability to
redeem shares of the fund. We believe
that this disclosure would help
investors understand the potential effect
of their redemption decisions during
periods that the fund experiences stress,
and to evaluate the full costs of
redeeming fund shares—one of the goals
of this rulemaking.438 Specifically, we
would expect money market funds to
briefly explain in the prospectus that if
the fund’s weekly liquid assets have
fallen below 15% of its total assets, the
fund will impose a liquidity fee of 2%
on all redemptions, unless the board of
directors of the fund (including a
majority of its independent directors)
determines that imposing such a fee
would not be in the best interest of the
fund or determines that a lesser fee
would be in the best interest of the fund.
We also would expect money market
funds to briefly explain in the
prospectus that if the fund’s weekly
liquid assets have fallen below 15% of
its total assets, the fund board would be
able to impose a temporary suspension
of redemptions for a limited period of
time and/or liquidate the fund. We also
would expect money market funds to
disclose in the prospectus that
information about the historical
occasions on which the fund’s weekly
liquid assets have fallen below 15% of
its total assets, or the fund has imposed
liquidity fees or redemption restrictions,
appears in the funds’ SAI (as
applicable).439
In addition, we would expect money
market funds to incorporate additional
disclosure in the prospectus or SAI, as
the fund determines appropriate,
discussing the operations of fees and
gates in more detail.440 This could
437 See
Item 11(c)(1) and Item 23 of Form N–1A.
supra note 351 and accompanying text
(discussing the extent to which standby liquidity
fees can provide a disincentive for money market
fund investors to redeem their shares during times
of stress).
439 See infra section III.B.8.d.
440 Prospectus disclosure regarding any
restrictions on redemptions is currently required by
Item 11(c)(1) of Form N–1A. However, we believe
that funds could determine that more detailed
disclosure about the operations of fees and gates, as
further discussed in this section, would
appropriately appear in a fund’s SAI, and that this
more detailed disclosure is responsive to Item 23
438 See
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include disclosure regarding the
following:
• Means of notifying shareholders
about the imposition and lifting of fees
and/or gates (e.g., press release, Web site
announcement);
• Timing of the imposition and lifting
of fees and gates, including an
explanation that if a fund’s weekly
liquid assets fall below 15% of its total
assets at the end of any business day,
the next business day it must impose a
2% liquidity fee on shareholder
redemptions unless the fund’s board of
directors determines otherwise, and an
explanation of the 30-day limit for
imposing gates;
• Use of fee proceeds by the fund,
including any possible return to
shareholders in the form of a
distribution;
• The tax consequences to the fund
and its shareholders of the fund’s
receipt of liquidity fees; and
• General description of the process
of fund liquidation 441 if the fund’s
weekly liquid assets fall below 15%,
and the fund’s board of directors
determines that the fund would be
unable to stay open (or, if gated, reopen) without further harm to the fund.
We request comment on the
disclosure that we expect funds to
include in their registration statements
regarding the operations and effects of
liquidity fees and redemption gates.
• Would the disclosure that we
discuss above adequately assist money
market fund investors in understanding
the potential effect of their redemption
decisions, and in evaluating the full
costs of redeeming fund shares? Should
we require funds to include this
disclosure in their prospectuses and/or
SAIs? Should we require funds to
include any additional prospectus and
SAI disclosure discussing, in detail, the
operations and effects of fees and
redemption gates? In particular, should
of Form N–1A (‘‘Purchase, Redemption, and Pricing
of Shares’’). In determining whether to include this
disclosure in the prospectus or SAI, money market
funds should rely on the principle that funds
should limit disclosure in prospectuses generally to
information that is necessary for an average or
typical investor to make an investment decision.
Detailed or highly technical discussions, as well as
information that may be helpful to more
sophisticated investors, dilute the effect of
necessary prospectus disclosure and should be
placed in the SAI. See Registration Form Used by
Open-End Management Investment Companies,
Investment Company Act Release No. 23064 (Mar.
13, 1998) [63 FR 13916 (Mar. 23, 1998)], at section
I. Based on this principle, we anticipate that funds
would generally consider the disclosure topics
covered by the first two bullets on the above list
(means of notifying shareholders of fees and gates
and the timing of the imposition and removal of
fees and gates) to be appropriate prospectus
disclosure.
441 See supra note 408 and accompanying text.
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we require funds to include any
additional details about the fund’s
liquidation process? 442 Alternatively,
should any of the proposed prospectus
and SAI disclosure not be required, and
if so, why not?
• Should we require any information
about the basic operations and effects of
fees and redemption gates to be
disclosed in the summary section of the
statutory prospectus (and any summary
prospectus, if used)?
• Should we require disclosure to
investors of the particular risks
associated with buying fund shares
when the fund or market is stressed,
especially when the fund is imposing
either a liquidity fee or a gate?
• Should Form N–1A or its
instructions be amended to more
explicitly require any of the proposed
disclosure to be included in a fund’s
prospectus and/or SAI? If so, how
should it be amended?
c. Disclosure of the Imposition of
Liquidity Fees and Gates
If we were to adopt a reform
alternative involving liquidity fees and
gates, we believe that it would be
important for money market funds
(other than government money market
funds that have chosen to rely on the
proposed rule 2a–7 exemption from the
fees and gates requirements) to inform
existing and prospective shareholders
when: (i) The fund’s weekly liquid
assets fall below 15% of its total assets;
(ii) the fund’s board of directors imposes
a liquidity fee pursuant to rule 2a–7; or
(iii) the fund’s board of directors
temporarily suspends the fund’s
redemptions pursuant to rule 2a–7 or
permanently suspends redemptions
pursuant to rule 22e–3. This
information would be important for
shareholders to receive, as it could
influence prospective shareholders’
decision to purchase shares of the fund,
as well as current shareholders’ decision
or ability to sell fund shares. To this
end, we are proposing an amendment to
rule 2a–7 that would require a fund to
post prominently on its Web site certain
information that the fund would be
required to report to the Commission on
Form N–CR 443 regarding the imposition
of liquidity fees, suspension of fund
redemptions, and the removal of
liquidity fees and/or resumption of fund
redemptions.444 The amendment would
442 Disclosure about the process of fund
liquidation might include, for example, disclosure
regarding any fees, including advisory fees, that the
adviser will collect during the liquidation process.
443 See infra section III.G.
444 See proposed (Fees & Gates) rule 2a–
7(h)(10)(v); proposed (Fees & Gates) Form N–CR
Parts E, F, and G; see also infra section III.G
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require a fund to include this Web site
disclosure on the same business day as
the fund files an initial report with the
Commission in response to any of the
events specified in Parts E, F, and G of
Form N–CR,445 and, with respect to any
such event, to maintain this disclosure
on its Web site for a period of not less
than one year following the date on
which the fund filed Form N–CR
concerning the event.446
We believe that this Web site
disclosure would provide greater
transparency to shareholders regarding
occasions on which a fund’s weekly
liquid assets drop below 15% of the
fund’s total assets, as well as the
imposition of liquidity fees and
suspension of fund redemptions,
because many investors currently obtain
important information about the fund
on the fund’s Web site.447 We
understand that investors have, in past
years, become accustomed to obtaining
money market fund information on
funds’ Web sites.448 While we believe
(discussing the proposed Form N–CR
requirements). With respect to the events specified
in Part E of Form N–CR (imposition of a liquidity
fee) and Part F of Form N–CR (suspension of fund
redemptions), a fund would be required to post on
its Web site only the preliminary information
required to be filed on Form N–CR on the first
business day following the triggering event. See
Instructions to proposed (Fees & Gates) Form N–CR
Parts E and F.
445 A fund must file an initial report on Form N–
CR in response to any of the events specified in
Parts E, F, or G within one business day after the
occurrence of any such event. We believe that funds
should disclose these events within one business
day following the event because it is particularly
important to provide shareholders with information
that could directly affect their redemption of fund
shares, and that could be a material factor in
determining whether to purchase or redeem fund
shares, as soon as reasonably possible.
446 See proposed (Fees & Gates) rule 2a–
7(h)(10)(v). We believe that the one-year minimum
time frame for Web site disclosure is appropriate
because this time frame would effectively oblige a
fund to post the required information in the interim
period until the fund files an annual post-effective
amendment updating its registration statement,
which update would incorporate the same
information. See infra notes 450 and 451 and
accompanying text. Although a fund would inform
prospective investors of any redemption fee or gate
currently in place by means of a prospectus
supplement (see infra note 449 and accompanying
text), the prospectus supplement would not inform
shareholders of any fees or gates that were imposed,
and then were removed, during the previous 12
months.
447 For example, fund investors may access the
fund’s proxy voting guidelines, and proxy vote
report, as well as the fund’s prospectus, SAI, and
shareholder reports if the fund uses a summary
prospectus, on the fund Web site.
448 See, e.g., 2010 Adopting Release, supra note
92 (adopting amendments to rule 2a-7 requiring
money market funds to disclose information about
their portfolio holdings each month on their Web
sites); SIFMA FSOC Comment Letter, supra note
358 (noting that some industry participants now
post on their Web sites portfolio holdings-related
information beyond that which is required by the
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that it is important to have a uniform,
central place for investors to access the
required disclosure, we note that
nothing in this proposal would prevent
a fund from supplementing its Form N–
CR filing and Web site posting with
complementary shareholder
communications, such as a press release
or social media update disclosing a fee
or gate imposed by the fund.
A fund currently must update its
registration statement to reflect any
material changes by means of a posteffective amendment or a prospectus
supplement (or ‘‘sticker’’) pursuant to
rule 497 under the Securities Act.449 We
would expect that, to meet this
requirement, promptly after a money
market fund imposes a redemption fee
or gate, it would inform prospective
investors of any fees or gates currently
in place by means of a prospectus
supplement.
We request comment on the proposed
requirement for money market funds to
inform existing and prospective
shareholders, on the fund’s Web site
and in the fund’s registration statement,
of any present occasion in which the
fund’s weekly liquid assets fall below
15% of its total assets, the fund’s board
imposes a liquidity fee, or the fund’s
board temporarily suspends the fund’s
redemptions.
• Should any more, any less, or any
other information be required to be
posted on the fund’s Web site than that
disclosed on Form N–CR?
• As proposed, should we require this
information to be posted ‘‘prominently’’
on the fund’s Web site? Should we
provide any other instruction as to the
presentation of this information, in
order to highlight the information and/
or lead investors efficiently to the
information, for example, should we
require that the information be posted
on the fund’s home page or be
accessible in no more than two clicks
from the fund’s home page?
• Should this information be posted
on the fund’s Web site for a longer or
shorter period than one year following
the date on which the fund filed Form
N–CR to disclose any of the events
specified in Part E, F, or G of Form N–
CR?
• Besides requiring a money market
fund that imposes a liquidity fee or gate
to file a prospectus supplement and
include related disclosure on the fund’s
Web site, should we also require the
money market reforms adopted by the Commission
in 2010, as well as daily disclosure of market value
per share); see also infra note 659 (discussing recent
decisions by a number of money market fund firms
to begin reporting funds’ daily shadow prices on the
fund Web site).
449 See 17 CFR 230.497.
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fund to notify shareholders individually
about the effects of the fee or gate?
Should we require a fund to engage in
any other supplemental shareholder
communications, such as issuing a press
release or disclosing the fee or gate on
any form of social media that the fund
uses?
• How will the disclosure of the
imposition of a fee or gate affect the
willingness of current or prospective
investors to purchase shares of the
fund? How will this disclosure affect
investors’ purchases and redemptions in
other funds? How will it affect other
market participants? Will these effects
differ based on the number of funds that
concurrently impose fees and/or gates?
d. Historical Disclosure of Liquidity
Fees and Gates
We also believe that money market
funds’ current and prospective
shareholders should be informed of
post-compliance-period historical
occasions in which the fund’s weekly
liquid assets have fallen below 15% or
the fund has imposed liquidity fees or
redemption gates. While we recognize
that historical occurrences are not
necessarily indicative of future events,
we anticipate that current and
prospective fund investors could use
this information as one factor to
compare the risks and potential costs of
investing in different money market
funds.
We are therefore proposing an
amendment to Form N–1A to require
money market funds (other than
government money market funds that
have chosen to rely on the proposed
rule 2a–7 exemption from the fees and
gates requirements) to provide
disclosure in their SAIs regarding any
occasion during the last 10 years (but
not before the compliance period) on
which the fund’s weekly liquid assets
have fallen below 15%, and with
respect to each such occasion, whether
the fund’s board of directors determined
to impose a liquidity fee and/or suspend
the fund’s redemptions.450 With respect
to each occasion, we propose requiring
funds to disclose: (i) The length of time
for which the fund’s weekly liquid
assets remained below 15%; (ii) the
dates and length of time for which the
fund’s board of directors determined to
impose a liquidity fee and/or
450 See proposed (Fees & Gates) Item 16(g)(1) of
Form N–1A. We believe that the proposed 10-year
look-back period would provide shareholders and
the Commission with a historical perspective that
would be long enough to provide a useful
understanding of past events, and to analyze
patterns with respect to fees and gates, but not so
long as to include circumstances that may no longer
be a relevant reflection of the fund’s management
or operations.
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36897
temporarily suspend the fund’s
redemptions; and (iii) a short discussion
of the board’s analysis supporting its
decision to impose a liquidity fee (or not
to impose a liquidity fee) and/or
temporarily suspend the fund’s
redemptions.451 We would expect that
this disclosure could include (as
applicable, and taking into account
considerations regarding the
confidentiality of board deliberations) a
discussion of the following factors
relating to the board’s decision to
impose a liquidity fee and/or suspend
redemptions: The fund’s shadow price;
relevant market indicators of liquidity
stress in the markets; changes in spreads
for portfolio securities; the fund’s future
liquidity profile (taking into account
predicted redemptions and other
expectations); the fund’s ability to apply
any collected fees quickly to rebuild
fund liquidity; and the predicted time
for portfolio securities to mature and
provide internal liquidity to the fund,
and for potentially distressed portfolio
securities to mature or recover. The
required disclosure would permit
current and prospective shareholders to
assess, among other things, any patterns
of stress experienced by the fund, as
well as whether the fund’s board has
previously imposed fees and/or
redemption gates in light of significant
drops in portfolio liquidity. This
disclosure also would provide investors
with historical information about the
board’s past analytical process in
determining how to handle liquidity
issues when the fund experiences stress,
which could influence an investor’s
decision to purchase shares of, or
remain invested in, the fund. In
addition, the required disclosure may
encourage portfolio managers to
increase the level of daily and weekly
liquid assets in the fund, as that would
tend to lessen the likelihood of a
liquidity fee or gate being needed, and
the fund being required to disclose the
fee or gate to current and prospective
investors.452
We request comment on the proposed
requirement for money market funds to
include SAI disclosure regarding the
historical occasions in which the fund’s
weekly liquid assets have fallen below
15% or the fund has imposed liquidity
fees or redemption gates.
• Would the proposed disclosure
requirement assist current and
prospective fund investors in comparing
the risks and potential costs of investing
in different money market funds, and
would retail investors as well as
451 See instructions to proposed (Fees & Gates)
Item 16(g)(1) of Form N–1A.
452 See supra note 365.
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institutional investors benefit from the
proposed disclosure? Would the
proposed requirement to include a short
discussion of the board’s analysis
supporting its decision whether to
impose a fee or suspend redemptions
result in meaningful and succinct
disclosure? Should any more, any less,
or any other disclosure be required to be
included in the fund’s SAI? Should the
disclosure instead be required in the
prospectus?
• Keeping in mind the compliance
period we propose,453 should the ‘‘lookback’’ period for this historical
disclosure be longer or shorter than 10
years?
• Should the proposed SAI disclosure
be permitted to be incorporated by
reference in a fund’s registration
statement, on account of the fact that
funds will have previously disclosed the
information proposed to be required in
this SAI disclosure on Form N–CR? 454
• Should we require this historical
disclosure to be included anywhere
else, for example, on the fund’s Web
site?
e. Prospectus Fee Table
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Under the proposed liquidity fees and
gates alternative, a liquidity fee would
only be imposed when a fund
experiences stress (i.e., we believe that
shareholders would not pay the
liquidity fee in connection with their
typical day-to-day transactions with the
fund under normal conditions and
many funds may never need to impose
the fee). Because funds are anticipated
to rarely, if at all, impose this fee,455 we
do not believe that the prospectus fee
table, which is intended to help
shareholders compare the costs of
investing in different mutual funds,
should include the proposed liquidity
fee.456 Therefore, we propose clarifying
in the instructions to Item 3 of Form N–
1A (‘‘Risk/Return Summary: Fee Table’’)
that the term ‘‘redemption fee,’’ for
purposes of the prospectus fee table,
does not include a liquidity fee that may
be imposed in accordance with rule 2a–
7.457 As discussed above, we do believe
that shareholders should be able to
compare the extent to which money
market funds have historically imposed
liquidity fees, and to this end, we have
453 See
infra section III.N.
proposed (Fees & Gates) Form N–CR Parts
E, F, and G.
455 See supra text following note 383.
456 Instruction 2(b) to Item 3 of Form N–1A
currently defines ‘‘redemption fee’’ to include any
fee charged for any redemption of the Fund’s
shares, but does not include a deferred sales charge
(load) imposed upon redemption.
457 See instruction 2(b) to proposed (Fees & Gates)
Item 3 of Form N–1A.
454 See
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proposed SAI amendments requiring
this disclosure.458 Also, as previously
discussed, funds would disclose in the
summary section of the statutory
prospectus (and, accordingly, any
summary prospectus, if used) that they
may impose a liquidity fee, and also
would include a detailed description of
the size of the fees, and when the fees
might be imposed, elsewhere in the
statutory prospectus.459
We request comment on the proposed
Form N–1A instruction that would
clarify that, for purposes of the
prospectus fee table, the term
‘‘redemption fee’’ does not include a
liquidity fee imposed in accordance
with rule 2a–7.
• Would shareholders find it
instructive for funds to disclose the
proposed liquidity fee in the prospectus
fee table? Why or why not? If we were
to require money market funds to
include liquidity fees in the fee table,
how should the fee table account for the
contingent nature of liquidity fees and
inform investors that liquidity fees will
only be imposed in certain
circumstances? Should the possibility of
a liquidity fee be disclosed in a footnote
of the fee table? Should a crossreference to the fund’s SAI disclosure
regarding historical occasions on which
the fund has imposed liquidity fees be
disclosed in a footnote of the fee table?
• Would the proposed SAI
amendments requiring disclosure of the
historical occasions on which the fund
has imposed liquidity fees be an
effective way for shareholders to
compare the extent to which money
market funds have historically imposed
liquidity fees, and analyze the
probability that a fund will impose such
fees in the future?
f. Economic Analysis
The liquidity fees and gates proposal
makes significant changes to the nature
of money market funds as an investment
vehicle. The proposed disclosure
requirements in this section are
intended to communicate to
shareholders the nature of the risks that
follow from the liquidity fees and gates
proposal. In section III.B, we discussed
why we are unable to estimate how the
liquidity fees and gates proposal will
affect shareholders’ use of money
market funds or the resulting effects on
the short-term financing markets
because we do not have the information
necessary to provide a reasonable
estimate. For similar reasons, we are
458 See supra notes 450 and 451 and
accompanying text.
459 See supra notes 429, 431 and 440 and
accompanying text.
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unable to estimate the incremental
effects that the proposed disclosure
requirements will have on either
shareholders or the short-term financing
markets. However, we believe that the
proposed disclosure will better inform
shareholders about the changes, which
should result in shareholders making
investment decisions that better match
their investment preferences. We expect
that this will have similar effects on
efficiency, competition, and capital
formation as those outlined in section
III.E rather than to introduce new
effects. We further believe that the
effects of the proposed disclosure
requirements will be small relative to
the liquidity fees and gates proposal.
The Commission staff has not measured
the quantitative benefits of these
proposed requirements at this time
because of uncertainty about how
increased transparency may affect
different investors’ understanding of the
risks associated with money market
funds.460 Where it is relevant, we
request the data needed to make these
calculations below.
We anticipate that money market
funds would incur costs to amend their
registration statements, and to update
their advertising and sales materials
(including the fund Web site), to
include the proposed disclosure
statement. We also anticipate that
money market funds (besides
government money market funds that
have chosen to rely on the proposed
rule 2a–7 exemption from the fees and
gates requirements) would incur costs to
(i) amend their registration statements to
incorporate disclosure regarding the
effects of fees and gates on redemptions;
(ii) include disclosure of the postcompliance-period historical occasions
in which the fund’s weekly liquid assets
have fallen below 15% or the fund has
imposed liquidity fees or gates; and (iii)
update the prospectus fee table. These
funds also would incur costs to disclose
current instances of liquidity fees or
gates on the fund’s Web site. These costs
would include initial, one-time costs, as
well as ongoing costs. Our staff
estimates that the average one-time costs
for a money market fund (except
government money market funds that
have chosen to rely on the proposed
rule 2a–7 exemption from the fees and
460 Likewise, uncertainty regarding how the
proposed disclosure may affect different investors’
behavior makes it difficult for the SEC staff to
measure the quantitative benefits of the proposed
requirements. With respect to the proposed
disclosure statement, there are many possible
permutations on specific wording that would
convey the specific concerns identified in this
Release, and the breadth of these permutations
makes it difficult for SEC staff to test how investors
would respond to each wording variation.
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gates requirements) to comply with
these proposed disclosure amendments
would be approximately $1,480, and
that the average one-time compliance
costs for a government money market
fund that has chosen to rely on the
proposed rule 2a–7 exemption from the
fees and gates requirements would be
approximately $592.461
Ongoing compliance costs include the
costs for money market funds
periodically to update disclosure in
their registration statements regarding
historical occasions in which the fund’s
weekly liquid assets have fallen below
15% or the fund has imposed fees or
gates, and also to disclose current
instances of any of these events on the
fund’s Web site. Because the required
registration statement and Web site
disclosure overlaps with the
information that a fund must disclose
on Form N–CR when the fund’s weekly
liquid assets fall below 15%, or the fund
imposes or removes a fee or gate,462 we
anticipate that the costs a fund will
incur to draft and finalize the disclosure
that will appear in its registration
statement and on its Web site will
largely be incurred when the fund files
Form N–CR, as discussed below in
section III.G.3. In addition, we estimate
that a fund (besides a government
money market fund that has chosen to
rely on the proposed rule 2a–7
exemption from the fees and gates
requirements) would incur average
annual costs of $296 463 to review and
update the historical disclosure in its
registration statement (plus printing
costs), and costs of $207 464 each time
that it updates its Web site to include
the required disclosure.
We request comment on this
economic analysis:
461 Staff estimates that these costs would be
attributable to amending the fund’s disclosure
statement and updating the fund’s advertising and
sales materials. See supra note 245 (discussing the
bases of our staff’s estimates of operational and
related costs). The costs associated with these
activities are all paperwork-related costs and are
discussed in more detail in infra section IV.B.7.
We expect the new required disclosure would
add minimal length to the current required
registration statement disclosure, and thus would
not increase the number of pages in, or change the
printing costs of, a fund’s registration statement.
Based on conversations with fund representatives,
the Commission understands that, in general,
unless the page count of a registration statement is
changed by at least four pages, printing costs would
remain the same.
462 See proposed (Fees & Gates) Form N–CR Parts
E, F, and G.
463 The costs associated with updating the fund’s
registration statement are paperwork-related costs
and are discussed in more detail in infra section
IV.B.7.
464 The costs associated with updating the fund’s
Web site are paperwork-related costs and are
discussed in more detail in infra section IV.B.1.g.iv.
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• Are any of the proposed disclosure
requirements unduly burdensome, or
would they impose any unnecessary
costs?
• We request comment on the staff’s
estimates of the operational costs
associated with the proposed disclosure
requirements.
• We request comment on our
analysis of potential effects of these
proposed disclosure requirements on
efficiency, competition, and capital
formation.
9. Alternative Redemption Restrictions
a. Stand-Alone Liquidity Fees or StandAlone Gates
We are proposing that money market
fund boards of directors be permitted to
institute liquidity fees or gates (and
potentially one followed by the other).
This proposal is designed to provide
money market funds with multiple tools
to manage heightened redemptions in
the best interest of the fund and to
mitigate potential contagion effects on
the short-term financing markets for
issuers.
We also have considered whether we
should permit these money market
funds to institute only liquidity fees or
only gates. As discussed above, fees and
gates can accomplish somewhat
different objectives and have somewhat
different tradeoffs and effects on
shareholders and the short-term
financing markets for issuers. For
shareholders valuing principal
preservation in their evaluation of
money market fund investments, a gate
may be preferable to a liquidity fee
particularly if the fund expects to
rebuild liquidity through maturing
assets. In contrast, shareholders
preferring liquidity over principal
preservation may prefer a liquidity fee
because it allows full liquidity of that
investor’s money market fund
shareholdings—it just imposes a greater
cost for that liquidity if the fund is
under stress.465
Because fees and gates can
accomplish somewhat different
objectives and one may be better suited
to one set of market circumstances than
the other, we preliminarily believe that
providing funds with the ability to use
either tool, as the board determines is in
465 See, e.g., Comment Letter of BlackRock, Inc.
on the IOSCO Consultation Report on Money
Market Fund Systemic Risk Analysis and Reform
Options (May 28, 2012), available at https://
www.iosco.org/library/pubdocs/pdf/
IOSCOPD392.pdf. (stating their preference for
liquidity fees over gates ‘‘because clients with an
extreme need for liquidity can choose to pay for
that liquidity in a crisis’’); BNP Paribas IOSCO
Comment Letter, supra note 357 (stating that it
‘‘would not make sense to restrict the redeemer
willing to pay the price of liquidity’’).
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36899
the best interest of the fund, is a better
approach to preserve the benefits of
money market funds for investors and
the short-term financing markets for
issuers, enhance investor protection,
and improve money market funds’
ability to manage and mitigate high
levels of redemptions. It also may better
allow funds to tailor the redemption
restrictions they employ to their
experience with the preferences and
behavior of their particular shareholder
base and to adapt the restriction they
institute as they or the industry gains
experience over time employing such
restrictions. We request comment on
stand-alone liquidity fees or stand-alone
gates.
• Should we adopt rule amendments
that would just permit money market
funds to institute liquidity fees or just
permit these money market funds to
institute a gate? Why might it be
preferable to allow only a fee or only a
gate? If we allowed only a fee or only
a gate, should there be different
parameters or restrictions around when
the fee or gate could be imposed or
lifted than what we have proposed? If
so, what should they be and why?
b. Partial Gates
We are proposing to permit money
market funds to institute a complete
gate in certain circumstances—a
temporary suspension of redemptions.
Some have suggested that we allow
money market funds to impose partial
gates in times of stress.466 For example,
once the money market fund had
crossed the 15% weekly liquid asset
threshold, we could permit the board of
directors (including a majority of its
independent directors) to limit
redemptions by any particular
shareholder to a certain percentage of
their shareholdings, to a certain
percentage of the fund’s outstanding
shares, or to a certain dollar amount per
day. Those limited redemptions would
not be charged a liquidity fee.
A partial gate can operate to prevent
‘‘fire sales’’ of assets in the fund and
provide some liquidity to investors
while allowing time for the fund to
satisfy the remaining portion of
redemptions requests under better
market conditions or with internally
generated liquidity. It can act as a
gradual brake on redemptions, reducing
466 See, e.g., HSBC EC Letter, supra note 156
(stating that a money market fund should be able
to limit the total number of shares that the fund is
required to redeem on any trading day to 10% of
the shares in issue, that any such gate be applied
pro rata to redemption requests, and that any
redemption requests not met be carried over to the
next business day and so forth until all redemption
requests have been met).
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them to the extent that they no longer
impact the fund’s value or liquidity. In
doing so, they can have a less severe
impact on fund shareholders because
they know they will be able to redeem
without cost at least a certain portion of
their investment on any particular day,
even in times of stress. A partial gate
could be imposed in lieu of a liquidity
fee or could be combined with a
liquidity fee (e.g., once the fund
imposed a partial gate, a shareholder
could redeem 10% of their
shareholdings at no cost and the rest of
their shareholdings by paying a
liquidity fee). Similarly, we could
consider adopting a partial gate in lieu
of our full gate proposal or as an
additional tool that would be available
to fund boards on the same terms as a
full gate is available.
On the other hand, a partial gate may
not impose a substantial enough
deterrent on redemption activity in
times of stress to effectively reduce the
contagion impact of heavy redemptions
on remaining investors and the shortterm financing markets. For example, in
2007 when a Florida local government
investment pool suspended
redemptions in response to a run, it reopened with a combined partial gate
and liquidity fee—local governments
could take out the greater of 15% of
their holdings or $2 million without
penalty, and the remainder of any
redemptions were subject to a 2%
redemption fee.467 We understand that
only a few investors redeemed more
than what was allowed without a fee,
but that investors redeemed most of
what was allowed under the partial gate
without triggering the redemption
fee.468 We also are concerned that a
partial gate would operate in
substantially the same manner as an
exemption from the fee or gate
requirement for small withdrawals,
discussed above in section III.B.5, and
thus may be subject to many of the same
drawbacks in terms of operational costs
and added complexity compared to our
liquidity fees and gates proposal.
We request comment on whether we
should require or permit partial gates in
certain circumstances.
• Should we allow partial gates? If so,
why? Under what conditions and of
what nature? Should they limit each
467 See David Evans and Darrell Preston, Florida
Investment Chief Quits; Fund Rescue Approved,
Bloomberg (Dec. 4, 2007).
468 See, e.g., Neil Weinberg, Florida Fund
Meltdown: Bad to Worse, Forbes (Dec. 6, 2007)
(noting that investors withdrew $1.2 billion from
the $14 billion pool after it re-opened, while
depositing only $7 million, but that only 3 out of
about 1,700 participants in the pool chose to pay
the redemption fee to withdraw additional assets).
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shareholder’s redemptions to a certain
percentage of his or her shareholdings
(e.g., 10% or 25%), to a certain
percentage of the fund’s outstanding
shares (e.g., 1% or 5%), or to a certain
dollar amount per day (e.g., $10,000 or
$50,000)? If so, what percentage or
dollar amount and why?
• How would partial gates affect
shareholder redemption decisions
compared to our proposal of liquidity
fees and full gates? Would they achieve
our goals of preserving the benefits of
money market funds for investors and
the short-term financing markets for
issuers, while mitigating the risk of
runs, enhancing investor protection and
improving money market funds’ ability
to manage and mitigate high levels of
redemptions to the same extent as our
proposed liquidity fees and gates? Why
or why not?
• If we allowed partial gates, should
they be allowed in addition to liquidity
fees and full gates or in lieu of fees or
full gates? What operational and other
costs would be involved if we allowed
partial gates in addition to or in lieu of
fees and/or full gates?
c. In-Kind Redemptions
In 2009, we requested comment on
requiring that funds satisfy redemption
requests in excess of a certain size
through in-kind redemptions.469 We
also requested comment on this type of
redemption restriction when we
requested comment on the PWG
Report.470 In-kind redemptions might
lessen the effect of large redemptions on
remaining money market fund
shareholders, and they would ensure
that the redeeming investors bear part of
the cost of their liquidity needs. During
the 2008 financial crisis, one money
market fund stated that it would honor
certain large redemptions in-kind in an
attempt to decrease the level of
redemptions in that fund.471
In both instances, almost all
commenters addressing this potential
reform option opposed it.472 Most
469 See 2009 Proposing Release, supra note 31, at
section III.B. An in-kind redemption occurs when
a shareholder’s redemption request to a fund is
satisfied by distributing to that shareholder
portfolio assets of that fund instead of cash.
470 See PWG Report, supra note 111, at section 3.c
(discussing requiring that money market funds
satisfy certain redemptions in-kind).
471 See 2009 Proposing Release, supra note 31, at
n.309.
472 But see Comment Letter of Forward
Management (Aug. 21, 2009) (available in File No.
S7–11–09) (supporting in-kind redemption
requirement); Comment Letter of the American Bar
Association (Committee on Federal Regulation of
Securities) (Sept. 9, 2009) (available in File No. S7–
11–09) (same). In addition, two PWG Report
commenters expressed concern that redemptions
in-kind would be technically unworkable, but were
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commenters believed that requiring inkind redemptions would be technically
unworkable due to the complex
valuation and operational issues that
would be imposed on both the fund and
on investors receiving portfolio
securities.473 They also asserted that
required in-kind redemptions could
result in disrupting, rather than
stabilizing, markets if redeeming
shareholders needing liquidity were
forced to sell into declining markets.474
Several commenters stated that
investors would dislike the prospect of
receiving redemptions in-kind and
would structure their holdings to avoid
the requirement, but would nevertheless
still collectively engage in redemptions
if the money market funds were to come
open to further examination of this option. See
Comment Letter of Invesco Advisers, Inc. (Jan. 10,
2011) (available in File No. 4–619) (‘‘We have
previously expressed our concern that requiring
money market funds to satisfy redemptions in-kind
under certain circumstances would likely be
technically unworkable and could result in
disrupting, rather than stabilizing, markets. While
we continue to harbor these concerns, we would be
supportive in principle of a mandatory in-kind
redemption requirement if these technical
challenges could be addressed successfully in a
partnership with regulatory authorities.’’);
Comment Letter of Federated Investors, Inc. (Jan. 7,
2011) (available in File No. 4–619) (‘‘Federated Jan
2011 PWG Comment Letter’’) (‘‘we have identified
some of the major problems associated with
redemption in-kind and included these in our
comment letter to the Commission on the recent
money market fund reforms. . . . At the appropriate
time, we would be willing to meet with the
Commission or its staff to review our analysis of the
issues raised in responding to such events and to
discuss approaches to resolving these issues.’’).
473 See, e.g., Comment Letter of BlackRock Inc.
(Jan. 10, 2011) (available in File No. 4–619)
(‘‘BlackRock PWG Comment Letter’’); Comment
Letter of The Dreyfus Corporation (Jan. 10, 2011)
(available in File No. 4–619) (‘‘Dreyfus PWG
Comment Letter’’); Comment Letter of Investment
Company Institute (Jan. 10, 2011) (available in File
No. 4–619) (‘‘ICI Jan 2011 PWG Comment Letter’’);
Comment Letter of Fidelity Investments (Jan. 10,
2011) (available in File No. 4–619) (‘‘Fidelity Jan
2011 PWG Comment Letter’’). For example, the
BlackRock PWG Comment Letter stated that some
shareholders cannot receive and hold direct
investments in money market assets and some
portfolio securities, such as repurchase agreements
and Eurodollar time deposits, are OTC contracts
and cannot be transferred to retail or to multiple
investors. The Fidelity Jan 2011 PWG Comment
Letter added that advisers may only be able to
transfer the most liquid securities, leaving a less
liquid portfolio for non-redeeming shareholders and
with odd-lot positions that are more difficult and
expensive to trade.
474 See, e.g., Comment Letter of Goldman Sachs
Asset Management, L.P. (Jan. 10, 2011) (available in
File No. 4–619) (‘‘a potential result of forced in-kind
redemptions is simply to transfer the selling
responsibility from presumably sophisticated and
experienced asset managers to a disparate group of
investors who do not necessarily have any reason
to know how to dispose of these securities
effectively’’); Comment Letter of SVB Asset
Management (Jan. 10, 2011) (available in File No.
4–619); Comment Letter of T. Rowe Price
Associates, Inc. (Jan. 10, 2011) (available in File No.
4–619).
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under stress with similar adverse
consequences for the funds and the
short-term financing markets.475
These comments led us to believe that
requiring in-kind redemptions would
create operational difficulties that could
prevent funds from operating fairly to
investors in practice and that it would
not necessarily mitigate money market
funds’ susceptibility to runs and related
adverse effects on the short-term
financing markets and capital formation.
Thus, we expect that the liquidity fees
and gates approach described above
would better achieve our goals of
preserving the benefits of money market
funds for investors and the short-term
financing markets for issuers while
enhancing investor protection and
improving money market funds’ ability
to manage and mitigate potential
contagion from high levels of
redemptions. Liquidity fees and gates
also may be easier to implement than
required in-kind redemptions. We
request comment on whether we are
correct in our analysis of the relative
merits and costs of in-kind redemptions
as compared to the other forms of
redemption restrictions described in
this Release as well as any others that
money market funds could seek to
impose.
We also request comment on all the
redemption restriction alternatives
discussed in this Release.
• Are there other alternatives that we
should consider? Do commenters agree
with our discussion about the
advantages and disadvantages of the
various alternatives? Do commenters
agree with our discussion of their
potential benefits and costs and other
economic effects?
C. Potential Combination of Standby
Liquidity Fees and Gates and Floating
Net Asset Value
Today, we are proposing two
alternative methods of reforming money
market funds. Although these two
proposals are designed to achieve many
of the same goals, by their nature they
would do so to different degrees and
with different tradeoffs. As discussed
above, our first alternative would
require money market funds (other than
government and retail funds) to adopt
floating NAVs. This proposal is
designed primarily to address the
incentive for shareholders to redeem
shares ahead of other investors in times
of fund and market stress. It also is
475 See,
e.g., ICI Jan 2011 PWG Comment Letter,
supra note 473; Richmond Fed PWG Comment
Letter, supra note 139; Comment Letter of Wells
Fargo Funds Management, LLC (Jan. 10, 2011)
(available in File No. 4–619) (‘‘Wells Fargo PWG
Comment Letter’’).
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intended to improve the transparency of
funds’ investment risks through more
transparent valuation and pricing
methods. It makes explicit the risk and
reward relation for money market funds.
We recognize, however, that the
proposal does not necessarily address
shareholders’ incentive to redeem from
money market funds due to their
liquidity risk or for other reasons as
discussed below. In times of severe
market stress when the secondary
markets for funds’ assets become
illiquid, investors may still have
incentives to redeem shares before their
fund’s liquidity dries up. It also may not
alter money market fund shareholders’
incentive to redeem in times of market
stress when investors are engaging in
flights to quality, liquidity, and
transparency and the related contagion
effects from such high levels of
redemptions.
Our second proposal, which requires
funds to impose liquidity fees unless the
fund’s board determines that it would
not be in the best interest of the fund
and permits them to impose gates in
certain circumstances, is primarily
focused on helping money market funds
manage heightened redemptions and
reducing shareholders’ incentive to
redeem under stress. It also could
improve the transparency of funds’
liquidity risks through a more
transparent and systematic allocation of
liquidity costs. In doing so, it addresses
a principal drawback of our floating
NAV proposal by imposing a cost on
redemptions in times of market stress
that may incorporate not just investment
risk but also liquidity risk. The prospect
of facing liquidity fees and gates will
give the additional benefit of better
informing and sensitizing investors to
the risks of investing in money market
funds. We recognize, however, that our
liquidity fees and gates proposal does
not entirely eliminate the incentive of
shareholders to redeem when the fund’s
shadow price falls below a dollar.
Moreover, it does not eliminate the lack
of valuation transparency in the pricing
of money market funds and any
corresponding lack of shareholder
appreciation of money market fund
valuation risks.
We are considering addressing the
limitations of the two proposals by
combining them into a single reform
package; that is, requiring money market
funds (other than government money
market funds and, regarding the floating
NAV, retail money market funds) to
both use a floating NAV and potentially
impose liquidity fees or gates in times
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of fund and market stress.476 Doing so
would address some of the drawbacks of
each proposal individually, but would
present other tradeoffs, as further
discussed below.
1. Potential Benefits of a Combination
A combined reform approach could
reduce investors’ incentive to quickly
redeem assets from money market funds
in a crisis, improve the transparency of
funds’ investment and liquidity risks,
and enhance money market funds’
ability to manage and mitigate potential
contagion from high levels of
redemptions relative to either proposal
alone. Under a combined approach, the
floating NAV should reduce investors’
incentive to redeem early to avoid a
market-based loss embedded in the
fund’s portfolio because the fund would
be transacting at the fair value of its
portfolio at all times. Doing so should
reduce the likelihood that investors
engage in preemptive redemptions that
could trigger the imposition of fees and
gates.477 Requiring a fund to operate
with a floating NAV with potential
imposition of fees and gates in times of
fund or market stress should thus
reduce the risk that funds would face
heavy redemptions. Early redeeming
shareholders would be less likely to be
able to exit the fund without bearing the
cost of their redemptions, and thereby it
will be less likely to concentrate losses
for the remaining shareholders. At the
same time, requiring a floating NAV
fund to consider imposing liquidity fees
or impose gates when the fund’s
liquidity buffer comes under strain
should enhance its ability to manage its
liquidity risk before it results in
portfolio losses.
The combination would provide a
broader range of tools to a floating NAV
money market fund to manage
redemptions in a crisis, thereby
avoiding ‘‘fire sales’’ of assets that
would affect all shareholders and
potentially the short-term financing
markets for issuers. The combined
approach also should further enhance
the ability of money market funds to
treat shareholders equitably, and could
allow better management of funds’
portfolios in a crisis to minimize
shareholder losses.
Requiring funds that can impose
liquidity fees and gates to have a
floating NAV provides fuller
transparency of fund valuation and
476 As discussed in supra section III.A.4, retail
money market funds would also be exempt from
our proposed floating NAV requirement.
477 See supra section III.B.1 (discussing
shareholders’ potential incentive to engage in
preemptive redemptions in a stable price money
market fund that can impose fees or gates).
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liquidity risk. This enhanced
transparency may better inform
investors to the risk profile of their
money market fund investment, and
may make investors less sensitive to
fluctuations in a money market fund’s
NAV. As a result of this familiarity with
money market fund NAV fluctuations,
investors may be less likely to redeem
shares in times of fund and market
stress because of the possibility that a
fund’s NAV might change, and
correspondingly reducing the chances
that fees or gates may be triggered.478
Liquidity fees also can encourage funds
to better and more systematically
manage liquidity and redemption
activity and encourage shareholders to
monitor and exert market discipline
over the fund to reduce the likelihood
that the imposition of fees or gates will
become necessary in that fund.
We request comment on the potential
benefits of combining our two
alternatives into a single proposal.
• Would combining the floating NAV
alternative with the liquidity fees and
gates alternative have the benefits we
discuss above? Are there any other
benefits that we have not discussed? If
so, what would they be?
• Would combining the floating NAV
alternative with only liquidity fees or
only gates provide different benefits?
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2. Potential Drawbacks of a Combination
Some drawbacks may result from
combining the two proposals.479 One
potential drawback is that combining a
floating NAV with liquidity fees and
gates does not preserve the benefits of
stable price money market funds for
investors as our liquidity fees and gates
alternative does. Although any
combination likely would include an
exemption to the floating NAV
requirement for government and retail
money market funds,480 most other
money market funds would have a
floating NAV, thereby incurring the
costs and operational issues associated
with that proposal. As discussed more
fully in the section on that alternative,
some investors may be deterred from
investing in a floating NAV fund for a
variety of reasons. We have designed
our liquidity fees and gates alternative
in large part to preserve the benefits of
478 See
supra section III.A.1.
commenter noted their opposition to
combining redemption gates with a floating NAV,
arguing that such a combination ‘‘acknowledges
that the floating NAV does not resolve such first
mover advantage.’’ See Dreyfus FSOC Comment
Letter, supra note 174.
480 See supra sections III.A.3 and III.A.4. In any
combination, retail funds would likely be subject to
fees and gates, although exempt from the floating
NAV, and thus would not be exempt from both
provisions as government funds likely would.
479 One
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stable price funds for those investors
while enhancing investor protection and
improving money market funds’ ability
to manage and mitigate potential
contagion from high levels of
redemptions. Combining the proposals
thus may not fully accomplish our goal
of preserving the current benefits of
money market funds.
Another drawback of combining the
two proposals is that if a floating NAV
significantly changes investor
expectations regarding money market
fund risk and their prospect of suffering
losses, requiring funds with a floating
NAV to also be able to impose standby
liquidity fees and gates may be
unnecessary to manage the risks of
heavy redemptions in times of crisis.
Because of the unique features of stable
price money market funds, liquidity fees
and gates may be necessary for a fund
to ensure that all of its shareholders are
treated the same, while also managing
the risks of contagion from heavy
redemptions. A fund with a floating
NAV may not face these same risks and
thus providing those funds with the
ability to impose fees or gates may not
be justified, particularly in light of the
Investment Company Act’s expressed
preference for full redeemability of
open-end fund shares.481
A last potential drawback is that
although some investors may be
comfortable investing in a money
market fund that has either a floating
NAV or liquidity fees and gates, some
investors may not wish to invest in a
fund that has both features because a
fund that does not have a stable price
and also may restrict redemptions may
not be suitable as a cash management
tool for such investors. The combination
of our proposals may result in these
investors looking to other investment
alternatives that offer principal stability
or that do not also have potential
restrictions on redemptions. We discuss
the potential effects of such a shift in
section III.E below.
We request comment on the potential
drawbacks of combining our two
alternatives into a single proposal.
• Would combining the floating NAV
alternative with the liquidity fees and
gates alternative have the drawbacks we
discuss above? Are there any other
drawbacks that we have not discussed?
If so, what would they be?
• Would combining the floating NAV
alternative with only liquidity fees or
only gates impose different costs?
481 See 15 U.S.C. 80a–2(a)(32) and 80a–22(e); see
also supra note 395.
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3. Effect of Combination
As discussed above, each of the
alternatives that we are proposing today
achieves similar goals, in different ways,
but they bear distinct costs.
Accordingly, if we were to combine the
two proposals, while there is the
likelihood that a combination may in
some ways improve on each alternative
standing alone, the combination would
impose two separate sets of costs on
funds, investors, and the markets. We
request comment on whether the benefit
of combining the two alternatives into a
single reform would justify the
drawbacks of imposing two distinct sets
of costs and economic impacts.
• Should we combine the two
alternatives as a single reform? What
would be the advantages and drawbacks
of such a combination? Would the
benefits of combining the proposals
justify requiring the two individual sets
of costs associated with implementing
the combined alternatives? Would the
imposition of two sets of costs
materially impact the decisions of
money market fund sponsors on
whether or not they would continue to
offer the product?
4. Operational Issues
Combining the two alternatives into a
single approach could pose certain
operational issues and raise questions
about how we should structure such a
reform. These issues are discussed
below.
a. Fee Structure
Under our liquidity fees and gates
proposal, the board of directors of a
money market fund would be required
to impose a liquidity fee (unless they
find that not doing so would be in the
best interest of the fund) if the fund’s
weekly liquid assets fell below 15% of
its total assets. The default liquidity fee
would be 2% unless the board
determined that a lesser fee would be in
the best interest of fund shareholders.
The liquidity fees imposed by a
floating NAV fund may serve different
purposes than those of a stable price
fund. A stable price fund board, for
example, might use liquidity fees to
recoup the costs associated with selling
assets at distressed prices in an illiquid
market to meet redemptions, as well as
to help repair the fund’s NAV. In
contrast, a floating NAV fund board
might choose to impose liquidity fees
only to recoup the costs associated with
selling assets at distressed prices. This
difference in the purpose served by
liquidity fees raises questions about the
appropriate default size of a liquidity
fee for the combined proposal, the
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appropriate thresholds for triggering
imposition of the fee, and the thresholds
for removing it.
We request comment on the structure
of the default liquidity fee if applied to
a floating NAV money market fund.
• Should we alter the default
liquidity fee for the combined proposal?
Should we specify a default fee for the
combined proposal or merely require
that a fee be based on the costs incurred
by the fund selling assets to meet
redemptions? We previously noted
issues that can arise with variable
liquidity fees.482 Would these issues be
of concern in the context of a floating
NAV fund?
• Should we contemplate different
percentages for funds to consider before
applying liquidity fees or gates to a
floating NAV money market fund than
weekly liquid assets falling below 15%?
If so, what percentages should we
consider. Should we consider a different
threshold for automatic removal of
liquidity fees other than recovery of a
fund’s liquidity to 30% weekly liquid
assets? If so, what should the threshold
for removal be?
• Should a liquidity fee in a floating
NAV fund be triggered by a different
factor other than weekly liquid assets
falling below 15%, such as a change in
NAV? If so, should such a trigger be
based on a relative percentage change in
NAV over some time period or on an
absolute change since a fund’s
inception? For example, should a
liquidity fee be triggered if a fund’s
NAV falls by more than 1⁄4 of 1% in a
week? Alternatively, should a liquidity
fee be triggered if a fund’s NAV falls by
more than a certain number of basis
points? If based on an absolute number,
what should the number be? A drop in
NAV of more than 25 basis points from
its initial starting price or another
number? What types of issues do the
two options present? What other types
of thresholds should be considered?
What issues would arise from using
other thresholds?
b. Redemption gates
Under our liquidity fees and gates
alternative, a fund would have the
option of imposing temporary
redemption gates if liquidity falls below
the same threshold that it imposes
liquidity fees. These redemption gates
are designed to act as ‘‘circuit breakers’’
to halt redemptions, thereby allowing
funds to minimize losses to all
shareholders and reducing any
associated contagion risks. Most of the
concerns that redemption gates are
designed to address in a stable price
482 See
supra section III.B.2.c.
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money market fund also apply to a
floating NAV money market fund, and
gates should be similarly useful in
addressing them. Much like a stable
price fund, a floating NAV fund may
also face difficulties managing heavy
redemptions in times of stress, and
redemption gates may work to mitigate
these difficulties. Gates, by halting
redemptions, would provide ‘‘breathing
room’’ for investors to take better stock
of a situation. Conversely, redemption
gates may not be in the interest of
investors who rationally wish to redeem
at the time, or who want immediate
liquidity.
• Do redemption gates on a floating
NAV fund pose any particular issues or
provide any specific benefits different
than those associated with gates in a
stable price fund? If so, what are they?
• If we were to combine the two
alternatives and permit redemption
gates on a floating NAV fund, should
the thresholds be the same as for
imposing liquidity fees? If not, what
should they be? Should they be tied to
redemption activity? Drops in NAV?
• Should the length of time permitted
for redemption gates in a floating NAV
fund be the same as that permitted
under the standalone alternative?
Should floating NAV funds be permitted
to gate redemptions for a longer or
shorter time? If so, why?
• If the proposals were combined,
would a partial gate be appropriate?
c. Floating NAV Combined with only
Liquidity Fees or only Gates
If we were to combine the
alternatives, we could also do so in a
partial manner, requiring money
markets to maintain a floating NAV and
combining it with standby liquidity fees
standing alone. Similarly, we could
instead require that a floating NAV fund
be able to impose gates, but not liquidity
fees. Combining a floating NAV with
just liquidity fees or gates may simplify
operational implementation of the
combination and make money market
funds more attractive to investors. On
the other hand, such a limited
combination may not achieve the goals
of the proposed reform to the same
extent as a full combination. We request
comment on whether, if we were to
combine the two alternatives, we should
require a floating NAV fund to only
have standby liquidity fees or gates, but
not both.
• What advantages and disadvantages
would result from such a limited
combination?
• If we were to pursue a limited
combination, which measure should we
combine with the floating NAV?
Liquidity fees or gates? Why?
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36903
d. Choice of Floating NAV or Liquidity
Fees and Gates
Another way of combining the
floating NAV and fees and gates
alternatives discussed in this Release
would be to require that money market
funds (other than government money
market funds) choose to either transact
with a floating NAV or be able to
impose liquidity fees and gates in times
of stress—in other words, each nongovernment money market fund would
have to choose to apply either the
floating NAV alternative or the liquidity
fees and gates alternative. Providing
such a choice may allow each money
market fund to choose the reform
alternative that is most efficient, costeffective, and preferable to shareholders.
This could enhance the efficiency of our
reforms and minimize costs and
competitive impacts. On the other hand,
allowing such a choice may not achieve
the goals of the proposed reform to the
same extent as a full combination or
mandating one alternative versus
another. In addition, in making such a
choice, the money market fund industry
may not necessarily be incentivized to
take into consideration the full likely
effects of their decisions on the shortterm financing markets, and thus capital
formation, or the broader systemic
effects of their choices. Funds would
need to clearly communicate their
choice of approaches to shareholders.
We request comment on whether we
should permit non-government money
market funds to choose to apply either
the floating NAV alternative or the fees
and gates alternative.
• What advantages and disadvantages
would result from permitting such a
choice?
• Would permitting such a choice
achieve our reform goals to the same
extent as either our floating NAV
proposal or our fees and gates proposal?
• Would this cause investor
confusion because of a fragmentation in
the market?
• How should a fund elect to make
such a choice? At inception of the fund?
Should a fund be permitted to switch
elections?
e. Other Issues
The combination of the two
alternatives could create other
operational issues. For example, we
have previously discussed our
understanding that a floating NAV fund
would meet the definition of a cash
equivalent for accounting purposes,
because it is unlikely to experience
significant fluctuations in value.483 We
483 See
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would expect a fund that combines
liquidity fees and gates with a floating
NAV should not experience any
additional volatility compared to a
floating NAV fund alone. That said, in
some circumstances, liquidity fees
could effectively lower share value, by
requiring the payment of fees upon
redemption. It is also important to note
that gates would potentially
compromise liquidity. Nevertheless, we
expect the value of floating NAV funds
with liquidity fees and gates would be
substantially stable and should continue
to be treated as a cash equivalent under
GAAP.484 We also do not expect that a
combination of the two approaches
would result in any novel tax issues that
we have not previously discussed in the
relevant sections above. We request
comment on the implications of
combining fees and gates with a floating
NAV on tax and accounting issues.
• Would a money market fund that
combines a floating NAV with liquidity
fees and gates continue to be treated as
a cash equivalent under GAAP? If not,
why not?
• Would a combination of the
alternatives create any additional
accounting or any novel tax issues? If
so, what would they be?
Under our floating NAV proposal we
are proposing that a fund would be
required to price to the fourth decimal
place if they price their shares at one
dollar (e.g., $1.0000), or to an equivalent
level of precision if the fund uses
another price level. We would require
such a level of pricing precision, in part,
to ensure that any fluctuations in a
fund’s NAV are visible to investors.485
We would expect that the value of such
transparency would be unchanged
under a combined approach.
• Would such a level of pricing
precision be appropriate for a fund that
combines liquidity fees and gates with
a floating NAV? If not, why not, and
what level of pricing precision should
be required instead?
As discussed above, we are proposing
exemptions under each alternative.
Under the floating NAV alternative, we
are proposing an exemption for
government and retail money market
funds. Under the liquidity fees and gates
alternative, we are proposing an
exemption for government money
market funds, but not retail funds. We
would expect that a combined approach
would also include these exemptions,
considering that the reasons we are
proposing the exemptions to the floating
NAV remain the same in the context of
a combined approach. However, our
484 Id.
485 See
supra section III.A.2.
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liquidity fees and gates proposal treats
government and retail funds differently,
and provides an exemption to the
liquidity fees and gates proposal for
government money market funds, but
not for retail funds. For the reasons
discussed in the sections where we
propose the exemptions, if we were to
combine the proposals, we would
expect to continue to offer the
exemptions provided under each
alternative, but would not extend them.
Accordingly, a combined approach
would likely provide an exemption to
the floating NAV and to fees and gates
for government money market funds,
but would provide only an exemption to
the floating NAV for retail funds, and
not an exemption to fees and gates.
• If we were to combine the two
alternatives, should we retain the
proposed exemptions to the floating
NAV requirement for government and
retail money market funds? If not, why
not?
• Under a combined approach,
should we also exempt retail funds from
not only the floating NAV but also from
the fees and gates requirements? If so,
why?
We are also proposing to retain rules
17a–9 and 22e–3 under both of the
alternatives we are proposing today,
with certain amendments to account for
operational differences to rule 22e–3’s
triggering mechanism.486 If we were to
combine the two alternatives into a
single approach, we would expect to
make the amendments to the triggering
mechanisms of rule 22e–3 we are
proposing today (which are the same
under each alternative) and retain rule
17a–9 unchanged. As discussed above,
we believe that funds would continue to
find the ability to sell securities to
affiliated persons under rule 17a–9
useful under both alternatives, as well
as under a combined approach. We also
expect that the amendments we are
making to the triggering mechanism
permitting a suspension of redemptions
in preparation for a fund’s liquidation
under rule 22e–3 would continue to be
appropriate under a combined approach
as well.
• Would a combined approach have
any significant effects on our proposed
treatment of rules 17a–9 and 22e–3?
Would we need to make any other
changes to those rules to accommodate
such a combination?
Our floating NAV alternative includes
a compliance period of 2 years to allow
for funds to transition to a floating NAV
486 We are proposing to change the trigger for use
of rule 22e–3 under both alternatives to a reduction
in a fund’s weekly liquid assets below 15%. See
supra section III.A.5.b.
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without imposing unnecessary costs.487
We would expect that any combined
approach would include a similar
compliance period because funds would
likely need a significant amount of time
to implement a floating NAV. At the
same time, we do not expect that
implementing both alternatives would
add substantially to the amount of time
it would take to implement a floating
NAV alone, and accordingly would
expect to provide the same compliance
period if we were to combine the
approaches.
• Should we provide the same
compliance period under a combined
approach? If not, should the compliance
period be longer or shorter? Should we
consider a grandfathering approach
instead of or in addition to a compliance
period?
Under both of the alternatives that we
are proposing today, we are also
including a variety of proposed
disclosure improvements designed to
improve transparency of fund risks and
risk management, with the relevant
disclosure tailored to each alternative. If
we were to combine the two
approaches, we would likely merge the
disclosure reforms, and revise the
disclosure requirements to take such a
merger into account. We would not
expect that a combined approach would
require significant additional disclosure
reforms not discussed under the two
alternatives.
• Would a combined approach pose
any new disclosure issues that are not
currently contemplated in the
discussion of disclosure reforms for
each of the two alternatives? If so, what
would those issues be? Would a
combined approach result in any new or
changed risks that investors should be
informed of?
We do not expect that there would be
any significant additional costs from
combining the two approaches that are
not previously discussed in the sections
discussing the costs of the two
alternatives above. It is likely that
implementing a combined approach
would likely save some percentage over
the costs of implementing each
alterative separately as a result of
synergies and the ability to make a
variety of changes to systems at a single
time. We do not expect that combining
the approaches would create any new
costs as a result of the combination
itself. Accordingly, we estimate that the
costs of implementing a combined
approach would at most be the sum of
the costs of each alternative, but may
likely be less.
487 See
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We request comment on the costs of
combining the two approaches.
• Would there be any new costs
associated with combining the two
approaches that are not already
discussed separately under each
alternative? If so, what would they be?
• Would there be a reduction in costs
as a result of implementing both
alternatives at the same time? If so, how
much savings would there be?
D. Certain Alternatives Considered
In addition to the proposed reforms
and alternatives described elsewhere in
this Release, it is important to note that
in coming to this proposal, we and our
staff considered a number of additional
alternative options for regulatory reform
in this area. For example, we considered
each option discussed in the PWG
Report and the FSOC Proposed
Recommendations. We currently are not
pursuing certain of these other options
because we believe, after considering
the comments we received on the PWG
Report and that FSOC received on the
FSOC Proposed Recommendations and
the economic analysis set forth in this
Release, that they would not achieve our
regulatory goals as well as what we
propose today. We discuss below these
options, and our principal reasons for
not pursuing them further at this time.
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1. Alternatives in the FSOC Proposed
Recommendations
As discussed in section II.D.3 above,
in November 2012, FSOC proposed to
recommend that we undertake
structural reforms of money market
funds. FSOC proposed three alternatives
for consideration, which, it stated, could
be implemented individually or in
combination. The first option 488—
requiring that money market funds use
a floating NAV—is part of our proposal.
The other two options in the FSOC
Proposed Recommendations each would
require that money market funds
maintain a NAV buffer. One option
would require that most money market
funds have a risk-based NAV buffer of
up to 1% to absorb day-to-day
fluctuations in the value of the funds’
portfolio securities and allow the funds
to maintain a stable NAV and that this
NAV buffer be combined with a
‘‘minimum balance at risk.’’ 489 The
required minimum size of a fund’s NAV
488 See FSOC Proposed Recommendations, supra
note 114, at section V.A.
489 Under the FSOC Proposed Recommendations,
Treasury money market funds would not be subject
to a NAV buffer or a minimum balance at risk. See
FSOC Proposed Recommendations, supra note 114,
at sections V.B and V.C for a full discussion of these
two alternatives. This section of the Release
provides a summary based on those sections of the
FSOC Proposed Recommendation.
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buffer would be determined based on
the composition of the money market
fund’s portfolio according to the
following formula:
• No buffer requirement for cash,
Treasury securities, and repos
collateralized solely by cash and
Treasury securities (‘‘Treasury repo’’);
• A 0.75% buffer requirement for
other daily liquid assets (or weekly
liquid assets, in the case of tax-exempt
money market funds); and
• A 1% buffer requirement for all
other assets.
A fund whose NAV buffer fell below
the required minimum amount would
be required to limit its new investments
to cash, Treasury securities, and
Treasury repos until its NAV buffer was
restored. A fund that completely
exhausted its NAV buffer would be
required to suspend redemptions and
liquidate or could continue to operate
with a floating NAV indefinitely or until
it restored its NAV buffer.
A money market fund could use any
funding method or combination of
methods to build the NAV buffer, and
could vary these methods over time.
The FSOC Proposed Recommendations
identified three funding methods that
would be possible with Commission
relief from certain provisions of the
Investment Company Act: (1) An escrow
account that a money market fund’s
sponsor established and funded and that
was pledged to support the fund’s stable
share price; (2) the money market fund’s
issuance of a class of subordinated, nonredeemable equity securities (‘‘buffer
shares’’) that would absorb first losses in
the funds’ portfolios; and (3) the money
market fund’s retention of some
earnings that it would otherwise
distribute to shareholders (subject to
certain tax limitations).490 We believe
that the first funding method would be
the most likely approach for funding the
buffer given the complexity of a fund
offering a new class of buffer shares
(and the uncertainty of an active, liquid
market for buffer shares developing) and
the tax limitations on the third
method.491 We note, however, that we
490 See FSOC Proposed Recommendations, supra
note 114, at section V.B.
491 Under the Internal Revenue Code, each year,
mutual funds, including money market funds, must
distribute to shareholders at least 90% of their
annual earnings or lose the ability to deduct
dividends paid to their shareholders. See, e.g.,
Comment Letter of the Investment Company
Institute (May 16, 2012) (available in File No. 4–
619). We note that the retained earnings method is
similar to how some money market funds paid for
insurance that was provided by ICI Mutual
Insurance Company from 1993 to 2003. This
insurance covered losses on money market fund
portfolio assets due to defaults and insolvencies but
not from events such as a security downgrade or a
rise in interest rates. Coverage was limited to $50
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36905
believe this funding method is the most
expensive of the three because of the
opportunity costs the fund’s sponsor
will bear to the extent that the firms
redirect this funding from other
essential activities, as further discussed
below.492
The minimum balance at risk
(‘‘MBR’’) would require that the last 3%
of a shareholder’s highest account value
in excess of $100,000 during the
previous 30 days (the shareholder’s
MBR or ‘‘holdback shares’’) be
redeemable only with a 30-day delay.493
All shareholders may redeem 97% of
their holdings immediately without
being restricted by the MBR. If the
money market fund suffers losses that
exceed its NAV buffer, the losses would
be borne first by the MBRs of
shareholders who have recently
redeemed (i.e., their MBRs would be
‘‘subordinated’’). The extent of
subordination of a shareholder’s MBR
would be approximately proportionate
to the shareholder’s cumulative net
redemptions during the prior 30 days—
in other words, the more the
shareholder redeems, the more their
holdback shares become ‘‘subordinated
holdback shares.’’
The last option in the FSOC Proposed
Recommendations would require money
market funds to have a risk-based NAV
buffer of up to 3% (which otherwise
would have the same structure as
discussed above), and this larger NAV
buffer could be combined with other
measures.494 The alternative measures
discussed in the FSOC Proposed
Recommendations include more
stringent investment diversification
requirements (which are proposed or
discussed in section III.J below),
increased minimum liquidity levels
million per fund, with a deductible of the first 10
to 40 basis points of any loss. Premiums ranged
from 1 to 3 basis points. See PWG Report, supra
note 111, at n.24 and accompanying text. Because
of the tax disadvantages of this funding method, it
would take a long time for a NAV buffer of any size
to build, particularly in the current low interest rate
environment.
492 This funding method also could have the
greatest competitive impacts on the money market
fund industry, as larger bank-affiliated sponsors
would have less costly access to funding for the
NAV buffer than independent asset management
firm sponsors. See, e.g., Systemic Risk Council
FSOC Comment Letter, supra note 363 (‘‘Capital
requirements would likely encourage money market
fund consolidation—particularly toward larger
bank-affiliated sponsors (who traditionally have,
and can access, more capital than traditional,
independent asset managers). If so, this could
further concentrate systemic risk from these
institutions, and create conflicts of interest in the
short-term financing markets (as fewer money funds
would control a larger share of the short-term
lending markets).’’).
493 See FSOC Proposed Recommendations, supra
note 114, at section V.C.
494 See id, at section V.C.
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(which we have not proposed), and
more robust disclosure requirements
(which are generally proposed in
sections III.F and III.G below).495
In the sections that follow, we discuss
our evaluation of a NAV buffer
requirement and an MBR requirement
for money market funds. We also
discuss comments FSOC received on
these recommendations. For the reasons
discussed below, the Commission is not
pursuing these alternatives because we
presently believe that the imposition of
either a NAV buffer combined with a
minimum balance at risk or a standalone NAV buffer, while advancing
some of our goals for money market
fund reform, might prove costly for
money market fund shareholders and
could result in a contraction in the
money market fund industry that could
harm the short-term financing markets
and capital formation to a greater degree
than the proposals under consideration.
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a. NAV Buffer
In considering a NAV buffer such as
those recommended by FSOC as a
potential reform option for money
market funds, we considered the
benefits that such a buffer could
provide, as well as its costs. Our
evaluation of what could be a
reasonable size for a NAV buffer also
factored into our analysis of the
advantages and disadvantages of these
options. A buffer can be designed to
satisfy different potential objectives. A
large buffer could protect shareholders
from losses related to defaults, such as
the one experienced by the Reserve
Primary Fund following the Lehman
Brothers bankruptcy. However, if
complete loss absorption is the
objective, a substantial buffer would be
required, particularly given that money
market funds can hold up to 5% of their
assets in a single security.496
495 The FSOC Proposed Recommendations asked
the Commission to consider increasing minimum
weekly liquidity requirements from 30% of total
assets to 40% of total assets. The justification
provided by FSOC was that most funds already
have weekly liquidity in excess of this 40%
minimum level. We do not consider this alternative
for two reasons. There is no evidence that current
liquidity requirements are inadequate. For example,
the RSFI Study notes that the heightened
redemption activity in the summer of 2011 did not
place undue burdens on MMFs when they sold
assets to meet redemption requests. No fund lost
more than 50 basis points during this period nor
did their shadow NAVs deviate significantly from
amortized cost. See RSFI Study, supra note 21.
Based on these considerations, we have
preliminarily determined not to address additional
minimum liquidity requirements.
496 Even commenters in favor of a buffer showed
concern that FSOC’s proposed buffer size of 1% or
3% may be inadequate. See, e.g., Federal Reserve
Bank Presidents FSOC Comment Letter, supra note
38, at 5 (‘‘For a poorly diversified fund with
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Alternatively, if a buffer were not
intended for complete loss absorption,
but rather designed primarily to absorb
day-to-day variations in the marketbased value of money market funds’
portfolio holdings under normal market
conditions, this would allow a fund to
hold a significantly smaller buffer.
Accordingly, the relatively larger buffers
contemplated in the FSOC Proposed
Recommendations 497 must have been
designed to absorb daily price
fluctuations as well as relatively large
security defaults.498 In fact, a 3% buffer
would accommodate all but extremely
large losses, such as those experienced
during the crisis. However, a buffer that
portfolio assets that carry relatively more credit
risk, a 3% (maximum) NAV buffer may not be
sufficient.’’); Harvard Business School FSOC
Comment Letter, supra note 24 (‘‘For a welldiversified portfolio, we estimate that MMFs should
hold 3 to 4% capital against unsecured paper issued
by financial institutions, the primary asset held by
MMFs. For more concentrated portfolios, we
estimate that the amount of capital should be
considerably higher.’’); Better Markets FSOC
Comment Letter, supra note 67 (‘‘The primary
shortcoming of [FSOC’s proposed buffer] is its low
level of 1 or 3 percent. . . . [Any buffer] must be
set at a level that is sufficient to cover all of these
factors: Projected and historical losses; additional
costs in the form of liquidity damages or
government backstops; and investor psychology in
the face of possible financial shocks or crises.
[. . . .] Historical examples alone . . . indicate that
MMF losses have risen as high as 3.9 percent. This
serves only as a floor regarding actual potential
losses, clearly indicating that the necessary buffer
must be substantially higher than 3.9 percent.’’);
Occupy the SEC FSOC Comment Letter, supra note
42 (arguing that FSOC’s proposed buffer does not
go far enough in accounting for potential risks in
a fund’s portfolio. Instead, the approach should be
a two-layer buffer, with a first layer of up to 3%
depending on the portfolio’s credit rating and a
second layer to be sized according to the
concentration of the portfolio).
497 While the second alternative in the FSOC
Proposed Recommendation only includes a NAV
buffer of up to 1%, it was combined with a 3%
MBR, which would effectively provide the fund
with a 4% buffer before non-redeeming
shareholders in the fund suffered losses.
498 For example, beginning in September 2008,
money market funds that chose to participate in the
Treasury Temporary Guarantee Program were
required to file with the Treasury their weekly
shadow price if it was below $0.9975. Our staff has
reviewed the data, and found that through October
17, 2008, only three funds carried losses larger than
four percent, and only five funds carried losses
larger than three percent. Reported shadow prices
excluded the value of any capital support
agreements in place at the time, but in some cases
included sponsor-provided capital contributions to
the fund. Not every money market fund that applied
to participate in the program reported shadow price
data for every day during the period between
September 1, 2008 and October 17, 2008. See also
Patrick E. McCabe et al., The Minimum Balance at
Risk: A Proposal to Mitigate the Systemic Risks
Posed by Money Market Funds, at 31, Table 2
Federal Reserve Bank of New York Staff Report No.
564, July 2012 (providing additional statistical
analysis of shadow price information reported by
money market funds filing under the Treasury
Temporary Guarantee Program). During that period
there were over 800 money market funds based on
Form N–SAR data.
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was designed to absorb such large losses
may be too high and too costly because
the opportunity cost of this capital
would be borne at all times even though
it was likely to be drawn upon to any
degree only rarely. Accordingly, a buffer
of the size contemplated by either
alternative in the FSOC Proposed
Recommendations appears to be too
costly to be practicable.499
i. Benefits of a NAV Buffer
The FSOC Proposed
Recommendations discusses a number
of potential benefits that a NAV buffer
could provide to money market funds
and their investors, many of which we
discuss below.500 It would preserve
money market funds’ stable share price
and potentially increase the stability of
the funds, but would likely reduce the
yields (and in the option that combines
a 1% NAV buffer with an MBR, the
liquidity) that money market funds
currently offer to investors. Like our
proposed reforms, the NAV buffer
presents trade-offs between stability,
yield, and liquidity.
In effect, depending on the size of the
buffer, a buffer could provide various
levels of coverage of losses due to both
the illiquidity and credit deterioration
of portfolio securities. Money market
funds that are supported by a NAV
buffer would be more resilient to
redemptions and credit or liquidity
changes in their portfolios than stable
value money market funds without a
buffer (the current baseline).501 As long
as the NAV buffer is funded at necessary
levels, each $1.00 in money market fund
shares is backed by $1.00 in fund assets,
eliminating the incentive of
shareholders to redeem at $1.00 when
the market-based value of their shares is
worth less. This reduces shareholders’
incentive to redeem shares quickly in
response to small losses or concerns
about the quality and liquidity of the
money market fund portfolio, discussed
in section II.B above, particularly during
499 There is another potential adverse effect of
requiring large NAV buffers for money market funds
to address risk from systemic events. According to
the FSOC Proposed Recommendations, outflows
from institutional prime money market funds
following the Lehman Brothers bankruptcy tended
to be larger among money market funds with
sponsors that were themselves under stress,
indicating that investors redeemed shares when
concerned about sponsors’ potential inability to
support ailing funds. But these sponsors were the
ones most likely to need funding dedicated to the
buffer for other purposes. As a result, larger buffers
may negatively affect other important activities of
money market fund sponsors and cause them to fail
faster.
500 See FSOC Proposed Recommendations, supra
note 114, at section V.B.
501 See, e.g., Occupy the SEC FSOC Comment
Letter, supra note 42.
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periods when the underlying portfolio
has significant unrealized capital losses
and the fund has not broken the buck.
As long as the expected effect on the
portfolio from potential losses is smaller
than the NAV buffer, investors would be
protected—they would continue to
receive a stable value for their shares.
A second benefit is that a NAV buffer
would force money market funds to
provide explicit capital support rather
than the implicit and uncertain support
that is permitted under the current
regulatory baseline. This would require
funds to internalize some of the cost of
the discretionary capital support
sometimes provided to money market
funds, and to define in advance how
losses will be allocated. In addition, a
NAV buffer could reduce fund
managers’ incentives to take risk beyond
what is desired by fund shareholders
because investing in less risky securities
reduces the probability of buffer
depletion.502
Another potential benefit is that a
NAV buffer might provide countercyclical capital to the money market
fund industry. This is because once a
buffer is funded it remains in place
regardless of redemption activity. With
a buffer, redemptions increase the
relative size of the buffer because the
same dollar buffer now supports fewer
assets.503 As an example, consider a
fund with a 1% NAV buffer that
experiences a 25 basis point portfolio
loss, which then triggers redemptions of
20% of its assets. The NAV buffer, as a
proportion of fund assets and prior to
any replenishment, will increase from
75 basis points after the loss to 93.75
basis points after the redemptions. This
illustrates how the NAV buffer
strengthens the ability of the fund to
absorb further losses, reducing
investors’ incentive to redeem shares.
This result contrasts to the current
regulatory baseline under rule 2a–7
where redemptions amplify the impact
of losses by distributing them over a
smaller investor base. For example,
suppose a fund with a shadow price of
$1.00 (i.e., no embedded losses)
experiences a 25 basis point loss, which
502 See, e.g., Harvard Business School FSOC
Comment Letter, supra note 24 (‘‘Capital buffers
also mean that there is an investor class that
explicitly bears losses and has incentives to curb ex
ante risk taking.’’).
503 See, e.g., J.P. Morgan FSOC Comment Letter,
supra note 342 ([W]here capital support is utilized
as a first loss position upon liquidation, the level
of capital can be tied to a MMF’s highest asset
levels. This can result in a structure whereby, as
redemptions accelerate and cause the unrealized
loss per share to increase further, the amount of
capital support available per share increases
accordingly, providing further capital support to the
remaining shareholders that do not redeem their
shares.’’).
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causes its shadow price to fall to
$0.9975. If 20% of the fund’s shares are
then redeemed at $1.00, its shadow
price will fall to $0.9969, reflecting a
loss which is 24% greater than the loss
precipitating the redemptions.
Finally, by allowing money market
funds to absorb small losses in portfolio
securities without affecting their ability
to transact at a stable price per share, a
NAV buffer may facilitate and protect
capital formation in short-term
financing markets during periods of
modest stress. Currently, money market
fund portfolio managers are limited in
their ability to sell portfolio securities
when markets are under stress because
they have little ability to absorb losses
without causing a fund’s shadow NAV
to drop below $1.00 (or embed losses in
the fund’s market-based NAV per share).
As a result, managers tend to avoid
trading when markets are strained,
contributing to further illiquidity in the
short-term financing markets in such
circumstances. A NAV buffer should
enable funds to absorb small losses and
thus could reduce this tendency. Thus,
by adding resiliency to money market
funds and enhancing their ability to
absorb losses, a NAV buffer may benefit
capital formation in the long term. A
more stable money market fund
industry may produce more stable shortterm financing markets, which would
provide more reliability as to the
demand for short-term credit to the
economy.
ii. Costs of a NAV Buffer
There are significant ongoing costs
associated with a NAV buffer. They can
be divided into direct costs that affect
money market fund sponsors or
investors and indirect costs that impact
capital formation. In addition, a NAV
buffer does not protect shareholders
completely from the possibility of
heightened rapid redemption activity
during periods of market stress,
particularly in periods where the buffer
is at risk of depletion. As the buffer
becomes impaired (or if shareholders
believe the fund may suffer a loss that
exceeds the size of its NAV buffer),
shareholders have an incentive to
redeem shares quickly because, once the
buffer fails, the fund will no longer be
able to maintain a stable value and
shareholders will suddenly lose money
on their investment.504 Such rapid
504 See, e.g., Systemic Risk Council FSOC
Comment Letter, supra note 363 (stating that capital
is difficult to set and is imperfect, that ‘‘[g]iven the
lack of data and impossibility of modeling future
events, even [a 3% NAV buffer] runs the risk of
being too high, or too low to protect the system in
the future’’ and that ‘‘too little capital could provide
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36907
severe redemptions could impair the
fund’s business model and viability.
Another possible implication of this
facet of NAV buffers is that money
market funds with buffers may avoid
holding riskier short-term debt
securities (like commercial paper) and
instead hold a higher amount of low
yielding investments like cash, Treasury
securities, or Treasury repos. This could
lead money market funds to hold more
conservative portfolios than investors
may prefer, given tradeoffs between
principal stability, liquidity, and
yield.505
The most significant direct cost of a
NAV buffer is the opportunity cost
associated with maintaining a NAV
buffer. Those contributing to the buffer
essentially deploy valuable scarce
resources to maintain a NAV buffer
rather than being able to use the funds
elsewhere. The cost of diverting funds
for this purpose represents a significant
incremental cost of doing business for
those providing the buffer funding. We
cannot provide estimates of these
opportunity costs because the relevant
data is not currently available to the
Commission.506
The second direct cost of a NAV
buffer is the equilibrium rate of return
that a provider of funding for a NAV
buffer would demand. An entity that
a false sense of security in a crisis’’). See also infra
note 512 and accompanying discussion.
505 But see, e.g., U.S. Chamber Jan. 23, 2013 FSOC
Comment Letter, supra note 248 (arguing that ‘‘a
NAV buffer is likely to incentivize sponsors to
reach for yield.’’); Vanguard FSOC Comment Letter,
supra note 172 (‘‘Capital buffers are also likely to
carry unintended consequences, as some funds may
purchase riskier, higher-yielding securities to
compensate for the reduction in yield. As a result,
capital buffers are likely to provide investors with
a false sense of security.’’); Comment Letter of
Federated Investors, Inc. (Re: Alternative 3) (Jan. 25.
2013) (available in File No. FSOC–2012–0003) (‘‘If
anything, creating a junior class of equity puts
earnings pressure on an MMF to alter its balance
sheet to decrease near-term liquid assets to generate
investment returns available from longer-term,
higher risk investments in order to either build
capital through retained earnings or to compensate
investors who have invested in the new class of
subordinated equity capital of the MMF.’’).
506 The opportunity costs would represent the net
present value of these forgone opportunities, an
amount that cannot be estimated without relevant
data about each firm’s productive opportunities.
However, a number of FSOC commenters have
already cautioned that a NAV buffer could make
money market funds unprofitable. See, e.g., Angel
FSOC Comment Letter, supra note 60 (stating that
‘‘in today’s low yield environment, even five basis
points [of cost associated with a NAV buffer] would
push most money market funds into negative yield
territory.’’); BlackRock FSOC Comment Letter,
supra note 204 (‘‘[A]ny capital over 0.75% will
make the MMF product uneconomical for sponsors
to offer.’’); Federated Investors Feb. 15 FSOC
Comment Letter, supra note 192 (calculating that
‘‘prime MMFs would no longer be economically
viable products’’ based on cost estimates provided
by the ICI.).
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provides such funding, possibly the
fund sponsor, would expect to be paid
a return that sets the market value of the
buffer equal to the amount of the capital
contribution. Since a NAV buffer is
designed to absorb the same amount of
risk regardless of its size, the promised
yield increases with the relative amount
of risk it is expected to absorb. This is
a well-known leverage effect.507
One could analogize a NAV buffer to
bank capital by considering the
similarities between money market
funds with a NAV buffer and banks with
capital. A traditional bank generally
finances long-term assets (customer
loans) with short-term liabilities
(demand deposits). The Federal Reserve
Board, as part of its prudential
regulation, requires banks to adhere to
certain minimum capital
requirements.508 Bank capital, among
other functions, provides a buffer that
allows banks to withstand a certain
amount of sudden demands for liquidity
and losses without becoming insolvent
and thus needing to draw upon federal
deposit insurance or other aspects of the
regulatory safety net for banks.509 The
fact that the bank assets have a long
maturity and are illiquid compared to
the bank’s liabilities results in a
maturity and liquidity mismatch
problem that creates the possibility of a
depositor run during periods of
stress.510 Capital is one part of a
507 The leverage effect reflects the concept that
higher leverage levels induce an equity holder to
demand higher returns to compensate for the higher
risk levels.
508 See the Federal Reserve Board’s Web site on
Capital Guidelines and Adequacy, available at
https://www.federalreserve.gov/bankinforeg/topics/
capital.htm, for an overview of minimum capital
requirements.
509 See, e.g., Allen N. Berger et al., The Role of
Capital in Financial Institutions, 19 J. of Banking
and Fin. 393 (1995) (‘‘Berger’’) (‘‘Regulators require
capital for almost all the same reasons that other
uninsured creditors of banks ‘require’ capital—to
protect themselves against the costs of financial
distress, agency problems, and the reduction in
market discipline caused by the safety net.’’).
510 More generally, banks are structured to satisfy
depositors’ preference for access to their money on
demand with businesses’ preference for a source of
longer-term capital. However, the maturity and
liquidity transformation provided by banks can also
lead to runs. Deposit insurance, access to a lender
of last resort, and other bank regulatory tools are
designed to lessen the incentive of depositors to
run. See, e.g., Douglas W. Diamond & Philip H.
Dybvig, Bank Runs, Deposit Insurance, and
Liquidity, 91 J. Pol. Econ 401 (June 1983)
(‘‘Diamond & Dybvig’’); Mark J. Flannery, Financial
Crises, Payment System Problems, and Discount
Window Lending, 28 Journal of Money, Credit and
Banking 804 (1996); Jeffrey A. Miron, Financial
Panics, the Seasonality of the Nominal Interest
Rate, and the Founding of the Fed, 76 American
Economic Review 125 (1986); S. Bhattacharya & D.
Gale, Preference Shocks, Liquidity, and Central
Bank Policy, in New Approaches to Monetary
Economics (eds., W. Barnnett and K. Singleton,
1987).
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prudential regulatory framework
employed to deter runs in banks and
generally protect the safety and
soundness of the banking system. A
money market fund with a NAV buffer
has been described as essentially a
‘‘special purpose bank’’ where fund
shareholders’ equity is equivalent to
demand deposits and a NAV buffer is
analogous to the bank’s capital.511 Since
a NAV buffer is effectively a leveraged
position in the underlying assets of the
fund that is designed to absorb interest
rate risk and mitigate default risk, a
provider of buffer funding should
demand a return that reflects the fund’s
aggregate cost of capital plus
compensation for the fraction of default
risk it is capable of absorbing.
The effectiveness of a NAV buffer to
protect against large-scale redemptions
during periods of stress is predicated
upon whether shareholders expect the
decline in the value of the fund’s
portfolio to be less than the value of the
NAV buffer. Once investors anticipate
that the buffer will be depleted, they
have an incentive to redeem before it is
completely depleted.512 In this sense, a
NAV buffer that is not sufficiently large
is incapable of fully mitigating the
possibility of a liquidity run. The
drawback with increasing buffer size to
address this risk, however, is that the
opportunity costs of operating a buffer
increase as the size of the buffer
increases. Due to the correlated nature
of portfolio holdings across money
market funds, this could amplify
market-wide run risk if NAV buffer
impairment also is highly correlated
across money market funds. The
incentive to redeem could be further
amplified if, as contemplated in the
FSOC Proposed Recommendations, a
NAV buffer failure would require a
money market fund to either liquidate
or convert to a floating NAV. If investors
anticipate this occurring, some investors
511 See, e.g., Gary Gorton & George Pennacchi,
Money Market Funds and Finance Companies: Are
They the Banks of the Future?, in Structural Change
in Banking (Michael Klausner & Lawrence J. White,
eds. 1993), at 173–214.
512 See, e.g., Federal Reserve Bank Presidents
FSOC Comment Letter, supra note 38 (‘‘The [FSOC]
Proposal notes that a fund depleting its NAV buffer
would be required to suspend redemptions and
liquidate under rule 22e–3 or continue operating as
a floating NAV fund. However, this sequence of
events could be destabilizing. Investors in 3% NAV
buffer funds may be quite risk averse, even more so
than floating NAV MMF investors might be, given
their revealed preference for stable NAV shares. If
they foresee a possible conversion to floating NAV
once the buffer is depleted, these risk-averse
investors would have an incentive to redeem prior
to conversion. If, on the other hand, investors
foresee a suspension of redemptions, they would
presumably have an even stronger incentive to
redeem before facing a liquidity freeze when the
NAV buffer is completely depleted.’’).
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that value principal stability and
liquidity may no longer view money
market funds as viable investments.
As noted above, substantial NAV
buffers may be able to absorb much, if
not all, of the default risk in the
underlying portfolio of a money market
fund. This implies that any
compensation for bearing default risk
will be transferred from current money
market fund shareholders to those
financing the NAV buffer, effectively
converting a prime money market fund
into a fund that mimics the return of a
Treasury fund for current money market
fund shareholders. If fund managers are
unable to pass through the yield
associated with holding risky securities,
like commercial paper, to money market
fund shareholders, it is likely that they
will reduce their investment in risky
securities, such as commercial paper or
short-term municipal securities.513
While lower yields would reduce, but
not necessarily eliminate, the utility of
the product to investors, it could have
a negative impact on capital formation.
Since the probability of breaking the
buck is higher for a money market fund
with riskier securities (e.g., a fund with
a WAM of 90 days rather than one with
a WAM of 60 days) 514 and fund
managers cannot pass through the
higher associated yields, it is likely that
managers will reduce investments in
commercial paper because they cannot
differentiate their funds on the basis of
yield.
In addition, many investors are
attracted to money market funds
because they provide a stable value but
have higher rates of return than
Treasury securities. These higher rates
of return are intended to compensate for
exposure to greater credit risk and
potential volatility than Treasury
securities. As a result of funding the
buffer, the returns to money market
fund shareholders are likely to decline,
potentially reducing demand from
investors who are attracted to money
market funds for their higher yield than
alternative stable value investments.515
513 But
see supra note 505.
RSFI Study, supra note 21, at 28–31.
515 See, e.g., Invesco FSOC Comment Letter, supra
note 192 (‘‘As a result of the ongoing ultra-low
interest rate environment, MMF yields remain at
historic lows. . . . A requirement to divert a
portion of a MMF’s earnings in order to build a
NAV buffer would result in prime MMF yields
essentially equaling those of Treasury MMFs
(which would not be required to maintain a buffer
under the Proposal). Faced with the choice of
equivalent yields but asymmetrical risks, logical
investors would abandon prime funds for Treasury
funds, potentially triggering the very instability that
reforms are intended to prevent and vastly reducing
corporate borrowers’ access to short-term
financing.’’).
514 See
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Taken together, the demand by
investors for some yield and the
incentives for fund managers to reduce
portfolio risk may impact competition
and capital formation in two ways. First,
investors seeking higher yield may
move their funds to other alternative
investment vehicles resulting in a
contraction in the money market fund
industry. In addition, fund managers
may have an incentive to reduce the
funds’ investment in commercial paper
or short-term municipal securities in
order to reduce the volatility of cash
flows and increase the resilience of the
NAV buffer. In both of these cases, there
may be an effect on the short-term
financing markets if the decrease in
demand for short-term securities from
money market funds results in an
increase in the cost of capital for issuers
of commercial paper and other
securities.
b. Minimum Balance at Risk
As discussed above, under the second
alternative in the FSOC Proposed
Recommendations, a 1% capital buffer
is paired with an MBR or a holdback of
a certain portion of a shareholder’s
money market fund shares.516 In the
event of fund losses, this alternative
effectively would create a ‘‘waterfall’’
with the NAV buffer bearing first losses,
subordinated holdback shares bearing
second losses, followed by nonsubordinated holdback shares, and
finally by the remaining shares in the
fund (and then only if the loss exceeded
the aggregate value of the holdback
shares). This allocation of losses, in
effect, would impose a ‘‘liquidity fee’’
on redeeming shareholders if the fund
experiences a loss that exceeds the NAV
buffer. The value of the holdback shares
effectively provides the non-redeeming
shareholders with an additional buffer
cushion when the NAV buffer is
exhausted.
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i. Benefits of a Minimum Balance at
Risk
An MBR requirement could provide
some benefits to money market funds.
First, it would force redeeming
shareholders to pay for the cost of their
liquidity during periods of severe
market stress when liquidity is
particularly costly. Such a requirement
could create an incentive against
shareholders participating in a run on a
fund facing potential losses of certain
sizes because shareholders will incur
greater losses if they redeem.517 It thus
516 See
FSOC Proposed Recommendations, supra
note 114, at section V.B.
517 See, e.g., Gordon FSOC Comment Letter, supra
note 159 (‘‘[T]he Minimum Balance at Risk feature
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may reduce the amount of less liquid
securities that funds would need to sell
in the secondary markets at unfavorable
prices to satisfy redemptions and
therefore may increase stability in the
short-term financing markets.
Second, it would allocate liquidity
costs to investors demanding liquidity
when the fund itself is under severe
stress. This would be accomplished
primarily by making redeeming
shareholders bear first losses when the
fund first depletes its buffer and then
the fund’s value falls below its stable
share price within 30 days after their
redemption. Redeeming shareholders
subject to the holdback are the ones
whose redemptions may have
contributed to fund losses if securities
are sold at fire sale prices to satisfy
those redemptions. If the fund sells
assets to meet redemptions, the costs of
doing so would be incurred while the
redeeming investor is still in the fund
because of the delay in redeeming his or
her holdback shares. Essentially,
investors would face a choice between
redeeming to preserve liquidity and
remaining invested in the fund to
protect their principal.
Third, an MBR would provide the
fund with 30 days to obtain cash to
satisfy the holdback portion of a
shareholder’s redemption. This may
give the fund time for distressed
securities to recover when, for example,
the market has acquired additional
information about the ability of the
issuer to make payment upon maturity.
As of February 28, 2013, 43% of prime
money market fund assets had a
maturity of 30 days or less.518 Thus, an
MBR would provide time for potential
losses in fund portfolios to be avoided
since distressed securities could trade at
a heavy discount in the market but may
ultimately pay in full at maturity. This
added resiliency could not only benefit
the fund and its investors, but it also
could reduce the contagion risk that a
run on a single fund can cause when
assets are correlated across the money
market fund industry.
ii. Costs of a Minimum Balance at Risk
There are a number of drawbacks to
an MBR requirement. It forces
shareholders that redeem more than
97% of their assets to pay for any losses,
if incurred, on the entire portfolio on a
ratable basis. Rather than simply
delaying redemption requests, the
contingent nature of the way losses are
distributed among shareholders forces
is a novel way to reduce MMF run risk by imposing
some of the run costs on the users of MMFs.’’).
518 Based on Form N–MFP data, with maturity
determined in the same manner as it is for purposes
of computing the fund’s weighted average life.
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early redeeming investors to bear the
losses they are trying to avoid.
As discussed in section II.B.2 above,
there is a tendency for a money market
fund to meet redemptions by selling
assets that are the most liquid and have
the smallest capital losses. Liquid assets
are sold first because managers can
trade at close to their non-distressed
valuations—they do not reflect large
liquidity discounts. Managers also tend
to sell assets whose market-based values
are close to or exceed amortized cost
because realized capital gains and losses
will be reflected in a fund’s shadow
price. Assets that are highly liquid will
not be sold at significant discounts to
fair value. Since the liquidity discount
associated with the sale of liquid assets
is smaller than that for illiquid assets,
shareholders can continue to
immediately redeem shares at $1.00 per
share under an MBR provided the fund
is capable of selling liquid assets. Once
a fund exhausts its supply of liquid
assets, it will sell less liquid assets to
meet redemption requests, possibly at a
loss. If in fact, assets are sold at a loss,
the stable value of the fund’s shares
could be impaired, motivating
shareholders to be the first to leave.
Therefore, even with a NAV buffer and
an MBR there continues to be an
incentive to redeem in times of fund
and market stress.519
The MBR, which applies to all
redemptions without regard to the
fund’s circumstances at the time of
redemption, constantly restricts some
portion of an investor’s holdings. Under
the resulting continuous impairment of
full liquidity, many current investors
who value liquidity in money market
funds may shift their investment to
other short-term investments that offer
higher yields or fewer restrictions on
redemptions. A reduction in the number
of money market funds and/or the
amount of money market fund assets
under management as a result of any
further money market fund reforms
would have a greater negative impact on
money market fund sponsors whose
fund groups consist primarily of money
market funds, as opposed to sponsors
that offer a more diversified range of
mutual funds or engage in other
financial activities (e.g., brokerage).
519 See, e.g., Comment Letter of Federated
Investors, Inc. (Dec. 17, 2012) (available in File No.
FSOC–2012–0003) (‘‘The data, analyses, surveys
and other commentary in the SEC’s docket show
convincingly that the MBR/capital proposal’s
impact in reducing runs is speculative and
unproven and in fact could and likely would
precipitate runs under certain circumstances.’’);
Schwab FSOC Comment Letter, supra note 171
(‘‘[I]t is not clear to us that holding back a certain
percentage of a client’s funds would reduce run
risk.’’)
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Given that money market funds’ largest
commercial paper exposure is to
issuances by financial institutions,520 a
reduction in the demand of money
market instruments may have an impact
on the ability of financial institutions to
issue commercial paper.521
The MBR will introduce additional
complexity to what to-date has been a
relatively simple product for investors
to understand. For example, requiring
shareholders that redeem more than
97% of their balances to bear the first
loss creates a cash flow waterfall that is
complex and that may be difficult for
retail investors to understand fully.522
Implementing an MBR could involve
significant operational costs. These
would include costs to convert existing
shares or issue new holdback and
subordinated holdback shares and
changes to systems that would allow
recordkeepers to account for and track
the MBR and allocation of unrestricted,
holdback or subordinated holdback
shares in shareholder accounts. We
expect that these costs would vary
significantly among funds depending on
a variety of factors. In addition, funds
subject to an MBR may have to amend
or adopt new governing documents to
issue different classes of shares with
quite different rights: Unrestricted
shares, holdback shares, and
subordinated holdback shares.523 The
costs to amend governing documents
would vary based on the jurisdiction in
which the fund is organized and the
amendment processes enumerated in
the fund’s governing documents,
520 See
supra Panel A in section III.E.
e.g., Wells Fargo FSOC Comment Letter,
supra note 342 (‘‘the MBR requirement would have
the anticipated impact of driving investors and
sponsors out of money market funds. We expect
that the resulting contraction of assets in the money
market fund industry would, in turn, have
disruptive effects on the short-term money markets,
decrease the supply of capital and/or raise the cost
of borrowing for businesses, states, municipalities
and other local governments that rely on money
market funds, and jeopardize the fragile state of the
economy and its long-term growth prospects.’’).
522 Several commenters have noted that the MBR
would be confusing to retail investors. See, e.g.,
Fidelity FSOC Comment Letter, supra note 295; T.
Rowe Price FSOC Comment Letter, supra note 290.
523 One commenter on the PWG Report suggested
that the MBR framework may be achieved by
issuing different classes of shares with conversion
features triggered by shareholder activity. See
Comment Letter of Federated Investors, Inc. (Mar.
16, 2012) (available in File No. 4–619) (‘‘Federated
March 2012 PWG Comment Letter’’). Multiple class
structures are common among funds offering
different arrangements for the payment of
distribution costs and related shareholder services.
Funds have also developed the operational capacity
to track and convert certain share classes to others
based on the redemption activity of the shareholder.
See Mutual Fund Distribution Fees; Confirmations,
Investment Company Act Release No. 29367 (July
21, 2010) [75 FR 47064 (Aug. 4, 2010)], at section
III.D.1.b.
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521 See,
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including whether board or shareholder
approval is necessary.524 The costs of
obtaining shareholder approval,
amending governing documents or
changing domicile would depend on a
number of factors, including the size
and the number of shareholders of the
fund.525
Overall, the complexity of an MBR
may be more costly for unsophisticated
investors because they may not fully
appreciate the implications. In addition,
money market funds and their
intermediaries (and money market fund
shareholders that have in place cash
management systems) could incur
potentially significant operational costs
to modify their systems to reflect a MBR
requirement. We believe that an MBR
coupled with a NAV buffer would turn
money market funds into a more
complex instrument whose valuation
may become more difficult for investors
to understand.
2. Alternatives in the PWG Report
a. Private Emergency Liquidity Facility
One option outlined in the PWG
Report is a private emergency liquidity
facility (‘‘LF’’) for money market
funds.526 One comment letter on the
PWG Report proposed a structure for
such a facility in some detail.527 Under
this proposal, the LF would be
organized as a state-chartered bank or
trust company. Sponsors of prime
money market funds would be required
to provide initial capital to the LF in an
amount based on their assets under
management up to 4.9% of the LF’s total
initial equity, but with a minimum
investment amount. The LF also would
charge participating funds commitment
fees of 3 basis points per year on fund
assets under management. Finally, at
the end of its third year, the LF would
issue to third parties time deposits
paying a rate approximately equal to the
3-month bank CD rate. The LF would be
524 See Federated Alternative 2 FSOC Comment
Letter, supra note 254 and Federated March 2012
PWG Comment Letter, supra note 523 (discussing
certain applicable state law requirements).
525 Other factors may include the concentration of
fund shares among certain shareholders, the
number of objecting beneficial owners and nonobjecting beneficial owners of street name
shareholders, whether certain costs can be shared
among funds in the same family, whether the fund
employs a proxy solicitor and the services the proxy
solicitor may provide, and whether the fund, in
connection with sending a proxy statement to
shareholders, uses the opportunity to have
shareholders vote on other matters. Other matters
that may be set forth in the proxy materials include
the election of directors, a change in investment
objectives or fundamental investment restrictions,
and fund reorganization or re-domicile.
526 See PWG Report, supra note 111, at 23–25.
527 See ICI Jan 2011 PWG Comment Letter, supra
note 473.
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designed to provide initially $7 billion
in backup redemption liquidity to prime
money market funds, $12.3 billion at the
end of the first year, $30 billion at the
end of five years, and $50–55 billion at
the end of year 10 (these figures take
into account the LF’s ability to expand
its capacity by borrowing through the
Federal Reserve’s discount window).
The LF would be leveraged at inception,
but would seek to achieve and maintain
a minimum leverage ratio of 5%. Each
fund would be able to obtain a
maximum amount of cash from the LF.
The LF would not provide credit
support. It would not provide liquidity
to a fund that had broken the buck or
would ‘‘break the buck’’ after using the
LF. There also would be eligibility
requirements for money market fund
access to the LF.
Participating funds would elect a
board of directors that would oversee
the LF, with representation from large,
medium, and smaller money market
fund complexes. The LF would have
restrictions on the securities that it
could purchase from funds seeking
liquidity and on the LF’s investment
portfolio. The LF would be able to
pledge approved securities (less a
haircut) to the Federal Reserve discount
window. We note that the interaction
with the Federal Reserve discount
window (as well as the bank structure
of the LF) means that the Commission
does not have regulatory authority to
create the LF.
An LF could lessen and internalize
some of the liquidity risk of money
market funds that contributes to their
vulnerability to runs by acting as a
purchaser of last resort if a liquidity
event is triggered. It also could create
efficiency gains by pooling this liquidity
risk within the money market fund
industry.528
Commenters on the PWG Report
addressing this option generally
supported the concept of the LF, stating
that it would facilitate money market
funds internalizing the costs of liquidity
and other risks associated with their
operations through the cost of
participation. In addition, such a facility
could reduce contagion effects by
limiting the need for fire sales of money
market fund assets to satisfy redemption
pressures.529
528 The liquidity facility would function in a
fashion similar to private deposit insurance for
banks. For the economics of using a liquidity
facility to stop runs, see Diamond & Dybvig, supra
note 510.
529 See, e.g., ICI Jan 2011 PWG Comment Letter,
supra note 473; Dreyfus PWG Comment Letter,
supra note 473; Federated Jan 2011 PWG Comment
Letter, supra note 472.
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However, several commenters
expressed reservations regarding this
reform option. For example, one
commenter supported ‘‘the idea’’ of
such a facility ‘‘in that it could provide
an incremental liquidity cushion for the
industry,’’ but noted that ‘‘it is difficult
to ensure that [a liquidity facility] with
finite purchasing capacity is fairly
administered in a crisis. . . . [which]
could lead to [money market funds]
attempting to optimize the outcome for
themselves, rather than working
cooperatively to solve a systemic
crisis.’’ 530 This commenter also stated
that shared capital ‘‘poses the danger of
increased risk-taking by industry
participants who believe that they have
access to a large collective pool of
capital.’’ 531 Another commenter, while
‘‘receptive to a private liquidity
facility,’’ expressed concern that the
facility itself might be vulnerable to
runs if the facility raises funding
through the short-term financing
markets.532 This commenter also noted
other challenges in designing such a
facility, including governance issues
and ‘‘the fact that because of its size, the
liquidity facility would only be able to
address the liquidity needs of a very
limited number of funds and would not
be able to meet the needs of the entire
industry in the event of a run.’’ 533
Another commenter expressed concerns
that ‘‘the costs, infrastructure and
complications associated with private
liquidity facilities are not worth the
minimal liquidity that would be
provided.’’ 534 Finally, another
commenter echoed this concern, stating:
[a private liquidity facility] cannot possibly
eliminate completely the risk of breaking the
buck without in effect eliminating maturity
transformation, for instance through the
imposition of capital and liquidity standards
on the private facilities. Thus, in the case of
a pervasive financial shock to asset values,
[money market fund] shareholders will
almost certainly view the presence of private
facilities as a weak reed and widespread runs
are likely to develop. In turn, government aid
is likely to flow. Because shareholders will
expect government aid in a pervasive
financial crisis, shareholder and [money
market fund] investment decisions will be
distorted. Therefore, we view emergency
530 BlackRock
PWG Comment Letter, supra note
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473.
531 Id. In the case of deposit insurance, bank
capital is used to overcome the moral hazard
problem of excessive risk taking. See, e.g., Berger,
supra note 509; Michael C. Keeley & Frederick T.
Furlong, A Reexamination of Mean-Variance
Analysis of Bank Capital Regulation, 14 J. of
Banking and Fin. 69 (1990).
532 Wells Fargo PWG Comment Letter, supra note
475.
533 Id.
534 Fidelity Jan 2011 PWG Comment Letter, supra
note 473.
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facilities as perhaps a valuable enhancement,
but not a reliable overall solution either to
the problem of runs or to the broader
problem of distorted investment decisions.535
A private liquidity facility was also
discussed at the 2011 Roundtable,
where many participants made points
and expressed concerns similar to those
discussed above.536
We have considered these comments,
and our staff has spent considerable
time evaluating whether an LF would
successfully mitigate the risk of runs in
money market funds and change the
economic incentives of market
participants. We have determined not to
pursue this option further for a number
of reasons, foremost because we are
concerned that a private liquidity
facility would not have sufficient
purchasing capacity in the event of a
widespread run without access to the
Federal Reserve’s discount window and
we do not have legal authority to grant
discount window access to an LF.
Access to the discount window would
raise complicated policy considerations
and likely would require legislation.537
In addition, such a facility would not
protect money market funds from
capital losses triggered by credit events
as the facility would purchase securities
at the prevailing market price. Thus, we
are concerned that such a facility
535 Richmond Fed PWG Comment Letter, supra
note 139.
536 See, e.g., Roundtable Transcript, supra note 43
(Brian Reid, Investment Company Institute)
(discussing the basic concept for a private liquidity
facility as proposed by the Investment Company
Institute and its potential advantages providing
additional liquidity to money market funds when
market makers were unwilling or unable to do so);
(Paul Tucker, Bank of England) (discussing the
potential policy issues involved in the Federal
Reserve extending discount window access to such
a facility); (Daniel K. Tarullo, Federal Reserve
Board) (discussing the potential policy issues
involved in the Federal Reserve extending discount
window access to such a facility); (Jeffrey A.
Goldstein, Department of Treasury) (questioning
whether there were potential capacity issues with
such a facility); (Sheila C. Bair, Federal Deposit
Insurance Corporation) (stating her belief that ‘‘the
better approach would be to try to reduce or
eliminate the systemic risk, as opposed to just kind
of acknowledge it’’ and institutionalize a ‘‘bailout
facility’’ in a way that would exacerbate moral
hazard).
537 See, e.g., id. (Paul Tucker, Bank of England)
(‘‘As I understand it, this is a bank whose sole
purpose is to stand between the Federal Reserve
and the money market mutual fund industry. If I
think about that as a central banker, I think ‘So, I’m
lending to the money market mutual fund industry.’
What do I think about the regulation of the money
market mutual fund industry? . . . And the other
thought I think I would have is . . . ‘If the money
market mutual fund industry can do this, what’s to
stop other parts of our economy doing this and
tapping into the special ability of the central bank
to create liquidity’ . . . It’s almost to bring out the
enormity of the idea that you have floated . . . it’s
posing very big questions indeed, about who should
have direct access and to the nature of the monetary
economy.’’)
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without additional loss protection
would not sufficiently prevent
widespread runs on money market
funds.
We also are concerned about the
conflicts of interest inherent in any such
facility given that it would be managed
by a diverse money market fund
industry, not all of whom may have the
same interests at all times. Participating
money market funds would be of
different sizes and the governance
arrangements would represent some
fund complexes and not others. There
may be conflicts relating to money
market funds whose nature or portfolio
makes them more or less likely to ever
need to access the LF. The LF may face
conflicts allocating limited liquidity
resources during a crisis, and choosing
which funds gain access and which do
not. To be successful, an LF would need
to be managed such that it sustains its
credibility, particularly in a crisis, and
does not distort incentives in the market
to favor certain business models or
types of funds.
These potential issues collectively
created a concern that such a facility
may not prove effective in a crisis and
thus we would not be able to achieve
our regulatory goals of reducing money
market funds’ susceptibility to runs and
the corresponding impacts on investor
protection and capital formation.
Combined with our lack of authority to
create an LF bank with access to the
Federal Reserve’s discount window,
these concerns ultimately have led us to
not pursue this alternative.
b. Insurance
We also considered whether money
market funds should be required to
carry some form of public or private
insurance, similar to bank accounts that
carry Federal Deposit Insurance
Corporation deposit insurance, which
has played a central role in mitigating
the risk of runs on banks.538 The
Treasury’s Temporary Guarantee
Program helped slow the run on money
market funds in September 2008, and
thus we naturally considered whether
some form of insurance for money
market fund shareholders might
mitigate the risk of runs in money
market funds and their detrimental
impacts on investors and capital
formation.539 Insurance might replace
538 See generally Charles W. Calomiris, Is Deposit
Insurance Necessary? A Historical Perspective, 50 J.
Econ. Hist. 283 (1990); Rita Carisano, Deposit
Insurance: Theory, Policy and Evidence (1992);
Diamond & Dybvig, supra note 510.
539 Authority for a guarantee program like the
Temporary Guarantee Program for Money Market
Funds has since been removed. See Emergency
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money market funds’ historical reliance
on discretionary sponsor support, which
has covered capital losses in money
market funds in the past but, as
discussed above, also contributes to
these funds’ vulnerability to runs.
While a few commenters expressed
some support for a system of insurance
for money market funds,540 most
commenters opposed this potential
reform option.541 Commenters
expressed concern that government
insurance would create moral hazard
and encourage excessive risk taking by
funds.542 They also asserted that such
insurance could distort capital flows
from bank deposits or government
money market funds into prime money
market funds, and that this
disintermediation could and likely
would cause significant disruption to
the banking system and the money
market.543 For example, one commenter
stated that:
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‘‘If the insurance program were partial (for
example, capped at $250,000 per account),
many institutional investors likely would
invest in this partially insured product rather
than directly in the market or in other cash
pools because the insured funds would offer
liquidity, portfolios that were somewhat less
risky than other pools, and yields only
slightly lower than alternative cash pools.
Without insurance covering the full value of
investors’ account balances, however, there
would still be an incentive for these investors
to withdraw the uninsured portion of their
Economic Stabilization Act of 2008 § 131(b), 12
U.S.C. § 5236 (2008) (prohibiting the Secretary of
Treasury from using the Exchange Stabilization
Fund for the establishment of any future guaranty
programs for the U.S. money market fund industry).
540 See, e.g., Richmond Fed PWG Comment
Letter, supra note 139 (stating that insurance would
be a second best solution for mitigating the risk of
runs in money market funds after a floating net
asset value because insurance premiums and
regulation are difficult to calibrate correctly, so
distortions would likely remain); Comment Letter of
Paul A. Volcker (Feb. 11, 2011) (available in File
No. 4–619) (‘‘Volcker PWG Comment Letter’’)
(stating that money market funds wishing to retain
a stable net asset value should reorganize as special
purpose banks or ‘‘submit themselves to capital and
supervisory requirements and FDIC-type insurance
on the funds under deposit’’).
541 See, e.g., Comment Letter of the American
Bankers Association (Jan. 10, 2011) (available in
File No. 4–619) (‘‘American Bankers PWG Comment
Letter’’); BlackRock PWG Comment Letter, supra
note 473; Dreyfus PWG Comment Letter, supra note
473; Fidelity Jan 2011 PWG Comment Letter, supra
note 473; Wells Fargo PWG Comment Letter, supra
note 475; ’’); Comment Letter of John M. Winters
(Jan. 5, 2011) (available in File No. 4–619)
(‘‘Winters PWG Comment Letter’’).
542 See, e.g., American Bankers PWG Comment
Letter, supra note 541; BlackRock PWG Comment
Letter, supra note 473; ICI Jan 2011 PWG Comment
Letter, supra note 473; Wells Fargo PWG Comment
Letter, supra note 475.
543 See, e.g., ICI Jan 2011 PWG Comment Letter,
supra note 473; Wells Fargo PWG Comment Letter,
supra note 475.
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assets from these funds during periods of
severe market stress.’’ 544
Commenters stated that with respect
to private insurance, it has been made
available in the past but the product
proved unsuccessful due to its cost and
in the future would be too costly.545
They also stated that they did not
believe any private insurance coverage
would have sufficient capacity.546
Given these comments, combined
with our staff’s analysis of this option,
and considering that we do not have
regulatory authority to create a public
insurance scheme for money market
funds, we are not pursuing this option
as it does not appear that it would
achieve our goal, among others, of
materially reducing the contagion
effects from heavy redemptions at
money market funds without undue
costs. We have made this determination
based on money market fund
insurance’s potential for creating moral
hazard and encouraging excessive risktaking by money market funds, given
the difficulties and costs involved in
creating effective risk-based pricing for
insurance and additional regulatory
structure to offset this incentive.547 If
insurance actually increases moral
hazard and decreases corresponding
market discipline, it may in fact
increase rather than decrease money
market funds’ susceptibility to runs. If
the only way to counter these incentives
was by imposing a very costly
regulatory structure and risk-based
pricing system our proposed
alternatives potentially offer a better
ratio of benefits to associated costs.
Finally, we were concerned with the
difficulty of creating private insurance
at an appropriate cost and of sufficient
capacity for a several trillion-dollar
industry that tends to have highly
correlated tail risk. All of these
considerations have led us to not pursue
this option further.
c. Special Purpose Bank
We also evaluated whether money
market funds should be regulated as
special purpose banks. Stable net asset
value money market fund shares can
544 ICI
Jan 2011 PWG Comment Letter, supra note
473.
545 See, e.g., BlackRock PWG Comment Letter,
supra note 473; Fidelity Jan 2011 PWG Comment
Letter, supra note 473; Dreyfus PWG Comment
Letter, supra note 473; Wells Fargo PWG Comment
Letter, supra note 475; Winters PWG Comment
Letter, supra note 541.
546 See, e.g., BlackRock PWG Comment Letter,
supra note 473; Fidelity Jan 2011 PWG Comment
Letter, supra note 473; Wells Fargo PWG Comment
Letter, supra note 475; Winters PWG Comment
Letter, supra note 541.
547 See, e.g., Yuk-Shee Chan et al., Is Fairly Priced
Deposit Insurance Possible?, 47 J. Fin. 227 (1992).
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bear some similarity to bank deposits.548
Some aspects of bank regulation could
be used to mitigate some of the risks
described in section II above.549 Money
market funds could benefit from access
to the special purpose bank’s capital,
government deposit insurance and
emergency liquidity facilities from the
Federal Reserve on terms codified and
well understood in advance, and thus
with a clearer allocation of risks among
market participants.
As the PWG Report noted, and as
commenters reinforced, there are a
number of drawbacks to regulating
money market funds as special purpose
banks. While a few commenters
expressed some support for this
option,550 almost all commenters on the
PWG Report addressing this possible
reform option opposed it.551 Some
commenters stated that the costs of
converting money market funds to
special purpose banks would likely be
large relative to the costs of simply
allowing more of this type of cash
management activity to be absorbed into
the existing banking sector.552 Others
expressed concern that regulating
money market funds as special purpose
banks would radically change the
product, make it less attractive to
investors and thereby have unintended
consequences potentially worse than the
mitigated risk, such as leading
sophisticated investors to move their
funds to unregulated or offshore money
market fund substitutes and thereby
limiting the applicability of the current
money market fund regulatory regime
and creating additional systemic risk.553
For example, one of these commenters
548 See
supra note 511 and accompanying text.
549 Id.
550 See Volcker PWG Comment Letter, supra note
540 (‘‘MMMFs that desire to offer their clients banklike transaction services . . . and promises of
maintaining a constant or stable net asset value
(NAV), should either be required to organize
themselves as special purpose banks or submit
themselves to capital and supervisory requirements
and FDIC-type insurance on funds under deposit.’’);
Winters PWG Comment Letter, supra note 541
(supporting it as the third best option, stating that
‘‘[a]s long as the federal government continues to
be the only viable source of large scale back-up
liquidity for MMFs, it is intellectually dishonest to
pretend that MMFs are not the functional
equivalent of deposit-taking banks. Thus, inclusion
in the federal banking system is warranted.’’).
551 See, e.g., BlackRock PWG Comment Letter,
supra note 473; Fidelity Jan. 2011 PWG Comment
Letter, supra note 473; ICI Jan. 2011 PWG Comment
Letter, supra note 473; Comment Letter of the
Institutional Money Market Funds Association (Jan.
10, 2011) (available in File No. 4–619).
552 See, e.g., Richmond Fed PWG Comment
Letter, supra note 139; ICI Jan. 2011 PWG Comment
Letter, supra note 473.
553 See, e.g., Comment Letter of the Mutual Fund
Directors Forum (Jan. 10, 2011) (available in File
No. 4–619); Fidelity Jan. 2011 PWG Comment
Letter, supra note 473; ICI Jan. 2011 PWG Comment
Letter, supra note 473.
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stated that transforming money market
funds into special purpose banks would
create homogeneity in the financial
regulatory scheme by relying on the
bank business model for all short-term
cash investments and that ‘‘[g]iven the
unprecedented difficulties the banking
industry has experienced recently, it
seems bizarre to propose that [money
market funds] operate more like banks,
which have absorbed hundreds of
billions of dollars in government loans
and handouts.’’ 554 Some pointed to the
differences between banks and money
market funds as justifying different
regulatory treatment, and expressed
concern that concentrating investors’
cash management activity in the
banking sector could increase systemic
risk.555
The potential costs involved in
creating a new special purpose bank
regulatory framework to govern money
market funds do not seem justified. In
addition, given our view that money
market funds have some features similar
to banks but other aspects quite
different from banks, applying
substantial parts of the bank regulatory
regime to money market funds does not
seem as well tailored to the structure of
and risks involved in money market
funds compared to the reforms we are
proposing in this Release. After
considering our lack of regulatory
authority to transform money market
funds into special purpose banks as well
as the views expressed in these
comment letters and our staff’s analysis
of these matters and for the reasons set
forth above, we are not pursuing a
reform option of transforming money
market funds into special purpose
banks.
d. Dual Systems of Money Market Funds
We evaluated options that would
institute a dual system of money market
funds, where either institutional money
market funds or money market funds
using a stable share price would be
subject to more stringent regulation than
others. As discussed in the PWG
Report,556 money market fund reforms
could focus on providing enhanced
regulation solely for money market
funds that seek to maintain a stable net
asset value, rather than a floating NAV.
Enhanced regulations could include any
of the regulatory reform options
discussed above such as mandatory
insurance, a private liquidity facility, or
special purpose bank regulation. Money
554 Fidelity Jan. 2011 PWG Comment Letter, supra
note 473.
555 See, e.g., Fidelity Jan. 2011 PWG Comment
Letter, supra note 473; ICI Jan. 2011 PWG Comment
Letter, supra note 473.
556 See PWG Report, supra note 111, at 29–32.
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market funds that did not comply with
these enhanced constraints would have
a floating NAV (though they would still
be subject to the other risk limiting
conditions contained in rule 2a–7).
There also may be other enhanced
forms of regulation or other types of
dual systems. For example, an
alternative formulation of this
regulatory regime would apply the
enhanced regulatory constraints
discussed above (e.g., a private liquidity
facility or insurance) only to
‘‘institutional’’ money market funds,
and ‘‘retail’’ money market funds would
continue to be subject to rule 2a–7 as it
exists today. We note that our proposals
to exempt retail and government money
market funds from any floating NAV
requirement and to exempt government
money market funds from any fees and
gates requirement in effect creates a
dual system.
These dual system regulatory regimes
for money market funds could provide
several important benefits. They attempt
to apply the enhanced regulatory
constraints on those aspects of money
market funds that most contribute to
their susceptibility to runs—whether it
is institutional investors that have
shown a tendency to run or a stable net
asset value created through the use of
amortized cost valuation that can create
a first mover advantage for those
investors that redeem at the first signs
of potential stress. A dual system that
imposes enhanced constraints on stable
net asset value money market funds
would allow investors to choose their
preferred mixture of stability, risk, and
return.
Because insurance, special purpose
banks, and the private liquidity facility
generally are beyond our regulatory
authority to create, these particular dual
options, which would impose one of
these regulatory constraints on a subset
of money market funds, could not be
created under our current regulatory
authority. Other options, such as
requiring a floating NAV or liquidity
fees and gates only for some types of
money market funds, however, could be
imposed under our current authority
and are indeed proposed.
Each of these dual systems generally
has the same advantages and
disadvantages as the potential enhanced
regulatory constraints that would be
applied, described above. In addition,
for any two-tier system of money market
fund regulation to be effective in
reducing the risk of contagion effects
from heavy redemptions, investors
would need to fully understand the
difference between the two types of
funds and their associated risks. If they
did not, they may indiscriminately flee
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36913
both types of money market funds even
if only one type experiences
difficulty.557
A dual system approach also would
allow the Commission to tailor its
reforms to the particular areas of the
money market fund industry that are of
most concern (e.g., funds operating with
a stable NAV or institutional funds or
accounts). Given the difficulties,
drawbacks, and limitations on our
regulatory authority associated with
dual systems involving a special
purpose bank, private liquidity facility
and insurance, we are not pursuing
creating a dual system of money market
fund regulation involving these
enhanced regulatory constraints at this
time. However, as noted above, our
current proposal would to some extent
create a dual system of money market
funds, and we request comment on
other potential dual systems that are
within our regulatory authority.
E. Macroeconomic Effects of the
Proposals
In this section, we analyze the macroeconomic consequences of our floating
NAV and liquidity fees and gates
proposals, as well as some of their
effects on efficiency, competition, and
capital formation. We also examine the
potential implications of these
proposals on current investments in
money market funds and on the shortterm financing markets.558 The baseline
for these analyses (and all of our
economic analysis in this Release) is
money market fund investment and the
short-term financing markets, as they
exist today.559
Our proposals should provide a
number of benefits and positive effects
on competition, efficiency, and capital
formation. As discussed in detail earlier
in this Release, we have designed both
557 For example, when The Reserve Primary Fund
broke the buck in September 2008, all money
market funds managed by Reserve Management
Company, Inc. experienced runs, even the Reserve
U.S. Government Fund, despite the fact that the
Reserve U.S. Government Fund had a quite
different risk profile. See Press Release, A
Statement Regarding The Reserve Primary and U.S.
Government Funds (Sept. 19, 2008) available at
https://www.primary-yieldplus-inliquidation.com/
pdf/PressReleasePrimGovt2008_0919.pdf (‘‘The
U.S. Government Fund, which had approximately
$10 billion in assets under management at the
opening of business on September 15, 2008, has
received redemption requests this week of
approximately $6 billion.’’).
558 In supra sections III.A and III.B we discuss the
specific benefits and costs associated with the two
alternative reform proposals, and we discuss later
in this Release the specific economic analysis of
other aspects of our proposals. The specific
operational costs of implementing the reform
proposals are discussed in each respective section.
559 See Panels A, B and C later in this section for
certain recent data regarding money market fund
investment and the short-term financing markets.
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of our proposals to improve the
transparency of money market funds’
risks and lessen the incentives for
investors to redeem shares in times of
fund or market stress. The floating NAV
proposal is designed to address the
incentive created today by money
market funds’ stable values for
shareholders to redeem fund shares
when the funds’ market-based NAVs are
below their intended stable price. That
proposal is also designed to reduce the
likelihood that funds would experience
heavy redemptions in times of stress, by
acclimatizing investors to expect small
fluctuations in the fund’s share price
over time, which could reduce the
chances that investors will redeem in
the face of market stress or stress on the
money market fund. However, for those
funds that do not qualify for the
proposed retail or government
exemptions to the floating NAV, this
alternative would come at the cost of
removing many of the benefits to
investors that are the result of a fund
being able to maintain a stable share
price through the rounding conventions
of rule 2a–7. A floating NAV also may
not deter heavy redemptions from
certain types of money market funds
(e.g., prime money market funds) in
times of stress if shareholders engage in
a flight to quality, liquidity or
transparency.
The liquidity fees and gates
alternative would preserve the benefits
of the stable price per share that
shareholders currently enjoy, but it
would do so at the cost of potentially
reducing (or making more costly)
shareholder liquidity in certain
circumstances. The liquidity fees and
gates proposal is designed to protect
fund shareholders that remain invested
in a fund from bearing the liquidity
costs of shareholders that exit a fund
when the funds’ liquidity is under
stress. Redeeming fund shareholders
receive the benefits of a fund’s liquidity,
which in times of stress may have the
effect of imposing costs on the
shareholders remaining in the fund. The
liquidity fees and gates proposal would
address this risk. The proposal also is
designed to better position a money
market fund to withstand heavy
redemptions. A fund’s board would be
permitted to impose a gate when the
fund is under stress, which would
provide time for a panic to subside; for
the fund’s portfolio securities to mature
and provide internal liquidity to meet
redemptions; and for fund managers to
assess the appropriate strategy to meet
redemptions. Liquidity fees also could
lessen investors’ incentives to redeem
and require investors to evaluate and
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price their liquidity needs. The fees and
gates proposal, however, would not
fully eliminate the incentive to quickly
redeem in times of stress, because
redeeming shareholders would retain an
economic advantage over shareholders
that remain in a fund if they redeem
when the costs of liquidity are high, but
the fund has not yet imposed a fee or
gate. Also, by their nature, liquidity fees
and redemption gates, if imposed,
increase costs on shareholders who seek
to redeem fund shares.
Both of these proposals are intended,
in different ways, to stabilize funds in
times of stress. Thus, the proposals are
designed to reduce the likelihood and
associated costs of any contagion effects
from heavy redemptions in money
market funds to other money market
funds, the short-term financing markets,
and other parts of the economy.
Nevertheless, we recognize that the
expected benefits of the proposals may
be accompanied by some adverse effects
on the short-term financing markets for
issuers, and may affect the level of
investment in money market funds that
would be subject to the proposals. The
magnitude of these effects, including
any effects on competition, efficiency,
and capital formation, would depend on
the extent to which investors reallocate
their investments within the money
market fund industry and on the extent
to which investors reallocate their
investments between money market
funds and alternatives outside the
money market fund industry. We
anticipate that the adverse effects on
investment in money market funds and
the short-term financing markets for
debt issuers would be small if either
relatively little money is reallocated, or
if the alternatives to which investors
reallocate their cash invest in securities
similar to those previously held by the
money market funds. Conversely, the
effects on investment in money market
funds and the short-term financing
markets would be larger if a substantial
amount of money is reallocated to
alternatives and those alternatives
invest in securities of a different type
from those previously held by money
market funds.
1. Effect on Current Investment in
Money Market Funds
The popularity of money market
funds today indicates they compete
favorably with other investment
alternatives. As of February 28, 2013, all
money market funds had approximately
$2.9 trillion in assets under
management while government money
market funds had approximately $929
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billion under management.560 Money
market funds that self-report as retail
prime money market funds held
approximately $497 billion in assets
under management and tax-exempt
money market funds held
approximately $277 billion in assets
under management. We do not know
how many of these funds would qualify
for our proposed retail exemption from
the floating NAV requirement.561
If we were to adopt either of the
alternatives we are proposing today,
current money market fund investors
would likely consider the tradeoffs
involved of investing in a money market
fund subject to our proposals. Investors
may decide to remain invested in
money market funds subject to either a
floating NAV or liquidity fees and gates,
or they may choose to invest in a money
market fund that is exempt from our
proposed reforms (such as a government
money market fund, or for the floating
NAV proposal, a retail fund), invest
directly in short-term debt instruments,
hold cash in a bank deposit account,
invest in one of the few alternative
diversified investments products that
maintains a stable value (such as certain
unregistered private funds), or invest in
other products that fluctuate in value,
such as ultra-short bond funds.
Money market funds under either of
our proposals, like money market funds
today, would compete against many
investment alternatives for investors’
assets. Our proposals, by increasing
transparency and reducing the incentive
for investors to redeem shares ahead of
other investors in times of stress, could
increase the attractiveness of money
market funds in the long term for
investors who value this aspect of our
reforms, potentially offsetting the loss of
some money market fund investors that
may occur in the short term if we were
to adopt either proposal, and enhancing
competition. The proposals could also
increase competition as investors
become more aware of certain aspects of
the industry and funds respond to meet
investors’ preferences. Our proposals
also could increase allocative
efficiency 562 by not only increasing
transparency of the underlying risks of
money market fund investing, but also
by making it harder for one group of
investors to impose disproportionate
costs on another group.563 In particular,
560 Based
on Form N–MFP data.
on iMoneyNet data as of April 16, 2013.
562 Allocative efficiency refers to investors
allocating their funds to the most suitable
investments on efficient terms, taking all relevant
factors into account.
563 Some commenters have noted the potential for
inequitable treatment of shareholders under the
stable NAV model. See, e.g., Better Markets FSOC
561 Based
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the floating NAV proposal requires
investors to bear day-to-day losses and
gains, and the liquidity fees and gates
proposal requires investors to bear their
liquidity costs when liquidity is
particularly costly. Today, money
market funds’ day-to-day market-based
losses and gains and any liquidity costs
generally are not borne by redeeming
investors because investors buy and sell
money market fund shares at their stable
$1.00 share price absent a break-thebuck event. In addition, as discussed in
section III.F below, our proposal would
require that money market fund
sponsors disclose their support of funds,
which also would advance investor
understanding of the risk of loss in
money market funds and thus may
advance allocative efficiency if investors
make better investment decisions as a
result.
If we were to adopt reforms to money
market funds, investors may withdraw
some of their assets from affected money
market funds. We believe that investors
may withdraw more assets under the
floating NAV proposal than they would
under the liquidity fees and gates
alternative because the floating NAV
proposal may have a more significant
effect on investors’ day-to-day
experience with and use of money
market funds than the liquidity fees and
gates alternative and because many
investors place great value on principal
stability in a money market fund.564 It
is important to note, however, that
investors that hold shares of money
market funds not subject to our
proposed reform alternatives (such as
government money market funds, or
under our floating NAV proposal, retail
money market funds) may not
experience outflows if we were to adopt
the proposed reforms to money market
funds because those funds would
continue to be able to maintain a stable
price under our floating NAV proposal.
These exempt funds may even
experience inflows of assets if investors
Comment Letter, supra note 67 (stating that ‘‘an
investor that succeeds in redeeming early in a
downward spiral may receive more than they
deserve in the sense that they liquidate at $1.00 per
share even though the underlying assets are actually
worth less. Without a sponsor contribution or other
rescue, that differential in share value is paid by the
shareholders remaining in the fund, who receive
less not only due to declining asset values but also
because early redeemers received more than their
fair share of asset value.’’); Comment Letter of
Wisconsin Bankers Association (Feb. 15. 2013)
(available in File No. FSOC–2012–0003) (stating
that ‘‘[a] floating NAV has the benefits of . . .
reducing the possibilities for transaction activity
that results in non-equitable treatment across all
shareholders’’). See also supra section II.B.1.
564 See, e.g., infra note 565 and accompanying
discussion.
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reallocate their investments to such
stable price funds.
We understand that many money
market fund investors value both price
stability and share liquidity.565 Because
of the exemptions to the alternatives
that we are proposing, under either the
floating NAV or liquidity fees and gates
proposal, investors will still be able to
invest in certain money market funds
that can continue to offer both price
stability and unrestricted liquidity.
Investors that value yield over these two
features will be able to invest in prime
money market funds, or if they are able
to accept the daily redemption limits,
retail money market funds. The key
change under this proposal is that
investors will have to prioritize their
preference for these characteristics as
they make their investment decisions
because under our proposal, money
market funds not subject to an
exemption will, depending on the
alternative adopted, suffer some
diminution in principal stability,
liquidity, or yield.
For those money market funds that
would be required to use floating NAVs
or to consider imposing liquidity fees
and gates, there may be shifts in asset
allocations not only among funds in the
money market fund industry but also
into alternative investment vehicles. We
currently do not have a basis for
estimating under either reform
alternative the number of investors that
might reallocate assets, the magnitude of
the assets that might shift, or the likely
investment alternatives because we do
not know how investors will weigh the
tradeoffs involved in reallocating their
investments to alternatives. We request
comment on these issues below.
As discussed in sections III.A and
III.B above, we anticipate some
institutional investors would not or
565 Many of the comments received by FSOC
stressed the importance of price stability and
liquidity to many investors. See, e.g., Steve Morgan
FSOC Comment Letter, supra note 290 (‘‘The stable
share price and liquid access to investors’ money
are key features of MMFs.’’); Comment Letter of
James White (Jan. 11, 2013) (available in File No.
FSOC–2012–0003) (‘‘Stability, convenience, and
liquidity—including the stable share price and
ability to access 100 percent of their money—are
what draw investors to MMFs.’’); Comment Letter
of The SPARK Institute (Jan. 18, 2013) (available in
File No. FSOC–2012–0003) (‘‘Money market funds
with a stable [NAV] serve important functions in
the operation and administration of defined
contribution retirement plans (e.g., 401(k) plans) as
convenient, cost-effective, simple, stable and liquid
cash management tools.’’); Comment Letter of
Association for Financial Professionals (Jan. 22,
2013) (available in File No. FSOC–2012–0003) (‘‘For
a large number of institutional investors, the
potential of principal loss would preclude investing
in floating NAV MMFs’’); Comment Letter of
Independent Directors Council (Jan. 23, 2013)
(available in File No. FSOC–2012–0003); Invesco
FSOC Comment Letter, supra note 192.
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could not invest in a money market
fund that does not offer principal
stability or that has restrictions on
redemptions. We do expect that more
institutional investors would be
unwilling to invest in a floating NAV
money market fund than a money
market fund that might impose a fee or
gate because a floating NAV would have
a persistent effect on investors’
experience in a money market fund.
These investors also may be unwilling
to incur the operational and other costs
and burdens discussed above that
would be necessary to use floating NAV
money market funds. One survey
concluded, among other things, that if
the Commission were to require money
market funds to use floating NAVs, 79%
of the 203 corporate, government, and
institutional investors that responded to
the survey would decrease their money
market fund investments or stop using
the funds.566 Similarly, a 2012 liquidity
survey found that up to 77% of the 391
organizations that responded to the
survey would be less willing to invest
in floating NAV money market funds,
and/or would reduce or eliminate their
money market fund holdings if the
Commission were to require the funds
to use floating NAVs.567 We also
566 See ICI Apr 2012 PWG Comment Letter, supra
note 62. According to this survey, if the
Commission were to require money market funds to
use floating NAVs: (i) 21% of the surveyed
respondents would continue using funds at the
same level; and (ii) 79% would either decrease use
or discontinue altogether. Treasury Strategies,
which conducted the survey, estimates that ‘‘money
market fund assets held by corporate, government
and institutional investors would see a net decrease
of 61%’’ based on its assessment of the survey
responses.
567 See 2012 AFP Liquidity Survey, supra note 73,
at 3 (201 corporate practitioner members of the
Association for Financial Professionals and 190
corporate practitioners who are not members
responded to the survey). See also, e.g., ICI Feb
2012 PWG Comment Letter, supra note 259
(describing a survey conducted by Treasury
Strategies Inc., a survey conducted by Harris
Interactive (commissioned by T. Rowe Price), and
a survey conducted by Fidelity); Dreyfus 2009
Comment Letter, supra note 350 (opposing a
floating NAV and stating that, after surveying 37 of
its largest institutional money market fund
shareholders (representing over $60 billion in
assets) regarding a floating NAV, 67% responded
that their business could not continue to invest in
a floating NAV product and that they would have
to seek an alternative investment option); Comment
Letter of National Association of State Treasurers
(Dec. 21, 2010) (available in File No. 4–619) (‘‘Nat.
Assoc. of State Treasurers PWG Comment Letter’’)
(opposing a floating NAV because, among other
reasons, ‘‘a floating NAV would push investors to
less regulated or non-regulated markets’’); Comment
Letter of the Association for Financial Professionals
(Jan. 10, 2011) (available in File No. 4–619) (‘‘AFP
Jan. 2011 PWG Comment Letter’’) (reporting results
of a survey of its members reflecting that four out
of five organizations would likely move at least
some of their assets out of money market funds if
the funds were required to use floating NAVs and
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understand that some institutional
investors currently are prohibited by
board-approved guidelines or internal
policies from investing certain assets in
money market funds that do not have a
stable value per share.568 Other
investors, including state and local
governments, may be subject to
statutory or regulatory requirements that
permit them to invest certain assets only
in funds that seek to maintain a stable
value per share.569 In these instances,
we anticipate monies would flow out of
prime money market funds and into
government money market funds or
alternate investment vehicles. This
would result in a contraction in the
prime money market fund industry,
thereby reducing the type and amount
of money market fund investments
available to investors and potentially
harming the ability of money market
funds to compete in several respects
affected by our proposal. The net effect
of this contraction would depend upon
the ability of investors to replicate the
pre-reform characteristics of money
market funds in alternative investments.
As of February 28, 2013, institutional
prime money market funds manage
approximately $974 billion in assets.570
As with government and retail funds,
however, we do not have a basis for
estimating the number of institutions
that might reallocate assets, the amount
of assets that might shift, or the likely
alternatives under either of our
proposals, because we do not know how
many of these investors face statutory or
other requirements that mandate
investment in a stable value product or
a product that will not restrict
redemptions or how these investors
would weigh the tradeoffs involved in
switching their investment to various
providing details as to the likely destinations);
Comment Letter of Federated Investors, Inc. (Feb.
24, 2012) (available in File No. 4–619) (stating that
many state laws would preclude trust investments
in money market funds with a floating NAV);
Roundtable Transcript, supra note 43 (Carol A
DeNale, (CVS Caremark) (‘‘I will not invest in a
floating NAV product. [. . . .] We will pull out of
money market funds, and I think that is the
consensus of the treasurers that I have talked to in
different meetings that I’ve been in, in group
panels.’’).
568 See, e.g., ICI Jan. 24 FSOC Comment Letter,
supra note 25; Wells Fargo FSOC Comment Letter,
supra note 342; Comment Letter of County
Commissioners Assoc. of Ohio (Dec. 21, 2012)
(available in File No. FSOC–2012–0003); Comment
Letter of the American Bankers Association (Sept.
8, 2009) (available in File No. S7–11–09); Fidelity
2009 Comment Letter, supra note 208; Comment
Letter of Goldman Sachs Asset Management, L.P.
(Sept. 8, 2009) (available in File No. S7–11–09);
Comment Letter of Treasury Strategies, Inc. (Sept.
8, 2009) (available in File No. S7–11–09).
569 Id.
570 Based on iMoneyNet data.
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alternative products. We request
comment on these issues below.
Investors that are unable or unwilling
to invest in a money market fund
subject to our proposed reforms would
have a range of investment options, each
offering a different combination of price
stability, risk exposure, return, investor
protections, and disclosure. For
example, some current money market
fund investors may manage their cash
themselves and, based on our
understanding of institutional investor
cash management practices, many of
these investors would invest directly in
securities similar to those held by
money market funds today. If so, our
proposal would not have a large
negative effect on capital formation.
Any desire to self-manage cash,
however, would likely be tempered by
the expertise required to invest in a
diversified portfolio of money market
securities directly and the costs of
investing in those securities given the
economies of scale that would be lost
when each investor has to conduct
credit analysis itself for each investment
(in contrast to money market funds
which could spread their credit analysis
costs for each security across their entire
shareholder base).571 Additionally,
these investors might find it difficult to
find appropriate investments that match
their specific cash flows available for
investment.
Shifts from reformed money market
funds to other investment alternatives
that could result from our proposals
likely would transfer certain risks from
money market funds to other markets
and institutions. Commenters have cited
to the fact that a shift of assets from
money market funds to bank deposits,
for example, would increase investors’
reliance on FDIC deposit insurance and
increase the size of the banking sector,
possibly increasing the concentration of
risk in banks.572 As discussed in the
RSFI Study, individual and business
holdings in checking deposits and
currency are large and have significantly
increased in recent years relative to
their holdings of money market fund
shares.573 The 2012 AFP Liquidity
Survey of corporate treasurers indicates
that bank deposits accounted for 51% of
the surveyed organizations’ short-term
investments in 2012, which is up from
25% in 2008.574 Money market funds
accounted for 19% of these
organizations’ short-term investments in
2012, down from 30% just a year earlier,
and down from almost 40% in 2008.575
This shift was likely motivated by the
availability of unlimited FDIC insurance
on non-interest bearing accounts
between the end of 2010 and January
2013.576 A further shift in assets from
money market funds to bank deposits
would increase this concentration.
As discussed in the RSFI Study, there
are a range of investment alternatives
that currently compete with money
market funds. If we adopt either of our
proposals, investors could choose from
among at least the following
alternatives: Money market funds that
are exempt from the proposed reforms;
under the liquidity fees and gates
proposal, money market funds that
invest only in weekly liquid assets; bank
deposit accounts; bank certificates of
deposit; bank collective trust funds;
local government investment pools
(‘‘LGIPs’’); U.S. private funds; offshore
money market funds; short-term
investment funds (‘‘STIFs’’); separately
managed accounts; ultra-short bond
funds; short-duration exchange-traded
funds; and direct investments in money
market instruments.577 Each of these
choices involves different tradeoffs, and
money market fund investors that are
unwilling or unable to invest in a
money market fund under either of our
proposals would need to analyze the
various tradeoffs associated with each
alternative.
The following table, taken from the
RSFI Study, outlines the principal
573 See
571 See,
e.g., U.S. Chamber Jan. 23, 2013 FSOC
Comment Letter, supra note 248 (‘‘Quite simply, it
is more efficient and economical to pay the
management fee for a MMMF than to hire the
internal staff to manage the investment of cash.’’).
572 See, e.g., Angel FSOC Comment Letter, supra
note 60 (stating that ‘‘[m]any of the proposed
reforms would seriously reduce the attractiveness of
MMMFs,’’ which ‘‘could increase, not decrease,
systemic risk as assets move to too-big-to-fail
banks.’’); Comment Letter of Jonathan Macey (Nov.
27, 2012) (available in File No. FSOC–2012–0003)
(stating that a ‘‘reduced MMF industry may lead to
the flow of large amounts of cash into [the banking
system], especially through the largest banks, and
increase pressure on the FDIC.’’); Federated
Investors Alternative 1 FSOC Comment Letter,
supra note 161 (‘‘A floating NAV would accelerate
the flow of assets to ‘‘Too Big to Fail’’ banks, further
concentrating risk in that sector.’’).
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RSFI Study, supra note 21, at figure 18.
2012 AFP Liquidity Survey, supra note 73.
575 See id., 2008 AFP Liquidity Survey, supra
note 73.
576 As of December 31, 2012, the amount in
domestic noninterest-bearing transaction accounts
over the normal $250,000 limit was $1.5 trillion.
See Federal Deposit Insurance Corporation
Quarterly Banking Profile, Fourth Quarter 2012, at
16, available at https://www2.fdic.gov/qbp/2012dec/
qbp.pdf. At December 31, 2008, the amount in
domestic noninterest-bearing transaction accounts
over the normal $250,000 limit was $814 billion.
See Federal Deposit Insurance Corporation
Quarterly Banking Profile, Fourth Quarter 2008, at
20, available at https://www2.fdic.gov/qbp/2008dec/
qbp.pdf.
577 See, e.g., ICI Feb 2012 PWG Comment Letter,
supra note 259; Comment Letter of the Association
for Financial Professionals et al. (Apr. 4, 2012)
(available in File No. 4–619).
574 See
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features of various cash alternatives to
money market funds that exist today.
TABLE 2—CASH INVESTMENT ALTERNATIVES
Restrictions on
investor base
Product
Valuation
Investment risks a
Redemption
restrictions
Yield b
Regulated
Bank demand deposits .............
Stable ...........
No ..............
Below benchmark.
Yes ...........
No.
Time deposits (CDs) .................
Stable ...........
Yes d ..........
No.
Stable or
Floating
NAV.
Floating NAV
Below benchmark.
Comparable
to benchmark.
Above benchmark.
Above benchmark.
Above benchmark.
Above benchmark.
Above benchmark.
Benchmark ...
Yes ...........
Offshore money funds (European short-term MMFs) e.
Below benchmark up to depository insurance (‘‘DI’’)
limit; above benchmark
above DI limit c.
Bank counterparty risk
above DI limit.
Comparable to benchmark ..
Yes ...........
Yes.g
Yes ...........
Yes.
No i ...........
Yes.j
Yes ...........
No.
Yes ...........
Tax-exempt bank
clients.l
Tax-exempt bank
clients.
Local government and public entities.
No.
Offshore money funds (European MMFs) h.
Enhanced cash funds (private
funds).
Ultra-short bond funds ..............
Some f .......
Above benchmark ................
Some .........
Stable NAV
(generally).
Floating NAV
Above benchmark ................
By contract
Above benchmark ................
Some .........
Collective investment funds k ....
Not stable .....
Above benchmark ................
No ..............
Short-term investment funds
(‘‘STIFs’’).
Local government investment
pools (‘‘LGIPs’’).
Stable ...........
Above benchmark ................
No ..............
Stable (generally) n.
Benchmark ...........................
No ..............
Short-duration ETFs ..................
Floating NAV;
Market
price o.
Not stable .....
Above benchmark ................
No ..............
Above benchmark.
Yes ...........
Above benchmark ................
No ..............
No ............
Not stable .....
Comparable to benchmark
but may vary depending
on investment mix q.
No ..............
Above benchmark.
Comparable
to benchmark but
may vary
depending
on investment mix.
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Separately managed accounts
(including wrap accounts).
Direct investment in MMF instruments.
Yes m ........
Yes ...........
No ............
Investment minimum.p
Some.r
a For purposes of this table, investment risks include exposure to interest rate and credit risks. The column also indicates the general level of
investment risk for the product compared with the baseline of prime money market funds and is generally a premium above the risk-free or
Treasury rate.
b The table entries reflect average yields in a normal interest rate environment. Certain cash management products, such as certificates of deposits (‘‘CDs’’) and demand deposits, may be able to offer rates above the baseline in a low interest rate environment.
c The current DI limit is $250,000 per owner for interest-bearing accounts. See Deposit Insurance Summary, Federal Deposit Insurance Corporation (‘‘FDIC’’), available at https://www.fdic.gov/deposit/deposits/dis/.
d Time deposits, or CDs, are subject to minimum early withdrawal penalties if funds are withdrawn within six days of the date of deposit or
within six days of the immediately preceding partial withdrawal. See 12 CFR 204.2(c)(1)(i). Many CDs are also subject to early withdrawal penalties if withdrawn before maturity, although market forces, rather than federal regulation, impose such penalties. CDs generally have specific
fixed terms (e.g., one-, three-, or six-month terms), although some banks offer customized CDs (e.g., with terms of seven days).
e The vast majority of money market fund assets are held in U.S. and European money market funds. See Consultation Report of the IOSCO
Standing Committee 5 (Apr. 27, 2012) (‘‘IOSCO SC5 Report’’), at App. B, §§ 2.1–2.36 (in 2011, of the assets invested in money market funds in
IOSCO countries, approximately 61% were invested in U.S. money market funds and 32% were invested in European money market funds).
Consequently, dollar-denominated European money market funds may provide a limited offshore money market fund alternative to U.S. money
market funds. Most European stable value money market funds are a member of the Institutional Money Market Funds Association (‘‘IMMFA’’).
According to IMMFA, as of March 1, 2013, there were approximately $286 billion U.S. dollar-denominated IMMFA money market funds. See
www.immfa.org (this figure excludes accumulating NAV U.S. dollar-denominated money market funds). Like U.S. money market funds, European
short-term money market funds must have a dollar-weighted average maturity of no more than 60 days and a dollar-weighted average life maturity of no more than 120 days, and their portfolio securities must hold one of the two highest short-term credit ratings and have a maturity of no
more than 397 days. However, unlike U.S. money market funds, European short-term money market funds may either have a floating or fixed
NAV. Compare Common Definition of European Money Market Funds (Ref. CESR/10–049) with rule 2a–7.
f Most European money market funds are subject to legislation governing Undertakings for Collective Investment in Transferable Securities
(‘‘UCITS’’), which also covers other collective investments. See, e.g., UCITS IV Directive, Article 84 (permitting a UCITS to, in accordance with
applicable national law and its instruments of incorporation, temporarily suspend redemption of its units); Articles L. 214–19 and L. 214–30 of the
French Monetary and Financial Code (providing that under exceptional circumstances and if the interests of the UCITS units holders so demand,
UCITs may temporarily suspend redemptions).
g Section 7(d) of the Investment Company Act requires that any non-U.S. investment company that wishes to register as an investment company in order to publicly offer its securities in the U.S. must first obtain an order from the SEC. To issue such an order, the SEC must find that
‘‘by reason of special circumstances or arrangements, it is both legally and practically feasible to enforce the provisions of [the Act against the
non-U.S. fund,] and that the issuance of [the] order is otherwise consistent with the public interest and the protection of investors.’’ No European
money market fund has received such an order. European money market funds could be offered to U.S. investors privately on a very limited
basis subject to certain exclusions from investment company regulation under the Investment Company Act and certain exemptions from registration under the Securities Act. U.S. investors purchasing non-U.S. funds in private offerings, however, may be subject to potentially significant
adverse tax implications. See, e.g., Internal Revenue Code of 1986 §§ 1291 through 1297. Moreover, as a practical matter, and in view of the severe consequences of violating the Securities Act registration and offering requirements, most European money market funds currently prohibit
investment by U.S. Persons.
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h European money market funds may have a dollar-weighted average portfolio maturity of up to six months and a dollar-weighted average life
maturity of up to 12 months that are significantly greater than are permitted for U.S. money market funds. Compare Common Definition of European Money Market Funds (Ref. CESR/10–049) with rule 2a–7.
i Private funds generally rely on one of two exclusions from investment company regulation by the Commission. Section 3(c)(1) of the Investment Company Act, in general, excludes from the definition of ‘‘investment company’’ funds whose shares are beneficially owned by not more
than 100 persons where the issuer does not make or propose to make a public offering. Section 3(c)(7) of the Act places no limit on the number
of holders of securities, as long as each is a ‘‘qualified purchaser’’ (as that term is defined in section 2(a)(51) of the Act) when the securities are
acquired and the issuer does not make or propose to make a public offering. Most retail investors would not fall within the definition of ‘‘qualified
purchaser.’’ Moreover, such private funds also generally rely on the private offering exemption in section 4(2) of the Securities Act or Securities
Act rule 506 to avoid the registration and prospectus delivery requirements of Section 5 of the Securities Act. Rule 506 establishes ‘‘safe harbor’’
criteria to meet the private offering exemption. The provision most often relied upon by private funds under rule 506 exempts offerings made exclusively to ‘‘accredited investors’’ (as that term is defined in rule 501(a) under the Securities Act). Most retail investors would not fall within the
definition of ‘‘accredited investor.’’ Offshore private funds also generally rely on one of the two non-exclusive safe harbors of Regulation S, an
issuer safe harbor and an offshore resale safe harbor. If one of the two is satisfied, an offshore private fund will not have to register the offer and
sale of its securities under the Securities Act. Specifically, rules 903(a) and 904(a) of Regulation S provide that offers and sales must be made in
‘‘offshore transactions’’ and rule 902(h) provides that an offer or sale is made in an ‘‘offshore transaction’’ if, among other conditions, the offer is
not made to a person in the United States. Regulation S is not available to offers and sales of securities issued by investment companies required to be registered, but not registered, under the Investment Company Act. See Regulation S Preliminary Notes 3 and 4.
j See id.
k Collective investment funds include collective trust funds and common trust funds managed by banks or their trust departments, both of which
are a subset of short-term investment funds. For purposes of this table, short-term investment funds are separately addressed.
l Collective trust funds are generally limited to tax-qualified plans and government plans, while common trust funds are generally limited to taxqualified personal trusts and estates and trusts established by institutions.
m STIFs are generally regulated by 12 CFR 9.18. The Office of the Comptroller of the Currency recently reformed the rules governing STIFs
subject to their jurisdiction to impose similar requirements to those governing money market funds. See Office of the Comptroller of Currency,
Treasury, Short-Term Investment Funds [77 FR 61229 (Oct. 9, 2012)].
n Regarding all items in this row of the table, LGIPs generally are structured to meet a particular investment objective. In most cases, they are
designed to serve as short-term investments for funds that may be needed by participants on a day-to-day or near-term basis. These local government investment pools tend to emulate typical money market mutual funds in many respects, particularly by maintaining a stable net asset
value of $1.00 through investments in short-term securities. A few local government investment pools are designed to provide the potential for
greater returns through investment in longer-term securities for participants’ funds that may not be needed on a near-term basis. The value of
shares in these local government investment pools fluctuates depending upon the value of the underlying investments. Local government investment pools limit the nature of underlying investments to those in which its participants are permitted to invest under applicable state law. See
https://www.msrb.org/Municipal-Bond-Market/About-Municipal-Securities/Local-Government-Investment-Pools.aspx. Investors in local government
investment pools may include counties, cities, public schools, and similar public entities. See, e.g., The South Carolina Local Government Investment Pool Participant Procedures Manual, available at https://www.treasurer.sc.gov/Investments/The%20South%20Carolina%20Local%20
Government%20Investment%20Pool%20Participant%20Procedures%20Manual.pdf.
o Although the performance of an exchange traded fund (‘‘ETF’’) is measured by its NAV, the price of an ETF for most shareholders is not determined solely by its NAV, but by buyers and sellers on the open market, who may take into account the ETF’s NAV as well as other factors.
p Many separately managed accounts have investment minimums of $100,000 or more.
q Depending on the nature and scope of their investments, these investors may also face risks stemming from a lack of portfolio diversification.
r Some money market fund instruments are only sold in large denominations or are only available to qualified institutional buyers. See generally
rule 144A under the Securities Act (17 CFR 230.144A(7)(a)(1)).
If we adopt the floating NAV
proposal, investors that value principal
stability would likely consider shifting
investments to government money
market funds (or retail money market
funds), which would be permitted to
continue to maintain stable prices under
that proposal. Similarly, if we adopt the
alternative fees and gates proposal,
investors that are unwilling to invest in
a money market fund that might impose
a liquidity fee or gate when liquidity is
particularly costly might shift their
investments to government money
market funds. Investors that shifted
their assets from prime money market
funds to government money market
funds would likely sacrifice yield under
both proposals, but they would
maintain the principal stability and
liquidity of their assets. Investors in
exempt retail money market funds
would not have to face the same
tradeoff. Alternatively, money market
fund investors could reallocate assets to
various bank products such as demand
deposits or short-maturity certificates of
deposit. FDIC insurance would provide
principal stability and liquidity
irrespective of market conditions for
bank accounts whose deposits are
within the insurance limits.
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Today, interest-bearing accounts and
non-interest-bearing transaction
accounts at depository institutions are
insured up to $250,000. Accordingly,
institutions would be deterred from
moving their investments from money
market funds to banks because their
assets would probably be above the
current depository insurance limits
which would expose them to substantial
counterparty risk.578 Nevertheless, these
investors could gain full insurance
coverage if they are willing and able to
break their cash holdings into
578 See, e.g., Comment Letter of Crawford and
Company (Jan. 14, 2013) (available in File No.
FSOC–2012–0003) (‘‘Bank demand deposits . . .
lack the diversification of MMFs and carry inherent
counterparty risk.’’); ICI Jan 2011 PWG Comment
Letter, supra note 473 (‘‘The Report suggests that
requiring money market funds to float their NAVs
could encourage investors to shift their liquid
balances to bank deposits. We believe that this
effect is overstated, particularly for institutional
investors. Corporate cash managers and other
institutional investors would not view an
undiversified holding in an uninsured (or
underinsured) bank account as having the same risk
profile as an investment in a diversified short-term
money market fund. Such investors would continue
to seek out diversified investment pools, which may
or may not include bank time deposits.’’).
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sufficiently small pieces and spread
them across enough banks.579
Investors in reformed money market
funds that value principal stability
would find most other investment
alternatives unattractive, including
floating value enhanced cash funds,
ultra-short bond funds, short-duration
ETFs, and collective investment funds.
These alternatives typically do not offer
principal stability. These investments,
however, might be attractive to investors
that value yield over principal stability
and the lowest investment risk. To our
knowledge, none of these alternative
investment products (except potentially
enhanced cash funds) may restrict
redemptions in times of stress without
obtaining relief from regulatory
restrictions.
One practical constraint for many
money market fund investors is that
they may be precluded from investing in
certain alternatives, such as STIFs,
offshore money market funds, LGIPs,
separately managed accounts, and direct
investments in money market
instruments, due to significant
579 Certain third party service providers offer such
services. See, e.g., Nathaniel Popper and Jessica
Silver-Greenberg, Big Depositors Seek New Safety
Net, N.Y. Times (Dec. 30, 2012).
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restrictions on participation. For
example, STIFs are only available to
accounts for personal trusts, estates, and
employee benefit plans that are exempt
from taxation under the U.S. Internal
Revenue Code.580 STIFs subject to
regulation by the Office of the
Comptroller of the Currency also are
subject to less stringent regulatory
restrictions than rule 2a–7 imposes, and
STIFs under the jurisdiction of other
banking regulators may be subject to no
restrictions at all equivalent to rule 2a–
7.581 Accordingly, these funds pose
greater risk than money market funds
and thus may not be attractive
alternatives to investors that highly
value principal stability. Offshore
money market funds, which are
investment pools domiciled and
authorized outside the United States,
can only sell shares to U.S. investors in
private offerings. Few offshore money
market funds offer their shares to U.S.
investors in part because doing so could
create adverse tax consequences.582 In
addition, European money market funds
can take on more risk than U.S. money
market funds as they are not currently
subject to regulatory restrictions on their
credit quality, liquidity, maturity, and
diversification as stringent as those
imposed under rule 2a–7, among other
differences in regulation.583
Some current money market fund
investors may have self-imposed
restrictions or fiduciary duties that limit
the risks they can assume or that
preclude them from investing in certain
alternatives. They might be prohibited
from investing in, for example,
enhanced cash funds that are privately
offered to institutions, wealthy clients,
and certain types of trusts due to greater
investment risk, limitations on investor
base, or the lack of disclosure and legal
protections of the type afforded them by
580 See Testimony of Paul Schott Stevens,
President and CEO of the Investment Company
Institute, before the Committee on Banking,
Housing, and Urban Affairs, United States Senate,
on ‘‘Perspectives on Money Market Mutual Fund
Reforms,’’ June 21, 2012.
581 For a discussion of the regulation of STIFs by
the Office of the Comptroller of the Currency (OCC),
see supra Table 2, note M. The OCC’s rule 9.18
governs STIFs managed by national banks and
federal savings associations. Other types of banks
may or may not follow the requirements of OCC
rule 9.18, depending, for example, on state law
requirements and federal tax laws. See Office of the
Comptroller of Currency, Treasury, Short-Term
Investment Funds, at n.6 and accompanying text
[77 FR 61229 (Oct. 9, 2012)].
582 See supra this section, Table 2, explanatory
notes G and I.
583 For a discussion of the regulation of European
money market funds, see supra Table 2, notes E and
H; Common Definition of European Money Market
Funds (Ref. CESR/10–049).
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U.S. securities regulations.584 Likewise,
money market fund investors that can
only invest in SEC-registered
investment vehicles could not invest in
LGIPs, which are not registered with the
SEC (as states and local state agencies
are excluded from regulation under the
Investment Company Act). Many
unregistered and offshore alternatives to
money market funds—unlike registered
money market funds in the United
States today—are not prohibited from
imposing gates or suspending
redemptions.585 Other investment
alternatives, such as bank CDs, also
impose redemption restrictions.
Investors placing a high value on
liquidity would likely find the potential
imposition of these restrictions
unacceptable and thus not invest in
them.
Both retail and institutional investors’
assessments of money market funds as
reformed under our proposals and their
attractiveness relative to alternatives
may be influenced by investors’ views
on the degree to which funds’ NAVs
will change from day to day under our
floating NAV proposal or the frequency
with which fees and gates will be
imposed under our liquidity fees and
gates proposal. For example, managers
of floating NAV funds could invest a
large percentage of their holdings in
very short-term or Treasury securities to
minimize fluctuations in the funds’
NAVs. Additionally, under our liquidity
fees and gates proposal, we expect that
funds would attempt to manage their
liquidity levels in order to avoid
crossing the threshold for applying
liquidity fees or gates. One possible
effect of each of these actions may be to
lower the expected yield of the fund.
Thus, we believe that, under our
proposals, fund managers would be
incentivized to mitigate the potential
direct costs of the proposals for
investors, and we further believe that
they would be successful in so doing in
all but the most extreme circumstances,
but that this mitigation may come at a
cost to fund yield and profitability as
managers shift to shorter dated or more
liquid securities.
Investors’ demand for stability in the
value of the money market fund
investment could provide an incentive
for sponsors to support their money
584 According to the 2012 AFP Liquidity Survey,
supra note 73, only 21% of respondents stated that
enhanced cash funds were permissible investment
vehicles under the organization’s short-term
investment policy. In contrast, 44% stated that
prime money market funds were a permissible
investment and 56% stated that Treasury money
market funds were a permissible investment.
585 See, e.g., supra this section, Table 2,
explanatory note F.
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36919
market funds in the event a particular
portfolio security would negatively
affect the NAV of the fund (i.e., to
prevent a fund’s NAV from declining
below a value the fund seeks to
maintain under either our floating NAV
proposal or our liquidity fees and gates
proposal). Under our floating NAV
proposal, sponsor support could permit
prime money market funds (or other
non-exempt money market funds) to
continue to maintain a stable price.
Under our liquidity fees and gates
proposal, a sponsor could prevent the
money market fund’s weekly liquid
assets from falling below the 15%
threshold for applying liquidity fees and
gates by giving the fund cash (for
example, the sponsor could lift out
some of the fund’s non-weekly liquid
assets or the sponsor could directly
purchase fund shares) to invest in
weekly liquid assets. We are proposing
a number of new disclosure
requirements regarding sponsor support
to help shareholders understand
whether a fund’s stable price or
liquidity was the result of careful
portfolio management or sponsor
support. Among other things, money
market funds would be required to
provide real-time notifications to both
investors and the Commission of new
instances of sponsor support, a
description of the nature of support, and
the date and amount of support
provided.586
As this analysis reflects, the economic
implications of our floating NAV and
liquidity fees and gates proposals
depend on investors’ preferences, and
the attractiveness of investment
alternatives.587 For these and the other
reasons discussed below, we believe
that the survey data submitted by
commenters reflecting that certain
investors expect to reduce or eliminate
their money market fund investments
under the floating NAV alternative may
586 See infra section III.G; proposed (FNAV and
Fees & Gates) Form N–CR, Part C (Provision of
Financial Support to Fund).
587 See, e.g., Better Markets FSOC Comment
Letter, supra note 67 (in response to industry
survey data reflecting intolerance for the floating
NAV, stating that ‘‘it is difficult to predict the level
of contraction that would actually result from
instituting a floating NAV. [. . . .] The move to a
floating NAV does not alter the fundamental
attributes of MMFs with respect to the type, quality,
and liquidity of the investments in the fund.
[. . . .] It is therefore unrealistic to think that MMFs
. . . will become extinct solely as a result of a move
to a more accurate and transparent valuation
methodology.’’); Winters FSOC Comment Letter,
supra note 190 (‘‘[T]he feared migration to
unregulated funds has not been quantified and is
probably overstated.’’); U.S. Chamber Jan. 23, 2013
FSOC Comment Letter, supra note 248 (‘‘No
alternatives with the same multiple benefits are
available to replace money market mutual funds.’’).
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not definitively indicate how investors
might actually behave.588
None of the surveys discussed above
considered the exemptions we are
proposing that would permit both
government money market funds (under
both proposals) and retail money market
funds (under the floating NAV proposal)
to continue to maintain a stable price
without restrictions. In addition, none
of the surveys addressed how investors
would respond to our specific liquidity
fees and gates proposal. Finally, the
surveys did not consider how available
alternatives to floating NAV money
market funds might satisfy money
market fund investors’ expressed desires
for stable, liquid, and safe investments.
Indeed, some commenters have
suggested that the mass exodus from
money market funds as a result of
further reforms is unlikely and that
money market fund investors may not
necessarily seek out investment
alternatives.589 Some alternatives to
money market funds, commenters
explain, would carry greater risks than
the effect of our proposals on money
market funds, would not be able to
accommodate a sizeable portion of
money market fund assets, or both.590
We also understand that at least one
money market fund sponsor converted
its non-U.S. stable value money market
funds to funds with floating NAVs and
found that its concern in advance of the
conversion that the funds’ mostly retail
588 See supra notes 566 and 567, and infra note
803 and accompanying text.
589 See, e.g., Winters FSOC Comment Letter,
supra note 190 (stating that, with respect to the
feared migration to unregulated funds, ‘‘the
capacity for existing unregulated funds to take
inflows is relatively small and the operators of such
funds may not welcome a flood of hot money with
riskless expectations.’’); ICI Jan 2011 PWG
Comment Letter, supra note 473 (‘‘The Report
suggests that requiring money market funds to float
their NAVs could encourage investors to shift their
liquid balances to bank deposits. We believe that
this effect is overstated, particularly for institutional
investors. Corporate cash managers and other
institutional investors would not view an
undiversified holding in an uninsured (or
underinsured) bank account as having the same risk
profile as an investment in a diversified short-term
money market fund. Such investors would continue
to seek out diversified investment pools, which may
or may not include bank time deposits.’’).
590 See, e.g., Thrivent FSOC Comment Letter,
supra note 396 (‘‘Arguments for massive
movements into vehicles such as cash enhanced
funds, offshore money market funds and the like
seem to assume that investors will behave
irrationally. There would be no logical reason to
move from highly regulated money market funds
with a history of maintaining a close proximity to
$1.00 per share net asset value to cash enhanced
funds, which are much less regulated and likely to
have a much more widely fluctuating NAV, nor to
offshore money funds which have materially
different guidelines, nor to stable value vehicles,
the growth of which is limited by available supply
of insured product with commensurate credit
ratings.’’).
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investors would redeem and reject the
floating NAV funds proved to be
unjustified.591
We request comment on what effects
our floating NAV or liquidity fees and
gates proposals would have on current
money market fund investments.
• Do commenters believe that the
likely effect of either our floating NAV
proposal or our liquidity fees and gates
proposal would be to cause some
investors to shift their money market
fund investments to alternative products
and thus reduce the amount of money
market fund assets under management?
If so, to what extent and why? To what
extent would these shifts vary
depending on whether the investor was
retail or institutional and why?
• Would either of our proposals result
in any reduction in the number of
money market funds and/or
consolidation of the money market
industry? How many funds and what
types of money market funds would
leave the industry? What would be the
effect on assets under management of
different types of money market funds if
we adopt either our floating NAV or
liquidity fees and gates proposal?
• To what extent under each
alternative would retail and
institutional money market fund
investors shift to investment
alternatives, including managing their
cash themselves?
• Would certain investment
alternatives that have significant
restrictions on their investor base be
unavailable for current money market
fund investors? If so, which alternatives
and to what extent?
• Do commenters agree with our
analysis of the likelihood that certain
shareholders would seek out particular
investment alternatives in the event we
adopted either of our floating NAV or
liquidity fees and gates proposals? For
example, would institutional investors
be unlikely to shift assets to bank
deposits (because of depository
insurance limits) or local government
investment pools, short-term investment
funds, or offshore money market funds
(because of the significant investment
restrictions)? Do commenters agree with
our analysis with respect to some or all
of these alternatives? Why or why not?
• Are there aspects of any investment
alternatives other than operational costs
discussed in sections III.A.7 and III.B.6
above or the factors we have identified
in this section that would affect whether
money market fund investors would be
likely to use other investment
alternatives in lieu of money market
funds under either of our proposals? We
591 UBS
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request that commenters differentiate
between short-term effects that would
occur as the industry transitions to one
in which money market funds use
floating NAVs or liquidity fees and gates
and the long-term effects that would
persist thereafter.
• Under each of the two proposals,
what fraction of prime money market
fund assets might be moved to
government money market funds, retail
funds, or to other alternatives (and to
which alternatives)? How would these
answers differ for retail investors and
institutional investors?
• What would be the net effect of our
proposal on competition in the money
market fund industry?
As noted above, we understand that
some institutional investors may be
prohibited by board-approved
guidelines or internal policies from
investing certain assets in money market
funds unless they have a stable value
per share or do not have redemption
restrictions, and we understand that
other investors, including state and
local governments, may be subject to
statutory or regulatory requirements that
permit them to invest certain assets only
in funds that seek to maintain a stable
value per share or that do not have any
redemption restrictions.
• How would these guidelines and
other constraints affect investors’ use of
floating NAV money market funds or
those that could impose fees or gates?
• Could institutional investors change
their guidelines or policies to invest in
either floating NAV money market
funds or funds that could impose fees or
gates, if appropriate? If not, why not? If
so, what costs might institutional
investors incur to change these
guidelines and policies?
• Do the guidelines or statutory or
regulatory constraints precluding
investment in floating NAV money
market funds permit investments in
investment products that can fluctuate
in value, such as direct investments in
money market instruments or Treasury
securities?
2. Effect on Current Issuers and the
Short-Term Financing Markets
Although we currently do not have
estimates of the amount of assets money
market fund investors might migrate to
investment alternatives, we recognize
that shifts from money market funds
into other choices could affect issuers of
short-term debt securities and the shortterm financing markets. The effects of
these shifts, including any effect on
efficiency, competition, and capital
formation, would depend on the size of
reallocations to investment alternatives
and the nature of the alternatives,
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including whether the alternatives
invest in the short-term financing
markets or otherwise provide similar
credit. We discuss these effects in detail
and seek comment on them, including
the effects of the proposal on the
commercial paper markets and
municipal financing.
The extent to which money market
fund investors might choose to
reallocate their assets to investment
alternatives as a result of money market
fund reforms would likely drive the
effect on issuers and the short-term
financing markets. As discussed in the
RSFI Study, prime money market funds
managed approximately $1.7 trillion as
of March 31, 2012, holding
approximately 57% of the total assets of
all registered money market funds. The
chart below provides information about
prime (and other) money market funds
as of December 31, 2012. Even a modest
shift could represent a sizeable increase
in other investments.
HOLDINGS OF MONEY MARKET FUNDS
Treasury
debt
Govmt
agency
debt
Treasury
repo
Govmt
agency
repo
VRDNs
Other municipal
debt
Financial
Co CP
Non-financial Co CP
ABCP
CDs
Other
Panel A. MMF Holdings in $B, December 31, 2012
Prime ...............
Treasury ..........
Other ...............
143.39
303.54
63.38
53.46
118.56
41.81
155.90
0.01
251.26
143.92
1.38
149.06
55.33
0.00
220.43
4.30
0.00
60.50
221.64
0.00
0.65
121.98
0.00
2.94
77.13
0.00
6.63
524.14
0.00
0.72
250.95
0.02
10.37
All MMF ....
510.31
213.83
407.17
294.36
275.77
64.80
222.29
124.92
83.76
524.86
261.33
Treasury
debt
Govmt
agency
debt
Treasury
repo
Govmt
agency
repo
VRDNs
Other municipal
debt
Financial
Co CP
Non-financial Co CP
ABCP
CDs
Other
Panel B. MMF Holdings as Percentage of Total Amortized Cost of MMFs by Type of Fund, December 31, 2012
Prime ...............
Treasury ..........
Other ...............
8.18
71.67
7.85
3.05
27.99
5.18
8.90
0.00
31.11
8.21
0.33
18.45
3.16
0.00
27.29
0.25
0.00
7.49
12.65
0.00
0.08
6.96
0.00
0.36
4.40
0.00
0.82
29.91
0.00
0.09
14.32
0.00
1.28
All MMF ....
17.11
7.17
13.65
9.87
9.24
2.17
7.45
4.19
2.81
17.59
8.76
Treas debt
as % treas
bills
outstnd
(Treas
debt +
repos) as
% treas
bills
outstnd
Govmt
agency
debt as %
of govmt
agency
sec
outstnd
(Govmt
agency
debt +
repos) as
% of
govmt
agency
sec
outstnd
VRDN as
% of muni
secs
outstnd
(VRDN+
other
muni) as
% of muni
secs
outstnd
Fncl Co
CP as %
of Fncl Co
CP outstnd
Non-Fncl
Co CP as
% of nonFncl Co
CP outstnd
CDs as %
of savings
and time
deposit
outstnd
CDs as %
of large
savings
and time
deposit
outstnd
Prime ...............
Treasury ..........
Other ...............
8.82
18.66
3.90
12.10
25.95
6.47
2.07
0.00
3.33
3.97
0.02
5.31
1.49
0.00
5.93
1.61
0.00
7.56
46.43
0.00
0.14
40.17
0.00
0.97
45.16
0.00
3.88
5.63
0.00
0.01
34.74
0.00
0.05
All MMF ....
31.37
44.52
5.40
9.30
7.42
9.17
46.56
41.13
49.04
5.64
34.78
ABCP as
% of
ABCP
outstnd
Panel C. MMF Holdings as Percentage of Amounts Outstanding, December 31, 2012
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Sources: Data on money market fund holdings is derived from Form N–MFP as of December 31, 2012. Data on outstanding Treasury debt, government agency
debt, certificates of deposit and municipal debt comes from the Federal Reserve Board’s Flow of Funds Accounts of the U.S. for Q4, 2012. Data on commercial paper
(not seasonally adjusted) is derived from the Federal Reserve Board’s Commercial Paper release for December 2012. VRDNs are Variable Rate Demand Notes; Fncl
Co CP is Financial Company Commercial Paper; and ABCP is Asset-Backed Commercial Paper.
Because prime money market funds’
holdings are large and their investment
strategies differ from some investment
alternatives, a shift by investors from
prime money market funds to
investment alternatives could affect the
markets for short-term securities. The
magnitude of the effect will depend on
not only the size of the shift but also the
extent to which there are portfolio
investment differences between prime
money market funds and the chosen
investment alternatives. If, for example,
investors in prime money market funds
were to choose to manage their cash
directly rather than invest in alternative
cash management products, they might
invest in securities that are similar to
those currently held by prime funds. In
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this case, the effects on issuers and the
short-term financing markets would
likely be minimal.592
If, however, capital flowed from
money market funds, which
traditionally have been large suppliers
of short-term capital, to bank deposits,
which tend to fund longer-term lending
and capital investments, issuers and the
short-term financing markets may be
affected to a greater extent. Similarly, if
capital flowed from prime money
market funds to government money
market funds because government
money market funds are exempt from
592 The preference for this alternative, however,
may be tempered by the cost to investors of
managing cash on their own. See, e.g., supra note
571 and accompanying text.
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further reforms, issuers that primarily
issue to prime funds (and thus the shortterm financing markets) would be
affected. To put these potential shifts in
context, on December 31, 2012, prime
money market funds held
approximately 46% of financialcompany commercial paper outstanding
and approximately 9% of Treasury bills
outstanding, whereas Treasury money
market funds held approximately 19%
of Treasury bills outstanding but no
financial company commercial
paper.593 A shift, therefore, from prime
money market funds to Treasury money
market funds could decrease demand
for commercial paper and adversely
593 See
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affect financial commercial-paper
issuers (in terms of the rate they must
offer on their short-term debt securities),
and could increase demand (thus
lowering borrowing costs) in the market
for government securities.
Historically, money market funds
have been a significant source of
financing for issuers of commercial
paper, especially financial commercial
paper, and for issuers of short-term
municipal debt.594 A shift by investors
from prime money market funds to
investment alternatives could cause a
decline in demand for financial
commercial paper and municipal debt,
reducing these firms’ and
municipalities’ access to capital from
money market funds and potentially
creating shortages of short-term
financing for such firms and
municipalities.595 If, however, money
market fund investors shift capital to
investment alternatives that demand the
same assets as prime money market
funds, the net effect on the short-term
financing markets would be small.
As discussed in the RSFI Study, the
2008–2012 increase in bank deposits
coupled with the contraction of the
money market funds presents an
594 Based on Form N–MFP data, non-financial
company commercial paper, which includes
corporate and non-financial business commercial
paper, is a small fraction of overall money market
holdings. In addition, commercial paper financing
by non-financial businesses is a small portion (one
percent) of their overall credit market instruments.
According to Federal Reserve Board flow of funds
data, as of December 31, 2012 non-financial
company commercial paper totaled $130.5 billion
compared with $12,694.2 billion of total credit
market instruments outstanding for these entities.
As such, we do not anticipate a significant effect on
the market for non-financial corporate fund raising.
Federal Reserve Board flow of funds data is
available at https://www.federalreserve.gov/releases/
z1/Current/z1.pdf.
595 See, e.g., Comment Letter of Associated
Oregon Industries (Jan. 18, 2013) (available in File
No. FSOC–2012–0003) (stating that if the proposed
reforms ‘‘drive investors out of money market
funds, the flow of short-term capital to businesses
will be significantly disrupted.’’); U.S. Chamber Jan.
23, 2013 FSOC Comment Letter, supra note 248
(stating that ‘‘any changes [that make MMFs] a less
attractive investment will impact the overall costs
for issuers in the commercial paper market resulting
from a reduced demand in commercial paper.’’);
Comment Letter of N.J. Municipal League (Jan. 23,
2013) (available in File No. FSOC–2012–0003)
(stating that ‘‘money market funds hold more than
half of the short-term debt that finances state and
municipal governments for public projects,’’ which
could force local governments to ‘‘limit projects and
staffing, spend more on financing . . . or increase
taxes’’ if such financing was no longer available.);
Comment Letter of Government Finance Officers
Association, et al. (Feb. 13, 2013) (available in File
No. FSOC–2012–0003) (stating that with respect to
FSOC’s floating NAV proposal, ‘‘changing the
fundamental feature of MMMFs . . . would
dampen investor demand for municipal securities
and therefore could deprive state and local
governments and other borrowers of much-needed
capital.’’).
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opportunity to examine how capital
formation can be affected by a
reallocation of capital among different
funding sources. According to Federal
Reserve Board flow of funds data,
money market funds’ investments in
commercial paper declined by 45% or
$277.7 billion from the end of 2008 to
the end of 2012. Contemporaneously,
funding corporations reduced their
holdings of commercial paper by 99%
or $357.7 billion.596 The end result was
a contraction of more than 40% or
$647.5 billion in the amount of
commercial paper outstanding. Analysis
of Form N–MFP data from November
2010 through March 2013 indicates that
financial company commercial paper
and asset-backed commercial paper
comprise most of money market funds’
commercial paper holdings.597
Although the decline in funds’
commercial paper holdings was large, it
is important to place commercial paper
borrowing by financial institutions into
perspective by considering its size
compared with other funding sources.
As with non-financial businesses,
financial company commercial paper is
a small fraction (3.2%) of all credit
market instruments.598 We have also
witnessed the ability of issuers,
especially financial institutions, to
adjust to changes in markets. Financial
institutions, for example, dramatically
reduced their use of commercial paper
from $1,125.8 billion at the end of 2008
to $449.2 billion at the end of 2012 after
regulators encouraged them to curtail
their reliance on short-term wholesale
financing.599 As such, we believe that
596 The Federal Reserve flow of funds data defines
funding corporations as ‘‘funding subsidiaries,
custodial accounts for reinvested collateral of
securities lending operations, Federal Reserve
lending facilities, and funds associated with the
Public-Private Investment Program (PPIP).’’
597 In addition, according to the RSFI Study,
supra note 21, ‘‘as of March 31, 2012, money market
funds held $1.4 trillion in Treasury debt, Treasury
repo, Government agency debt, and Government
agency repo as its largest sector exposure, followed
by $659 billion in financial company commercial
paper and CDs, its next largest sector exposure.’’
598 According to the Federal Reserve Flow of
Funds data as of December 31, 2012, commercial
paper outstanding was $449.2 billion compared
with $13,852.2 billion of total credit market
instruments outstanding for financial institutions.
599 The statistics in this paragraph are based on
the Federal Reserve Board’s Flow of Funds data.
See also 2012 FSOC Annual Report, available at
https://www.treasury.gov/initiatives/fsoc/
Documents/2012%20Annual%20Report.pdf, at 55–
56, 66 (showing substantial declines in domestic
banking firm’s reliance on short-term wholesale
funding compared with deposit funding). The Basel
III liquidity framework also proposes requirements
aimed at limiting banks’ reliance on short-term
wholesale funding. See 2011 FSOC Annual Report,
available at https://www.treasury.gov/initiatives/
fsoc/Documents/FSOCAR2011.pdf, at 90
(describing Basel III’s proposed liquidity coverage
ratio and the net stable funding ratio); Basel
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financial institutions, as well as other
firms, would be able to identify over
time alternate short-term financing
sources if the amount of capital
available for financial commercial paper
declined in response to money market
fund rule changes. Alternatively,
commercial paper issuers may have to
offer higher yields in order to attract
alternate investors, potentially
hampering capital formation for issuers.
The increase in yield, however, may
increase demand for these investments
which may mitigate, to some extent, the
potential adverse capital formation
effects on the commercial paper market.
Municipalities also could be affected
if our proposals caused the money
market fund industry to contract. As
shown in Panel C of the table
immediately above, money market
funds held approximately 9% of
outstanding municipal debt securities as
of December 31, 2012. Between the end
of 2008 and the end of 2012, money
market funds decreased their holdings
of municipal debt by 34% or $172.8
billion.600 Despite this reduction in
holdings by money market funds,
municipal issuers increased aggregate
borrowings by over 4% between the end
of 2008 and the end of 2012.
Municipalities were able to fill the gap
by attracting other investor types. Other
types of mutual funds, for example,
increased their municipal securities
holdings by 61% or $238.6 billion.
Depository institutions have also
increased their funding of municipal
issuers during this time period by
$141.2 billion as investors have shifted
their assets away from money market
funds into bank deposit accounts. Life
insurance companies almost tripled
their municipal securities holdings from
$47.1 billion at the end of 2008 to $121
billion at the end of 2012. It would have
been difficult to model in 2008 which
investors would step into the municipal
debt market to take the place of
withdrawing money market funds and,
for the same reasons, it is difficult now
to predict what may happen to the
municipal debt markets as a result of
our proposal.
To make their issues attractive to
alternative lenders, municipalities
lengthened the terms of some of their
debt securities. Most municipal debt
securities held by money market funds
are variable rate demand notes
(‘‘VRDNs’’), in which long-term
Committee on Banking Supervision: Basel III: The
Liquidity Coverage Ratio and liquidity risk
monitoring tools (Jan. 2013), available at https://
www.bis.org/publ/bcbs238.pdf (describing revisions
to the liquidity coverage ratio).
600 The statistics in this paragraph are based on
the Federal Reserve Board’s Flow of Funds data.
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municipal bonds are transformed into
short-term instruments through the use
of third-party credit and/or liquidity
enhancements, such as letters of credit
and standby bond purchase agreements
from financial institutions. Declines in
the creditworthiness of these credit and
liquidity enhancement providers have
reduced the amount of VRDNs
outstanding from approximately $371
billion in December 2010 to
approximately $264 billion in December
2012.601 We believe that this downward
trend is likely to continue irrespective
of changes in the money market fund
industry because of potential
downgrades to the financial institutions
providing these services and potential
bank regulatory changes, which may
increase the cost of providing such
guarantees.602
Additionally, our floating NAV
proposal has an explicit exemption for
retail funds that will permit sponsors to
offer retail funds that seek to maintain
a stable price and invest in municipal
securities. We expect that the net
investment in municipal money market
funds will not change in response to the
floating NAV proposal because we
understand that few institutional
investors invest in retail funds today
and believe that most retail investors
would not object to the daily $1,000,000
redemption limit. Investment in retail
money market funds may in fact
increase, if investors see stable price
retail funds as an attractive cash
management tool compared to other
alternatives.
Both the floating NAV proposal and
the requirement of increased disclosure
under each alternative regarding the
fund’s market-based value and liquidity
as well as any sponsor support or
defaults in portfolio securities, among
other matters, should improve
informational efficiency. The floating
NAV alterative as well as the proposed
shadow NAV disclosure requirement
601 See Securities Industry and Financial Markets
Association U.S. Municipal VRDO Update (Dec.
2012), available at https://www.sifma.org/research/
item.aspx?id=8589941389. This data has some
limitations as its estimate for outstanding VRDNs in
December 2012 is lower than our estimate of money
market fund holdings of VRDNs from Form N–MFP
as of December 31, 2012.
602 See, e.g., Moody’s Downgrades U.S. Muni
Obligations Backed by Banks and Securities Firms
with Global Capital Markets Operations (June 22,
2012), available at https://www.moodys.com/
research/Moodys-downgrades-US-muni-obligationsbacked-by-banks-and-securities-PR_248937; Chris
Reese, Money Market Funds’ Investments Declining,
Reuters (Oct. 24, 2011) (stating that supplies of
VRDNs have been constrained and that the ‘‘decline
in issuance can be attributed to low interest rates,
challenges of budget shortfalls at state and local
governments and knock-on effects from European
banking concerns’’); Dan Seymour, Liquidity Fears
May Be Overblown, Bond Buyer (Jan. 31, 2011).
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under the liquidity fees and gates
alternative provide greater transparency
to shareholders regarding the daily
market-based value of the fund. This
should improve investors’ ability to
allocate capital efficiently across the
economy. Under the liquidity fees and
gates proposal, if a fund imposes a
liquidity fee or redemption gate, this
may hamper allocative efficiency and
hence capital formation to the extent
that investors are unable to reallocate
their assets to their preferred use while
the fee or gate is in place.
Our proposals may or may not affect
competition within the short-term
financing markets. On the one hand, the
competitive effects are likely to be small
or negligible if shareholders either
remain in money market funds or move
to alternatives that, in turn, invest in
similar underlying assets. On the other
hand, the effects may be large if
investors reallocate (whether directly or
through intermediaries) their
investments into substantively different
assets. In that case, issuers are likely to
offer higher yields to attract capital,
whether from the smaller money market
fund industry or from other investors.
Either way, issuers that are unable to
offer the required higher yield may have
difficulties raising their required capital,
at least in the short-term financing
markets.
We request comment on what effects
our proposals would have on issuers
and the short-term financing markets for
issuers. In particular, we request that
commenters discuss whether the effects
would be different between the floating
NAV alterative and the liquidity fees
and gates alternative and to provide
analysis of the magnitude of the
difference.
• How would either reform proposal
affect issuers in the short-term financing
markets, whether through a smaller
money market fund industry or through
fewer highly risk-averse investors
holding money market funds shares?
• Would either reform proposal result
in increased stability in money market
funds and hence enhance stability in the
short-term financing markets and the
willingness of issuers to rely on shortterm financing because the issuers
would be less exposed to volatility in
the availability of short-term financing
from money market funds?
• What effect would either proposal
have on the issuers of commercial paper
and short-term municipal debt? How
would either proposal affect the market
for short-term government securities?
• What would be the long-term effect
from either alternative on the economy?
Please include empirical data to support
any conclusions.
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We expect that yields in prime money
market funds under the floating NAV
alternative could be higher than yields
under our fees and gates alternative.
Under the fees and gates proposal,
prime money market funds would have
an incentive to closely manage their
weekly liquid assets, which they could
do by holding larger amounts of such
assets, which tend to have
comparatively low yields. If so, this
would provide a competitive advantage
for issuers that are able and willing to
issue assets that qualify as weekly liquid
assets, and it might result in the overall
short-term financing markets being
tilted toward shorter-term issuances. We
believe that prime money market funds
under this proposal would not meet the
increased demand for weekly liquid
assets solely by increasing their
investments in Treasury securities
because investors that want the riskreturn profile that comes from Treasury
securities would probably prefer to
invest in Treasury funds, which would
be exempt from key aspects of either of
our provisions of the proposal. Under
the floating NAV proposal, prime
money market funds might not have an
incentive to reduce portfolio risk if the
relatively more risk-averse investors
avoid prime money market funds and
invest in government money market
funds or retail funds, which would
continue to maintain a stable price. If
so, this would provide a competitive
advantage for issuers of higher-yielding
2a–7-eligible assets. The potential
differing portfolio composition of
money market funds under our two
reform proposals, therefore, could have
an effect on issuers and the short-term
financing markets through differing
levels of money market fund demand for
certain types of portfolio securities.
We request comment on this aspect of
our proposal and how the effect on
money market fund yields, short-term
debt security issuers, and the short-term
financing markets would differ
depending on which alternative we
adopted.
We request comment on our
assumptions, expectations, and
estimates described in this section.
• Are they correct?
• Do commenters agree with our
analyses of certain effects on efficiency,
competition, and capital formation that
may arise from our floating NAV and
liquidity fees and gates proposals? Do
commenters agree with our analysis of
potential additional implications of
these proposals on current investments
in money market funds and on the
short-term financing markets?
• Are there alternative assumptions,
expectations, or estimates that we have
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not discussed? If so, what are they and
how would they affect our analyses?
• Are there any other economic
effects associated with our proposed
alternatives that we have not discussed?
Please quantify and explain any
assumptions used in response to these
questions (and any others) to the extent
possible.
• What would have been the effect on
money market funds, investors, the
short-term financing markets, and
capital formation if our floating NAV
proposal or our liquidity fees and gates
proposal had been in place in 2007 and
2008?
F. Amendments to Disclosure
Requirements
We are proposing amendments to rule
2a–7 and Form N–1A that would require
money market funds to provide
additional disclosure in certain areas to
provide greater transparency regarding
money market funds, so that investors
have an opportunity to better evaluate
the risks of investing in a particular
fund and that the Commission and other
financial regulators obtain important
information needed to administer their
regulatory programs. As discussed in
more detail below, these amendments
would require enhanced registration
statement and Web site disclosure 603
about: (i) Any type of financial support
provided to a money market fund by the
fund’s sponsor or an affiliated person of
the fund; (ii) the fund’s daily and
weekly liquidity levels; and (iii) the
fund’s daily current NAV per share,
rounded to the fourth decimal place in
the case of funds with a $1.0000 share
price or an equivalent level of accuracy
for funds with a different share price
(e.g., $10.000 or $100.00 per share). In
addition, we are considering whether to
require more frequent disclosure of
money market funds’ portfolio holdings.
We are also proposing amendments to
rule 2a–7 that would require stable price
money market funds to calculate their
current NAV per share (rounded to the
fourth decimal place in the case of
funds with a $1.0000 share price or an
equivalent level of accuracy for funds
with a different share price) daily, as a
corollary to the proposed requirement
for money market funds to disclose their
daily current NAV per share.
In addition, we are proposing a new
rule 604 that would require money
market funds to file new Form N–CR
with the Commission when certain
events (such as instances of portfolio
security default, sponsor support of
funds, and other similar significant
603 See
supra note 448.
rule 30b1–8.
604 Proposed
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events) occur. The proposed Form N–CR
filing requirements are discussed below
at section III.G.
1. Financial Support Provided to Money
Market Funds
a. Proposed Disclosure Requirements
Throughout the history of money
market funds, and in particular during
the 2007–2008 financial crisis, money
market fund sponsors and other fund
affiliates have, on occasion, provided
financial support to money market
funds.605 Indeed, one study estimates
that during the period from 2007 to
2011, direct sponsor support to money
market funds totaled at least $4.4
billion, for 78 of the 314 funds the study
reviewed.606 We continue to believe that
sponsor support will provide fund
sponsors with the flexibility to protect
shareholder interests. Additionally, if
we ultimately adopt the liquidity fees
and gates alternative, sponsor support
would allow sponsors the flexibility to
prevent a money market fund from
breaching the 15% weekly liquid asset
threshold that would otherwise require
the board to impose a liquidity fee
(absent a board finding that doing so
would not be in the fund’s best interest)
and permit the board to impose a gate.
However, we believe that if money
market fund investors do not
understand the nature and extent that
the fund’s sponsor has discretionarily
supported the fund, they may not fully
appreciate the risks of investing in the
fund.607
For these reasons, we propose
requiring money market funds to
disclose current and historical instances
of sponsor support. We believe that
these disclosure requirements would
clarify, to current and prospective
money market fund investors as well as
to the Commission, the frequency,
nature, and amount of financial support
provided by money market fund
sponsors. We believe that the disclosure
of historical instances of sponsor
605 See,
e.g., supra section II.B.3; see also RSFI
Study, supra note 21, at notes 20–21 and
accompanying text.
606 See Federal Reserve Bank of Boston Staff Risk
and Policy Analysis Working Paper No. 12–3 (Aug.
13, 2012).
607 See FSOC Proposed Recommendations, supra
note 114 (noting, for example, that ‘‘[w]hile MMF
prospectuses must warn investors that their shares
may lose value, the extensive record of sponsor
intervention and its critical role historically in
maintaining MMF price stability may have
obscured some investors’ appreciation of MMF risks
and caused some investors to assume that MMF
sponsors will absorb any losses, even though
sponsors are under no obligation to do so’’)
(internal citations omitted). But see ICI Jan. 24
FSOC Comment Letter, supra note 25, and
Federated Investors Feb. 15 FSOC Comment Letter,
supra note 192.
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support would allow investors,
regulators, and the fund industry to
understand better whether a fund has
required financial support in the past.
Currently, when sponsor support is
provided during circumstances in
which a money market fund experiences
stress but does not ‘‘break the buck,’’
and sponsor support is not immediately
disclosed, investors may be unaware
that their money market fund has come
under stress.608 The proposed historical
disclosure would permit investors to
understand whether, for instance, a
fund’s sponsor or affiliate has provided
financial support to help mitigate
liquidity stress experienced by the fund,
or has repurchased fund portfolio
securities that have fallen in value.
While we recognize that historical
occurrences are not necessarily
indicative of future events, the proposed
disclosure also would permit investors
to assess the sponsor’s past ability and
willingness to provide financial support
to the fund, which could reflect the
sponsor’s financial position or
management style.609 Finally, the
proposed disclosure would provide
greater information to regulators and the
fund industry regarding the extent of
financial support that money market
funds receive from their sponsors and
other affiliates, which could assist
regulators in overseeing money market
funds and administering their regulatory
programs.
Accordingly, we are proposing
amendments to Form N–1A that would
require money market funds to provide
SAI disclosure 610 regarding historical
instances in which the fund has
received financial support from a
sponsor or fund affiliate.611 Specifically,
the proposed amendments would
require each money market fund to
disclose any occasion during the last ten
years on which an affiliated person,
promoter, or principal underwriter of
the fund, or an affiliated person of such
608 See RSFI Study, supra note 21, at text
following note 25.
609 But see Moody’s Investors Service, ‘‘Sponsor
Support Key to Money Market Funds’’ (Aug. 9,
2010), at 5–6 available at https://www.alston.com/
files/docs/Moody’s_report.pdf (suggesting that fund
sponsors may be unwilling to provide sponsor
support in future years).
610 See supra note 440 (discussing guiding
principles that are used to determine whether to
include disclosure items in a fund’s prospectus or
SAI).
611 See proposed (FNAV) Item 16(g) of Form N–
1A; proposed (Fees & Gates) Item 16(g)(2) of Form
N–1A. Requiring this disclosure to appear in the
fund’s SAI, rather than the prospectus, reflects the
principle that funds should limit disclosure in
prospectuses generally to information that is
necessary for an average or typical investor to make
an investment decision. See Registration Statement
Adopting Release, supra note 310, at section I.
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person,612 provided any form of
financial support to the fund.613 With
respect to each such occasion, the
proposed amendments would require
the fund to describe the nature of
support, the amount of support, the date
the support was provided, the security
supported and its value on the date the
support was initiated (if applicable), the
reason for the support, the term of
support (if applicable), and any
contractual restrictions relating to the
support.614 We believe that the
proposed 10-year look-back period
would provide shareholders and the
Commission with a historical
perspective that would be long enough
to provide a useful understanding of
past events, and to analyze patterns
with respect to financial support
received by the fund, but not so long as
to include circumstances that may no
longer be a relevant reflection of the
fund’s management or operations. We
believe that disclosing historical
information about the financial support
that a fund has received from a sponsor
or fund affiliate in the fund’s SAI is the
clearest and least expensive means to
disseminate this disclosure. We believe
that other possible methods, such as
requiring public disclosure of a
sponsor’s financial statements (such that
non-shareholders could evaluate the
sponsor’s capacity to provide support)
would provide less straightforward
information to investors, and would be
costlier for funds to implement than the
proposed SAI disclosure requirement.
Because past analyses of financial
support provided to money market
funds have differed in their assessment
of what actions constitute such
support,615 we are also proposing
instructions to the proposed
amendments that would clarify the
meaning of the term ‘‘financial support’’
612 Rule 2a–7 currently requires a money market
fund to report to the Commission the purchase of
money market fund portfolio securities by an
affiliated person, promoter, or principal
underwriter of the fund, or an affiliated person of
such person, pursuant to rule 17a–9. See rule 2a–
7(c)(7)(iii)(B). Because the proposed definition of
‘‘financial support’’ includes the purchase of a
security pursuant to rule 17a–9 (as well as similar
actions), we believe that the scope of the persons
covered by the proposed definition should reflect
the scope of persons covered by rule 2a–
7(c)(7)(iii)(B).
613 See proposed (FNAV) Item 16(g) of Form N–
1A; proposed (Fees & Gates) Item 16(g)(2) of Form
N–1A.
614 See infra notes 616 and 617 and
accompanying text for a discussion of actions that
would be deemed to constitute ‘‘financial support.’’
615 See, e.g., study accompanying Comment Letter
of Linus Wilson (Jan. 1, 2013) (available in File No.
FSOC–2012–0003) (discussing various definitions
of ‘‘support’’ used in analyzing historical instances
of support provided to money market funds by their
sponsors or other affiliated persons).
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for purposes of the required
disclosure.616 These proposed
instructions would specify that the term
‘‘financial support’’ would include, but
not be limited to (i) any capital
contribution, (ii) purchase of a security
from the fund in reliance on rule 17a–
9, (iii) purchase of any defaulted or
devalued security at par, (iv) purchase
of fund shares, (v) execution of a letter
of credit or letter of indemnity, (vi)
capital support agreement (whether or
not the fund ultimately received
support), (vii) performance guarantee, or
(viii) any other similar action to increase
the value of the fund’s portfolio or
otherwise support the fund during times
of stress.617 The Commission believes
that all of these actions should be
included in the term ‘‘financial
support’’ because they each represent
means by which a fund’s sponsor or
affiliate could provide financial or
monetary assistance to a fund by
directly increasing the value of a fund’s
portfolio, or (for funds that maintain a
stable share price) by otherwise
permitting a fund to maintain its current
intended stable price per share. We are
also proposing instructions to the
proposed amendments to clarify that
funds must disclose any financial
support provided to a predecessor fund
(in the case of a merger or other
reorganization) within the proposed
look-back period, in order to allow
investors to understand the full extent
of historical support, provided to a fund
or its predecessor. Specifically, these
proposed instructions would state that if
the fund has participated in a merger
with another investment company
during the last ten years,618 the fund
must additionally provide the required
disclosure with respect to the other
investment company.619
We request comment on the proposed
amendments to Form N–1A that would
require money market funds to provide
disclosure regarding historical instances
in which the fund has received financial
616 See Instruction 1 to proposed (FNAV) Item
16(g) of Form N–1A; Instruction 1 to proposed (Fees
& Gates) Item 16(g)(2) of Form N–1A.
617 Id.
618 For purposes of this instruction, the term
‘‘merger’’ means a merger, consolidation, or
purchase or sale of substantially all of the assets
between the fund and another investment company.
See Instruction 2 to proposed (FNAV) Item 16(g) of
Form N–1A; Instruction 2 to proposed (Fees &
Gates) Item 16(g)(2) of Form N–1A.
619 See Instruction 2 to proposed (FNAV) Item
16(g) of Form N–1A; Instruction 2 to proposed (Fees
& Gates) Item 16(g)(2) of Form N–1A. Additionally,
if a fund’s name has changed (but the corporate or
trust entity remains the same), we would expect the
fund to provide the required disclosure with respect
to the entity or entities identified by the fund’s
former name.
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support from a sponsor or other fund
affiliate.
• Would the proposed disclosure
regarding historical instances of
financial support provided to money
market funds assist investors in
appreciating the risks of investing in
money market funds generally, and/or
in particular money market funds? Do
investors already appreciate the extent
of financial support that money market
funds sponsors and other affiliates have
historically provided, and that such
support has been provided on a
discretionary basis?
• We request comment on the specific
disclosure items contemplated by the
proposed SAI disclosure requirement. Is
there any additional information, with
respect to the historical instances in
which a money market fund has
received financial support from a
sponsor or other fund affiliate, that
funds should be required to disclose?
Would all of the items included in the
proposed SAI disclosure assist
shareholders’ understanding of the
historical financial support provided to
a fund? If not, which items should we
not include, and why?
• Instead of, or in addition to,
requiring funds to disclose historical
information about financial support
received from a sponsor or fund affiliate
on the fund’s SAI, should we require
fund sponsors to publicly disclose their
financial statements, in order to permit
non-shareholders to evaluate the
sponsor’s capacity to provide support?
Why or why not?
• We request comment on the
proposed instruction clarifying the
meaning of the term ‘‘financial support’’
by providing a non-exclusive list of
examples of actions that would be
deemed to be ‘‘financial support’’ for
purposes of the proposed disclosure
requirement. Should the proposed
instruction be expanded or limited, and
if so, how and why?
• We request comment on the 10-year
look-back period contemplated by the
proposed SAI disclosure requirement.
Should the proposed disclosure
requirement include a longer or shorter
look-back period, and if so, why?
• We request comment on the list of
persons whose financial support of a
fund would necessitate disclosure under
the proposed SAI disclosure
requirement. Should this list of persons
be expanded or limited, and if so, why?
• We request comment on the
proposed instruction requiring
disclosure of any financial support
provided to a predecessor fund. Are
there other situations, besides those
identified in this instruction, in which
disclosure of financial support provided
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to a fund or other entity besides the
fund named on the registration
statement would assist shareholders in
understanding attendant investment
risks? Are there any situations in which
the merger-related disclosure that we
propose to require would not assist
shareholders in understanding the risks
of investing in the fund named on the
registration statement (for instance, if
the fund’s sponsor has changed as a
result of the merger)? Would the
proposed merger-related disclosure
make it more difficult for a fund with
a history of support to merge with
another fund?
• Would it be useful for shareholders
for the Commission to require
prospective prospectus and/or SAI
disclosure regarding the circumstances
under which a money market fund’s
sponsor, or an affiliated person of the
fund, may offer any form of financial
support to the fund, as well as any
limits to this support? If so, what kind
of disclosure should be required?
We believe it is important for money
market funds to inform existing and
prospective shareholders of any present
occasion on which the fund receives
financial support from a sponsor or
other fund affiliate. We believe that this
disclosure could influence prospective
shareholders’ decision to purchase
shares of the fund, and could inform
shareholders’ assessment of the ongoing
risks associated with an investment in
the fund. We believe that it is possible
that shareholders would interpret prior
support as a sign of fund strength, as it
demonstrates the sponsor’s willingness
to backstop the fund. However, we also
recognize that this disclosure could
potentially make shareholders quicker
to redeem shares if they believe the
provision of financial support to be a
sign of weakness, or an indication that
the fund may not continue in business
in the future (for instance, if providing
financial support to a fund were to
weaken the sponsor’s own financial
condition, possibly affecting its ability
to manage the fund).
We are proposing an amendment to
rule 2a–7 that would require a fund to
post prominently on its Web site
substantially the same information that
the fund is required to report to the
Commission on Form N–CR regarding
the provision of financial support to the
fund.620 The fund would be required to
include this Web site disclosure on the
same business day as it files a report to
620 See proposed (FNAV) rule 2a–7(h)(10)(v);
proposed (Fees & Gates) rule 2a–7(h)(10)(v);
proposed (FNAV) Form N–CR Part C; proposed
(Fees & Gates) Form N–CR Part C; see also infra
section III.G (discussing the proposed Form N–CR
requirements).
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the Commission in response to an event
specified in Part C of Form N–CR, and
the disclosure would be required to be
posted for a period of not less than one
year following the date on which the
fund filed Form N–CR concerning the
event.621 We believe that requiring Web
site disclosure, along with Form N–CR
disclosure, is an important step towards
increased transparency because we
believe that significant information
about a money market fund is already
made available at that fund’s Web
site.622 As discussed in more detail
below, we believe that this time frame
for reporting balances the exigency of
the report with the time it will
reasonably take a fund to compile the
required information (which is the same
information a fund would be required to
file on Form N–CR).623 We believe that
the one-year minimum time frame for
Web site disclosure is appropriate
because this time frame would
effectively oblige a fund to post the
required information in the interim
period until the fund files an annual
post-effective amendment updating its
registration statement, which update
would incorporate the same
information.624
We request comment on the proposed
amendment to rule 2a–7 that would
require money market funds to inform
current and prospective shareholders,
via Web site, of any present occasion on
which the fund receives financial
support from a sponsor or other fund
affiliate.
• Should any more, any less, or any
other information be required to be
posted on the fund’s Web site than that
disclosed on Form N–CR? Is the fund’s
Web site the best place for us to require
such disclosure?
• As proposed, should we require this
information to be posted ‘‘prominently’’
on the fund’s Web site? Should we
provide any other instruction as to the
presentation of this information, in
order to highlight the information and/
or lead investors efficiently to the
information, for example, should we
require that the information be posted
621 See proposed (FNAV) rule 2a–7(h)(10)(v);
proposed (Fees & Gates) rule 2a–7(h)(10)(v). A fund
would also be required to file Form N–CR no later
than the first business day following the occurrence
of any event specified in Part C of Form N–CR.
622 See supra note 448.
623 See infra text following note 710.
624 See supra notes 611—619 and accompanying
text. Of course, in the likely event that the fund files
a post-effective amendment within one year
following the provision of financial support to the
fund, information about the financial support
would appear both in the fund’s registration
statement and on the fund’s Web site for the
remainder of the year following the provision of
support.
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on the fund’s home page or be
accessible in no more than two clicks
from the fund’s home page?
• Should this information be posted
on the fund’s Web site for a longer or
shorter period than one year following
the occurrence of any event specified in
Part C of Form N–CR?
• How would the requirement for
money market funds to disclose current
instances of financial support affect the
behavior of fund shareholders and/or
the market as a whole? For instance,
could this disclosure make shareholders
quicker to redeem shares if they believe
the provision of financial support to be
a sign of portfolio weakness? 625
Alternatively, would shareholders
prefer funds with histories of support
because of the sponsors’ demonstrated
willingness to backstop the funds?
b. Economic Analysis
The qualitative benefits and costs of
the proposed requirements regarding the
disclosure of financial support received
by a fund from its sponsor or a fund
affiliate are discussed above. The
Commission staff has not measured the
quantitative benefits of these proposed
requirements at this time because of
uncertainty regarding how the proposed
disclosure may affect different investors’
behavior.626 Because the required
registration statement and Web site
disclosure overlap with the information
that a fund must disclose on Form N–
CR when the fund receives financial
support from a sponsor or fund affiliate,
we anticipate that the costs a fund will
incur to draft and finalize the disclosure
that will appear in its registration
statement and on its Web site will
largely be incurred when the fund files
Form N–CR, as discussed below in
section III.G.3.627 In addition, we
625 See Federated Investors Feb. 15 FSOC
Comment Letter, supra note 192 (noting that
enhanced disclosure requirements may have
unintended consequences).
626 Likewise, the SEC staff has not presently
quantified the benefits of the proposed
requirements on account of uncertainty regarding
the effects that the requirements may have on, for
example, investors’ understanding of the risks
associated with money market funds, investors’
ability to compare the relative risks of investing in
different funds, the potential imposition of market
discipline on portfolio managers, or the
Commission’s ability to execute its oversight role.
627 Although the proposed registration statement
disclosure would include historical information
about the financial support that a fund has received
from its sponsor or other fund affiliate(s), and the
proposed Form N–CR and Web site disclosure
would include information about current instances
of financial support, the required disclosure
elements for the proposed Form N–CR disclosure,
Web site disclosure, and registration statement
disclosure are identical. Therefore, we anticipate
that a fund would largely be able to use the
disclosure it drafted for purposes of the Form N–
CR and Web site disclosure requirements for
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estimate that a fund would incur costs
of $148 628 to review and update the
historical disclosure in its registration
statement (plus printing costs), and
costs of $207 629 each time that it
updates its Web site to include the
required disclosure.
We believe that the proposed
requirements could increase
informational efficiency by providing
additional information to investors and
the Commission about the frequency,
nature, and amount of financial support
provided by money market fund
sponsors. This in turn could assist
investors in analyzing the risks
associated with particular funds, which
could increase allocative efficiency 630
and could positively affect competition
by permitting investors to choose
whether to invest in certain funds based
on this information. However, the
proposed requirements could advantage
larger funds and fund groups, if a fund
sponsor’s ability to provide financial
support to a fund is perceived to be a
competitive benefit. Also, if investors
move their assets among money market
funds or decide to invest in investment
products other than money market
funds as a result of the proposed
disclosure requirements, this could
adversely affect the competitive stance
of certain money market funds, or the
money market fund industry generally.
The proposed disclosure requirements
also could have additional effects on
capital formation, depending on if
investors interpret financial support as
a sign of money market fund strength or
weakness. If sponsor support (or the
lack of need for sponsor support) were
understood to be a sign of fund strength,
the proposed requirements could
enhance capital formation by promoting
stability within the money market fund
industry. On the other hand, the
proposed disclosure requirements could
detract from capital formation if sponsor
support were understood to indicate
fund weakness and made money market
funds more susceptible to heavy
redemptions during times of stress, or if
money market fund investors decide to
move their money out of money market
funds entirely as a result of the
proposed disclosure. Accordingly,
because we do not have the information
purposes of the registration statement disclosure
requirement.
628 The costs associated with updating the fund’s
registration statement are paperwork-related costs
and are discussed in more detail in infra section
IV.A.7 and IV.B.7.
629 The costs associated with updating the fund’s
Web site are paperwork-related costs and are
discussed in more detail in infra section IV.A.1.f
and IV.B.1.f.
630 See supra note 562 and accompanying text.
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necessary to provide a reasonable
estimate, we are unable to determine the
effects of this proposal on capital
formation. Finally, the required
disclosure could assist the Commission
in overseeing money market funds and
developing regulatory policy affecting
the money market fund industry, which
might affect capital formation positively
if the resulting more efficient or more
effective regulatory framework
encouraged investors to invest in money
market funds.
We request comment on this
economic analysis:
• Are any of the proposed disclosure
requirements unduly burdensome, or
would they impose any unnecessary
costs?
• We request comment on the staff’s
estimates of the operational costs
associated with the proposed disclosure
requirements.
• We request comment on our
analysis of potential effects of these
proposed disclosure requirements on
efficiency, competition, and capital
formation. In particular, would the
proposed disclosure increase
informational efficiency by increasing
awareness of sponsor support? If so,
would the disclosure requirements for
sponsor support make money market
funds more or less susceptible to heavy
redemptions in times of fund and
market stress?
2. Daily Disclosure of Daily Liquid
Assets and Weekly Liquid Assets
a. Proposed Disclosure Requirements
We are proposing amendments to rule
2a–7 that would require money market
funds to disclose prominently on their
Web sites the percentage of the fund’s
total assets that are invested in daily
and weekly liquid assets, as well as the
fund’s net inflows or outflows, as of the
end of the previous business day.631 The
proposed amendments would require a
fund to maintain a schedule, chart,
graph, or other depiction on its Web site
showing historical information about its
investments in daily liquid assets and
weekly liquid assets, as well as the
fund’s net inflows or outflows, for the
previous 6 months, and would require
the fund to update this historical
information each business day, as of the
end of the preceding business day.632
These amendments would complement
the proposed requirement, as discussed
elsewhere in this Release, for money
631 See proposed (FNAV) rule 2a–7(h)(10)(ii);
proposed (Fees & Gates) rule 2a–7(h)(10)(ii). A
‘‘business day,’’ defined in rule 2a–7 as ‘‘any day,
other than Saturday, Sunday, or any customary
business holiday,’’ would end after 11:59 p.m. on
that day.
632 Id.
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market funds to provide on their
monthly reports on Form N–MFP the
percentage of total assets invested in
daily liquid assets and weekly liquid
assets broken out on a weekly basis.633
We believe that daily disclosure of
money market funds’ daily liquid assets
and weekly liquid assets would promote
transparency regarding how money
market funds are managed, and thus
may permit investors to make more
efficient and informed investment
decisions. Additionally, we believe that
this enhanced disclosure may impose
external market discipline on portfolio
managers, in that it may encourage fund
managers to carefully manage their daily
and weekly liquid assets, which may
decrease portfolio risk and promote
stability in the short-term financing
markets.634 We also believe that it could
encourage funds to ensure that the
fund’s liquidity level is at least as large
as its shareholders’ demand for
liquidity. The proposed daily disclosure
requirement would provide an
additional level of detail to the
proposed requirement for money market
funds to break out their daily liquid
assets and weekly liquid assets on a
weekly basis on their monthly reports
on Form N–MFP, which in turn would
further enhance investors’ and the
Commission’s ability to monitor fund
risks. For example, daily Web site
disclosure of liquid asset levels would
help investors estimate, in near-real
time, the likelihood that a fund may be
able to satisfy redemptions by using
internal cash sources (rather than by
selling portfolio securities) in times of
market turbulence, or, if our liquidity
fees and gates proposal is adopted,
whether a fund may approach or exceed
a trigger for the potential imposition of
a liquidity fee or gate. Requiring daily
Web site disclosure of liquid assets
across the money market fund industry
also would permit investors more
readily to determine whether liquidityrelated stresses are idiosyncratic to
particular funds, thus minimizing the
prospect of redemption pressures on
funds that are not similarly affected.635
This disclosure also could make
information about fund liquidity more
accessible to a broad range of investors.
This daily Web site disclosure should
also assist the Commission in its
633 See
infra note 769 and accompanying text.
ICI Jan. 24 FSOC Comment Letter, supra
note 25 (stating that prime money market funds
should be required to make frequent public
disclosure (via their Web sites) of their weekly
liquid asset levels to ‘‘enhance transparency and
encourage a highly conservative approach to
portfolio management’’).
635 See ICI Jan. 24 FSOC Comment Letter, supra
note 25.
634 See
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oversight role and promote certain
efficiencies, in that it would permit the
Commission to access detailed portfolio
liquidity information as necessary to its
oversight of money market funds,
without the need to contact fund
management or service providers to
obtain it. However, the proposed
disclosure could also change behavior,
in that it could make shareholders
quicker to redeem shares if they believe
a decrease in portfolio liquidity could
affect the fund’s ability to satisfy
redemptions.636 The proposed
disclosure also could increase the
volatility of a fund’s flows, even during
times when the fund is not under stress,
if shareholders are sensitive to changes
in the fund’s liquidity levels.637
While investors will be able to access
historical information about money
market funds’ daily liquid assets and
weekly liquid assets if the proposed
amendments to Form N–MFP are
adopted,638 we believe that daily Web
site disclosure of money market funds’
daily liquid assets and weekly liquid
assets, as well as the fund’s net inflows
or outflows, would permit shareholders
to access more detailed information in
a more convenient and detailed manner
than comparing monthly Form N–MFP
filings. We believe that investors would
be able to compare current liquidity
information with previous information
from which they (or others) may discern
trends. Public daily disclosure of money
market funds’ daily liquid assets and
weekly liquid assets also could decrease
funds’ susceptibility to runs, as
shareholders might be less likely to
redeem fund shares during the
occurrence of negative market events if
they could ascertain, in near real time,
that the fund had enough liquidity such
that remaining shareholders would not
bear the costs of liquidity incurred by
redeeming shareholders. Because money
market funds are currently required to
maintain a six-month record of portfolio
holdings on the fund Web site,639
requiring a fund to post its daily liquid
assets and weekly liquid assets for the
same period would permit investors to
analyze the relationship between the
fund’s portfolio holdings and its
636 See FSOC Proposed Recommendations, supra
note 114 (‘‘There is a risk that more frequent
reporting of portfolio information may make
investors quicker to redeem when these indicators
show signs of deterioration. In addition, more
frequent reporting of portfolio information such as
daily mark-to-market per share values or liquidity
levels could increase the volatility of MMFs’ flows,
even when the funds are not under stress, if
investors are highly sensitive to changes in those
levels.’’).
637 See id.
638 See infra note 769 and accompanying text.
639 See rule 2a–7(c)(12).
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liquidity levels over time. Additionally,
we believe that disclosure of
information about net shareholder flow
would provide helpful contextual
information regarding the significance
of the reported liquidity information, as
a fund would require greater liquidity to
respond to greater shareholder flow
volatility, and vice versa.
We request comment on the proposed
amendments to rule 2a–7 that would
require money market funds to disclose
daily the percentages of fund assets
invested in daily and weekly liquid
assets, as well as the fund’s net inflows
or outflows.
• Would the proposed amendments
be useful in assisting shareholders in
better understanding how money market
funds are managed and in assessing a
fund’s risk? Would the proposed
amendments promote the goals of
enhancing transparency and
encouraging market discipline on
money market funds in a way that
increases stability in the short-term
financing markets? How, if at all, would
the proposed amendments affect the
amount of liquid assets that a money
market fund’s investment adviser
purchases on behalf of the fund? Would
disclosing information about net
shareholder flows assist investors in
understanding the significance of the
reported liquidity information?
• Should we require that any more,
any less, or any other information
regarding portfolio liquidity be posted
on money market funds’ Web sites?
• As proposed, should we require this
information to be posted ‘‘prominently’’
on the fund’s Web site? Should we
provide any other instruction as to the
presentation of this information, in
order to highlight the information and/
or lead investors efficiently to the
information? For example, should we
require that the information be posted
on the fund’s home page or be
accessible in no more than two clicks
from the fund’s home page?
• Should we require information
regarding the percentage of money
market fund assets invested in daily
liquid assets and weekly liquid assets to
be posted less frequently than daily?
Should we require funds to maintain
this information on their Web sites for
a period of more or less than 6 months?
• Would the proposed amendments
incentivize a money market fund, in
certain circumstances, to sell assets that
are not weekly liquid assets rather than
weekly liquid assets? Will this harm
non-redeeming shareholders?
• How would the requirement for
money market funds to disclose the
percentages of fund assets invested in
daily liquid assets and weekly liquid
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assets affect the behavior of fund
shareholders and/or the market as a
whole? For instance, could this
disclosure make shareholders quicker to
redeem shares upon a decrease in
portfolio liquidity, or generally increase
the volatility of a fund’s flows? Would
this disclosure result in reducing the
chances that better-informed
shareholders may redeem ahead of retail
or less informed shareholders? If the
liquidity fees and gates proposal is
adopted, would transparency of fund
liquidity be important to permit
investors in funds other than the one
imposing a fee to assess the liquidity
position of their fund before
determining whether to redeem? Would
such transparency affect investors’
redemptions in normal market
conditions or just in periods when
liquidity is costly? Would such
transparency affect investors’
willingness to buy shares? How are
these factors related to what motivates
money market fund investors to
redeem?
• Would disclosure of money market
funds’ liquidity levels, coupled with
portfolio holdings reported on Form N–
MFP (and more frequent portfolio
holdings disclosure on funds’ Web sites,
to the extent the Commission
determines to require this 640), enable
other market participants to infer a
fund’s potential liquidity demand and
likely trading needs by the fund? Would
this disadvantage a money market fund
in any way?
b. Economic Analysis
The qualitative benefits and costs of
the proposed requirements regarding
disclosure of the percentage of a money
market fund’s assets that are invested in
daily liquid assets and weekly liquid
assets, as well as the fund’s net inflows
or outflows, are discussed above.641 We
believe that the proposed requirements
could increase informational efficiency
by providing additional information
about money market funds’ liquidity to
investors and the Commission. This in
turn could assist investors in analyzing
the risks associated with particular
funds, which could increase allocative
efficiency and could positively affect
competition by permitting investors to
choose whether to invest in certain
funds based on this information.
However, if investors were to move their
assets among money market funds or
decide to invest in investment products
other than money market funds as a
640 See
infra section III.F.4.
supra note 626 and accompanying text for
a discussion of the reasons that the Commission
staff has not measured the quantitative benefits of
these proposed requirements at this time.
641 See
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result of the proposed disclosure
requirements, this could adversely affect
the competitive stance of certain money
market funds, or the money market fund
industry generally.
The proposed requirements could also
have effects on capital formation. The
required disclosure could assist the
Commission in overseeing money
market funds and developing regulatory
policy affecting the money market fund
industry, which might affect capital
formation positively if the resulting
regulatory framework more efficiently or
more effectively encouraged investors to
invest in money market funds. The
proposed requirements also may impose
external market discipline on portfolio
managers, which in turn could create
market stability and enhance capital
formation, if the resulting market
stability encouraged more investors to
invest in money market funds. However,
the proposed requirements could detract
from capital formation by decreasing
market stability if investors became
quicker to redeem during times of stress
as a result of the proposed disclosure
requirements. Accordingly, we do not
have the information necessary to
provide a reasonable estimate the effects
of these proposed requirements on
capital formation.
Costs associated with these disclosure
requirements include initial, one-time
costs, as well as ongoing costs. Initial
costs include the costs to design the
schedule, chart, graph, or other
depiction showing historical liquidity
information in a manner that clearly
communicates the required information
and to make the necessary software
programming changes to the fund’s Web
site to present the depiction in a manner
that can be updated each business day.
We estimate that the average one-time
costs for each money market fund to
design and present the historical
depiction of daily liquid assets and
weekly liquid assets would be
$20,150.642 Funds also would incur
ongoing costs to update the depiction of
daily liquid assets and weekly liquid
assets each business day. We estimate
that the average ongoing annual costs
that each fund would incur to update
the required disclosure would be
$9,184.643 Because money market funds
642 Staff estimates that these costs would be
attributable to project assessment (associated with
designing and presenting the historical depiction of
daily liquid assets and weekly liquid assets), as well
as project development, implementation, and
testing. See supra note 245 (discussing the bases of
our staff’s estimates of operational and related
costs). The costs associated with these activities are
all paperwork-related costs and are discussed in
more detail in infra section IV. See infra section
IV.A.1.f.
643 See id.
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currently must calculate the percentage
of their assets that are invested in daily
liquid assets and weekly liquid assets
each day for purposes of compliance
with the portfolio liquidity provisions of
rule 2a–7, funds should incur no
additional costs in obtaining this data
for purposes of the proposed disclosure
requirements.
We request comment on this
economic analysis:
• Are any of the proposed disclosure
requirements unduly burdensome, or
would they impose any unnecessary
costs?
• We request comment on the staff’s
estimates of the operational costs
associated with the proposed disclosure
requirements.
• We request comment on our
analysis of potential effects of these
proposed disclosure requirements on
efficiency, competition, and capital
formation.
3. Daily Web site Disclosure of Current
NAV per Share
a. Proposed Disclosure Requirements
We are proposing amendments to rule
2a–7 that would require each money
market fund to disclose daily,
prominently on its Web site, the fund’s
current NAV per share, rounded to the
fourth decimal place in the case of a
fund with a $1.0000 share price of an
equivalent level of accuracy for funds
with a different share price 644 (the
fund’s ‘‘current NAV’’) as of the end of
the previous business day.645 The
proposed amendments would require a
fund to maintain a schedule, chart,
graph, or other depiction on its Web site
showing historical information about its
daily current NAV per share for the
previous 6 months, and would require
the fund to update this historical
information each business day as of the
end of the preceding business day.646
If we were to adopt the floating NAV
alternative, the proposed amendments
would effectively require a money
market fund to publish historical
information about the sale and
redemption price of its shares each
business day as of the end of each
preceding business day.647 The
proposed amendments would require a
government money market fund or retail
money market fund (which generally
would be permitted to transact at stable
price per share), on the other hand, to
publish historical information about its
644 E.g.,
$10.000 or $100.00 per share.
proposed (FNAV) rule 2a–7(h)(10)(iii);
proposed (Fees & Gates) rule 2a–7(h)(10)(iii).
646 Id.
647 See proposed (FNAV) rule 2a–7(h)(10)(iii); 17
CFR 270.22c–1.
645 See
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market-based current NAV per share,
rounded to the fourth decimal place in
the case of funds with a $1.0000 share
price or an equivalent level of accuracy
for funds with a different share price,
each business day as of the end of each
preceding business day. Likewise, if we
were to adopt the liquidity fees and
gates alternative, the proposed
amendments would require all money
market funds to publish historical
information about the fund’s marketbased current NAV per share each
business day as of the end of each
preceding business day.648 The
proposed amendments would
complement the current requirement for
a money market fund to disclose its
shadow price monthly on Form N–
MFP.649
Whether we adopt either of the
proposed reform alternatives, we believe
that daily disclosure of money market
funds’ current NAV per share would
increase money market funds’
transparency and permit investors to
better understand money market funds’
risks.650 While Form N–MFP
information about money market funds’
month-end shadow prices is currently
publicly available with a 60-day lag,651
the proposed amendments would
permit shareholders to reference funds’
current NAV per share in near real time
to assess the effect of market events on
their portfolios.652 Public disclosure of
money market funds’ daily current NAV
per share also could decrease funds’
susceptibility to runs, as shareholders
might be less likely to sell fund shares
during the occurrence of negative
market events if they could ascertain
that their investment was not affected
by such events on a near real-time
basis.653 Requiring daily disclosure of
648 See proposed (Fees & Gates) rule 2a–
7(h)(10)(iii). The proposed amendments under the
liquidity fees and gates alternative also would
require money market funds to calculate their
market-based NAV at least once each business day.
See infra section III.F.5.
649 See Form N–MFP, Item 18. But see proposed
Form N–MFP Item A.20 and B.5 (requiring money
market funds to provide net asset value per share
data as of the close of business on each Friday
during the month reported).
650 See supra note 167 and accompanying text
(discussing the extent to which investors treat
money market funds as essentially risk-free).
651 We are proposing to eliminate the 60-day
delay in making Form N–MFP information publicly
available. See infra section III.H.4.
652 See Comment Letter of Capital Advisors
Group, Inc. (Feb. 1, 2013) (available in File No.
FSOC–2012–0003) (‘‘Capital Advisors Group FSOC
Comment Letter’’).
653 See id. But see Federated Investors Feb. 15
FSOC Comment Letter, supra note 192 (noting that
enhanced disclosure requirements ‘‘may have
unintended consequences that should also be
weighed.’’); Larry G. Locke, Ethan Mitra, and
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money market funds’ current NAV per
share also could prevent month-end
‘‘window dressing.’’ 654 This enhanced
disclosure also could impose external
market discipline on portfolio managers
consistent with their investment
objective, as well as the stability of
short-term financing markets
generally.655 However, the proposed
disclosure could also change behavior,
in that it could make shareholders
quicker to redeem shares if they believe
a decrease in the fund’s current NAV
signals portfolio deterioration or
foreshadows other problems.656 The
proposed disclosure also could increase
the volatility of a fund’s flows, even
during times when the fund is not under
stress, if shareholders are sensitive to
changes in the fund’s current NAV.657
Although current and prospective
shareholders may presently obtain
historical information about money
market funds’ month-end shadow prices
on Form N–MFP, we believe that
requiring a six-month record of the
fund’s daily current NAV on the fund’s
Web site would permit shareholders to
access more detailed information in a
more convenient manner than
comparing monthly Form N–MFP
filings. We believe that investors should
be able to compare recent NAV
information with previous information
from which they (or others analyzing
the data) may discern trends. Because
money market funds are presently
required to maintain a six-month record
of portfolio holdings on the fund Web
site,658 requiring a fund to post its daily
current NAV for the same period would
permit investors to analyze any
relationship between the fund’s
portfolio holdings and its daily current
NAV over time.
There has been a significant amount
of industry support for the more
frequent disclosure of money market
funds’ current NAV per share. In
Virginia Locke, Harnessing Whales: The Role of
Shadow Price Disclosure in Money Market Mutual
Fund Report, 11 J. BUS. & ECON. RES. 4 (2013)
(asserting that, under the current Form N–MFP
shadow price disclosure regime, there is no
statistical correlation between the shadow price of
money market funds and their investment activity,
but that the effects on shareholder behavior of
increased transparency and frequency of fund
information reporting are hard to predict).
654 See Capital Advisors Group FSOC Comment
Letter, supra note 652.
655 See ICI Jan. 24 FSOC Comment Letter, supra
note 25 (maintaining that prime money market
funds should be required to make frequent public
disclosure (via their Web sites) of their marketbased share price to ‘‘enhance transparency and
encourage a highly conservative approach to
portfolio management’’).
656 See FSOC Proposed Recommendations, supra
note 114 at 60.
657 See id.
658 See rule 2a–7(c)(12).
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January and February of 2013, a number
of money market fund sponsors of large
funds began voluntarily disclosing their
funds’ daily current NAV per share,
calculated using available market
quotations.659 Additionally, industry
groups have advocated for more
frequent public disclosure of money
market funds’ current NAV per share.660
We request comment on the proposed
amendments to rule 2a–7 that would
require money market funds to disclose
the fund’s daily market-based NAV per
share on the fund Web site:
• Would daily disclosure of money
market funds’ current NAV per share be
useful to assist shareholders in
increasing money market funds’
transparency and better understanding
money market funds’ risks? Would the
proposed amendments promote the
goals of enhancing transparency and
encouraging fund managers to manage
portfolios in a manner that increases
stability in the short-term financing
markets? Would the daily disclosure of
market prices encourage funds to invest
in easier-to-price securities or less
volatile securities? How, if at all, would
the effects of the proposed disclosure
requirement differ for stable price funds
(which would be required to disclose
their market-based current NAV per
share) and floating NAV funds (which
would be required to disclose the sale
and redemption price of their shares)?
• How, if at all, have shareholders
responded to the monthly disclosure of
funds’ current NAV per share, as
required by the 2010 amendments?
Would shareholders respond differently
to the proposed daily disclosure than
they have to historical monthly
disclosure?
• Should information regarding
money market funds’ current NAV per
share be required to be posted to a
fund’s Web site less frequently than the
proposed amendments would require?
Should funds be required to maintain
this information on their Web sites for
a period of more or less than 6 months?
• As proposed, should we require this
information to be posted ‘‘prominently’’
on the fund’s Web site? Should we
provide any other instruction as to the
presentation of this information, in
order to highlight the information and/
or lead investors efficiently to the
659 A number of large fund complexes have begun
(or plan) to disclose daily money market fund
market valuations (i.e., shadow prices), including
BlackRock, Charles Schwab, Federated Investors,
Fidelity Investments, Goldman Sachs, J.P. Morgan,
Reich & Tang, and State Street Global Advisors. See,
e.g., Money Funds’ New Openness Unlikely to Stop
Regulation, WALL ST. J. (Jan. 30, 2013).
660 See e.g., ICI Jan. 24 FSOC Comment Letter,
supra note 25; SIFMA FSOC Comment Letter, supra
note 358, at 11.
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information, for example, should we
require that the information be posted
on the fund’s home page or be
accessible in no more than two clicks
from the fund’s home page?
• How would the requirement for
money market funds to disclose their
current NAV per share daily affect the
behavior of fund shareholders and/or
the market as a whole? For instance,
could this disclosure make shareholders
quicker to redeem shares upon a
decrease in current NAV, or generally
increase the volatility of a fund’s flows?
b. Economic Analysis
The qualitative benefits and costs of
the proposed requirements regarding
daily disclosure of a money market
fund’s current NAV per share are
discussed above.661 We believe that the
proposed requirements’ effects on
efficiency, competition, and capital
formation would likely be similar to the
effects of the proposed daily disclosure
requirements regarding funds’ daily
liquid assets and weekly liquid assets,
discussed above.662 We believe that the
proposed requirements could increase
informational efficiency by providing
greater information about money market
funds’ daily current per-share NAV to
investors and the Commission. This in
turn could assist investors in analyzing
the risks associated with particular
funds, which could increase allocative
efficiency and could positively affect
competition by permitting investors to
choose whether to invest in certain
funds based on this information.
However, if investors move their assets
among money market funds or decide to
invest in investment products other
than money market funds as a result of
the proposed disclosure requirements,
this could adversely affect the
competitive stance of certain money
market funds, or the money market fund
industry generally.
The proposed requirements could also
have effects on capital formation. On
one hand, the proposed requirements
may impose external market discipline
on portfolio managers, which in turn
could create market stability and
enhance capital formation, if the
resulting market stability encouraged
more investors to invest in money
market funds. On the other hand, the
proposed requirements could detract
from capital formation by decreasing
market stability if investors became
quicker to redeem during times of stress
as a result of the proposed disclosure
661 See supra note 626 and accompanying text for
a discussion of the reasons that the Commission
staff has not measured the quantitative benefits of
these proposed requirements at this time.
662 See supra section III.F.2.
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requirements. Accordingly, we do not
have the information necessary to
provide a reasonable estimate of the
effects of these proposed requirements
on capital formation.
Costs associated with these disclosure
requirements include initial, one-time
costs, as well as ongoing costs.663 Initial
costs include the costs to design the
schedule, chart, graph, or other
depiction showing historical NAV
information in a manner that clearly
communicates the required information
and to make the necessary software
programming changes to the fund’s Web
site to present the depiction in a manner
that will be able to be updated each
business day. We estimate that the
average one-time costs for each money
market fund to design and present the
fund’s daily current NAV would be
$20,150.664 Funds also would incur
ongoing costs to update the depiction of
the fund’s current NAV each business
day. We estimate that the average
ongoing annual costs that each fund
would incur to update the required
disclosure would be $9,184.665 Because
floating NAV money market funds
would be required to calculate their sale
and redemption price each day, these
funds should incur no additional costs
in obtaining this data for purposes of the
proposed disclosure requirements.
Stable price money market funds
(including government money market
funds and retail funds if we adopt the
floating NAV proposal, and all funds if
we adopt the liquidity fees and gates
proposal), which would be required to
calculate their current NAV per share
daily pursuant to proposed amendments
to rule 2a–7, likewise should incur no
additional costs in obtaining this data
for purposes of the proposed disclosure
requirements.666
We request comment on this
economic analysis:
• Are any of the proposed disclosure
requirements unduly burdensome, or
663 As discussed above, some money market
funds presently publicize their current NAV per
share daily on the fund’s Web site. The staff expects
these funds to incur few, if any, additional costs to
comply with these proposed disclose requirements.
664 Staff estimates that these costs would be
attributable to project assessment (associated with
designing and presenting the historical depiction of
the fund’s daily current NAV per share), as well as
project development, implementation, and testing.
See supra note 245 (discussing the bases of our
staff’s estimates of operational and related costs).
The costs associated with these activities are all
paperwork-related costs and are discussed in more
detail in infra sections IV.A.1.f and IV.B.1.f.
665 Id.
666 See infra section III.F.5 (discussing the
proposed requirement for stable price money
market funds to calculate their current NAV per
share daily, as well as the operational costs
associated with this proposed daily calculation
requirement).
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would they impose any unnecessary
costs?
• We request comment on the staff’s
estimates of the operational costs
associated with the proposed disclosure
requirements.
• We request comment on our
analysis of potential effects of these
proposed disclosure requirements on
efficiency, competition, and capital
formation.
4. Disclosure of Portfolio Holdings
a. Harmonization of Rule 2a–7 and Form
N–MFP Portfolio Holdings Disclosure
Requirements
Money market funds are currently
required to file information about the
fund’s portfolio holdings on Form N–
MFP within five business days after the
end of each month, and to disclose
much of the portfolio holdings
information that Form N–MFP requires
on the fund’s Web site each month with
60-day delay.667 We are proposing
amendments to rule 2a–7 in order to
harmonize the specific portfolio
holdings information that rule 2a–7
currently requires funds to disclose on
the fund’s Web site with the
corresponding portfolio holdings
information proposed to be reported on
Form N–MFP pursuant to proposed
amendments to Form N–MFP. We
believe that these proposed
amendments would benefit money
market fund investors by providing
additional, and more precise,
information about portfolio holdings
information, which could allow
investors better to evaluate the current
risks of the fund’s portfolio investments.
Specifically, we are proposing
amendments to the categories of
portfolio investments reported on Form
N–MFP, and are therefore also
proposing amendments to the categories
of portfolio investments currently
required to be reported on a money
market fund’s Web site.668 We are also
proposing an amendment to Form N–
MFP that would require funds to report
the maturity date for each portfolio
security using the maturity date used to
calculate the dollar-weighted average
life maturity, and therefore we are also
proposing amendments to the current
Web site disclosure requirements
regarding portfolio securities’ maturity
dates.669 In addition, we are proposing
amendments to the current requirement
667 See rule 2a–7(c)(12)(ii); rule 30b1–7; Form N–
MFP, General Instruction A.
668 See proposed (FNAV and Fees & Gates) rule
2a–7(h)(10)(i)(B); proposed Form N–MFP, Item C.6.
669 See proposed (FNAV and Fees & Gates) rule
2a–7(h)(10)(i)(B); proposed Form N–MFP, Item
C.12.
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36931
for funds to disclose the ‘‘amortized cost
value’’ of each portfolio security to
reflect the fact that funds under each
proposal would no longer be permitted
to use the amortized cost method to
value portfolio securities.670 Currently,
we do not require funds to disclose the
market-based value of portfolio
securities on the fund’s Web site,
because doing so would disclose this
information prior to the time the
information becomes public on Form N–
MFP (on account of the current 60-day
delay before Form N–MFP information
becomes publicly available). Because we
propose to remove this 60-day delay, we
are also proposing that funds make the
market-based value of their portfolio
securities available on the fund Web site
at the same time that this information
becomes public on Form N–MFP.671
Because the new information that a
fund would be required to present on its
Web site overlaps with the information
that a fund would be required to
disclose on Form N–MFP, we anticipate
that the costs a fund will incur to draft
and finalize the disclosure that will
appear in its Web site will largely be
incurred when the fund files Form N–
MFP, as discussed below in section
III.H.6. In addition, we estimate that a
fund would incur annual costs of $2,484
associated with updating its Web site to
include the required monthly
disclosure.672
• We request comment on the Web
site disclosure that we propose to
harmonize with the disclosure proposed
to be reported on Form N–MFP. Should
any of the information that is proposed
to be reported on Form N–MFP, and that
we propose to require funds to disclose
on the fund’s Web site, not be required
to appear on the fund’s Web site?
• We request comment on the staff’s
estimates of the operational costs
associated with the proposed disclosure
requirements.
b. Request for Comment About
Additional Web Site Disclosure on
Portfolio Holdings
Because certain money market funds
have high portfolio turnover rates, the
monthly disclosure requirement
described above may not permit fund
investors to fully understand a fund’s
portfolio composition and its attendant
670 See proposed (FNAV and Fees & Gates) rule
2a–7(h)(10)(i)(B).
671 See proposed (Fees & Gates) rule 2a
7(h)(10)(i)(B).
672 The costs associated with updating the fund’s
Web site are paperwork-related costs and are
discussed in infra section IV.A.1.f.i.
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risks.673 For this reason, during times of
stress, uncertainty regarding portfolio
composition could increase investors’
incentives to redeem in between
reporting periods, as they would not be
able to determine if their fund is
exposed to certain stressed assets.674
We are considering whether to require
more frequent disclosure of money
market funds’ portfolio holdings on a
fund’s Web site, including the market
value of individual portfolio
securities.675 Increasing the frequency of
such disclosure might provide greater
transparency to investors and the
Commission regarding the risks of the
investments held by money market
funds. More frequent portfolio holdings
disclosure also could assist investors,
particularly during times of stress, in
differentiating between money market
funds based on the quality and stability
of their investments, potentially limiting
the incentive to run.676 In addition,
requiring money market funds to
disclose their portfolio holdings more
frequently may impose external market
discipline on portfolio managers
consistent with their investment
objective.677
On the other hand, more frequent
disclosure of portfolio holdings could
make investors quicker to redeem when
these holdings show signs of
deterioration, and also could encourage
money market funds to use less
differentiated investment strategies.678
More frequent disclosure of portfolio
holdings also might lead to ‘‘front
running’’ of the portfolio, where other
investors could trade ahead of money
market fund purchasers, or ‘‘free
riding,’’ where other investors mirror
the investment strategies of the money
market fund. In past years, some fund
complexes have begun disclosing
money market fund portfolio holdings
weekly and daily on their Web sites,
673 See Federal Reserve Bank Presidents FSOC
Comment Letter, supra note 38 (noting that as of
month end November 2012, prime funds turned
over on average 44% of portfolio assets every week).
674 See id.
675 We also request comment on whether we
should require more frequent filing of Form N–
MFP, which would result in more frequent
disclosure of portfolio holdings on Form N–MFP, in
infra section III.H.5.
676 See FSOC Proposed Recommendations, supra
note 114, at 60.
677 See supra notes 654 and 655 and
accompanying text. See also RSFI Study, supra note
21, at 38 (noting that increased transparency of
portfolio holdings ‘‘might dampen a fund manager’s
willingness to hold securities whose ratings are at
odds with the underlying risk, especially at times
when credit conditions are deteriorating’’).
678 See FSOC Proposed Recommendations, supra
note 114, at 61.
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citing shareholder demand as the
impetus for this disclosure.679
We request comment on whether we
should require money market funds to
disclose portfolio holdings via their
Web site more frequently than monthly.
• Would more frequent disclosure of
money market funds’ portfolio holdings
be useful to assist shareholders in
assessing a fund’s risk? Would more
frequent disclosure promote the goals of
enhancing transparency, permitting
shareholders to differentiate between
money market funds, and encouraging
fund managers to manage portfolios in
a manner that increases stability in the
short-term financing markets? How, if at
all, would more frequent disclosure of
portfolio holdings affect the portfolio
assets that a money market fund’s
investment adviser purchases on behalf
of the fund?
• What type of investors would be
most likely to benefit from more
frequent disclosure of money market
funds’ portfolio holdings? Would this
disclosure allow more attentive
investors to disadvantage less attentive
investors?
• If more frequent disclosure of
money market funds’ portfolio holdings
would be useful, how frequently should
such disclosure be required? Daily?
Weekly?
• During the 2007–2008 financial
crisis, some funds voluntarily chose to
disclose portfolio information more
frequently than usual, while other funds
did not change their disclosure
practices. How and why did funds make
these decisions, and how did investors
respond? How would the benefits and
costs of disclosure be affected by
moving from a voluntary system to a
mandated system? What would be the
679 See, e.g., Dreyfus FSOC Comment Letter,
supra note 174 (‘‘We decided to disclose portfolio
holdings daily for client-servicing purposes to
facilitate due diligence inquiries from fund
shareholders on portfolio composition issues on a
real-time basis in a manner consistent with
applicable law. Institutional investors in particular
are keenly aware of risk of loss in their money
market fund investments. As part of their due
diligence, they regularly analyze Dreyfus fund
portfolio holdings for credit, issuer, liquidity, and
counterparty concerns, among others.’’); Colleen
Sullivan & Mike Schnitzel, Money Funds Move to
Update Holdings Faster, FUND ACTION, Sept. 29,
2008, available at https://www.fundaction.com/pdf/
FA092908.pdf (noting that American Beacon Funds,
Fidelity Investments, Evergreen Investments,
Oppenheimer Funds, and Sentinel Investments
provide money market fund portfolio holdings
information more frequently than monthly, for
reasons related to investor demand).
In addition, such Web site disclosures would also
address issues related to selective disclosure of
portfolio holdings. See Disclosure Regarding Market
Timing and Selective Disclosure of Portfolio
Holdings, Securities Act Release No. 33–8408 (Apr.
19, 2004) [69 FR 22300 (Apr. 23, 2004)] at section
II.C.
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benefits of retaining a voluntary system?
Would investors view voluntary
disclosure as a signal regarding the level
of transparency of a fund?
• Should any requirement for more
frequent disclosure of portfolio holdings
be limited to a certain type or types of
money market fund (e.g., prime money
market funds, which have historically
been more prone to heavy redemptions
during times of market stress than other
kinds of money market funds)? 680
• How would more frequent
disclosure of money market funds’
portfolio holdings affect the behavior of
fund shareholders and/or the market as
a whole? For instance, would this
disclosure increase or decrease funds’
susceptibility to runs, affect money
market funds’ ability to use
differentiated investment strategies, or
lead to ‘‘front running’’ or ‘‘free riding’’?
• If we were to require more frequent
Web site disclosure of money market
funds’ portfolio holdings, should we
also require more frequent filing of
Form N–MFP (which includes certain
portfolio information that we do not
currently require, and do not currently
propose to require, funds to disclose on
their Web sites) with the Commission?
If so, should we require Form N–MFP to
be filed as frequently as we require Web
site disclosure of portfolio holdings?
What impact would this have, if any, on
analysts who use Form N–MFP data?
5. Daily Calculation of Current NAV per
Share Under the Liquidity Fees and
Gates Proposal
a. Proposed Daily NAV Calculation
Requirement for Stable Price Funds
We are proposing amendments to rule
2a–7 that would require stable price
funds (including government and retail
funds under the floating NAV proposal,
and all funds under the fees and gates
proposal) to calculate the fund’s current
NAV per share based on current market
factors at least once each business
day.681 Rule 2a–7 currently requires
money market funds to calculate the
fund’s NAV per share, using available
market quotations (or an appropriate
substitute that reflects current market
conditions), at such intervals as the
board of directors determines
appropriate and reasonable in light of
current market conditions.682 We
believe that daily disclosure of money
market funds’ current NAV per share
680 See
supra notes 79–89 and accompanying text.
proposed (FNAV and Fees & Gates) rule
2a–7(h)(10)(iii); see also text accompanying supra
notes 644 and 645 for definition of ‘‘current NAV.’’
682 Rule 2a–7(c)(8)(ii). Item 18 of Form N–MFP
currently requires a fund to disclose its marketbased NAV monthly.
681 See
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would increase money market funds’
transparency and permit investors to
better understand money market funds’
risks, and thus we propose amendments
to rule 2a–7 that would require this
proposed disclosure.683 Because we are
proposing to require money market
funds to disclose their current NAV
daily on the fund Web site, we
correspondingly are proposing to amend
rule 2a–7 to require funds to make this
calculation on a daily basis, rather than
at the board’s discretion.684 Many
money market funds already calculate
and disclose their current NAV on a
daily basis, and thus we do not expect
that requiring all money market funds to
perform a daily calculation should
entail significant additional costs.685
We request comments on the
proposed amendments to rule 2a–7 that
would require money market funds to
calculate their current NAV daily if the
we were to adopt the liquidity fees and
gates alternative.
• Would the proposed daily
calculation requirement affect what
assets a money market fund purchases?
For example, would the requirement
make funds less willing to invest in
assets that are more difficult to value, or
in more volatile assets?
• Rule 2a–7 currently requires a
money market fund’s board of directors
to review the amount of deviation
between the fund’s market-based NAV
per share and the fund’s amortized cost
per share ‘‘periodically.’’ 686 If we
require a money market fund to
calculate its current NAV daily, should
we also require the fund’s board to
review the deviation between the
current NAV per share and the fund’s
intended stable price per share at a
specified interval? If so, what would be
an appropriate interval? Weekly?
Monthly? Quarterly?
b. Economic Analysis
The qualitative benefits and costs of
the proposed requirement for money
market funds to calculate the fund’s
683 See
supra section III.F.3.
we were to adopt the floating NAV
alternative, money market funds would be required
to calculate a potentially fluctuating sale and
redemption price daily, and therefore, under the
floating NAV alternative, we do not propose to
amend rule 2a–7 in order to require daily marketbased NAV calculations.
685 The costs for those funds that do not already
calculate and disclose their market-based NAV on
a daily basis are discussed in detail below. See infra
notes 689–693 and accompanying text.
686 Rule 2a–7(c)(8)(ii)(A)(2). The proposed
amendments to rule 2a–7 do not include this
requirement, as money market funds under each
proposal generally would no longer be able to use
amortized cost valuation for their portfolio
holdings. See supra notes 140, 177, 182, and 328
and accompanying text.
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684 If
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current NAV per share daily are
discussed above.687 We believe that this
proposed requirement may positively
affect competition, in that it would
require all money market funds to
calculate their daily current per-share
NAV. Presently, some funds but not
others calculate their current NAV per
share daily, and therefore the proposed
requirement would help level the
associated costs incurred by all money
market funds and neutralize any
competitive advantage associated with
determining not to calculate daily
current per-share NAV. We believe that
the effects on efficiency and capital
formation of calculating the fund’s
current NAV daily cannot be separated
from the effects of disclosing money
market funds’ current NAV per share
daily, which are discussed above.
The costs associated with this
proposed requirement include the costs
for funds to determine the current
values of their portfolio securities each
day. We estimate that 25% of active
money market funds, or 147 funds, will
incur new costs to comply with this
requirement.688 However, the proposed
requirement will result in no additional
costs for those money market funds that
presently determine their current NAV
per share daily on a voluntary basis.689
All money market funds are presently
required to disclose their market-based
NAV per share monthly on Form N–
MFP, and if the proposed amendments
to Form N–MFP are adopted, the
frequency of this disclosure would
increase to weekly.690 As discussed
below, some money market funds
license a software solution from a third
party that is used to assist the funds to
prepare and file the information that
Form N–MFP requires, and some funds
retain the services of a third party to
provide data aggregation and validation
services as part of preparing and filing
of reports on Form N–MFP on behalf of
the fund.691 We expect, based on
conversations with industry
representatives, that money market
687 See supra note 626 and accompanying text for
a discussion of the reasons that the Commission
staff has not measured the quantitative benefits of
these proposed requirements at this time.
688 Commission staff estimates that there are
currently 586 active money market funds. This
estimate is based on a staff review of reports on
Form N–MFP filed with the Commission for the
month ended February 28, 2013. 586 money market
funds × 25% = 147 money market funds.
689 Based on our understanding of money market
fund valuation practices, we estimate that 75% of
active money market funds presently determine
their current NAV daily.
690 See proposed Form N–MFP Item A.21 and B.5
(requiring money market funds to provide net asset
value per share data as of the close of business on
each Friday during the month reported).
691 See infra sections III.H.6, IV.A.3 and IV.B.3.
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funds that do not presently calculate the
current values of their portfolio
securities each day would generally use
the same software or service providers
to calculate the fund’s current NAV per
share daily that they presently use to
prepare and file Form N–MFP, and for
these funds, the associated base costs of
using this software or these service
providers should not be considered new
costs. However, the third-party software
suppliers or service providers may
charge more to funds to calculate a
fund’s current NAV per share daily,
which costs would be passed on to the
fund. While we do not have the
information necessary to provide a point
estimate (as they depend on a variety of
factors, including discounts relating to
volume and economies of scale, which
pricing services may provide to certain
funds), we estimate that the average
additional annual costs that a fund
would incur associated with calculating
its current NAV daily would range from
$6,111 to $24,444.692 Assuming, as
discussed above, that 147 money market
funds do not presently determine and
publish their current NAV per share
daily, the average additional annual cost
that these 147 funds will collectively
incur would range from $898,317 to
$3,593,268.693 These costs could be less
than our estimates if funds were to
receive significant discounts based on
economies of scale or the volume of
securities being priced.
We request comment on this
economic analysis:
• Are any of the proposed
requirements unduly burdensome, or
would they impose any unnecessary
costs?
• We request comment on the staff’s
estimates of the operational costs
692 We estimate, based on discussions with
industry representatives, that obtaining the price of
a portfolio security would range from $0.25–$1.00
per CUSIP number per quote. We estimate that each
money market fund’s portfolio consists of, on
average, securities representing 97 CUSIP numbers.
Therefore, the additional daily costs to calculate a
fund’s market-based NAV per share would range
from $24.25 ($0.25 × 97]) to $97.00 ($1.00 × 97). The
additional annual costs would therefore range from
$6,111 (252 business days in a year × $24.25) to
$24,444 (252 business days in a year × $97.00).
693 This estimate is based on the following
calculations: low range of $6,111 × 147 funds =
$898,317; high range of $24,444 × 147 funds =
$3,593,268. See supra note 692. This figure likely
overestimates the costs that stable price funds
would incur if the floating NAV proposal were
adopted. This is because fewer than 586 active
money market funds would be stable price funds
required to calculate their current NAV per share
daily, and thus the estimate of 147 funds (25% ×
586 active funds) that would be required to comply
with this requirement is likely overinclusive. Under
the floating NAV proposal, floating NAV funds
would calculate their shares’ purchase and sale
price daily, but the costs associated with this
calculation are included in the costs discussed
above at section III.A.7.
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associated with the proposed disclosure
requirements. In particular, we request
comment on our assumption that money
market funds would generally use the
same software or service providers to
calculate the fund’s current NAV per
share daily that they presently use to
prepare and file Form N–MFP.
• We request comment on our
analysis of potential effects of these
proposed requirements on efficiency,
competition, and capital formation.
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6. Money Market Fund Confirmation
Statements
Rule 10b–10 under the Securities
Exchange Act of 1934 (the
‘‘Confirmation Rule’’) addresses brokerdealers’ obligations to confirm their
customers’ securities transactions. The
rule provides an exception for
transactions in money market funds that
attempt to maintain a stable net asset
value and where no sales load or
redemption fee is charged.694 The rule
permits a broker-dealer to provide
transaction information to fund
shareholders on a monthly basis in lieu
of individual, immediate confirmations
for all purchases and redemptions of
shares of these money market funds.
The floating NAV proposal, if
adopted, would negate applicable
exemptions that have historically
permitted money market funds to
maintain a stable net asset value.
Instead, money market funds, like other
mutual funds, would sell and redeem
shares at prices that reflect the current
market values of their portfolio
securities. Given the likelihood that
share prices of money market funds that
are not exempt from the floating NAV
proposal will fluctuate, broker-dealers
may not be permitted under the
Confirmation Rule to provide money
market fund shareholders transaction
information on a monthly basis.695
The Confirmation Rule was designed
to provide customers with the relevant
information relating to their investment
decisions at or before the completion of
a transaction. The Confirmation Rule
exception was adopted because the
Commission believed that in cases
where funds maintain a constant net
asset value per share and no load is
charged, monthly statements were
adequate to ensure investor protection
due to the stable pricing of the fund
694 See
Exchange Act rule 10b–10(b).
proposal includes exemptions from the
floating NAV requirement for government and retail
money market funds, which would permit these
funds to continue to maintain a stable price per
share. See supra sections III.A.3 and III.A.4.
Accordingly, for investor transactions in such
exempt funds, broker-dealers would still be able to
take advantage of the exception in the Confirmation
Rule and send monthly transaction reports.
695 Our
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shares.696 However, for transactions in a
floating NAV fund, investors would not
know relevant information about the
costs of transacting in fund shares
before, or at the time of, the transaction.
Because of the floating NAV, investors
may desire to obtain more immediate
confirmations for all purchases and
redemptions to obtain better price
transparency at or before the completion
of a transaction. We request comment
on whether, if we adopt the floating
NAV requirement, we should leave the
Confirmation Rule unchanged, which
would have the effect of requiring
broker-dealers to provide fund investors
immediate confirmations of their
transactions.
• Should broker-dealers be required
to provide immediate confirmations to
shareholders of funds with a floating
NAV, or should broker-dealers be
permitted to continue to provide
confirmations for these transactions on
a monthly basis? What are the
advantages and disadvantages of
requiring broker-dealers to provide fund
shareholders with immediate
confirmations of transactions in floating
NAV money market funds rather than
monthly confirmations?
• If a floating NAV were
implemented, what are the reasons why
shareholders might prefer to receive this
information immediately? Are there any
additional costs to broker-dealers
associated with providing immediate
confirmations? If so, what are the nature
and magnitude of such costs? Should
the Commission consider alternative
exceptions to the Confirmation Rule in
the context of a floating NAV, such as
permitting confirmations to be provided
to shareholders for some different time
period (e.g., weekly statements)? What
benefits and costs would be associated
with any alternative approach?
• How, if at all, do the proposed
amendments that require money market
funds to disclose daily market-based
NAV per share affect the need for
immediate confirmations?
G. New Form N–CR
We are proposing a new rule that
would require money market funds to
file new Form N–CR with the
Commission when certain events
occur.697 The information reported on
Form N–CR would include instances of
696 The Commission’s adopting release extending
the confirmation delivery requirement exception
noted that ‘‘where shares are priced at a constant
net asset value per share and no load is charged,
the need for investors to receive immediate
confirmations does not appear to outweigh the cost
to broker-dealers of providing the confirmation.’’
See Exchange Act Release 34–19887 (Apr. 18,
1983); [48 FR 17585 (Apr. 25, 1983)], at section II.1.
697 Proposed rule 30b1–8.
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portfolio security default, sponsor
support of funds, and other similar
significant events. We believe that this
information would enable the
Commission to enhance its oversight of
money market funds and its ability to
respond to market events. It would also
provide investors with better and more
timely disclosure of potentially
important events. The Commission
would be able to use the information
provided on Form N–CR in its
regulatory, disclosure review,
inspection, and policymaking roles.
Like Form 8–K under the Exchange
Act,698 Form N–CR would require
disclosure, by means of a current report
filed with the Commission, related to
specific reportable events. A report on
Form N–CR would be made public on
the Commission’s Electronic Data
Gathering, Analysis, and Retrieval
system (‘‘EDGAR’’) immediately upon
filing. We would require reporting on
Form N–CR under both of the reform
alternatives we are proposing today, but
the Form would differ in certain
respects depending on the alternative
that we adopt.
1. Proposed Disclosure Requirements
Under Both Reform Alternatives
Under both the floating NAV
alternative and the liquidity fees and
gates alternative, we are proposing to
require that money market funds file a
current report on new Form N–CR
within a specified period of time after
the occurrence of certain events.699
Under each proposed alternative, we
would require a money market fund to
file a report on Form N–CR if the issuer
of one or more of the fund’s portfolio
securities, or the issuer of a demand
feature or guarantee, experiences a
default or event of insolvency 700 (other
698 17
CFR 249.308.
(FNAV) Form N–CR General
Instructions; proposed (Fees & Gates) Form N–CR
General Instructions. Proposed Form N–CR would
also require a fund to report the following general
information: (i) the date of the report; (ii) the
registrant’s central index key (‘‘CIK’’) number; (iii)
the EDGAR series identifier; (iv) the Securities Act
file number; and (v) the name, email address, and
telephone number of the person authorized to
receive information and respond to questions about
the filing. See proposed (FNAV) Form N–CR Part
A; proposed (Fees & Gates) Form N–CR Part A. The
name, email address, and telephone number of the
person authorized to receive information and
respond to questions about the filing would not be
disclosed publicly on EDGAR.
700 See 17 CFR 270.5b–3(c)(2) (defining ‘‘event of
insolvency’’ as (i) an admission of insolvency, the
application by the person for the appointment of a
trustee, receiver, rehabilitator, or similar officer for
all or substantially all of its assets, a general
assignment for the benefit of creditors, the filing by
the person of a voluntary petition in bankruptcy or
application for reorganization or an arrangement
with creditors; (ii) the institution of similar
proceedings by another person which proceedings
699 Proposed
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than an immaterial default unrelated to
the financial condition of the issuer),
and immediately before the default or
event of insolvency the portfolio
security or securities (or the securities
subject to the demand feature or
guarantee) accounted for at least 1⁄2 of
1% of the fund’s total assets.701
Although rule 2a–7 currently requires
money market funds to report defaults
or events of insolvency to the
Commission by email,702 we believe
that requiring funds to report these
events on Form N–CR would provide
important transparency to fund
shareholders, and also would provide
information more uniformly and
efficiently to the Commission. Form N–
CR would require funds to disclose
certain information about these
reportable events, including the nature
and financial effect of the default or
event of insolvency, as well as the
security or securities affected.703 The
Commission believes that the factors
specified in the required disclosure are
all necessary to understand the nature
and extent of the default, as well as the
potential effect of the default on the
are not contested by the person; or (iii) the
institution of similar proceedings by a government
agency responsible for regulating the activities of
the person, whether or not contested by the person).
701 See proposed (FNAV) Form N–CR Part B;
proposed (Fees & Gates) Form N–CR Part B; see also
rule 2a–7(c)(7)(iii)(A).
702 See rule 2a–7(c)(7)(iii)(A). We propose to
eliminate this requirement should proposed Form
N–CR be adopted, as it would duplicate with the
proposed Form N–CR reporting requirements
discussed in this section.
703 See proposed (FNAV) Form N–CR Part B;
proposed (Fees & Gates) Form N–CR Part B.
Proposed Form N–CR would require a fund to
disclose the following information: (i) the security
or securities affected; (ii) the date or dates on which
the defaults or events of insolvency occurred; (iii)
the value of the affected securities on the dates on
which the defaults or events of insolvency
occurred; (iv) the percentage of the fund’s total
assets represented by the affected security or
securities; and (v) a brief description of the actions
the fund plans to take in response to such event.
See id.
An instrument subject to a demand feature or
guarantee would not be deemed to be in default,
and an event of insolvency with respect to the
security would not be deemed to have occurred, if:
(i) in the case of an instrument subject to a demand
feature, the demand feature has been exercised and
the fund has recovered either the principal amount
or the amortized cost of the instrument, plus
accrued interest; (ii) the provider of the guarantee
is continuing, without protest, to make payments as
due on the instrument; or (iii) the provider of a
guarantee with respect to an unrated, first-tier assetbacked security, as defined by rule 2a–7, is
continuing, without protest, to provide credit,
liquidity, or other support as necessary to permit
the asset-backed security to make payments as due.
See Instruction to proposed (FNAV) Form N–CR
Part B; Instruction to proposed (Fees & Gates) Form
N–CR Part B. This instruction is based on the
current definition of the term ‘‘default’’ in the
provisions of rule 2a–7 that require funds to report
defaults or events of insolvency to the Commission.
See rule 2a–7(c)(7)(iv).
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fund’s operations and its portfolio as a
whole.
We would require funds to file a
report on Form N–CR within one
business day after the default or event
of insolvency occurs, which time frame
balances, we believe, the exigency of the
report with the time it will reasonably
take a fund to compile the required
information.704 The Commission and
shareholders have a significant interest
in receiving the information filed in
response to Form N–CR Part B as soon
as possible, as the default or event of
insolvency required to be reported
could signal circumstances that may
require Commission action or analysis,
and that may affect an investor’s
decision to purchase shares of the fund
or remain invested in the fund.
Additionally, we believe that current
reports of occasions on which a money
market fund receives financial support
from a sponsor or other fund affiliate
would provide important transparency
to shareholders and the Commission,
and also could help shareholders better
understand the ongoing risks associated
with an investment in the fund.705
Therefore, under each proposed reform
alternative, we would require all money
market funds to report all instances of
sponsor support on proposed Form N–
CR. Specifically, we propose to require
money market funds to file Form N–CR
if the fund’s sponsor, or another
affiliated person of the fund, provides
any form of financial support to the
fund.706 The term ‘‘financial support’’
includes, but is not limited to, (i) any
capital contribution, (ii) purchase of a
security from the fund in reliance on
rule 17a–9, (iii) purchase of any
defaulted or devalued security at par,
(iv) purchase of fund shares, (v)
execution of letter of credit or letter of
indemnity, (vi) capital support
agreement (whether or not the fund
ultimately received support), (vii)
performance guarantee, or (viii) any
other similar action to increase the
value of the fund’s portfolio or
otherwise support the fund during times
of stress.707 Form N–CR would require
funds receiving such financial support
to disclose certain information about the
support, including the nature, amount,
and terms of the support, as well as the
704 See General Instruction A to proposed (FNAV)
Form N–CR; general Instruction A to proposed
(Fees & Gates) Form N–CR.
705 See supra section III.F.1.b (discussing the
potential benefits and costs of the proposed
requirement for a money market fund to disclose on
its Web site any present occasion on which the fund
receives financial support from a sponsor or other
fund affiliate).
706 See proposed (FNAV) Form N–CR Part C;
proposed (Fees & Gates) Form N–CR Part C.
707 See id.
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relationship between the person
providing the support and the fund.708
The Commission believes that factors
specified in the required disclosure are
necessary for investors to understand
the nature and extent of the sponsor’s
discretionary support of the fund.709
The Commission also believes that these
factors are necessary for Commission
staff to analyze the economic effects of
financial support that money market
funds receive from sponsors or other
affiliated persons.
We would require funds to file a
report on Form N–CR within one
business day after a fund receives such
financial support,710 which time frame
we believe balances the exigency of the
report with the time it will reasonably
take a fund to compile the required
information. The Commission and
shareholders have a significant interest
in receiving the information filed in
response to Form N–CR Part C as soon
as possible, as the financial support
required to be reported could signal
circumstances that may require
Commission action or analysis, and that
may affect an investor’s decision to
purchase shares of the fund or remain
invested in the fund.
Today, when a sponsor supports a
fund by purchasing a security pursuant
to rule 17a–9, we require prompt
disclosure of the purchase by email to
the Director of the Commission’s
Division of Investment Management, but
we do not otherwise receive notice of
such support unless the fund needs and
requests no-action or other relief.711 The
proposed Form N–CR reporting
requirement would permit the
708 See id. Proposed Form N–CR would require a
fund to disclose the following information: (i) a
description of the nature of the support; (ii) the
person providing support; (iii) a brief description of
the relationship between the person providing the
support and the fund; (iv) a brief description of the
reason for the support; (v) the date the support was
provided; (vi) the amount of support; (vii) the
security supported, if applicable; (viii) the marketbased value of the security supported on the date
support was initiated, if applicable; (ix) the term of
support; and (x) a brief description of any
contractual restrictions relating to support.
In addition, if an affiliated person, promoter, or
principal underwriter of the fund, or an affiliated
person of such a person, purchases a security from
the fund in reliance on rule 17a–9, the money
market fund would be required to provide the
purchase price of the security, as well as certain
other information. Instruction to proposed (FNAV)
Form N–CR Part C; Instruction to proposed (Fees &
Gates) Form N–CR Part C.
709 See supra note 607.
710 See General Instruction A to proposed (FNAV)
Form N–CR; general Instruction A to proposed
(Fees & Gates) Form N–CR.
711 See rule 2a–7(c)(7)(iii)(B). We propose to
eliminate this requirement should proposed Form
N–CR be adopted, as it would duplicate with the
proposed Form N–CR reporting requirements
discussed in this section.
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Commission additionally to receive
notification of other kinds of financial
support (which could affect a fund as
significantly as a security purchase
pursuant to rule 17a–9) and a
description of the reason for the
support, and it would also assist
investors in understanding the extent to
which money market funds receive
financial support from their sponsors or
other affiliates.712
Under either alternative proposal, we
also would require funds that are
permitted to transact at a stable price to
file a report on proposed Form N–CR on
the first business day after any day on
which the fund’s current NAV per
share 713 (rounded to the fourth decimal
place in the case of a fund with a
$1.0000 share price, or an equivalent
level of accuracy for funds with a
different share price) deviates
downward significantly from its
intended stable price (generally, $1.00).
We believe that this requirement to file
a report for each day the fund’s current
NAV is low would not only permit the
Commission and others to better
monitor indicators of stress in specific
funds or fund groups and in the
industry, but also help increase money
market funds’ transparency and permit
investors to better understand money
market funds’ risks.714 We believe that
a deviation of 1⁄4 of 1 percent is
sufficiently significant that it could
signal future, further deviations in the
fund’s NAV that could require a stable
price fund’s board to consider re-pricing
the fund’s shares (among other
actions).715 To this end, if we adopt the
floating NAV alternative, we would
require only government or retail money
market funds to file a report on Form N–
CR if the fund’s current NAV per share
deviates downward from its intended
stable price by more than 1⁄4 of 1
percent.716 If we adopt the liquidity fees
712 As discussed above, money market funds’
receipt of financial support from sponsors and other
affiliates has not historically been disclosed to
investors, which has resulted in a lack of clarity
among investors about which money market funds
have received such financial support. See supra text
following note 49.
713 See text accompanying supra notes 644 and
645 for definition of ‘‘current NAV.’’
714 See generally supra section III.F.3.b
(discussing the potential benefits and costs of the
proposed requirement for a money market fund to
disclose its current NAV on its Web site).
715 See rule 2a–7(c)(8)(ii)(B) and (C); see also rule
30b1–6T (interim final temporary rule (no longer in
effect) requiring money market funds to provide the
Commission certain weekly portfolio and valuation
information if their market-based net asset value per
share declines below 99.75% of its stable NAV).
716 Proposed (FNAV) Form N–CR Part D.
Proposed Form N–CR would require a fund to
disclose the following information: (i) the date or
dates on which such deviation exceeded 1⁄4 of 1
percent; (ii) the extent of deviation between the
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and gates alternative, we would require
all money market funds to file a report
on Form N–CR if the fund’s current
NAV per share deviates downward from
its intended stable price by more than
1⁄4; of 1 percent.717 The Commission
believes that the factors specified in the
required disclosure are all necessary to
understanding the nature and extent of
the deviation, as well as the potential
effect of the deviation on the fund’s
operations.
We would require funds to file a
report on Form N–CR within one
business day following the reportable
movement of the fund’s current NAV,
which time frame we believe balances
the exigency of the report with the time
it will reasonably take a fund to compile
the required information.718 The
Commission and shareholders have a
significant interest in receiving the
information filed in response to Form
N–CR Part D as soon as possible, as the
NAV deviation required to be reported
could signal circumstances that may
require Commission action or analysis,
and that may affect an investor’s
decision to purchase shares of the fund
or remain invested in the fund.
We request comments on the
proposed general disclosure
requirements of new Form N–CR:
• Are there any other events that
warrant a current report filing obligation
for money market funds under either or
both of the proposed reform
alternatives? If so, what are they?
Should we add any additional
disclosure requirements to proposed
Form N–CR? Should any proposed
requirements not be included in Form
N–CR?
• With respect to the proposed
requirement for stable price money
market funds to report certain
deviations between the fund’s current
NAV and its intended stable price per
share, is our proposed threshold of
reporting (1⁄4 of 1 percent deviation)
appropriate? How frequently should we
fund’s current NAV per share and its intended
stable price; and (iii) the principal reason for the
deviation, including the name of any security
whose market-based value or sale price, or whose
issuer’s downgrade, default, or event of insolvency
(or similar event) has contributed to the deviation.
717 Proposed (Fees & Gates) Form N–CR Part D.
Proposed Form N–CR would require a fund to
disclose the following information: (i) the date or
dates on which such deviation exceeded 1⁄4 of 1
percent; (ii) the extent of the deviation between the
fund’s current net asset value per share and its
intended stable price; and (iii) the principal reason
for the deviation, including the name of any
security whose market-based value or sale price, or
whose issuer’s downgrade, default, or event of
insolvency (or similar event) has contributed to the
deviation.
718 See General Instruction A to proposed (FNAV)
Form N–CR; general Instruction A to proposed
(Fees & Gates) Form N–CR.
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expect to receive reports based on this
threshold? Which threshold would help
the public differentiate funds that are
having difficulties maintaining their
stable price from those that are not?
Should we adopt a lower threshold
(such as 10 or 20 basis points) or a
higher threshold (such as 30 or 40 basis
points)? Why or why not? How would
investors interpret and respond to this
reporting threshold? Would it affect
their purchase and redemption activity
in the reporting fund or in other funds,
and if so, how and why?
• Do the proposed reporting
deadlines for each part appropriately
balance the Commission’s and the
public’s need for information on current
events affecting money market funds
with the costs of preparing and
submitting a report on Form N–CR?
Should we require a longer or shorter
time frame in which to file a report on
any of the parts of Form N–CR?
• Would the particular information
that we propose requiring funds to
report in response to Parts B, C, and D
of Form N–CR be useful to shareholders
in understanding the events triggering
the filing of Form N–CR, as well as
certain of the risks associated with an
investment in the fund? Should we
require any more, any less, or any other
information to be reported?
• How frequently do commenters
anticipate that funds would file Form
N–CR to report a default or event of
insolvency with respect to portfolio
securities, the provision of financial
support to the fund, or a significant
deviation between the fund’s current
per-share NAV and its intended stable
price? For how many consecutive days
do commenters anticipate that funds
would likely report low current NAVs?
Under what conditions would these
reports trigger investor redemptions?
Under what conditions would these
reports affect investor purchases?
• Which types of investors (or other
parties) would be most likely to monitor
Form N–CR filings in real time?
• Would the proposed requirement to
file a report in response to Part C of
Form N–CR make funds less likely to
request sponsor support? Why or why
not? How would this affect the
sponsor’s willingness to provide
support?
• Would the requirement to file a
report in response to Part D of Form N–
CR make funds more likely to request
sponsor support? Why or why not? How
would this affect the sponsor’s
willingness to provide support?
• How would the requirement to file
Form N–CR affect the fund’s investment
decisions? Would the reporting
requirement make the fund more
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conservative, investing in safer
securities to reduce the chance of being
required to file Form N–CR? Would this
affect fund yield to the point that it
would affect how investors choose to
invest in the fund?
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2. Additional Proposed Disclosure
Requirements Under Liquidity Fees and
Gates Alternative
We propose to require that money
market funds file a report on Form N–
CR if a fund reaches the threshold
triggering board consideration of a
liquidity fee or redemption gate, if we
adopt the proposed liquidity fees and
gates alternative. This report would
include a description of the fund’s
response (such as whether and why a
fee was not imposed, as rule 2a–7
requires by default, or whether any why
a gate was imposed).719 The
Commission believes that the factors
specified in the required disclosure are
necessary for investors and the
Commission to understand the
circumstances surrounding the fund’s
weekly liquid assets falling below 15%
of total fund assets, or the imposition or
removal of a liquidity fee or gate. This
in turn could affect the Commission’s
oversight of the fund and regulation of
money market funds generally, and
could influence investors’ decisions to
purchase shares of the fund or remain
invested in the fund. Disclosure of the
board’s analysis regarding whether to
impose a liquidity fee or gate could
provide investors and the Commission
with a greater understanding of the
719 Proposed (Fees & Gates) Form N–CR Parts E
and F. Specifically, we propose requiring a report
to be filed on Form N–CR if a fund’s weekly liquid
assets fall below 15% of total fund assets as set forth
in proposed (Fees & Gates) rule 2a–7(c)(2). We
would require the fund to disclose the following
information: (i) the date on which the fund’s weekly
liquid assets fell below 15% of total fund assets; (ii)
if the fund imposes a liquidity fee pursuant to
proposed (Fees & Gates) rule 2a–7(c)(2)(i), the date
on which the fund instituted the liquidity fee; (iii)
a brief description of the facts and circumstances
leading to the fund’s weekly liquid assets falling
below 15% of total fund assets; and (iv) a short
discussion of the board of directors’ analysis
supporting its decision that imposing a liquidity fee
pursuant to proposed (Fees & Gates) rule 2a–
7(c)(2)(i) (or not imposing such a liquidity fee)
would be in the best interest of the fund. Proposed
(Fees & Gates) Form N–CR Part E.
Similarly, if a money market fund whose weekly
liquid assets fall below 15% of total fund assets
suspends the fund’s redemptions pursuant to [rule
2a–7(c)(2)(ii)], we would require the fund to
disclose the following information: (i) the date on
which the fund’s weekly liquid assets fell below
15% of total fund assets; (ii) the date on which the
fund initially suspended redemptions; (iii) a brief
description of the facts and circumstances leading
to the fund’s weekly liquid assets falling below 15%
of total fund assets; and (iv) a short discussion of
the board of directors’ analysis supporting its
decision to suspend the fund’s redemptions.
Proposed (Fees & Gates) Form N–CR Part F.
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events affecting and potentially causing
stress to the fund, and could provide
insight into the manner in which the
board handles periods of fund stress.
We would also require money market
funds to file a report on Form N–CR
when the board lifts the fee or resumes
redemptions of fund shares.720 We
would require funds to file an initial
report on Form N–CR on the first
business day following any occasion on
which the fund’s weekly liquid assets
fall below 15% of its total assets, the
fund’s board imposes (or removes) a
liquidity fee, or the fund’s board
temporarily suspends (or resumes) the
fund’s redemptions, which report would
provide the date of the triggering
event(s).721 Funds would need to file an
amendment to the initial report on Form
N–CR by the fourth business day
following any of these triggering events,
which amendment would provide
additional detailed information about
the event(s) (namely, a description of
the facts and circumstances leading to
the triggering event, as well as a
discussion of the fund board’s analysis
supporting the decision with respect to
the imposition of fees or gates).722 We
believe that these reporting
requirements would permit the
Commission to better monitor and
respond to indicators of stress, and also
would help alert shareholders to events
that could influence their decision to
purchase shares of the fund, as well as
their decision or ability to sell fund
shares. We believe that the deadlines of
one business day for filing an initial
report and four business days for
amending the initial report balance the
exigency of the reports with the time it
will reasonably take a fund to compile
the required information. The
Commission and shareholders have a
720 Proposed (Fees & Gates) Form N–CR Part G.
Specifically, we would require the fund to disclose
the date on which the fund removed the liquidity
fee and/or resumed fund redemptions.
721 See General Instruction A to (Fees & Gates)
Form N–CR; Instructions to proposed (Fees & Gates)
Form N–CR Parts E and F.
722 Id. The instructions to proposed (Fees & Gates)
Form N–CR Part E and Part F specify which
information a fund must file in the initial report,
and which information a fund must file in the
amendment to the initial report. Specifically, funds
would need to include the date of the triggering
event(s) on the initial report. The amendment to the
initial report would include a brief description of
the facts and circumstances leading to the fund’s
weekly liquid assets falling below 15% of total fund
assets, and a short discussion of the board’s
rationale in determining whether to impose a
liquidity fee (if the fund is filing Part E) or gate (if
the fund is filing Part F).
Proposed (Fees & Gates) Form N–CR Part G would
not require an amendment after its initial filing,
because Part G simply requires a fund to disclose
the date on which the fund lifted liquidity fees and/
or resumed fund redemptions.
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significant interest in knowing that a
fund’s weekly liquid assets have fallen
below 15% of total fund assets, and that
the fund has imposed or removed a
liquidity fee or gate, as soon as possible.
This information directly affects
investors’ ability to redeem shares of a
fund, and it could be a material factor
in determining whether to purchase or
redeem fund shares. The Commission
requires this information to effectively
oversee money market funds that have
come under stress, and to ensure the
protection of investors in these funds.
The Part E and Part F initial reports, as
well as Part G, do not require funds to
submit substantial analysis of the
underlying factors; thus, we propose to
require funds to submit Part E and Part
F initial reports, as well as Part G,
within one business day of the event
triggering the filing.
The Commission and shareholders
also have a substantial interest in
receiving the information that a fund
would submit in amending an initial
report filed in response to events
specified in Part E or Part F. However,
we believe that receiving an analysis of
the factors leading to the imposition of
fees and/or gates, as well as the board’s
determination whether to impose a fee
and/or gates, would be of less
immediate concern to the Commission
and shareholders. Also, the disclosure
in the amendment would require more
time to compose and compile than the
information required to be submitted in
the initial report. Because funds would
be required to submit a moderate
amount of explanatory information in
amending initial Part E or Part F reports,
and because the personnel of a fund
required to file a Part E or Part F report
will likely simultaneously be occupied
resolving fund liquidity pressures, we
propose to permit funds to submit
amendments to initial Part E or Part F
reports within four business days.
We request comments on the
proposed additional requirements in
new Form N–CR specific to the
proposed liquidity fees and gates
alternative:
• Should we add any additional
disclosure requirements to proposed
Form N–CR specific to the proposed
liquidity fees and gates alternative?
Should any of the proposed
requirements not be included in Form
N–CR?
• Should we require reporting not
just when a fund reaches the thresholds
that trigger consideration of board
action, but also before those triggers are
reached? If so, when should we require
reporting? When weekly liquid assets
reach 25% of portfolio assets? Some
other number? What additional
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information should we ask? Would a
higher reporting requirement result in
too-frequent reporting?
• Should we require reporting not
just when a fund reaches the thresholds
that trigger consideration of board
action, but also at some threshold after
those triggers are reached? If yes, when
should we require the additional
reporting? When weekly liquid assets
reach 10% of portfolio assets? Some
other number? Should we require
similar reporting when daily liquid
assets drop below a certain threshold? If
so, what threshold should we require?
When daily liquid assets reach 0%, or
should we set a higher threshold such
as 5%?
• Would the particular information
that we propose requiring funds to
report in response to Parts E, F, and G
of Form N–CR be useful to shareholders
in understanding the events triggering
the filing of Form N–CR? Should we
require any more, any less, or any other
information to be reported?
• How frequently do commenters
anticipate that funds would file reports
on proposed Form N–CR in response to
the proposed requirements specific to
the proposed liquidity fees and gates
alternative? What average length of time
do commenters anticipate transpiring
between a fund’s initial report in
response to Part E or Part F of Form N–
CR, and a fund’s report in response to
Part G of Form N–CR?
• Do the proposed reporting
deadlines appropriately balance the
Commission’s and the public’s need for
information on current events affecting
money market funds with the costs of
preparing and submitting a report on
Form N–CR? Does the proposed
requirement to file an initial report on
Form N–CR for Parts E and F within one
business day following a triggering
event, and then to file an amended
report within four business days
following the event, appropriately
balance the exigency of the reports with
the time that it will reasonably take a
fund to compile the required
information for each part? Should we
require a longer or shorter time frame in
which to file a report on Form N–CR for
any of the parts?
• Are there any other events that
warrant a current report filing obligation
under the proposed liquidity fees and
gates alternative?
• How, if at all, would the
requirement to file Form N–CR affect
the fund’s investment decisions,
including the fund’s decision to invest
in weekly liquid assets?
• How, if at all, would the
requirement to file Form N–CR affect
the fund’s decisions with respect to
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accepting investments from certain
groups of shareholders? For example,
would funds be less likely to accept
investments from large shareholders or
short-term shareholders?
• How, if at all, would the
requirement to file Form N–CR affect
the board’s decisions surrounding the
imposition of liquidity fees and gates?
Would the Form N–CR filing
requirement affect the board’s
willingness to deviate from the default
liquidity fee requirements? Why or why
not?
3. Economic Analysis
As discussed above, we believe that
the Form N–CR reporting requirements
would provide important transparency
to investors and the Commission, and
also could help investors better
understand the risks associated with a
particular money market fund, or the
money market fund industry generally.
The Form N–CR reporting requirements
would permit investors and the
Commission to receive information
about certain money market fund
material events consistently and
relatively quickly. As discussed above,
we believe that investors and the
Commission have a significant interest
in receiving this information because it
would permit investors and the
Commission to monitor indicators of
stress in specific funds or fund groups,
as well as the money market fund
industry, and also to analyze the
economic effects of certain material
events. The Form N–CR reporting
requirements could give investors and
the Commission a greater understanding
of the circumstances leading to events of
stress, and also how a fund’s board
handles events of stress. We believe that
investors could find all of this
information to be material and helpful
in determining whether to purchase
fund shares, or remain invested in a
fund. However, we recognize that the
Form N–CR reporting requirements have
operational costs (discussed below), and
also may result in opportunity costs, in
that personnel of a fund that has
experienced an event that requires Form
N–CR reporting may lose a certain
amount of time that could be used to
respond to that event because of the
need to comply with the reporting
requirement. However, as discussed
above, we believe that the proposed
time frames for filing reports on Form
N–CR balance the exigency of the report
with the time it will reasonably take a
fund to compile the required
information.
We believe that the proposed Form
N–CR reporting requirements may
complement the benefits of increased
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transparency of publicly available
money market fund information that
have resulted from the requirement that
money market funds report their
portfolio holdings and other key
information on Form N–MFP each
month. The RSFI Study found that the
additional disclosures that money
market funds are required to make on
Form N–MFP improve fund
transparency (although funds file the
form on a monthly basis with no interim
updates, and the Commission currently
makes the information public with a 60day lag).723 The RSFI Study also noted
that this ‘‘increased transparency, even
if reported on a delayed basis, might
dampen a fund manager’s willingness to
hold securities whose ratings are at odds
with the underlying risk, especially at
times when credit conditions are
deteriorating.’’ 724 Additionally, the
availability of public, standardized,
money market fund-related data that has
resulted from the Form N–MFP filing
requirement has assisted both the
Commission and the money market
fund industry in various studies and
analyses of money market fund
operations and risks.725 The proposed
Form N–CR reporting requirement could
extend these benefits of Form N–MFP
by providing additional transparency
about money market funds’ risks on a
near real-time basis, which may, like
Form N–MFP disclosure, impose market
discipline on portfolio managers and
provide additional data that would
allow investors to make investment
decisions, and the Commission and the
money market fund industry to conduct
risk- and operations-related analyses.
We believe that the proposed
reporting requirements may positively
affect regulatory efficiency because all
money market funds would be required
to file information about certain
material events on a standardized form,
thus improving the consistency of
information disclosure and reporting,
and assisting the Commission in
overseeing individual funds, and the
money market fund industry generally,
more effectively. The proposed
requirements also could positively affect
informational efficiency. This could
assist investors in understanding
various risks associated with certain
723 See RSFI Study, supra note 21, at 31; see also
infra note 793 and accompanying text (discussing
the Commission’s proposal to eliminate the 60-day
delay in making Form N–MFP information publicly
available).
724 See RSFI Study, supra note 21, at 38.
725 See, e.g., Money Market Mutual Funds, Risk,
and Financial Stability in the Wake of the 2010
Reforms, 19 ICI Research Perspective No. 1 (Jan.
2013), at n.29 (noting that certain portfolio-related
data points are often only available from the SEC’s
Form N–MFP report).
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funds, and risks associated with the
money market fund industry generally,
which in turn could assist investors in
choosing whether to purchase or redeem
shares of certain funds. The proposed
requirements could positively affect
competition because funds could
compete with each other based on
certain information required to be
disclosed on Form N–CR, as well as
based on more traditional competitive
factors such as price and yield. For
instance, investors might see a fund that
invests in securities whose issuers have
never experienced a default as a more
attractive investment than a similar
fund that frequently files reports in
response to Form N–CR Part B (‘‘Default
or Event of Insolvency of portfolio
security issuer’’). However, if investors
move their assets among money market
funds or decide to invest in investment
products other than money market
funds as a result of the Form N–CR
reporting requirements, this could
negatively affect the competitive stance
of certain money market funds, or the
money market fund industry generally.
If money market fund investors decide
to move all or a substantial portion of
their money out of the market, this
could negatively affect capital
formation.726 On the other hand, capital
formation could be positively affected if
the Form N–CR reporting requirements
were to assist the Commission in
overseeing and regulating the money
market fund industry, and the resulting
regulatory framework more efficiently or
more effectively encouraged investors to
invest in money market funds.
Additional effects of these proposed
filing requirements on efficiency,
competition, and capital formation
would vary according to the event
precipitating the Form N–CR filing, and
they are substantially similar to the
effects of other proposed disclosure
requirements, as discussed in more
detail above.727
726 For an analysis of the potential
macroeconomic effects of our proposals, see supra
section III.E.1.
727 We believe that the effects on efficiency,
competition, and capital formation of filing Form
N–CR in response to Part B or C would overlap
significantly with the effects of the proposed
disclosure requirements regarding the financial
support provided to money market funds. See
discussion in supra section III.F.1.b. We believe
that the effects of filing Form N–CR in response to
Part D would overlap significantly with the effects
of the proposed disclosure requirements regarding
a money market fund’s daily market-based NAV per
share. See discussion in supra section III.F.3.b. We
believe that the effects of filing Form N–CR in
response to Parts E, F, and G would overlap
significantly with the effects of the proposed
disclosure requirements regarding current and
historical instances of the imposition of liquidity
fees and/or gates. See supra section III.B.8.f.
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The operational costs of filing Form
N–CR in response to the events
specified in Parts B–G of Form N–CR are
discussed below.728 The Commission
staff has not measured the quantitative
benefits of these proposed requirements
at this time because of uncertainty about
how increased transparency may affect
different investors’ understanding of the
risks associated with money market
funds and their imposition of market
discipline.729
We have estimated that the costs of
filing a report in response to an event
specified on Part B of Form N–CR
would be higher than the costs that
money market funds currently incur in
complying with rule 2a–7(c)(7)(iii)(A),
which requires money market funds to
report defaults or events of insolvency
to the Commission by email.730 We
estimate the costs of filing a report in
response to an event specified on Part
B of Form N–CR to be $1,708 per
filing,731 and we expect, based on our
estimate of the average number of
notifications of events of default or
insolvency that money market funds
currently file each year, that the
Commission would receive
approximately 20 such filings per
year.732 Therefore, we expect that the
annual costs relating to filing a report on
Form N–CR in response to an event
specified on Part B would be $34,160.733
Likewise, we have estimated that the
costs of filing a report in response to an
event specified on Part C of Form N–CR
in part by reference to the costs that
money market funds currently incur in
728 These costs incorporate the costs of
responding to Part A (‘‘General information’’) of
Form N–CR. We anticipate that the costs associated
with responding to Part A will be minimal, because
Part A requires a fund to submit only basic
identifying information.
729 Likewise, uncertainty regarding the proposed
disclosure’s effect on different investors’ behavior
makes it difficult for the SEC staff to measure the
quantitative benefits of the proposed requirements
at this time.
730 The requirements of rule 2a–7(c)(7)(iii)(A) and
the requirement of Part B of Form N–CR are
substantially similar, although Part B on its face
specifies more information to be reported than rule
2a–7(c)(7)(iii)(A). However, Commission staff
understands that funds disclosing events of default
or insolvency pursuant to rule 2a–7(c)(7)(iii)(A)
already have historically reported substantially the
same information proposed to be required by Part
B.
731 The costs associated with filing Form N–CR in
response to an event specified on Part B of Form
N–CR are paperwork-related costs and are
discussed in more detail in infra section IV.A.4 and
IV.B.4.
732 See Submission for OMB Review, Comment
Request, Extension: Rule 2a–7, OMB Control No.
3235–0268, Securities and Exchange Commission
[77 FR 236 (Dec. 7, 2012)].
733 These estimates are based on the following
calculations: $1,708 (cost per report) × 20 filings per
year = $34,160 per year. See supra notes 731–732
and accompanying text.
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complying with rule 2a–7(c)(7)(iii)(B),
which requires disclosure to the
Commission by email when a sponsor
supports a money market fund by
purchasing a security in reliance on rule
17a–9. However, because Part C of Form
N–CR defines ‘‘financial support’’ more
broadly than the purchase of a security
from a fund in reliance on rule 17a–9,
and because the requirements of Part C
of Form N–CR are more extensive than
the requirements of rule 2a–
7(c)(7)(iii)(B), we expect that the costs
associated with filing a report in
response to a Part C event would be
higher than the current costs of
compliance with rule 2a–7(c)(7)(iii)(B).
We estimate the costs of filing a report
in response to an event specified on Part
C of Form N–CR to be $1,708 per
filing,734 and we expect, based in part
by reference to our estimate of the
average number of notifications of
security purchases in reliance on rule
17a–9 that money market funds
currently file each year, that the
Commission would receive
approximately 40 such filings per
year.735 Therefore, we expect that the
annual costs relating to filing a report on
Form N–CR in response to an event
specified on Part C would be $68,320.736
As discussed in more detail in section
IV below, we have estimated the costs
associated with filing a report on Form
N–CR in response to an event specified
on Part D, E, F, or G on a broad average
basis. In particular, in an event of filing,
the staff believes a fund’s particular
circumstances that gave rise to a
reportable event would be the
predominant factor in determining the
time and costs associated with filing a
report on Form N–CR. Accordingly, on
average, we estimate the costs of filing
a report in response to an event
specified on Part D of Form N–CR to be
$1,708 per report.737 On average, we
estimate the costs of filing a report in
response to an event specified on Part
E or Part F of Form N–CR to be $1,708
per filing.738 On average, we estimate
734 The costs associated with filing Form N–CR in
response to an event specified on Part C of Form
N–CR are paperwork-related costs and are
discussed in more detail in infra section IV.A.4 and
IV.B.4.
735 See Submission for OMB Review, Comment
Request, Extension: Rule 2a–7, OMB Control No.
3235–0268, Securities and Exchange Commission
[77 FR 236 (Dec. 7, 2012)].
736 These estimates are based on the following
calculations: $1,708 (cost per report) × 40 filings per
year = $68,320 per year. See supra notes 734–735
and accompanying text.
737 See infra section IV.A.4 and IV.B.4.
738 Id. This estimate includes the costs of filing
an initial report, as well as amending the initial
report. See instructions to proposed (Fees & Gates)
Form N–CR Parts E, F.
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the costs of filing a report in response
to an event specified on Part G of Form
N–CR to be $1,708 per filing.739
We request comment on this
economic analysis:
• Would any of the proposed
disclosure requirements impose
unnecessary costs? Why or why not?
• How many filings would be made
each year in response to the events
specified on each of Part B, Part C, Part
D, Part E, Part F, and Part G of Form N–
CR?
• Please comment on our analysis of
the potential effects of these proposed
disclosure requirements on efficiency,
competition, and capital formation.
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H. Amendments to Form N–MFP
Reporting Requirements
The Commission is proposing to
amend Form N–MFP, the form that
money market funds use to report to us
their portfolio holdings and other key
information each month. We use the
information to monitor money market
funds and support our examination and
regulatory programs. Each fund must
file information on Form N–MFP
electronically within five business days
after the end of each month. We make
the information public 60 days after the
end of the month.740 Money market
funds began reporting this information
to us in November 2010.741
We are proposing to amend Form N–
MFP to reflect amendments to rule 2a–
7 discussed above, as well as request
certain additional information that
would be useful for our oversight of
money market funds, and make other
improvements to the form based on our
experience with filings submitted
during the past two and a half years. As
discussed below in section III.H.1, our
proposed amendments related to rule
2a–7 changes proposed elsewhere in
this Release would be adopted under
either regulatory alternative. Regardless
of the regulatory alternative adopted, or
if neither alternative is adopted, we
anticipate that we would adopt the
other amendments that we propose to
make to the Form described in this
section relating to new reporting
requirements, clarifying amendments,
and public availability of information
(sections III.H.2–III.H.4 below) because
they would be relevant to the
Commission’s efforts to oversee the
stability of money market funds and
739 Id.
740 See
rule 30b1–7(b).
average, 616 money market funds filed
Form N–MFP with us each month during 2012.
Funds reported information on nearly 68,000
securities on average each month.
741 On
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compliance with rule 2a–7.742 In
connection with these amendments, we
propose to renumber the items of Form
N–MFP to separate the items into four
separate sections.743
1. Amendments Related to Rule 2a–7
Reforms
Under our floating NAV proposal or
our liquidity fees and gates proposal, we
would revise Form N–MFP to reflect
certain proposed amendments to rule
2a–7. Because both alternative proposals
would require that all money market
funds (including government and retail
money market funds otherwise exempt)
value portfolio securities using marketbased factors and/or fair value pricing
(not amortized cost 744), we propose to
amend the items in Form N–MFP that
reference ‘‘amortized cost.’’ Those items
instead would require that funds
disclose the ‘‘value’’ of portfolio
securities.745
742 References to Form N–MFP will be ‘‘Proposed
Form N–MFP Item.’’ We are not proposing to
amend items in Form N–MFP that reference credit
ratings. References to credit ratings will be
addressed in a separate rulemaking. See supra note
130 and accompanying text.
743 See proposed Form N–MFP: (i) General
information (Items 1–8); (ii) information about each
series of the fund (Items A.1–A.21; (iii) information
about each class of the fund (Items B.1–B.8); and
(iv) information about portfolio securities (Items
C.1–C.25). Our proposed renumbering of the items
will enable us to add or delete items in the future
without having to re-number all subsequent items
in the form.
744 As discussed above, money market funds, like
other mutual funds, would be able to use amortized
cost to value securities with maturities of 60 days
or less provided the fund’s board determines that
the security’s fair value is its amortized cost and the
circumstances do not suggest otherwise. See supra
note 136 and accompanying discussion. Because
the board in these circumstances must conclude
that the amortized value of the securities is the fair
value of the securities, there would be no need for
separate disclosure of both values. In addition,
government and retail money market funds, which
would be exempt from our floating NAV proposal,
would be required to value portfolio securities
using market-based factors (not amortized cost), but
continue to be allowed to use penny rounding to
maintain a stable price per share. See supra sections
III.A.3 and III.A.4.
745 Form N–MFP requires that each series of a
fund disclose the total amortized cost of its
portfolio securities (Item 13) and the amortized cost
for each portfolio security (Item 41). We propose to
amend Items 13 and 41 by replacing amortized cost
with ‘‘value’’ as defined in section 2(a)(41) of the
Act. See proposed Form N–MFP Items A.14.b, C.18,
and proposed Form N–MFP General Instructions, E.
Definitions. As a result, we propose to remove
current Form N–MFP Items 45 and 46, which
require that a fund disclose the value of each
security using available market quotations, both
with and without the value of any capital support
agreement. Proposed Form N–MFP Item C.18 would
require that MMFs report portfolio security market
values both including and excluding the value of
any sponsor support. To improve transparency of
MMF’s risks, we propose to clarify that MMFs must
disclose the value of ‘‘any sponsor support’’
applicable to a particular portfolio security, rather
than ‘‘capital support agreements’’ as stated in
current Form N–MFP Items 45 and 46.
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Accordingly, without amortized cost,
funds would not have a ‘‘shadow price’’
to disclose. Therefore, we also propose
to eliminate the items in Form N–MFP
that require disclosure of ‘‘shadow
prices.’’ 746 A fund would still be
required to disclose the net asset value
per share at the series level and class
level, but we propose to require that
each monthly report include the net
asset value per share as of the close of
business on each Friday during the
month reported. Thus, while funds
would continue to file reports on Form
N–MFP once each month (as they do
today), certain limited information
(such as the NAV per share) would be
reported on a weekly basis. In addition,
we propose to require, both for each
series and each class, reporting of the
net asset value per share, rounded to the
fourth decimal place for a fund with a
$1.00 share price (or an equivalent level
of accuracy for funds with a different
share price).747 If we adopted our
floating NAV proposal, this would
conform net asset value per share
reporting to the rounding convention in
our rule proposal.748 If we adopted our
liquidity fees and gates proposal, these
items would in effect require reporting
of the fund’s price per share without
penny rounding. This information
would be used by the Commission and
others to identify money market funds
that continue to seek to maintain a
stable price per share 749 and better
evaluate any potential deviations in
their unrounded share price. Finally, we
propose to amend the category options
at the series level that money market
funds use to identify themselves and
include government funds that would
746 Form N–MFP currently requires a fund to
disclose the shadow price of the fund series (Item
18) and each fund class (Item 25), both of which
we propose to eliminate.
We also propose to amend the definition of
‘‘money market fund’’ to conform to our proposed
amendment. As proposed, a money market fund
means a fund that holds itself out as a money
market fund and meets all of the requirements of
rule 2a–7 (eliminating the specific reference to rule
2a–7’s maturity, quality, and diversification
requirements). See proposed Form N–MFP General
Instructions, E. Definitions (defining ‘‘Money
Market Fund’’).
747 See proposed Form N–MFP Items A.21 and
B.5 (noting that if the reporting date falls on a
holiday or other day on which the fund does not
calculate the net asset value per share, provide the
value as of the close of business on the date in that
week last calculated). This reporting instruction
also applies to our proposed weekly reporting of
daily and weekly liquid assets. See proposed Form
N–MFP Item A.13.
748 See proposed (FNAV) rule 2a–7(c)(1).
749 We propose to require that a fund that seeks
to maintain a stable price per share state the price
that the fund seeks to maintain. See proposed Form
N–MFP Item A.18.
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be exempt under either alternative
proposal.750
Our proposed amendment to require
that each monthly report include the net
asset value per share as of the close of
business on each Friday during the
month reported would be consistent
with other actions taken by the
Commission and fund industry
participants to increase the frequency of
disclosure of funds’ NAV per share (on
funds’ Web sites).751 Despite the
increased frequency of disclosure
within the monthly report, funds would
continue to file reports on Form N–MFP
once each month. By including this
information in Form N–MFP, in
addition to a fund’s Web site,
Commission staff and others may better
monitor the risks that may be present in
declining prices, for example. This
information, if available on Form N–
MFP, could then be aggregated and
analyzed across the fund industry. If we
adopt our floating NAV proposal, funds
required to price their shares at the
market-based NAV per share would
already have this information readily
available. Also, as noted above, many
money market funds have begun
disclosing shadow prices daily on fund
Web sites and therefore we believe this
information is readily available to
funds. Any effect resulting from our
proposed amendment to require that
each monthly report include NAV per
share data on a weekly basis is included
in our economic analysis of our
proposed amendment to require that
money market funds disclose NAV per
share daily on fund Web sites.752
Finally, we note that the remaining
proposed changes would omit or amend
disclosure requirements that would no
longer be relevant if we adopt the
changes we are proposing to rule 2a–7.
Accordingly, we do not believe that the
proposed amendments would impose
costs on money market funds other than
those required to modify systems used
to aggregate data and file reports on
Form N–MFP. These costs are discussed
in section III.H.6 below.
We believe that the proposed revised
form will be easier for investors to
understand because the simplifications
allow investors to focus on a single
market-based valuation for individual
portfolio securities and the fund’s
750 See proposed Form N–MFP Item A.10 (adding
‘‘Exempt Government’’ category). If we adopt the
floating NAV alternative, we would also add a new
category for ‘‘Exempt Retail’’ funds.
751 See supra section III.F.3 (proposing to require
that money market funds disclose on fund Web
sites the fund’s current market-based NAV per
share); see also infra note 793 and accompanying
text (noting the current industry trend to disclose
shadow prices daily on fund Web sites).
752 See supra section III.F.3.
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overall NAV per share. This approach is
also consistent with today’s standard
practice for mutual funds that are not
money market funds. We expect that the
overall effects will be to increase
efficiency for not only investors but also
the funds themselves. As discussed
above, the floating NAV proposal and
the liquidity fees and gates proposal
will affect both competition and capital
formation. Because we believe that
investors are likely to make at least
incremental changes to their trading
patterns in money market funds due to
the proposed changes to Form N–MFP,
it is likely that the changes will affect
competition and capital formation.
Although it is difficult to quantify the
size of these effects without better
knowledge about how investors will
respond, we believe that the effects from
the proposed changes to Form N–MFP
will be small relative to the effects of the
underlying alternative proposals. We
seek comment on this aspect of our
proposal.
• Should money market funds be
required to include in each monthly
Form N–MFP filing the NAV per share
as of the close of business on each
Friday during the month reported? Or
should we require that money market
funds report market-based NAV per
share data daily on Form N–MFP?
Would the costs be significantly
different from reporting monthly data,
as is currently required? Would the
costs to funds be significantly different
from reporting weekly data, as we
propose above? Please describe the
associated costs.
• Do commenters agree with our
analysis of potential effects on
efficiency, competition, and capital
formation?
2. New Reporting Requirements
We are also proposing (regardless of
the alternative proposal adopted, if any)
several new items to Form N–MFP that
we believe will improve our (and
investors’) ability to monitor money
market funds.753 These proposed
amendments would address gaps in
information that have become apparent
during the time we have received Form
N–MFP filings and our staff has
analyzed the data. As discussed further
below, each proposed amendment
requires reporting of additional
753 The proposed new reporting requirements,
clarifying amendments, amendments related to
public availability of information, and potential
amendment to Form N–MFP’s filing date, discussed
in infra sections III.H.2–5 are separate from the
proposed amendments to Form N–MFP related to
the rule 2a–7 reforms discussed above (see supra
section III.H.1). Thus, even if we do not adopt
amendments to rule 2a–7, we may adopt the other
proposed amendments to Form N–MFP.
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information that should be readily
available to the fund and, in many
cases, should infrequently change from
report to report.
Several proposed amendments are
designed to help us and investors better
identify fund portfolio securities.754 To
facilitate monitoring and analysis of the
risks posed by funds, it is important for
Commission staff to be able to identify
individual portfolio securities. Fund
shareholders and potential investors
that are evaluating the risks of a fund’s
portfolio would similarly benefit from
the clear identification of a fund’s
portfolio securities. Currently, the form
requests information about the CUSIP
number of a security, which the staff
uses as a search reference. The staff has
found that some securities reported by
money market funds lack a CUSIP
number, and this absence has reduced
the usefulness of other information
reported.755 To address this issue going
forward, we propose to require that
funds report, in addition to the CUSIP,
the Legal Entity Identifier (‘‘LEI’’) that
corresponds to the security.756 The
proposed amendments would also
754 We also propose to require that a fund provide
the name, email address, and telephone number of
the person authorized to receive information and
respond to questions about Form N–MFP. We plan
to exclude this information from Form N–MFP
information that is made publicly available through
EDGAR. Proposed Form N–MFP Item 8.
755 Our inability to identify specific securities, for
example, limits our ability to compare ownership
of the security across multiple funds and monitor
issuer exposure. During the month of February
2013, funds reported 6,821 securities without
CUSIPs (approximately 10% of all securities
reported on the form).
756 See proposed Form N–MFP Item C.4;
Proposed Form N–MFP General Instructions, E.
Definitions (defining ‘‘LEI’’). To ensure accurate
identification of Form N–MFP filers and update the
Form for pending industry-wide changes, we are
also proposing that each registrant provide its LEI,
if available. See proposed Form N–MFP Item 3. The
Legal Entity Identifier is a unique identifier
associated with a single corporate entity and is
intended to provide a uniform international
standard for identifying counterparties to a
transaction. The Commission has begun to require
disclosure of the LEI, once available. See, e.g., Form
PF, Reporting Form for Investment Advisers to
Private Funds and Certain Commodity Pool
Operators and Commodity Trading Advisors,
available at https://www.sec.gov/rules/final/2011/ia3308-formpf.pdf. A global LEI standard is currently
in the implementation stage. See Frequently Asked
Questions: Global Legal Entity Identifier (LEI) (Feb.
2013), U.S. Treasury Dept., available at https://
www.treasury.gov/initiatives/ofr/data/Documents/
LEI_FAQs_February2013_FINAL.pdf. Consistent
with staff guidance provided in a Form PF
Frequently Asked Questions (https://www.sec.gov/
divisions/investment/pfrd/pfrdfaq.shtml), funds
that have been issued a CFTC Interim Compliant
Identifier (‘‘CICI’’) by the Commodity Futures
Trading Commission may provide this identifier in
lieu of the LEI until a global LEI standard is
established.
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require that funds report at least one
other security identifier.757
We also propose amendments that are
designed to help the staff (and investors)
better identify certain risk
characteristics that the form currently
does not capture. Responses to these
new items, together with other
information reported, would improve
the staff’s (and investors’)
understanding of a fund and its
potential risks. First, we propose to
require funds to report whether a
security is categorized as a level 1, level
2, or level 3 measurement in the fair
value hierarchy under U.S. Generally
Accepted Accounting Principles.758
Level 1 measurements include quoted
prices for identical securities in an
active market (e.g., active exchangetraded equity securities; U.S.
government and agency securities).
Level 2 measurements include: (i)
Quoted prices for similar securities in
active markets; (ii) quoted prices for
identical or similar securities in nonactive markets; and (iii) pricing models
whose inputs are observable or derived
principally from or corroborated by
observable market data through
correlation or other means for
substantially the full term of the
security. Securities categorized as level
3 are those whose value cannot be
determined by using observable
measures (such as market quotes and
prices of comparable instruments) and
often involve estimates based on certain
assumptions.759
We understand that most money
market fund portfolio securities are
categorized as level 2. Although we
understand that very few of a money
market fund’s portfolio securities are
currently valued using unobservable
inputs, information about any such
securities would enable our staff to
identify individual securities that may
be more susceptible to wide variations
in pricing.760 Commission staff could
757 See proposed Form N–MFP Item C.5
(requiring that, in addition to the CUSIP and LEI,
a fund provide at least one additional security
identifier (e.g., ISIN, CIK or other unique
identifier)). Security identifiers should be readily
available to funds. See, e.g., https://www.sec.gov/
edgar/searchedgar/cik.htm (providing a CIK lookup
that is searchable by company name). We are also
proposing to require that a fund provide the CUSIP
number and LEI (if available) for a security subject
to a repurchase agreement. See proposed Form N–
MFP Items C.8.c. and C.8.d.
758 See Accounting Standards Codification 820,
‘‘Fair Value Measurement’’; Proposed Form N–MFP
Item C.20.
759 See Accounting Standards Codification 820,
‘‘Fair Value Measurement’’.
760 For a discussion of some of the challenges
regulators may face with respect to Level 3
accounting, see, e.g., Konstantin Milbradt, Level 3
Assets: Booking Profits and Concealing Losses, in
25 Rev. Fin. Stud. 55–95 (2011).
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also use this information to monitor for
increased valuation risk in these
securities, and to the extent there is a
concentration in the security across the
industry, identify potential outliers that
warrant additional monitoring or
investigation. Our proposed amendment
would permit the Commission and
others to analyze movements in the
assets in each level, for example,
movements in level 2 securities as a
percentage of net assets. In addition,
Commission staff would be better able
to identify anomalies in reported data
by aggregating all money market fund
holdings industry-wide into the various
level categories. We believe that most
funds directly evaluate the fair value
level measurements when they acquire
the security and re-assess the
measurements when they perform
portfolio valuations.761 Accordingly, we
believe that funds should have ready
access to the nature of the portfolio
security valuation inputs used.
• Would our new proposed
requirements help us better identify
certain risk characteristics that the form
currently does not capture?
• Would information about each
security’s categorization as a level 1,
level 2, or level 3 measurement better
enable our staff to identify individual
securities that may be more susceptible
to wide variations in pricing?
• Is our understanding about how
fund sponsors value most money market
fund portfolio securities (i.e., using
Level 2 measurements) correct?
• Do our assumptions about fund
valuation procedures and access to the
nature of portfolio security valuation
inputs correspond to fund practices? Is
this information readily available to a
fund?
• Are there other ways in which a
fund could identify and disclose
securities that do not have readily
available market quotations or
observable inputs?
• Do commenters agree that this
information will help the Commission
and investors better identify risk
characteristics?
Second, we would require that funds
disclose additional information about
each portfolio security, including, in
addition to the total principal
amount,762 the purchase date, the yield
at purchase, the yield as of the Form N–
MFP reporting date (for floating and
761 Funds should regularly evaluate the pricing
methodologies used and test the accuracy of fair
value prices (if used). See Accounting Series
Release No. 118, Financial Reporting Codification
(CCH) section 404.03 (Dec. 23, 1970).
762 Current Form N–MFP Item 40.
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variable rate securities, if applicable),763
and the purchase price.764 We would
require that funds report this
information separately for each lot
purchased.765 In addition, we propose
to require that money market funds
disclose the same information for any
security sold during the reporting
period.766 Because money market funds
often hold multiple maturities of a
single issuer, each time a security is
purchased or sold, price discovery
occurs and an issuer yield curve could
be updated and used for revaluing all
holdings of that particular credit.
Therefore, our proposed amendments
would have the incidental benefit of
facilitating price discovery and would
enable the Commission and others to
evaluate pricing consistency across
funds (and identify potential
outliers).767 We request comment on
this aspect of our proposal.
• Do commenters agree that our
proposed additional requirements
would facilitate price discovery? Would
any of our proposed additional
requirements not facilitate price
discovery? Are there other requirements
than those proposed that would be
helpful?
• Should we require a different
convention for pricing fixed income
securities? If so, what?
In addition, we would require funds
to report the amount of cash they
763 We understand that the yields on variable rate
demand notes, for example, may vary daily, weekly,
or monthly. Our proposed amendment would
provide Commission staff and others with a way to
monitor the market’s response to changes in credit
quality, as well as identify potential outliers. We
believe that money market funds have this
information readily available because funds require
this information to calculate daily distributions of
income, and thus, should not impose costs on funds
(other than those discussed in infra section III.H.6).
764 See proposed N–MFP Item C.17. Because yield
at purchase would be disclosed in a separate item,
we propose to delete the reference to ‘‘(including
coupon or yield)’’ from current Form N–MFP Item
27 (Proposed Form N–MFP Item C.2). The purchase
price must be reported as a percentage of par,
rounded to the nearest one thousandth of one
percent. See proposed Form N–MFP Item C.17.e.
We believe this represents the standard convention
for pricing fixed-income securities. For example, a
security issued at a 1% premium to par would
report the purchase price as $101.000.
765 See proposed Form N–MFP Item C.17.
766 See proposed Form N–MFP Item C.25
(requiring that a fund disclose, for each security
sold by the series during the reporting period, (i)
the total principal amount; (ii) the purchase price;
(iii) the sale date; (iv) the yield at sale; and (v) the
sale price. Information about any securities sold by
the fund during the reporting period would also
provide the Commission and others with important
information about how the fund may be handling
heavy redemptions (e.g., selling securities at a
haircut).
767 See Federal Reserve Bank Presidents FSOC
Comment Letter, supra note 38 (suggesting that
more frequent reporting on Form N–MFP might
increase price discovery (for market-based NAV
calculations)).
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hold,768 the fund’s Daily Liquid Assets
and Weekly Liquid Assets,769 and
whether each security is considered a
Daily Liquid Asset or Weekly Liquid
Asset.770 Unlike the other items of
disclosure on Form N–MFP which must
be disclosed on a monthly basis, we
propose to require that funds report the
Daily Liquid Assets and Weekly Liquid
Assets on a weekly basis. Similarly, we
propose to require that money market
funds disclose the weekly gross
subscriptions (including dividend
reinvestments) and weekly gross
redemptions for each share class, once
each week during the month
reported.771 As discussed earlier, money
market funds would continue to file
reports on Form N–MFP once each
month, but certain information
(including disclosure of Daily and
Weekly Liquid Assets and shareholder
flow) would be reported weekly within
the Form.
Our proposed amendments would
provide Commission staff and others
with more relevant data to efficiently
monitor fund risk, such as the
likelihood that a fund might trip a
liquidity-based trigger (e.g., a liquidity
fee or gate, if that regulatory alternative
is adopted) and correlated risk shifts in
liquidity across the industry.772
Increased periodic disclosure of the
daily and weekly liquid assets on Form
N–MFP would provide increased
transparency into how funds manage
their liquidity, and it may also impose
market discipline on portfolio managers.
In addition, increased disclosure of
weekly gross subscriptions and gross
redemptions (reported weekly, in
addition to monthly) would improve the
ability of the Commission and others to
better understand the significance of
other liquidity disclosures required by
768 See proposed Form N–MFP Item A.14.a;
Proposed Form N–MFP General Instructions, E.
Definitions (requiring disclosure of the amount of
cash held and defining ‘‘cash’’ to mean demand
deposits in insured depository institutions and cash
holdings in custodial accounts). We propose to
amend Item 14 of Current Form N–MFP (total value
of other assets) to clarify that ‘‘other assets’’
excludes the value of assets disclosed separately
(e.g., cash and the value of portfolio securities). See
proposed Form N–MFP Item A.14.c. Our proposed
amendment would ensure that reported amounts
are not double counted.
769 See proposed Form N–MFP Item A.13.
770 Proposed Form N–MFP Items C.21–C.22.
771 See proposed Form N–MFP Item B.6. We
propose to continue to require that money market
funds also disclose the monthly gross subscriptions
and monthly gross redemptions for the month
reported. See current Form N–MFP Item 23
(proposed Form N–MFP Item B.6.f).
772 As discussed in section III.F.2, under either
alternative proposal, money market funds would
also be required to disclose each day on its Web site
the fund’s Daily Liquid Assets and Weekly Liquid
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our proposals (e.g., daily and weekly
liquid assets). As a result, investors may
make more informed investment
decisions and fund managers may
manage fund portfolios in a way that
enhances stability in the short-term
financing markets. We also propose to
require that funds disclose whether,
during the reporting period, any person
paid for or waived all or part of the
fund’s operating expenses or
management fees.773 Information about
expense waivers will help us
understand potential strains on a fund’s
investment adviser during periods of
low interest rates. We request comment
on these aspects of our proposed
reforms.
• Would reporting the daily and
weekly liquid asset levels and gross
subscriptions and redemptions as of the
close of business each Friday during the
reporting period conflict with the fund’s
other disclosure requirements, which
are required only as of the last business
day or any later calendar day in the
month? Should we require that this
information be provided to the
Commission more or less frequently, or
at a different time or day each week?
• Would reporting on expense
waivers help us and investors better
understand potential financial strains
on a fund’s investment adviser?
• Do commenters agree that increased
transparency will lead to greater market
discipline on portfolio managers and
lead investors to make more informed
decisions?
We also propose to require that funds
disclose the total percentage of shares
outstanding, to the nearest tenth of one
percent, held by the twenty largest
shareholders of record.774 This
information would help us (and
investors) identify funds with
significant potential redemption risk
stemming from shareholder
concentration, and evaluate the
likelihood that a significant market or
credit event might result in a run on the
fund or the imposition of a liquidity fee
or gate, if we were to adopt that aspect
of our proposal.775 Investors may avoid
773 Proposed Form N–MFP Item B.8 (requiring
that funds provide the name of the person and
describe the nature and amount the expense
payment or fee waiver, or both (reported in dollars).
774 See, e.g., Fidelity Investments, An Analysis of
the SEC Study on Money Market Mutual Funds:
Considering the Scope and Impact of Possible
Further Regulation (Jan. 2013) at 5, available at
https://www.sec.gov/comments/mms-response/
mmsresponse-16.pdf (suggesting one key factor that
could be used to distinguish between retail and
institutional money market funds be whether the
top 20 shareholders accounts for greater than or less
than 15% of the fund’s assets).
775 Proposed Form N–MFP Item A.19. We are also
proposing to require that a fund disclose the
number of shares outstanding, to the nearest
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overly concentrated funds and this
preference may incentivize some funds
to avoid becoming too concentrated.
This may, in turn, increase investment
costs for large shareholders that are
compelled to spread their investments
across multiple funds, especially if they
choose funds from multiple fund
groups. We request comment on this
proposed reporting.
• Would the total percentage of
shares outstanding held by the fund’s
twenty largest shareholders help us and
investors identify funds with significant
potential redemption risk stemming
from shareholder concentration?
• Would the use of omnibus accounts
reduce the value of information about
shareholder concentration? If so, is there
other data we could require that would
yield more useful information?
• Could funds or shareholders
‘‘game’’ this reporting requirement by
splitting a large investment into smaller
pieces? Are there reasonable rules the
Commission could adopt to address this
potential ‘‘gaming?’’
• Should we require that funds report
the total holdings of a different number
of top shareholders (e.g., five, ten, or
thirty shareholders)?
• Should we require the reporting of
this information only if the top
shareholders of record own in the
aggregate at least a certain total
percentage of the fund’s outstanding
shares? If so, how many shareholders
should we consider, and what should
that threshold be (e.g., 1%, 2%, or 5%)?
• Is there a better way to assess the
risks associated with shareholder
concentration? Should we require
aggregation of holdings by affiliates?
In addition, we propose that funds
report the maturity date for each
portfolio security using the maturity
date used to calculate the dollarweighted average life maturity (‘‘WAL’’)
(i.e., without reference to the exceptions
in rule 2a–7(i) regarding interest rate
readjustments).776 In 2010, we adopted
a requirement that limits the WAL of a
fund’s portfolio to 120 calendar days
because we were concerned about the
extent to which a manager could expose
a fund to credit spread risk associated
with longer-term, adjustable-rate
securities.777 This information will
assist the Commission in monitoring
and evaluating this risk, at the security
level, as well as help evaluate
hundredth, at both the series level and class level.
Proposed Form N–MFP Items A.17 and B.4. This
information would permit us to verify or detect
errors in information provided on Form N–MFP,
such as net asset value per share.
776 Proposed Form N–MFP Item C.12.
777 See 2010 Adopting Release, supra note 92, at
section II.B.2.
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compliance with rule 2a–7’s maturity
provisions. In addition, our proposed
amendments would make clear that
funds disclose for each security all three
maturity calculations as required under
rule 2a–7: dollar-weighted average
portfolio maturity (‘‘WAM’’), WAL, and
the final legal maturity date.778 Finally,
the proposed amendments would
require that a fund disclose additional
information about certain types of
securities held by the fund.779 We
request comment on our proposed
amendments.
• Do commenters agree that
disclosure of each security’s WAL will
assist the Commission and investors in
evaluating credit spread risk? We note
that Form N–MFP currently requires
that funds disclose each security’s
WAM and final legal maturity date.780
• Would our proposed amendments
to the category of investment increase
the accuracy of how securities are
778 We also propose to clarify that the maturity
date required to be reported in current Form—N–
MFP Item 35 is the maturity date used to calculate
WAM under proposed (FNAV and Fees & Gates)
rule 2a–7(d)(1)(ii) (see proposed Form N–MFP Item
C.11) and the maturity date required to be reported
in current Form—N–MFP Item 36 is the final legal
maturity date, i.e., the date on which, in accordance
with the terms of the security without regard to any
interest rate readjustment or demand feature, the
principal amount must unconditionally be paid (see
proposed Form N–MFP Item C.13). The final legal
maturity date, as clarified, will help us distinguish
between debt securities that are issued by the same
issuer.
779 We propose to amend the investment
categories in proposed Form N–MFP Item C.6 to
include new categories: ‘‘Non U.S. Sovereign Debt,’’
‘‘Non-U.S. Sub-Sovereign Debt,’’ ‘‘Other AssetBacked Security,’’ ‘‘Non-Financial Company
Commercial Paper’’ (instead of ‘‘Other Commercial
Paper’’), and ‘‘Collateralized Commercial Paper,’’
and amend ‘‘U.S. Government Agency Debt’’ and
‘‘Certificate of Deposit (including Time Deposits
and Euro Time Deposits).’’ The new investment
categories would help Commission staff identify
particular exposures that otherwise are often
reported in other less descriptive categories (e.g.,
reporting sovereign debt as ‘‘treasury debt’’ or
reporting asset-backed securities (that are not
commercial paper) as ‘‘other note’’ or ‘‘other
instrument’’). We note that a fund should only
designate a security as ‘‘U.S. Treasury Repurchase
Agreement’’ or ‘‘Government Agency Repurchase
Agreement’’ when the underlying collateral is 100%
Treasuries or Government Agency, respectively;
otherwise, a fund should use the ‘‘Other
Repurchase Agreement’’ category. We are also
proposing to include a requirement that a fund
disclose, where applicable, the period remaining
until the principal amount of a security may be
recovered through a demand feature and whether a
security demand feature is conditional. Proposed
Form N–MFP Items C.14.e. and C.14.f. These
proposed amendments would improve the
Commission’s and investors’ ability to evaluate and
monitor a security’s credit and default risk.
780 Current Form N–MFP Item 35 (the maturity
date taking into account the maturity shortening
provisions of rule 2a–7(d), i.e., ‘‘WAM’’) and Item
36 (the final legal maturity date taking into account
any maturity date extensions that may be effected
at the option of the issuer).
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categorized currently? Should we
include other investment categories?
As detailed above, our proposed new
reporting requirements are intended to
address gaps in the reporting regime
that Commission staff has identified
through two and a half years of
experience with Form N–MFP and to
enhance the ability of the Commission
and investors to monitor funds.
Although the potential benefits are
difficult to quantify, they would
improve the ability of the Commission
and investors to identify (and analyze)
a fund’s portfolio securities (e.g., by
requiring disclosure of LEIs and an
additional security identifier beyond
CUSIPs already required). In addition,
many of our proposed new reporting
requirements would enhance the ability
of the Commission and investors to
evaluate a fund’s risk characteristics (by
requiring that fund’s disclose, for
example, the following data: security
categorizations as level 1, level 2, or
level 3 measurements; more detailed
information about securities at the time
of purchase; liquidity metrics; and
information about shareholder
concentration). We believe that the
additional information required should
be readily available to funds as a matter
of general business practice and
therefore would not impose costs on
money market funds other than those
required to modify systems used to
aggregate data and file reports on Form
N–MFP. These costs are discussed in
section III.H.6 below.
Our proposed new reporting
requirements may improve
informational efficiency by improving
the transparency of potential risks in
money market funds and promoting
better-informed investment decisions,
which, in turn, will lead to a better
allocation of capital. Similarly, the
increased transparency may promote
competition as fund managers are
exposed to external market discipline
and better-informed investors who may
be more likely to select an alternative
investment if they are not comfortable
with the risk-return profile of their fund.
The newly disclosed information may
cause some money market fund
investors to exchange their assets
between different money market funds,
but because we do not have the
information necessary to provide a
reasonable estimate, we are unable to
estimate this with specificity. In
addition, some investors may exchange
assets between money market funds and
alternative investments or other
segments of the short-term financing
markets, but we are unable to estimate
how frequently this will happen with
specificity and we do not know how the
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other underlying assets compare with
those of money market funds. Therefore,
we are unable to estimate the overall net
effect on capital formation.
Nevertheless, we believe that the net
effect will be small, especially during
normal market conditions.
We request general comment on our
proposed new reporting requirements.
• Do commenters agree that the
information we would require is readily
available to funds as a matter of general
business practice? If not, are there other
types of readily available data that
would provide us with similar
information?
• Are there costs associated with our
proposed new reporting requirements
(other than to make systems
modifications discussed below) that we
have not considered? If so, please
describe the nature and amounts of
those costs.
• Is there additional information that
we have not identified that could be
useful to us or investors in monitoring
money market funds? How should such
information be reported?
3. Clarifying Amendments
We are proposing (regardless of the
alternative proposal adopted, if any)
several amendments to clarify current
instructions and items of Form N–MFP.
Revising the form to include these
clarifications should improve the ability
of fund managers to complete the form
and improve the quality of the data they
submit to us.781 We believe that many
of our proposed clarifying amendments
are consistent with current filing
practices.782
We understand that some fund
managers compile the fund’s portfolio
holdings information as of the last
calendar day of the month, even if that
day falls on a weekend or holiday. To
provide flexibility, we propose to
amend the instructions to Form N–MFP
to clarify that, unless otherwise
specified, a fund may report information
on Form N–MFP as of the last business
day or any later calendar day of the
month.783 We also propose to revise the
781 We are proposing technical changes to the
‘‘General Information’’ section of the form that will
clarify the circumstances under which a money
market fund must complete certain question subparts. See proposed Form N–MFP Items 6 and 7.
782 As discussed below, the proposed
amendments are consistent with guidance our staff
has provided to money market fund managers and
service providers completing Form N–MFP.
783 See proposed Form N–MFP General
Instruction A (Rule as to Use of Form N–MFP);
proposed rule 30b1–7. Our proposed approach is
also consistent with a previous interpretation
provided by our staff. See Staff Responses to
Questions about Rule 30b1–7 and Form N–MFP,
Question I.B.1 (revised July 29, 2011), available at
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definition of ‘‘Master-Feeder Fund’’ to
clarify that the definition of ‘‘Feeder
Fund’’ includes unregistered funds
(such as offshore funds).784 Our
proposed amendments also would
clarify that funds should calculate the
WAM and WAL reported on Form N–
MFP using the same methods they use
for purposes of compliance with rule
2a–7.785 We also propose to require that
funds disclose in Part B (Class-Level
Information about the Fund) the
required information for each class of
the series, regardless of the number of
shares outstanding in the class.786
We also are proposing to amend the
reporting requirements for repurchase
agreements by restating the item’s
requirements as two distinct
questions.787 The amendment would
https://www.sec.gov/divisions/investment/guidance/
formn-mfpqa.htm.
784 See proposed Form N–MFP General
Instruction E (defining ‘‘Master-Feeder Fund,’’ and
defining ‘‘Feeder Fund’’ to include a registered or
unregistered pooled investment vehicle). Form N–
MFP requires that a master fund report the identity
of any feeder fund. Our proposed amendment is
designed to address inconsistencies in reporting of
master-feeder fund data that we have observed in
filings, and would help us determine the extent to
which feeder funds, wherever located, hold a
master fund’s shares. The change would reflect how
we understand data from master-feeder funds is
collected by the Investment Company Institute for
its statistical reports. We are also proposing to make
grammatical and conforming amendments to
proposed Form N–MFP Items A.7 and A.8.
785 See proposed Form N–MFP Items A.11 and
A.12 (defining ‘‘WAM’’ and ‘‘WAL’’ and crossreferencing the maturity terms to rule 2a–7). We
also propose to amend the 7-day gross yield to
require that the resulting yield figure be carried to
(removing the words ‘‘at least’’) the nearest
hundredth of one per cent and clarify that master
and feeder funds should report the 7-day gross yield
(current Form –N–MFP Item 17) at the master-fund
level. Proposed Form N–MFP Item A.20. These
proposed amendments are intended to achieve
consistency in reporting and remove potential
ambiguity for feeder funds when reporting the 7day gross yield.
786 See text before proposed Form N–MFP Item
B.1. Our staff has found that funds inconsistently
report fund class information, for example, when a
fund does not report a fund class registered on
Form N–1A because the fund class has no shares
outstanding. Our proposed amendment is intended
to clarify a fund’s reporting obligations and provide
Commission staff (and investors) with more
complete information about each fund’s capital
structure.
787 See proposed Form N–MFP Item C.7
(requiring that a fund disclose if it is treating the
acquisition of a repurchase agreement as the
acquisition of the underlying securities (i.e.,
collateral) for purposes of portfolio diversification
under rule 2a–7). See proposed Form N–MFP Item
C.8 (requiring that a fund describe the securities
subject to the repurchase agreement, including: (a)
name of the collateral issuer; (b) CUSIP; (c) LEI (if
available); (d) maturity date; (e) coupon or yield; (f)
principal amount; (g) value of the collateral; and (h)
the category of investments. We also propose to
require that a fund specify whether the repurchase
agreement is ‘‘open’’ (i.e., by its terms, will be
extended or ‘‘rolled’’ each business day unless the
investor chooses to terminate it). This information
should be readily available to funds and would
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make clear that information about the
securities subject to a repurchase
agreement must be disclosed regardless
of how the fund treats the acquisition of
the repurchase agreement for purposes
of rule 2a–7’s diversification
requirements.788 Finally, we propose to
amend the items in Form N–MFP that
require information about demand
features, guarantors, or enhancement
providers to make clear that funds
should disclose the identity of each
demand feature issuer, guarantor, or
enhancement provider and the amount
(i.e., percentage) of fractional support
provided.789 Our amendments also
would clarify that a fund is not required
to provide additional information about
a security’s demand feature(s) or
guarantee(s) unless the fund is relying
on the demand feature or guarantee to
determine the quality, maturity, or
liquidity of the security.790
As discussed above, our proposed
clarifying amendments are intended to
improve the quality of the data we
receive on Form N–MFP by clarifying a
number of reporting obligations so that
all funds report information on Form N–
MFP in a consistent manner.
Accordingly, we do not believe that our
proposed clarifying amendments would
impose any new costs on funds other
than those required to modify systems
enhance the ability of Commission staff and others
to evaluate the risks (e.g., rollover risk or the
duration of the lending) presented by investments
in repurchase agreements. See proposed Form N–
MFP Item C.8.a. Our proposal would also provide
a specific list of investment categories from which
funds may choose, including new categories
(Equity; Corporate Bond; Exchange Traded Fund;
Trust Receipt (other than for U.S. Treasuries); and
Derivative). Finally, our proposal would also clarify
that a fund is required to disclose the name of the
collateral issuer (and not the name of the issuer of
the repurchase agreement). In addition, when
disclosing a security’s coupon or yield (as required
in proposed Form N–MFP Item C.8.f), a fund would
be required to report (i) the stated coupon rate,
where the security is issued with a stated coupon;
(ii) the interest rate at purchase, for instance, if the
security is issued at a discount (without a stated
coupon); and (iii) the coupon rate as of the Form
N–MFP reporting date, if the security is floating or
variable rate.
788 We propose several other clarifications to
other items. See proposed Form N–MFP Item 1
(amending the format of reporting date provided by
funds); and proposed Form N–MFP Item A.10
(modifying, for consistency, the names of money
market fund categories).
789 See proposed Form N–MFP Items C.14–C.16.
790 Form N–MFP already requires that a fund
disclose only security enhancements on which the
fund is relying to determine the quality, maturity,
or liquidity of the security. See current Form N–
MFP Item 39. Similarly, we propose to amend
current Form N–MFP Items 37 (demand features)
and 38 (guarantees) to make clear that funds are
required to disclose information relating to demand
features and guarantees only when the fund is
relying on these features to determine the quality,
maturity, or liquidity of the security. See proposed
Form N–MFP Items C.14 and C.15.
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36945
used to aggregate data and file reports
on Form N–MFP. These costs are
discussed in section III.H.6 below.
Because our proposed clarifying
amendments would not change funds’
current reporting obligations, we believe
there would be no effect on efficiency,
competition, or capital formation.
We request comment on our proposed
clarifying amendments.
• Is our understanding about current
fund practices correct?
• Would our proposed amendments
provide greater clarity and flexibility to
funds? Are they consistent with current
fund practices?
• Would our proposed amendments
alter the manner in which data is
currently reported to us on Form N–
MFP, or alter the amount of data
reported?
• Are there other clarifying
amendments that we should consider
that would improve the consistency and
utility of the information reported on
Form N–MFP to Commission staff and
others?
• Should we adopt our proposed
clarifying amendments even if we do
not adopt either the floating NAV or
liquidity fees and gates proposals?
4. Public Availability of Information
Currently, each money market fund
must file information on Form N–MFP
electronically within five business days
after the end of each month and that
information is made publicly available
60 days after the end of the month for
which it is filed. We propose (regardless
of the alternative proposal adopted, if
any) to make Form N–MFP publicly
available immediately upon filing.791
The delay, which we instituted when
we adopted the form in 2010, responded
to commenters’ concerns regarding
potential reactions of investors to the
disclosure of funds’ portfolio
information and shadow NAVs.792
Although we did not believe that it was
necessary to keep the portfolio
information private for 60 days, we
believed then that the shadow price data
should not be made public immediately.
However, we now believe that the
immediate release of the shadow price
791 See proposed rule 30b1–7 (eliminating
subsection (b), public availability).
792 See 2010 Adopting Release, supra note 92, at
section II.E.2 (noting that there may be less need in
the future to require a 60-day delay). Commenters
also objected to the disclosure of information filed
on Form N–MFP because of the competitive effects
on funds or fund managers. In the adopting release,
we stated our belief that the competitive risks were
overstated by commenters. We noted that the risks
of trading ahead of funds (‘‘front running’’) or ‘‘free
riding’’ on a fund’s investment strategies were
minimal because of the short-term nature of money
market fund investments and the restricted universe
of eligible portfolio securities.
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data would not be harmful. This is
based, in part, on our understanding
that many money market funds now
disclose their shadow prices every
business day on their Web sites.
Therefore we propose (under both
alternatives we are proposing today) to
eliminate the 60-day delay in making
the information on the form publicly
available.793
Eliminating the 60-day delay would
provide more timely information to the
public and greater transparency of
money market fund information, which
could promote efficiency. This
disclosure could also make the monthly
disclosure on Form N–MFP more
relevant to investors, financial analysts,
and others by improving their ability to
more timely assess potential risks and
make informed investment decisions. In
other words, investors may be more
likely to use the reported information
because it is more timely and
informative. In response to this
potential heightened sensitivity of
investors to the reported information,
some funds might move toward more
conservative investment strategies to
reduce the chance of having to report
bad outcomes. Because, as discussed
above, shadow prices (which were a
primary reason why we adopted the 60day delay in making filings public) have
been disclosed by a number of money
market funds since February 2013
without incident, we do not believe that
eliminating the 60-day delay would
affect capital formation. We request
comment on this aspect of our proposal.
• Do commenters believe that our
five-day filing deadline continues to be
appropriate? Should the filing delay be
shorter or longer? Please provide
support for any suggested change to the
filing deadline.
• Do commenters agree that there
have not been adverse impacts from
recent publication of daily shadow
NAVs by a number of large money
market funds?
• Is a 60-day delay in making the
information public still necessary to
protect against possible ‘‘front running’’
or ‘‘free riding?’’ Have any
developments occurred that should
cause us to reconsider our 2010 decision
that the information required to be
disclosed would not be competitively
sensitive?
793 A number of large fund complexes have begun
(or plan) to disclose daily money market fund
market valuations (i.e., shadow prices), including
BlackRock, Charles Schwab, Federated Investors,
Fidelity Investments, Goldman Sachs, J.P. Morgan,
Reich & Tang, and State Street Global Advisors. See,
e.g., Money Funds’ New Openness Unlikely to Stop
Regulation, Wall St. J. (Jan. 30, 2013).
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• Would a shorter delay (45, 30, or 15
days) be more appropriate? If so, why?
• Do commenters agree with our
estimated impact on efficiency,
competition, and capital formation?
• Should we adopt our proposed
amendment to eliminate the 60-day
delay even if we do not adopt either the
floating NAV or liquidity fees and gates
proposals?
5. Request for Comment on Frequency
of Filing
To increase further the transparency
of money market funds and the utility
of information disclosed, the
Commission requests comment
(regardless of the alternative proposal
adopted, if any) on increasing the
frequency of filing Form N–MFP from
monthly to weekly. Given the rapidly
changing composition of money market
fund portfolios and increased emphasis
on portfolio liquidity (i.e., shortened
maturities),794 the information provided
on Form N–MFP may become stale and
less relevant. We believe that increasing
the frequency of disclosure, as well as
eliminating the 60-day delay in making
information on Form N–MFP publicly
available (discussed above), would
further increase transparency into
money market funds and make the
information more relevant to investors,
academic researchers, financial analysts,
and economic research firms. We note
that, under our floating NAV proposal,
more frequent disclosure on Form N–
MFP could also facilitate more accurate
market-based valuations.795 While we
do not have the information necessary
to provide a point estimate of the
additional costs that may be imposed on
funds because of more frequent filings
of reports on Form N–MFP, we believe
that the increased costs per fund would
be negligible because most funds use a
licensed software solution (either
directly or through a third-party service
provider) and would experience
significant economies of scale.796
Despite the incremental increase in
costs to file the report more frequently,
794 The RSFI Study notes that as of November 30,
2012, the typical prime fund held over 25% of its
portfolio in daily liquid assets (‘‘DLA’’) (with 10%
DLA required under rule 2a–7) and nearly 50% of
its portfolio in weekly liquid assets (‘‘WLA’’) (with
30% WLA required under rule 2a–7). See RSFI
Study, supra note 21, at 20.
795 See supra note 767 and accompanying text.
796 Staff estimates that our proposed amendments
to Form N–MFP (12 filings per year) would result
in, at the outside range, a first-year aggregate
additional 49,810 total burden hours at a total cost
of $12.9 million, and external costs of $373,680. See
infra section IV.A.3. We expect that funds would
incur substantially lower costs that those described
above if we were to require that reports on Form
N–MFP be filed weekly, rather than monthly as
currently required.
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more timely and relevant data may
increase competition and efficiency for
the same reasons discussed above with
respect to our proposed amendment to
eliminate the 60-day delay.
We request comment on increasing
the frequency of the filing of Form N–
MFP.
• Do commenters agree with our
analysis of the benefits and costs
associated with increasing the frequency
of disclosure of reports on Form N–
MFP? Why or why not?
• Would increasing the frequency of
reporting affect the investment strategies
employed by fund managers, for
example, causing managers to increase
risk taking?
• Would fund managers be more
likely to ‘‘front-run’’ or reverse engineer
another fund’s portfolio strategy?
• Would increasing the frequency of
disclosure affect the costs or benefits
associated with our proposed
amendment to eliminate the 60-day
delay in public availability? If so, how?
• What types of costs would funds
incur to change from monthly to weekly
filing of reports on Form N–MFP?
Would funds have sufficient time to
evaluate and validate data received from
outside vendors?
• Should we increase the filing
frequency even if we do not adopt either
the floating NAV or liquidity fees and
gates proposals?
6. Operational Implications
We anticipate that fund managers
would incur costs to gather the new
items of information we propose to
require on Form N–MFP. To reduce
costs, we have decided to propose
needed improvements to the form at the
same time we are proposing
amendments necessitated by the
amendments to rule 2a–7 we are
proposing. We note that our proposed
clarifying amendments should not
affect, or should only minimally affect,
current filing obligations or the
information content of the filings.
We expect that the operational costs
to money market funds to report the
information required in proposed Form
N–MFP would be the same costs we
discuss in the Paperwork Reduction Act
analysis in section IV of the Release,
below. As discussed in more detail in
that section, our staff estimates that our
proposed amendments to Form N–MFP
would result in, at the outside range, a
first-year aggregate additional 49,810
burden hours at a total cost of $12.9
million plus $373,680 in total external
costs (which represent fees to license a
software solution and fees to retain a
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third-party service provider).797 Our
operational cost estimates are based on
our floating NAV proposal, but would
not change if we instead adopted our
liquidity fees and gates alternative
proposal.
We request comment on our analysis
of operational implications summarized
above and described in detail in
sections IV.A.3 and IV.B.3 below. We
also request comment on the costs and
benefits described above, including
whether any proposed disclosure
requirements are unduly burdensome or
would impose unnecessary costs.
I. Amendments to Form PF Reporting
Requirements
The Commission is proposing to
amend Form PF, the form that certain
investment advisers registered with the
Commission use to report information
regarding the private funds they
manage, including ‘‘liquidity funds,’’
which are private funds that seek to
maintain a stable NAV (or minimize
fluctuations in their NAVs) and thus can
resemble money market funds.798 We
adopted Form PF, as required by the
Dodd-Frank Act,799 to assist FSOC in its
monitoring and assessment of systemic
risk; to provide information for FSOC’s
use in determining whether and how to
deploy its regulatory tools; and to
collect data for use in our own
regulatory program.800 As discussed in
more detail below, FSOC and the
Commission have recognized the risks
that may be posed by cash management
products other than money market
797 See
infra section IV.A.3.
purposes of Form PF, a ‘‘liquidity fund’’
is any private fund that seeks to generate income
by investing in a portfolio of short term obligations
in order to maintain a stable net asset value per unit
or minimize principal volatility for investors. See
Glossary of Terms to Form PF.
799 See Reporting by Investment Advisers to
Private Funds and Certain Commodity Pool
Operators and Commodity Trading Advisors on
Form PF, Investment Advisers Act Release No. 3308
(Oct. 31, 2011) [76 FR 71128 (Nov. 16, 2011)]
(‘‘Form PF Adopting Release’’) at section I. Form PF
is a joint form between the Commission and the
CFTC only with respect to sections 1 and 2 of the
Form; section 3, which we propose to amend, and
section 4, were adopted only by the Commission.
Id.
800 FSOC’s regulatory tools include, for example,
designating nonbank financial companies that may
pose risks to U.S. financial stability for supervision
by the Board of Governors of the Federal Reserve
System, and issuing recommendations to primary
financial regulators for more stringent regulation of
financial activities that FSOC determines may
create or increase systemic risk. Although Form PF
is primarily intended to assist FSOC in its
monitoring obligations under the Dodd-Frank Act,
we also may use information collected on Form PF
in our regulatory program, including examinations,
investigations, and investor protection efforts
relating to private fund advisers. See Form PF
Adopting Release, supra note 799, at sections II and
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funds, including liquidity funds, and
the potentially increased significance of
such products in the event we adopt
further money market fund reforms such
as those we propose today.801 Therefore,
to enhance FSOC’s ability to monitor
and assess systemic risks in the shortterm financing markets and to facilitate
our oversight of those markets and their
participants, we propose today to
require large liquidity fund advisers—
registered advisers with $1 billion or
more in combined money market fund
and liquidity fund assets—to file
virtually the same information with
respect to their liquidity funds’ portfolio
holdings on Form PF as money market
funds are required to file on Form N–
MFP.802
We share the concern expressed by
some commenters that, if further money
market fund reforms cause investors to
seek alternatives to money market
funds, including private funds that seek
to maintain a stable NAV but that are
not registered with the Commission, this
shift could reduce transparency of the
potential purchasers of short-term debt
instruments, and potentially increase
systemic risk.803 We discuss in detail
801 See
infra note 816 and accompanying text.
propose to incorporate in a new Question
63 in section 3 of Form PF the substance of virtually
all of the questions on Part C of Form N–MFP as
we propose to amend that form, except that we have
modified the questions where appropriate to reflect
that liquidity funds are not subject to rule 2a–7
(although some liquidity funds have a policy of
complying with rule 2a–7’s risk-limiting
conditions) and have not added questions that
would parallel Items C.7 and C.9 of Form N–MFP.
We do not propose to include a question that would
parallel Item C.7 because that item relates to
whether a money market fund is treating the
acquisition of a repurchase agreement as the
acquisition of the collateral for purposes of rule 2a–
7’s diversification testing; liquidity funds, in
contrast, are not subject to rule 2a–7’s
diversification limitations, and the information on
repurchase agreement collateral we propose to
collect through new Question 63(g) on Form PF
would allow us to better understand liquidity
funds’ use of repurchase agreements and their
collateral. Item C.9 asks whether a portfolio security
is a rated first tier security, rated second tier
security, or no longer an eligible security. We did
not include a parallel question in Form PF because
these concepts would not necessarily apply to
liquidity funds, and we believe the additional
questions on Form PF would provide sufficient
information about a portfolio security’s credit
quality and the large liquidity fund adviser’s use of
credit ratings.
803 See, e.g., Dreyfus FSOC Comment Letter,
supra note 174 (opposing a floating NAV and citing
adverse redistribution of systemic risk); Dreyfus
2009 Comment Letter, supra note 350 (opposing a
floating NAV and stating that, after surveying 37 of
its largest institutional money market fund
shareholders (representing over $60 billion in
assets) regarding a floating NAV, 67% responded
that their business could not continue to invest in
a floating NAV product and that they would have
to seek an alternative investment option); Nat.
Assoc. of State Treasurers PWG Comment Letter,
supra note 567 (opposing a floating NAV because,
among other reasons, ‘‘a floating NAV would push
802 We
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the potential for money market fund
investors to reallocate their assets to
alternative investments in section III.E
above. The amendments that we
propose to Form PF today are designed
to achieve two primary goals. First, they
are designed to ensure to the extent
possible that any further money market
fund reforms do not decrease
transparency in the short-term financing
markets, and to better enable FSOC to
monitor and address any related
systemic risks and to better enable us to
develop effective regulatory policy
responses to any shift in investor assets.
Second, the proposed amendments to
Form PF are designed to allow FSOC
and us to more effectively administer
our regulatory programs even if
investors do not shift their assets as a
result of any further money market fund
reforms, as the increased transparency
concerning liquidity funds, combined
with information we already collect on
Form N–MFP, will provide a more
complete picture of the short-term
financing markets in which liquidity
funds and money market funds both
invest.
1. Overview of Proposed Amendments
to Form PF
Our proposal would apply to large
liquidity fund advisers, which generally
are SEC-registered investment advisers
that advise at least one liquidity fund
investors to less regulated or non-regulated
markets’’); AFP Jan. 2011 PWG Comment Letter,
supra note 567 (reporting results of a survey of its
members reflecting that four out of five
organizations would likely move at least some of
their assets out of money market funds if the funds
were required to use floating NAVs, with 22%
reporting that they would move their money market
fund investments to ‘‘fixed-value investment
vehicles (e.g., offshore money market funds,
enhanced cash funds and stable value vehicles)’’);
ICI Apr 2012 PWG Comment Letter, supra note 62
(enclosing a survey commissioned by the
Investment Company Institute and conducted by
Treasury Strategies, Inc. finding, among other
things, that if the Commission were to require
money market funds to use floating NAVs, 79% of
the 203 corporate, government, and institutional
investors that responded to the survey would
decrease their money market fund investments or
stop using the funds); Federated Investors
Alternative 1 FSOC Comment Letter, supra note 161
(stating that requiring money market funds to use
floating NAVs, among other things, ‘‘would cause
investors to move liquidity balances elsewhere,’’
including to ‘‘to bank-sponsored short-term
investment funds, hedge funds and offshore
investment vehicles that are less transparent, less
regulated, less efficient and result in the same ‘rollover risk’ for issuers in the money markets that the
Council apparently wants to ameliorate through its
plan to change the structure of MMFs’’); ICI Jan. 24
FSOC Comment Letter, supra note 25 (stating that
if money market funds were required to use floating
NAVs, ‘‘[i]t is very likely that institutional investors
would continue to seek out diversified investment
pools that strive to maintain a stable value’’ and
that ‘‘[m]ost of these pools are not regulated under
the Investment Company Act—and some of them lie
beyond the jurisdictional reach of U.S. regulators’’).
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and manage, collectively with their
related persons, at least $1 billion in
combined liquidity fund and money
market fund assets.804 Large liquidity
fund advisers today are required to file
information on Form PF quarterly,
including certain information about
each liquidity fund they manage.805
Under our proposal, for each liquidity
fund it manages, a large liquidity fund
adviser would be required to provide,
quarterly and with respect to each
portfolio security, the following
information for each month of the
reporting period: 806
• The name of the issuer;
• The title of the issue;
• The CUSIP number;
• The legal entity identifier or LEI, if
available;
• At least one of the following other
identifiers, in addition to the CUSIP and
LEI, if Available: ISIN, CIK, or any other
unique identifier;
• The category of investment (e.g.,
Treasury debt, U.S. government agency
debt, Asset-backed commercial paper,
certificate of deposit, repurchase
agreement 807);
804 An adviser is a large liquidity fund adviser if
it has at least $1 billion combined liquidity fund
and money market fund assets under management
as of the last day of any month in the fiscal quarter
immediately preceding its most recently completed
fiscal quarter. See Form PF: Instruction 3 and
Section 3. This $1 billion threshold includes assets
managed by the adviser’s related persons, except
that an adviser is not required to include the assets
managed by a related person that is separately
operated from the adviser. Id. An adviser’s related
persons include persons directly or indirectly
controlling, controlled by, or under common
control with the investment adviser. See Form PF:
Glossary of Terms (defining the term ‘‘related
person’’ by reference to Form ADV). Generally, a
person is separately operated from an investment
adviser if the adviser: (1) Has no business dealings
with the related person in connection with advisory
services the adviser provides to its clients; (2) does
not conduct shared operations with the related
person; (3) does not refer clients or business to the
related person, and the related person does not refer
prospective clients or business to the adviser; (4)
does not share supervised persons or premises with
the related person; and (5) has no reason to believe
that its relationship with the related person
otherwise creates a conflict of interest with the
adviser’s clients. See Form PF: Glossary of Terms
(defining the term by reference to Form ADV).
805 See Form PF: Instruction 3 and Section 3.
806 See Question 63 of proposed Form PF.
Advisers would be required to file this information
with their quarterly liquidity fund filings with data
for the quarter broken down by month. Advisers
would not be required to file information on Form
PF more frequently as a result of today’s proposal
because large liquidity fund advisers already are
required to file information each quarter on Form
PF. See Form PF: Instruction 9.
807 For repurchase agreements we are also
proposing to require large liquidity fund advisers to
provide additional information regarding the
underlying collateral and whether the repurchase
agreement is ‘‘open’’ (i.e., whether the repurchase
agreement has no specified end date and, by its
terms, will be extended or ‘‘rolled’’ each business
day (or at another specified period) unless the
investor chooses to terminate it).
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• If the rating assigned by a credit
rating agency played a substantial role
in the liquidity fund’s (or its adviser’s)
evaluation of the quality, maturity or
liquidity of the security, the name of
each credit rating agency and the rating
each credit rating agency assigned to the
security;
• The maturity date used to calculate
weighted average maturity;
• The maturity date used to calculate
weighted average life;
• The final legal maturity date;
• Whether the instrument is subject
to a demand feature, guarantee, or other
enhancements, and information about
any of these features and their
providers;
• For each security, reported
separately for each lot purchased, the
total principal amount; the purchase
date(s); the yield at purchase and as of
the end of each month during the
reporting period for floating or variable
rate securities; and the purchase price as
a percentage of par;
• The value of the fund’s position in
the security and, if the fund uses the
amortized cost method of valuation, the
amortized cost value, in both cases with
and without any sponsor support;
• The percentage of the liquidity
fund’s assets invested in the security;
• Whether the security is categorized
as a level 1, 2, or 3 asset or liability on
Form PF; 808
• Whether the security is an illiquid
security, a daily liquid asset, and/or a
weekly liquid asset, as defined in rule
2a–7; and
• Any explanatory notes.809
We also propose to remove current
Questions 56 and 57 on Form PF. These
questions generally require large
liquidity fund advisers to provide
information about their liquidity funds’
portfolio holdings broken out by asset
class (rather than security by security).
We and FSOC would be able to derive
the information currently reported in
response to those questions from the
new portfolio holdings information we
propose to require advisers to provide.
We also are proposing to require large
liquidity fund advisers to provide
information about any securities sold by
their liquidity funds during the
reporting period, including sale and
purchase prices.810 Finally, we propose
808 See Question 14 of Form PF. See also infra
notes 758–761 and accompanying and following
text.
809 We also propose to define the following terms
in Form PF: Conditional demand feature; credit
rating agency; demand feature; guarantee;
guarantor; and illiquid security. See proposed Form
PF: Glossary of Terms.
810 See Question 64 of proposed Form PF. See
also supra notes 766–767 and accompanying text.
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to require large liquidity fund advisers
to identify any money market fund
advised by the adviser or its related
persons that pursues substantially the
same investment objective and strategy
and invests side by side in substantially
the same positions as a liquidity fund
the adviser reports on Form PF.811
2. Utility of New Information, Including
Benefits, Costs, and Economic
Implications
The amendments that we propose
today are designed to enhance FSOC’s
ability to fulfill its mission, and thereby
to facilitate FSOC’s ability to take
measures to protect the U.S. economy
from significant harm from future
financial crises.812 As we have
explained, the information that advisers
today must report on Form PF
concerning their liquidity funds is
designed to assist FSOC in assessing the
risks undertaken by liquidity funds,
their susceptibility to runs, and how
their investments might pose systemic
risks either among liquidity funds or
through contagion to registered money
market funds.813 The information that
advisers must report today also is
intended to aid FSOC in its
determination of whether and how to
deploy its regulatory tools.814 Finally,
the information that advisers must
report today is designed to assist FSOC
in assessing the extent to which a
liquidity fund is being managed
consistent with restrictions imposed on
registered money market funds that
might mitigate their likelihood of posing
systemic risk.815
We believe, based on our staff’s
consultations with staff representing the
members of FSOC, that the additional
information we propose to require
advisers to report on Form PF will assist
FSOC in carrying out these
responsibilities. FSOC and the
811 See Question 65 of proposed Form PF. This
question is based on the current definition of a
‘‘parallel fund structure’’ in Form PF. See Glossary
of Terms to Form PF (defining a ‘‘parallel fund
structure’’ as ‘‘[a] structure in which one or more
private funds (each, a ‘parallel fund’) pursues
substantially the same investment objective and
strategy and invests side by side in substantially the
same positions as another private fund’’).
812 See Form PF Adopting Release, supra note
799, at nn.455–457 and accompanying and
following text (explaining that ‘‘Congress responded
to the recent financial crisis, in part, by establishing
FSOC as the center of a framework intended ‘to
prevent a recurrence or mitigate the impact of
financial crises that could cripple financial markets
and damage the economy’ ’’; the goal of this
framework, we explained, ‘‘is the avoidance of
significant harm to the U.S. economy from future
financial crises’’) (internal citations omitted).
813 See Form PF Adopting Release, supra note
799, at section II.C.3.
814 Id.
815 Id.
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Commission have recognized the risks
that may be posed by cash management
products other than money market
funds, including liquidity funds, and
the potentially increased significance of
such products in the event we adopt
further money market fund reforms such
as those we propose today.816 FSOC also
stated that it and its members ‘‘intend
to use their authorities, where
appropriate and within their
jurisdictions, to address any risks to
financial stability that may arise from
various products within the cash
management industry in a consistent
manner,’’ as ‘‘[s]uch consistency would
be designed to reduce or eliminate any
regulatory gaps that could result in risks
to financial stability if cash management
products with similar risks are subject
to dissimilar standards.’’ 817 We expect,
therefore, that requiring advisers to
provide additional information on Form
PF as we propose today would enhance
FSOC’s ability to assess systemic risk
across the short-term financing markets.
We propose to require only large
liquidity fund advisers to report this
additional information for the same
reason that we previously determined to
816 See FSOC Proposed Recommendations, supra
note 114, at 7 (‘‘The Council recognizes that
regulated and unregulated or less-regulated cash
management products (such as unregistered private
liquidity funds) other than MMFs may pose risks
that are similar to those posed by MMFs, and that
further MMF reforms could increase demand for
non-MMF cash management products. The Council
seeks comment on other possible reforms that
would address risks that might arise from a
migration to non-MMF cash management
products.’’) We, too, have recognized that
‘‘[l]iquidity funds and registered money market
funds often pursue similar strategies, invest in the
same securities and present similar risks.’’ See
Form PF Adopting Release, supra note 799, at
section II.A.4. See also Reporting by Investment
Advisers to Private Funds and Certain Commodity
Pool Operators and Commodity Trading Advisors
on Form PF, Investment Advisers Act Release No.
3145 (Jan. 26, 2011) [76 FR 8068 (Feb. 11, 2011)]
(‘‘Form PF Proposing Release’’), at n.68 and
accompanying text (explaining that, ‘‘[d]uring the
financial crisis, several sponsors of ‘enhanced cash
funds,’ a type of liquidity fund, committed capital
to those funds to prevent investors from realizing
losses in the funds,’’ and noting that ‘‘[t]he fact that
sponsors of certain liquidity funds felt the need to
support the stable value of those funds suggests that
they may be susceptible to runs like registered
money market funds’’). See generally supra notes
113–118 and accompanying text.
817 See FSOC Proposed Recommendations, supra
note 114, at 7. The President’s Working Group on
Financial Markets reached a similar conclusion,
noting that because vehicles such as liquidity funds
‘‘can take on more risks than MMFs, but such risks
are not necessarily transparent to investors . . . ,
unregistered funds may pose even greater systemic
risks than MMFs, particularly if new restrictions on
MMFs prompt substantial growth in unregistered
funds.’’ See PWG Report, supra note 111, at 21. The
potentially increased risks posed by liquidity funds
were of further concern because these risks ‘‘are
difficult to monitor, since [unregistered cash
management products like liquidity funds] provide
far less market transparency than MMFs.’’ Id. at 35.
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require these advisers to provide more
comprehensive information on Form PF:
So that the group of private fund
advisers filing more comprehensive
information on Form PF will be
relatively small in number but represent
a substantial portion of the assets of
their respective industries.818 Based on
information filed on Form PF and Form
ADV, as of February 28, 2013, we
estimate that there were approximately
25 large liquidity fund advisers (out of
55 total advisers that advise at least one
liquidity fund), with their aggregate
liquidity fund assets under management
representing approximately 98% of
liquidity fund assets managed by
advisers registered with the
Commission.
This threshold also should minimize
the costs of our proposed amendments
because large liquidity fund advisers
already are required to make quarterly
reports on Form PF and, as of February
28, 2013, virtually all either advise a
money market fund or have a related
person that advises a money market
fund. Requiring large liquidity fund
advisers to provide substantially the
same information required by Form N–
MFP therefore may reduce the burdens
associated with our proposal, which we
discuss below, because large liquidity
fund advisers generally already have (or
may be able to obtain access to) the
systems, service providers, and/or staff
necessary to capture and report the
same types of information for reporting
on Form N–MFP. These same systems,
service providers, and/or staff may
allow large liquidity fund advisers to
comply with our proposed changes to
Form PF more efficiently and at a
reduced cost than if we were to require
advisers to report information that
differed materially from that which the
advisers must file on Form N–MFP.
In addition to our concerns about
FSOC’s ability to assess systemic risk,
we also are concerned about losing
transparency regarding money market
fund investments that may shift into
liquidity funds if we were to adopt the
money market reforms we propose
today and our ability effectively to
formulate policy responses to such a
shift in investor assets.819 We note in
particular that a run on liquidity funds
could spread to money market funds
818 See Form PF Adopting Release, supra note
799, at n.88 and accompanying text.
819 See, e.g., RSFI Study, supra note 21, at section
4.C (analysis of investment alternatives to money
market funds, considering, among other issues, the
potential for investors to shift their assets to money
market fund alternatives, including liquidity funds,
in response to further money market fund reforms
and certain implications of a shift in investor
assets).
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because, for example, both types of
funds often invest in the same securities
as noted above.820 Our ability to
formulate a policy response to address
this risk could be diminished if we had
less transparency concerning the
portfolio holdings of liquidity funds as
compared to money market funds, and
thus were not able as effectively to
assess the degree of correlation between
various funds or groups of funds that
invest in the short-term financing
markets, or if we were unable
proactively to identify funds that own
distressed securities. Indeed, Form PF,
by defining large liquidity fund advisers
subject to more comprehensive
reporting requirements as advisers with
$1 billion in combined money market
fund and liquidity fund assets under
management today reflects the
similarities between money market
funds and liquidity funds and the need
for comprehensive information
concerning advisers’ management of
large amounts of short-term assets
through either type of fund. The need
for this comprehensive data would be
heightened if money market fund
investors shift their assets to liquidity
funds in response to any further money
market fund reforms.
Finally, this increased information on
liquidity funds managed by large
liquidity fund advisers also would be
useful to us and FSOC even absent a
shift in money market fund investor
assets. Collecting this information about
these liquidity funds would, when
combined with information collected on
Form N–MFP, provide us and FSOC a
more complete picture of the short-term
financing markets, allowing each of us
to more effectively fulfill our statutory
820 Liquidity funds may generally have a more
institutional shareholder base because the funds
rely on exclusions from the Investment Company
Act’s definition of ‘‘investment company’’ provided
by section 3(c)(1) or 3(c)(7) of that Act. See section
202(a)(29) of the Advisers Act (defining the term
‘‘private fund’’ to mean ‘‘an issuer that would be an
investment company, as defined in section 3 of the
Investment Company Act (15 U.S.C. 80a–3), but for
section 3(c)(1) or 3(c)(7) of that Act’’). Funds relying
on those exclusions sell their shares in private
offerings which in many cases are restricted to
investors who are ‘‘accredited investors’’ as defined
in rule 501(a) under the Securities Act. Investors in
funds relying on section 3(c)(7), in addition,
generally must be ‘‘qualified purchasers’’ as defined
in section 2(a)(51) of the Investment Company Act.
The funds’ more institutional shareholder base may
increase the potential for a run to develop at a
liquidity fund. As discussed in greater detail in
section II.C of this Release, redemption data from
the 2007–2008 financial crisis show that some
institutional money market fund investors are likely
to redeem from distressed money market funds
more quickly than other investors and to redeem a
greater percentage of their holdings. This may be
indicative of the way institutional investors in
liquidity funds would behave, particularly liquidity
funds that more closely resemble money market
funds.
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mandates. For example, the contagion
risk we discuss above—of a run starting
in a liquidity fund and spreading to
money market funds—may warrant our
or FSOC’s attention even today. But it
may be impossible effectively to assess
this risk today without more detailed
information about the portfolio holdings
of the liquidity funds managed by
advisers who manage substantial
amounts of short-term investments and
the ability to combine that data with the
information we collect on Form N–MFP.
For example, if a particular security or
issuer were to come under stress, our
staff today would be unable to
determine which liquidity funds, if any,
held that security. This is because
advisers currently are required only to
provide information about the types of
assets their liquidity funds hold, rather
than the individual positions.821 Our
staff could see the aggregate value of all
of a liquidity fund’s positions in
unsecured commercial paper issued by
non-U.S. financial institutions, for
example, but could not tell whether the
fund owned commercial paper issued
by any particular non-U.S. financial
institution. If a particular institution
were to come under stress, the
aggregated information available today
would not allow us or our staff to
determine the extent to which liquidity
funds were exposed to the financial
institution; lacking this information,
neither we nor our staff would be able
as effectively to assess the risks across
the liquidity fund industry and, by
extension, the short-term financing
markets.
Position level information for
liquidity funds managed by large
liquidity fund advisers also could allow
our staff more efficiently and effectively
to identify longer-term trends in the
industry and at particular liquidity
funds or advisers. The aggregated
position information that advisers
provide today may obscure the level of
risk in the industry or at particular
advisers or liquidity funds that, if more
fully understood by our staff, could
allow the staff to more efficiently and
effectively target their examinations and
enforcement efforts, and could better
inform the staff’s policy
recommendations.
Indeed, our experience with the
portfolio information money market
funds report on Form N–MFP—which
was limited at the time we adopted
821 See Question 56 of Form PF (requiring
advisers to provide exposures and maturity
information, by asset class, for liquidity fund assets
under management); Question 57 of Form PF
(requiring advisers to provide the asset class and
percent of the fund’s NAV for each open position
that represents 5% or more of the fund’s NAV).
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Form PF—has proved useful in our
regulation of money market funds in
these and other ways and has informed
this proposal.822 During the 2011
Eurozone debt crisis, for example, we
and our staff benefitted from the ability
to determine which money market
funds were exposed to specific financial
institutions (and other positions) and
from the ability to see how funds
changed their holdings as the crisis
unfolded. This information was useful
in assessing risk across the industry and
at particular money market funds. Given
the similarities between money market
funds and liquidity funds and the
possibility for risk to spread between
the groups of funds, our experience with
portfolio information filed on Form N–
MFP suggests that virtually the same
information for liquidity funds managed
by large liquidity fund advisers would
provide significant benefits for us and
FSOC.
For all of these reasons and as
discussed above, we expect that
requiring large liquidity fund advisers to
report their liquidity funds’ portfolio
information on Form PF as we propose
would provide substantial benefits for
us and FSOC, including positive effects
on efficiency and capital formation. If
this additional information allows FSOC
more effectively to monitor systemic
risk as intended, our proposed
amendments to Form PF could benefit
the broader U.S. economy, with positive
effects on capital formation, to the
extent FSOC is better able to protect the
U.S. economy from significant harm
from future financial crises.
In addition, as we explained in more
detail when adopting Form PF,
requiring advisers to report on Form PF
is intended to positively affect
efficiency and capital formation, in part
by enhancing our ability to evaluate and
develop regulatory policies and to more
effectively and efficiently protect
investors and maintain fair, orderly and
efficient markets.823 We explained, for
example, that Form PF data was
designed to allow us to more efficiently
and effectively target our examination
programs and, with the benefit of Form
822 Money market funds were required to begin
filing information on Form N–MFP by December 7,
2010. See 2010 Adopting Release, supra note 92, at
n.340 and accompanying text. Form PF was
proposed shortly thereafter on January 26, 2011,
and adopted on October 31, 2011. See Form PF
Proposing Release, supra note 816; Form PF
Adopting Release, supra note 799.
823 See generally Form PF Adopting Release,
supra note 799, at section V.A (explaining that, in
addition to assisting FSOC fulfill its mission, ‘‘we
expect this information to enhance [our] ability to
evaluate and develop regulatory policies and
improve the efficiency and effectiveness of our
efforts to protect investors and maintain fair,
orderly and efficient markets’’).
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PF data, to better anticipate regulatory
problems and the implications of our
regulatory actions, and thereby to
increase investor protection.824 We also
explained that Form PF data could have
a positive effect on capital formation
because, as a result of the increased
transparency to regulators made
possible by Form PF, private fund
advisers might assess more carefully the
risks associated with particular
investments and, in the aggregate,
allocate capital to investments with a
higher value to the economy as a
whole.825
The Form PF amendments that we
propose today are designed to increase
the same benefits we identified when
we adopted Form PF, although we are
unable to quantify them because their
extent depends on future events that we
cannot predict (e.g., the nature and
extent of any future financial crisis and
the role that Form PF data could play in
mitigating or averting it). The additional
information on Form PF may better
inform our understanding of the
activities of liquidity funds and their
advisers and the operation of the shortterm financing markets, including risks
that may arise in liquidity funds and
harm other participants in those markets
or those who rely on them—including
money market funds and their
shareholders and the companies and
governments who seek financing in the
short-term financing markets. The
additional information we propose to
require advisers to report on Form PF,
particularly when combined with
similar data reported on Form N–MFP,
therefore may enhance our ability to
evaluate and develop regulatory policies
and enable us to more effectively and
efficiently protect investors and
maintain fair, orderly, and efficient
markets. By further increasing
transparency to regulators, the proposed
amendments also could increase capital
formation if private fund advisers, as a
result, ultimately allocate capital to
investments with a higher value to the
economy as a whole, as discussed
above. We note, however, that any
effects on capital formation from
increased transparency to regulators,
positive and negative, likely would be
less significant than those associated
with our adoption of Form PF. This is
because today’s proposal would provide
an incremental increase in transparency
as opposed to the larger increase in
transparency created by the adoption of
Form PF in the first instance.
824 See Form PF Adopting Release, supra note
799, at section V.A.
825 See id. at text accompanying and following
n.494.
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For these same reasons we believe
that requiring large liquidity fund
advisers to provide portfolio-level
information is justified, and that it
would be most beneficial and efficient
to require large liquidity fund advisers
to file virtually the same information for
their liquidity funds as money market
funds are required to file on Form N–
MFP. We considered whether we and
FSOC would be able as effectively to
carry out our respective missions as
discussed above using the information
large liquidity fund advisers currently
must file on Form PF. But as we discuss
above, we expect that requiring large
liquidity funds advisers to provide
portfolio holdings information would
provide a number of benefits and would
allow us and FSOC to better understand
the activities of large liquidity fund
advisers and their liquidity funds than
would be possible with the higher level,
aggregate information that advisers file
today on Form PF (e.g., the ability to
determine which liquidity funds own a
distressed security).
For the reasons discussed above we
also considered, but ultimately chose
not to propose, requiring advisers to file
portfolio information about their
liquidity funds that differs from the
information money market funds are
required to file on Form N–MFP.
Generally, different portfolio holdings
information could be less useful than
the types of information money market
funds file on Form N–MFP, given our
experience with Form N–MFP data, and
could be more difficult to combine with
Form N–MFP data. Requiring advisers
to file on Form PF virtually the same
information money market funds file on
Form N–MFP also could be more
efficient for advisers and reduce the
costs of reporting.
Finally, we considered whether to
propose to require large liquidity fund
advisers to provide their liquidity funds’
portfolio information more frequently
than quarterly. Monthly filings, for
example, would provide us and FSOC
more current data and could facilitate
our combining the new information
with the information money market
funds file on Form N–MFP (which
money market funds file each month).
We balanced the potential benefits of
more frequent reporting against the
costs it would impose and believe, at
this time, that quarterly reporting may
be more appropriate.826
826 Large liquidity fund advisers already are
required to make quarterly filings on Form PF. See
Form PF: Instruction 9. Requiring large liquidity
fund advisers to provide the new portfolio holdings
information on a quarterly basis should therefore be
more cost effective for the advisers.
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We recognize, however, that our
proposed amendments to Form PF,
while limited to large liquidity fund
advisers, would create costs for those
advisers, and also could affect
competition, efficiency, and capital
formation. We expect that the
operational costs to advisers to report
the new information would be the same
costs we discuss in the Paperwork
Reduction Act analysis in section IV
below. As discussed in more detail in
that section, our staff estimates that our
proposed amendments to Form PF
would result in an annual aggregate
additional 7,250 burden hours at a time
cost of $1,836,500, plus $409,350 in
total external costs (which represent
fees to license a software solution and
fees to retain a third-party service
provider).827 Allocating this burden
across the estimated 25 large liquidity
fund advisers that collectively advise 43
liquidity funds results in annual per
large liquidity fund adviser costs, as
discussed in more detail in section IV
below, of 290 burden hours, at a time
cost of $73,460, and $16,374 in external
costs.828
These estimates are based on our
staff’s estimates of the paperwork
burdens associated with our proposed
amendments to Form N–MFP because
advisers would be required to file on
Form PF virtually the same information
about their large liquidity funds as
money market funds would be required
to file on Form N–MFP as we propose
to amend it. We therefore expect that
the paperwork burdens associated with
Form N–MFP (as we propose to amend
it) are representative of the costs that
large liquidity fund advisers could incur
as a result of our proposed amendments
to Form PF. We note, however, that this
is a conservative approach for several
reasons. Large liquidity fund advisers
may experience economies of scale
because, as discussed above, virtually
all of them advise a money market fund
or have a related person that advises a
money market fund. Large liquidity
fund advisers therefore likely would pay
a combined licensing fee or fee to retain
the services of a third party that covers
filings on both Forms PF and Form N–
MFP. We expect that this combined fee
likely would be less than the combined
estimated PRA costs associated with
Forms PF and Form N–MFP. Finally,
increased burdens associated with
providing the proposed portfolio
holdings information should be
considered together with the cost
savings that would result from our
827 See
infra notes 1166–1168 and accompanying
text.
828 See
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removing current Form PF questions 56
and 57.
We also recognize that large liquidity
fund advisers may have concerns about
reporting information about their
liquidity funds’ portfolio holdings and
may regard this as commercially
sensitive information. Indeed,
previously we have noted in response to
similar concerns that Form PF data—
even if it were inadvertently or
improperly disclosed—generally could
not, on its own, be used to identify
individual investment positions, and
thus provides a limited ability for
competitors to use Form PF data to
replicate a trading strategy or trade
against an adviser.829 Today’s proposal,
of course, would require advisers to
identify individual investment
positions.
Without diminishing advisers’
concerns about the sensitive nature of
certain of the information reported on
Form PF, we note that position-level
information for liquidity funds generally
may not be as sensitive as position-level
data for other types of private funds. For
example, although some commenters on
proposed Form PF confirmed that the
information on Form PF is
competitively sensitive or proprietary,
these commenters did not address
liquidity funds in particular. Further,
liquidity funds, by definition, invest in
‘‘portfolio[s] of short term obligations.’’
This increases the likelihood that any
inadvertently or improperly disclosed
Form PF data, notwithstanding the
controls and systems for handling the
data, would relate to securities that
already had matured or that would
mature shortly thereafter. And because
we understand that liquidity funds, like
money market funds, tend to hold many
of their securities to maturity—rather
than selling them in the market—any
inadvertent or improper disclosure of a
liquidity fund’s portfolio holdings
generally should not adversely affect the
value of the fund’s position.830 The
relatively limited universe of securities
appropriate for purchase by a liquidity
fund together with the similarity of
investment strategies followed by
829 See Form PF Adopting Release, supra note
799, at n.343 and accompanying text.
830 In contrast, if the market learned that a private
fund had a concentrated position in an equity
security and determined that the fund likely would
need to sell that security, market makers in the
security and other market participants could lower
their bid prices for the security in anticipation of
the sale. Information about a liquidity fund’s
(relatively) concentrated position in a security
likely to be held until maturity is unlikely to elicit
the same reaction because market participants
would not anticipate that the liquidity fund would
sell the security, and there likely would not be
broker-dealers making markets in the security in
any event.
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liquidity funds 831 also suggests that
information about their portfolio
holdings may be less sensitive than
information about the holdings of hedge
funds, for example, which may pursue
a variety of investment strategies and
whose holdings therefore may reveal
more sensitive information.832 Finally,
because we expect that many large
liquidity fund advisers also will advise
money market funds, they already will
be accustomed to managing their
portfolios while also making continuous
public disclosure of their portfolio
holdings as proposed here (as compared
to the non-public, quarterly reporting
required on Form PF).
In addition to these considerations,
and as we discussed in detail in the
Form PF Adopting Release, we do not
intend to make public Form PF
information identifiable to any
particular adviser or private fund, and
indeed, the Dodd-Frank Act amended
the Advisers Act to preclude us from
being compelled to reveal this
information except in very limited
circumstances.833 We therefore make
Form PF data identifiable to any
particular adviser or private fund
available outside of the Commission
only in very limited circumstances,
primarily to FSOC as required by the
Dodd-Frank Act, subject to the
confidentiality provisions of the DoddFrank Act.834 In recognition of the
831 Liquidity funds, by definition, have similar
investment objectives. See Glossary of Terms to
Form PF (defining a ‘‘liquidity fund’’ as any private
fund that ‘‘seeks to generate income by investing in
a portfolio of short term obligations in order to
maintain a stable net asset value per unit or
minimize principal volatility for investors’’).
832 We are not today proposing to require advisers
to file position-level data about private funds other
than liquidity funds managed by large liquidity
fund advisers, in part, because of the more sensitive
information that could be revealed by the positionlevel data of other types of private funds. In
addition, the information we propose to require
large liquidity fund advisers to file concerning their
liquidity funds is designed primarily to enhance
FSOC’s ability to assess systemic risk, and thus is
informed, in part, by FSOC’s own particular
concerns about systemic risk in the short-term
financing markets. See, e.g., supra note 817 and
accompanying text. FSOC has not expressed similar
concerns about other types of private funds or other
markets in which other types of private funds invest
exclusively that would suggest FSOC would derive
substantial benefits from position-level data about
other types of private funds.
833 See Form PF Adopting Release, supra note
799, at section II.D.
834 We also may share Form PF data with other
federal departments or agencies or with selfregulatory organizations, in addition to the CFTC
and FSOC, for purposes within the scope of their
jurisdiction, as contemplated by the Dodd-Frank
Act. Id. In each case, any such department, agency
or self-regulatory organization would be exempt
from being compelled under FOIA to disclose to the
public any information collected through Form PF
and must maintain the confidentiality of that
information. Id. Prior to sharing any Form PF data,
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sensitivity of some of the data collected
on Form PF, our staff is handling Form
PF data in a manner that reflects the
sensitivity of this data and is consistent
with the confidentiality protections
established in the Dodd-Frank Act.
In addition to any concerns advisers
may have about the sensitivity of their
portfolio holdings, we note that
although the increased transparency to
regulators provided by our proposal
could positively affect capital formation
as discussed above, increased
transparency, as we observed when
adopting Form PF, could also have a
negative effect on capital formation if it
increases advisers’ aversion to risk and,
as a result, reduces investment in
enterprises that may be risky but
beneficial to the economy as a whole.835
To the extent that our proposal were to
cause changes in investment allocations
that lead to reduced economic outcomes
in the aggregate, our proposal could
result in a negative effect on capital
available for investment. As we discuss
above, however, any effects on capital
formation from increased transparency
to regulators—including these possible
negative effects—likely would be less
significant than those associated with
our adoption of Form PF.
We also do not believe that our
proposed amendments to Form PF
would have a significant effect on
competition because the information
that advisers report on Form PF,
including the new information we
propose to require, generally will be
non-public and similar types of advisers
will have compatible burdens under the
form as we propose to amend it.836 We
also do not believe that the proposed
amendments would have a significant
negative effect on capital formation,
again because the information collected
generally will be non-public and,
therefore, should not affect large
liquidity fund advisers’ ability to raise
capital.837
We request comment on all aspects of
our proposed amendments to Form PF,
including our discussion of the benefits,
costs, and effects on competition,
efficiency, and capital formation.
• Would the portfolio holdings
information we propose to require large
liquidity fund advisers to file on Form
PF, together with the other information
we require that any such department, agency or
self-regulatory organization represent to us that it
has in place controls designed to ensure the use and
handling of Form PF data in a manner consistent
with the protections established in the Dodd-Frank
Act. Id.
835 See Form PF Adopting Release, supra note
799, at text accompanying and following n.537.
836 See id. at text accompanying n.535.
837 See id. at text following n.535.
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that advisers already must file on the
form, appropriately identify the ways in
which their liquidity funds might
generate systemic risk? Are there ways
these liquidity funds could create
systemic risk, particularly if we were to
adopt any of the money market fund
reforms we are proposing today, that
would not be reflected in the additional
information?
• Should we require large liquidity
fund advisers to file additional or
different information about their
liquidity funds? If so, which
information and how would that
information be useful to FSOC and the
Commission? Do commenters expect
they would derive efficiencies from our
requiring large liquidity fund advisers to
file the same types of information that
must be reported on Form N–MFP?
• Is our proposal to require more
comprehensive liquidity fund reporting
by large liquidity fund advisers
appropriate? Should we, instead, create
a new subcategory of large liquidity
fund advisers who would be subject to
these additional reporting requirements?
If so, how should we define that
subcategory? Would requiring only
those large liquidity fund advisers with
a more substantial amount of combined
liquidity fund and money market fund
assets under management—for example,
$10, $25 or $50 billion—allow us to
more effectively achieve our goals?
• Rather than require all large
liquidity fund advisers to file portfolio
holdings information with respect to
each of their liquidity funds, should we
define ‘‘qualifying’’ liquidity funds and
require any adviser to such a fund,
potentially including advisers that are
not large liquidity fund advisers, to file
this more comprehensive information?
If so, why, and how should we define
such a qualifying liquidity fund? Should
we define a ‘‘qualifying liquidity fund’’
as a liquidity fund that, together with
funds managed in parallel with the
liquidity fund, is at least a certain size?
What size would be appropriate (e.g.,
$100 million, $500 million, $1 billion)?
• Should we retain our proposed
approach but provide an exemption for
de minimis liquidity funds for which no
additional reporting would be required?
This would require a large liquidity
fund adviser to provide portfolio
holdings information about all of its
liquidity funds except those that
qualified for the de minimis exemption.
Such an approach would prevent an
adviser that is a large liquidity fund
adviser primarily because of its money
market funds assets under management
from having to file portfolio holdings
information for a relatively small
liquidity fund (e.g., an adviser with $10
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billion in money market fund assets
under management and a single
liquidity fund with only $10 million in
assets under management). Would this
minimize reporting burdens on advisers
to smaller or start up liquidity funds
that are less likely to have a systemic
impact while still providing us and
FSOC information about the adviser’s
short-term investing activities, which in
the aggregate may be relevant to an
assessment of systemic risks? How
would we structure such a de minimis
exemption? Should it be based solely on
the size of a liquidity fund and funds
managed in parallel with the liquidity
fund? Would a $1 billion threshold be
appropriate because it would ensure
that large liquidity fund advisers are
only required to provide portfolio
holdings information for relatively large
liquidity funds?
• Do commenters agree that the new
information we propose to require
advisers to provide would be useful to
FSOC and the Commission for the
reasons we discuss above? Do
commenters believe that the information
would have the effects on capital
formation, competition, and efficiency
that we discuss above? Why or why not?
Would there be additional effects that
we have not discussed here?
• Do commenters agree with our
assessment of the potential sensitivity of
the information we propose to require
advisers to provide? Why or why not?
To the extent, advisers view the
proposed information as sensitive and
are concerned about the information’s
inadvertent or inappropriate disclosure,
is there other information the advisers
view as less sensitive that would
achieve our goals?
• We propose to require large
liquidity fund advisers to provide this
new information quarterly with the
information broken out monthly.
Should we instead require these
advisers to file the information more or
less frequently? Would a monthly
reporting requirement, consistent with
Form N–MFP, be more appropriate?
• As discussed above, our proposed
amendments to Form PF are designed to
enhance FSOC’s ability to monitor and
assess systemic risks in the short-term
financing markets and to facilitate our
oversight of those markets and their
participants, particularly in the event
that further money market fund reforms
cause investors to seek alternatives to
money market funds, including private
funds. Further money market reforms
also could incentivize investors to seek
out money market fund alternatives that
are registered with the Commission,
such as ultra-short bond mutual funds.
Information about these and similar
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funds’ portfolio holdings also could be
useful to us and FSOC, particularly
when combined with (or considered
together with) information money
market funds and advisers would file on
amended Forms N–MFP and PF. Should
we therefore require registered
investment companies that invest in the
short-term financing markets to file the
same information money market funds
must file on Form N–MFP and in the
same format and with the same
frequency to facilitate comparisons? If
so, how should we designate which
funds would be subject to this new
requirement?
J. Diversification
Rule 2a–7 requires a money market
fund’s portfolio to be diversified, both
as to the issuers of the securities it
acquires and providers of guarantees
and demand features related to those
securities.838 Generally, money market
funds must limit their investments in
the securities of any one issuer of a first
tier security (other than government
securities) to no more than 5% of fund
assets.839 They must also generally limit
their investments in securities subject to
a demand feature or a guarantee to no
more than 10% of fund assets from any
one provider, except that the rule
provides a so-called ‘‘twenty-five
percent basket,’’ under which as much
as 25% of the value of securities held
in a fund’s portfolio may be subject to
guarantees or demand features from a
single institution.840 We adopted these
838 Rule 2a–7(c)(4)(i) through (iv). The
diversification requirements of rule 2a–7 differ in
significant respects from the requirements for
diversified management investment companies
under section 5(b)(1) of the Act. A money market
fund that satisfies the applicable diversification
requirements of the paragraphs (c)(4) and (c)(6) of
the rule is deemed to have satisfied the
requirements of section 5(b)(1). Rule 2a–7(c)(4)(v).
Subchapter M of the Internal Revenue Code
contains other diversification requirements for a
money market fund to be a ‘‘regulated investment
company’’ for federal income tax purposes. 26
U.S.C. 851 et seq. See also 1990 Proposing Release,
supra note 310, at n.25.
839 Rule 2a–7(c)(4)(i)(A) and (B). A first tier
security is any eligible security that has received a
short-term credit rating in the highest short-term
category for debt obligations or, if the security is an
unrated security, that is of comparable quality, as
determined by the money market fund’s board of
directors. Rule 2a–7(a)(14). Government securities
and securities issued by money market funds also
are first tier securities. Id. A fund also may invest
no more than 0.5% of fund assets in any one issuer
of a second tier security. Rule 2a–7(c)(4)(i)(C). A
second tier security is an eligible security that is not
a first tier security. Rule 2a–7(a)(24). The rule
contains a safe harbor where a taxable and national
tax-exempt fund may invest up to 25% of its assets
in the first tier securities of a single issuer for a
period of up to three business days after acquisition
(but a fund may use this exception for only one
issuer at a time). Rule 2a–7(c)(4)(i)(A).
840 Rule 2a–7 currently applies a 10%
diversification limit on guarantees and demand
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requirements in order to limit the
exposure of a money market fund to any
one issuer, guarantor, or demand feature
provider.841
As further explained below, we are
concerned that the diversification
requirements in rule 2a–7 today may not
appropriately limit money market fund
risk exposures. We therefore propose, as
discussed below, to: (1) require money
market funds to treat certain entities
that are affiliated with each other as
single issuers when applying rule 2a–7’s
5% issuer diversification requirement;
(2) require funds to treat the sponsors of
asset-backed securities as guarantors
subject to rule 2a–7’s diversification
requirements unless the fund’s board
makes certain findings; and (3) remove
the twenty-five percent basket.
1. Treatment of Certain Affiliates for
Purposes of Rule 2a-7’s Five Percent
Issuer Diversification Requirement
The diversification requirements in
rule 2a–7 apply to money market funds’
exposures to issuers of securities (as
well as providers of demand features
and guarantees), as discussed above.
Rule 2a–7, however, does not require a
money market fund to aggregate its
exposures to entities that are affiliated
with each other when measuring its
exposure for purposes of these
requirements. As a result, a money
market fund could be in compliance
with rule 2a–7 while assuming a
concentrated amount of risk to a single
economic enterprise. For example,
although a money market fund would
not be permitted to invest more than 5%
of its assets in the securities issued by
a single bank holding company, the
fund could invest well in excess of 5%
of its assets in securities issued by the
bank holding company together with its
affiliates. Under current rule 2a–7, for
example, a money market fund could
invest 5% of its assets in Bank XYZ,
features only to 75% of a money market fund’s total
assets. See rule 2a–7(c)(4)(iii)(A). The money
market fund, however, may only use the twenty-five
percent basket to invest in demand features or
guarantees that are first tier securities issued by
non-controlled persons. See rule 2a–7(c)(4)(iii)(B)
and (C). All of rule 2a–7’s diversification limits are
applied at the time of acquisition. For example, a
fund may not invest in a particular issuer if, after
acquisition, the fund’s aggregate investments in the
issuer would exceed 5% of fund assets. But if the
fund’s aggregate exposure after making the
investment was less than 5%, the fund would not
be required to later sell the securities if the fund’s
assets decreased and the fund’s investment in the
issuer came to represent more than 5% of the fund’s
assets.
841 See 2009 Proposing Release, supra note 31, at
n.220 and accompanying text; 1990 Proposing
Release, supra note 310, at text accompanying n.23
(‘‘Diversification limits investment risk to a fund by
spreading the risk of loss among a number of
securities.’’).
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NA, another 5% of its assets in Bank
XYZ Corp., another 5% of its assets in
Bank XYZ Securities, LLC, another 5%
of its assets in Bank XYZ (Grand
Cayman), another 5% of its assets in
Bank XYZ (London), and so on.
Financial distress at an issuer can
quickly spread to affiliates through a
number of mechanisms. Firms within an
affiliated group, for example, may issue
financial guarantees, whether implicit
or explicit, of each other’s securities,
effectively creating contingent liabilities
whose values depend on the value of
other firms in the group. These
guarantees can be ‘‘upstream,’’ whereby
a subsidiary guarantees its parent’s debt;
‘‘downstream,’’ whereby a parent
guarantees a subsidiary’s debt; or ‘‘cross
stream,’’ whereby one subsidiary
guarantees another subsidiary’s debt.
Affiliates may be separate legal entities,
but their valuations and the
creditworthiness of their securities may
depend on the financial well-being of
other firms in the group. As an example,
a firm may issue debt securities that
would be considered to be in default if
one of the firm’s affiliates is unable to
meet its financial obligations.
Alternatively, the value of a firm’s
securities may depend, implicitly or
explicitly, on the strength of the affiliate
group’s consolidated financial
statements. If an affiliate in the group
experiences financial distress and the
affiliate group’s consolidated financials
therefore suffer, then the value of the
securities of the other firms in the group
may decline. Indeed, bank holding
companies are required to act as a
source of financial strength to their bank
subsidiaries, providing a means for
financial distress at a bank subsidiary to
affect the parent banking holding
company.842 The possibility for
financial distress to transmit across
affiliated entities was demonstrated
during the 2007–2008 financial crisis
when, for example, American
International Group Inc. came under
financial stress, which affected a
number of its affiliates. In some cases,
AIG’s corporate group contagion
required the sponsors of money market
funds that owned AIG’s affiliates’
securities to seek no-action relief from
our staff in order for the sponsors to
support their funds.843
842 See
section 616 of the Dodd-Frank Act.
e.g., SEC Staff No-Action Letter to USAA
Mutual Funds Trust (Oct. 22, 2008) (providing noaction assurances so that an affiliated person of the
money market fund could purchase certain shortterm notes issued by AIG Funding, Inc. based in
part on representations that the securities’ market
values could soon decline below the securities’
shadow prices); SEC Staff No-Action Letter to
MainStay VP Cash Management Portfolio (Oct. 22,
843 See,
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Rule 2a–7 today thus can allow a fund
to take on highly concentrated risks,
risks that appear inconsistent with the
purposes of the diversification
requirements and that may be
inconsistent with investors’
expectations of the level of risk posed
by a money market fund. Indeed, we
have explained that ‘‘[d]iversification
limits investment risk to a fund by
spreading the risk of loss among a
number of securities.’’ 844 But exposure
to entities that are affiliated with each
other may not effectively spread the risk
of loss as contemplated by rule 2a–7’s
diversification requirements and, as
discussed in more detail below, data
analyzed by our staff show that many
money market funds have invested in
affiliated entities to a greater extent than
would be permitted if the exposures
were aggregated.
We propose, therefore, to amend rule
2a–7’s diversification requirements to
require that money market funds limit
their exposure to affiliated groups,
rather than to discrete issuers in
isolation. Specifically, we propose to
require money market funds to aggregate
their exposures to certain entities that
are affiliated with each other when
applying rule 2a–7’s 5% issuer
diversification limit.845 Entities would
be affiliated for this purpose if one
controlled the other entity or was
controlled by it or under common
control with it.846 For this purpose only,
control would be defined to mean
ownership of more than 50% of an
entity’s voting securities.847 By using a
more than 50% test (i.e., majority
ownership), we believe the alignment of
2008) (providing the same relief for the purchase of
notes issued by AIG Funding, Inc. based in part on
representations that it would be advisable for the
fund to sell the security but, ‘‘due in large part to
market concerns regarding the sponsoring entity of
the Security and its affiliates,’’ the adviser was
unable to sell the security on behalf of the fund in
then-current markets); SEC Staff No-Action Letter to
Phoenix Opportunities Trust and Phoenix Edge
Series Fund (Oct. 22, 2008) (providing no-action
assurances so that an affiliated person of the money
market funds could purchase certain securities
issued by International Lease Finance Corporation,
a subsidiary of American International Group, Inc.,
based in part on representations that the securities’
market values had declined below the securities’
amortized cost values); SEC Staff No-Action Letter
to Penn Series Funds, Inc. (Oct. 22, 2008)
(providing no-action assurances so that an affiliated
person of the money market fund could purchase
certain securities issued by Sun America Sponsored
Trust and International Lease Finance Corporation,
both affiliates of American International Group,
Inc., based in part on representations that the
securities’ market values had declined below the
securities’ amortized cost values).
844 See supra note 841.
845 See proposed (FNAV and Fees & Gates) rule
2a–7(d)(3)(ii)(F).
846 Id.
847 Id.
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economic interests and risks of the
affiliated entities is sufficient to justify
aggregating their exposures for purposes
of rule 2a–7’s 5% issuer diversification
limit.848
This approach is consistent with some
of the circumstances under which
affiliated entities must be consolidated
on financial statements prepared in
accordance with GAAP, under which a
parent generally must consolidate its
majority-owned subsidiaries.849
Majority-owned subsidiaries generally
must be consolidated under GAAP for
similar reasons—the operations of the
group are sufficiently related such that
they are presented under GAAP as if
they ‘‘were a single economic entity’’—
which appear to support consolidating
them for purposes of rule 2a–7’s 5%
diversification requirements as well.850
A majority ownership test also should
mitigate the costs to money markets
funds of complying with the proposed
amendment. Our understanding is that
money market funds generally would be
able to determine issuer affiliations,
defined with a majority ownership test,
as part of their evaluation of whether a
security presents minimal credit risks,
or that money market funds could
readily obtain this information from
issuers or the broker-dealers marketing
the issuance. In this regard we note that,
although some companies that sell their
securities to money market funds will
have a relatively large number of such
affiliates, we expect that only a
relatively small subset of these affiliates
will be companies in which a money
market fund could invest (e.g., that have
a requisite credit rating and issue shortterm debt in U.S. dollars). We expect
that in many cases affiliates under this
848 We previously have taken a similar approach
in delineating affiliates. See Further Definition of
‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘SecurityBased Swap Agreement’’; Mixed Swaps; SecurityBased Swap Agreement Recordkeeping, Exchange
Act Release No. 67453 (July 18, 2012) [77 FR 48208
(Aug. 13, 2012)], at nn.797–803 and accompanying
text.
849 See, e.g., FASB ASC, supra note 270, at
paragraph 810–10–15–8 (‘‘The usual condition for
a controlling financial interest is ownership of a
majority voting interest, and, therefore, as a general
rule ownership by one reporting entity, directly or
indirectly, of more than 50 percent of the
outstanding voting shares of another entity is a
condition pointing toward consolidation.’’).
850 See, e.g., id. at paragraph 810–10–10–1 (‘‘The
purpose of consolidated financial statements is to
present, primarily for the benefit of the owners and
creditors of the parent, the results of operations and
the financial position of a parent and all its
subsidiaries as if the consolidated group were a
single economic entity. There is a presumption that
consolidated financial statements are more
meaningful than separate financial statements and
that they are usually necessary for a fair
presentation when one of the entities in the
consolidated group directly or indirectly has a
controlling financial interest in the other entities.’’).
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proposal—and especially affiliates in
which money market funds are likely to
invest—will have other readily
observable characteristics that will help
money market funds to discern their
affiliations (e.g., substantially similar
names). We also understand that,
because exposures to entities that are
affiliated with each other can be
expected to be highly correlated, most
money market funds today consider
their exposures to entities that are
affiliated with each other for risk
management purposes, although they
may nonetheless choose to invest in
affiliated entities to a greater extent than
would be permitted under this proposal.
We also are concerned that the other
approaches we considered could limit
money market funds’ investment
flexibility unnecessarily and could be
more difficult to apply. For example, we
considered the approach we are
proposing today but with the definition
of ‘‘control’’ set at an ownership
threshold lower than 50%.’’ 851 We also
considered requiring money market
funds to aggregate exposures to a
broader range of entities by requiring
aggregation of ‘‘affiliated persons,’’ as
defined in the Investment Company
Act.852 If we were to use that definition,
a money market fund would have to
aggregate its exposures to two issuers if,
for example, one issuer owned directly
or indirectly 5% of the other issuer’s
voting securities.
We are concerned that either of these
alternative approaches could
unnecessarily limit a money market
fund’s flexibility. Our goal is to require
money market funds to limit their
851 This approach is reflected in other provisions
of the federal securities laws. See, e.g., section
2(a)(3) of the Investment Company Act (defining the
term ‘‘affiliated person’’); section 202(a)(17) of the
Advisers Act (defining the term ‘‘person associated
with an investment adviser’’); Form ADV: Glossary
of Terms (defining the term ‘‘Related Person’’); see
also section 2(a)(9) of the Investment Company Act
(providing that the term ‘‘control’’ means ‘‘the
power to exercise a controlling influence over the
management or policies of a company, unless such
power is solely the result of an official position
with such company’’); section 202(a)(12) (same
definition of ‘‘control’’).
852 See section 2(a)(3) of the Investment Company
Act (‘‘‘Affiliated person’ of another person means
(A) any person directly or indirectly owning,
controlling, or holding with power to vote, 5 per
centum or more of the outstanding voting securities
of such other person; (B) any person 5 per centum
or more of whose outstanding voting securities are
directly or indirectly owned, controlled, or held
with power to vote, by such other person; (C) any
person directly or indirectly controlling, controlled
by, or under common control with, such other
person; (D) any officer, director, partner, copartner,
or employee of such other person; (E) if such other
person is an investment company, any investment
adviser thereof or any member of an advisory board
thereof; and (F) if such other person is an
unincorporated investment company not having a
board of directors, the depositor thereof.’’).
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exposure to particular economic
enterprises without unnecessarily
limiting money market funds’
investments in other persons whose
connection to the economic enterprise
may be sufficiently attenuated that they
may not be highly correlated with the
enterprise. We are concerned that either
of these alternative approaches could
restrict money market funds from
investing in securities whose issuers
had only an attenuated connection to
the economic enterprise. For example, if
a parent owned only 5% of the voting
stock of one of its subsidiaries, the risks
posed by investing in the parent and
minority-owned subsidiary likely would
be less correlated than if the parent
owned more than 50% of the
subsidiary’s voting stock. These other
approaches also could be more difficult
to apply in that they would require a
money market fund to conduct a more
extensive analysis for each investment
(e.g., to ascertain the extent to which
entities control one another or are under
common control, where control could
be established through more attenuated
relationships or ownership levels).
We also considered proposing to
require a money market fund to treat as
affiliates all entities that must be
consolidated on a balance sheet. This
would include affiliated entities as we
propose, as well as certain ‘‘variable
interest entities,’’ which generally are
entities in which the parent holds a
controlling financial interest that is not
based on the parent’s ownership of a
majority of the entity’s voting stock.853
An SPE issuing ABS could be a variable
interest entity consolidated on the
sponsor’s balance sheet, for example. In
light of the large variety of entities that
may be variable interest rate entities and
the diverse activities in which they may
engage,854 we believe, at this time, that
853 See, e.g., FASB ASC, supra note 270, at
paragraph 810–10–05–8 (‘‘The Variable Interest
Entities Subsections clarify the application of the
General Subsections to certain legal entities in
which equity investors do not have the
characteristics of a controlling financial interest or
do not have sufficient equity at risk for the legal
entity to finance its activities without additional
subordinated financial support. Paragraph 810–10–
10–1 states that consolidated financial statements
are usually necessary for a fair presentation if one
of the entities in the consolidated group directly or
indirectly has a controlling financial interest in the
other entities. Paragraph 810–10–15–8 states that
the usual condition for a controlling financial
interest is ownership of a majority voting interest.
However, application of the majority voting interest
requirement in the General Subsections of this
Subtopic to certain types of entities may not
identify the party with a controlling financial
interest because the controlling financial interest
may be achieved through arrangements that do not
involve voting interests.’’).
854 See, e.g., id. at paragraph 810–10–05–11
(‘‘VIEs often are created for a single specified
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it is more appropriate to address them
(as needed) through more targeted
reforms like our ABS diversification
proposal. For these same reasons, and
because we already are further
tightening rule 2a–7’s 10% limit on
indirect exposures through our ABS and
twenty-five percent basket
diversification proposals, this proposal
only addresses aggregation of exposures
for purpose of rule 2a–7’s 5% issuer
diversification limit.
We request comment on our
approach.
• Do commenters agree that the
exposures to risks of issuers who would
be treated as affiliates under this
proposal would be highly correlated? Is
our proposed approach to delineating
affiliates too broad or too narrow and
why? Do commenters believe that our
proposed approach would limit money
market funds’ investment flexibility
unnecessarily, and if so, to what extent?
Should we, instead, use any of the
alternative approaches to delineating a
group of affiliates we discuss above? Are
there other approaches we should
consider? Should we, for example,
require money market funds to aggregate
exposures to parent companies and any
of their ‘‘majority-owned subsidiaries,’’
as defined in the Investment Company
Act? A parent’s majority-owned
subsidiaries under this definition would
be any company ‘‘50 per centum or
more of the outstanding voting
securities of which are owned by [the
parent], or by a company which . . . is
a majority-owned subsidiary of such
person.’’ 855
• Do commenters agree that a more
than 50% (i.e., majority ownership) test
rather than a lower threshold used to
define ‘‘control’’ or a different threshold
would make it more likely that there
would be an alignment of economic
interests of the affiliated entities that is
sufficient to justify aggregating their
exposures for purposes of rule 2a–7’s
5% issuer diversification limit?
• Do commenters agree that money
market funds generally would be able to
determine these affiliations, defined
with a majority ownership test, as part
of their evaluation of whether a security
purpose, for example, to facilitate securitization,
leasing, hedging, research and development,
reinsurance, or other transactions or arrangements.
The activities may be predetermined by the
documents that establish the VIEs or by contracts
or other arrangements between the parties
involved.’’).
855 See section 2(a)(24) of the Investment
Company Act (‘‘‘Majority-owned subsidiary’ of a
person means a company 50 per centum or more
of the outstanding voting securities of which are
owned by such person, or by a company which,
within the meaning of this paragraph, is a majorityowned subsidiary of such person.’’).
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presents minimal credit risks, or that
money market funds could readily
obtain this information from issuers or
the broker-dealers marketing the
issuance? Why or why not? We ask that
money market funds responding to this
request for comment describe the
materials they typically review as part
of their evaluation of whether a security
presents minimal credit risks and how
these materials would or would not
allow a money market fund to
determine affiliations under our
proposal.
• Is our understanding that money
market funds today attempt to identify
and measure their exposure to entities
that are affiliated with each other as part
of their risk management or stress
testing processes correct? If so, how do
they determine affiliations for these
purposes?
• Do commenters agree with our
expectation that, although some issuers
that sell their securities to money
market funds will have a relatively large
number of affiliates, only a relatively
small subset of these affiliates will be
companies in which a money market
fund could invest? Why or not?
• Should we require a money market
fund to treat as entities that are affiliated
with each other those that must be
consolidated on a balance sheet,
including ‘‘variable interest entities’’ (in
addition to majority-owned subsidiaries
that would be treated as affiliates under
our proposal)? Why or why not? Do
commenters agree that, in light of the
large variety of entities that may be
variable interest rate entities, it is more
appropriate to address them (as needed)
through more targeted reforms? Should
we, instead, require money market
funds to treat entities that are affiliated
with each other as if they were a single
entity when applying rule 2a–7’s 10%
diversification limit (for providers of
demand features and guarantees) as
well? If so, should we use the same
approach for determining when entities
would be affiliated with each other as
we propose for purposes of the rule’s
5% issuer diversification limit (i.e., with
a majority-ownership test)? Why or why
not? As discussed in more detail below,
we are proposing to treat certain ABS
sponsors as guarantors subject to the
10% limit, and also are proposing to
remove the twenty-five percent basket.
What would be the cumulative impact
on money market funds’ ability to
acquire securities subject to guarantees
or demand features (and issuers’ ability
to issue those securities) if, in addition
to these other two proposals, we also
were to require money market funds to
aggregate their exposures to providers of
demand features and guarantees that are
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affiliated with each other for purposes
of the 10% limit?
We expect that this proposal, and our
diversification proposals collectively,
would provide a number of benefits.
These proposals are designed to
diversify the risks to which money
market funds may be exposed and
thereby reduce the impact of any single
issuer’s (or guarantor’s or demand
feature provider’s) financial distress on
a fund under either of our floating NAV
or liquidity fees and gates proposals.
Requiring money market funds to more
broadly diversify their risks should
reduce the volatility of fund returns
(and hence NAVs) and limit the impact
of an issuer’s distress (or guarantor’s or
demand feature provider’s distress) on
fund liquidity. By reducing money
market funds’ volatility and making
their liquidity levels more resilient, our
diversification proposals are designed to
mitigate the risk of heavy shareholder
redemptions from money market funds
in times of financial distress and
promote capital formation by making
money market funds a more stable
source of financing for issuers of shortterm credit instruments. Reducing
money market funds’ volatility and
making their liquidity levels more
resilient also should cause money
market funds to attract further
investments, increasing their role as a
source of capital in the short-term
financing markets for issuers. We are
not able to quantify these benefits
(although we do provide quantitative
information concerning certain
impacts), primarily because we believe
it is impractical, if not impossible, to
identify with sufficient precision the
marginal decrease in risk and increase
in stability we expect these
diversification proposals would
provide.
More fundamentally, this proposal is
designed to more effectively achieve the
diversification of risk contemplated by
the rule’s current 5% issuer
diversification requirement. As noted
above, we have explained that
‘‘[d]iversification limits investment risk
to a fund by spreading the risk of loss
among a number of securities.’’ 856
856 See supra note 841. See also, e.g., Occupy the
SEC FSOC Comment Letter, supra note 42 (stating
that rule 2a–7’s current regulatory framework for
diversification is inadequate, in part because
‘‘issuer-level diversification limits do not directly
address the potential for aggregate exposure across
subsidiaries of the same firm, allowing for
significant aggregation effects’’); Better Markets
FSOC Comment Letter, supra note 67 (‘‘Limiting
issuer concentration in MMF portfolios, broadening
the definition of ‘issuer’ to include affiliates, and
enhancing liquidity standards are plainly
appropriate measures that will help stabilize
MMFs.’’).
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Requiring funds to purchase ‘‘a number
of securities’’ rather than a smaller
number of concentrated investments
will only ‘‘spread . . . the risk of loss’’
if the performance of those securities is
not highly correlated. That is, a fund’s
investments in Issuers A, B, and C are
no less risky (or only marginally so)
than a single investment in Issuer A if
Issuers A, B, and C are likely to
experience declines in value
simultaneously and to approximately
the same extent. This may indeed be
likely if Issuers A, B, and C are affiliated
with each other. Prime money market
funds’ concentrated exposures to
financial institutions increase these
concerns because prime money market
funds’ portfolios already appear
correlated to some extent.857 The risk
posed by this sector concentration
would be increased if a prime money
market fund, in addition, had large
correlated exposures to a particular
financial services group through
investments in various entities that are
affiliated with each other.
We recognize, however, that this
proposal could impose costs on money
market funds and could affect
competition, efficiency, and capital
formation. To help us evaluate these
effects, RSFI staff analyzed the
diversification and concentration in the
money market fund industry, as
described in detail in RSFI’s memo
‘‘Issuances by Parents and Exposures by
Parents in Money Market Funds,’’
which will be placed in the comment
file for this Release (‘‘RSFI
Diversification Memo’’). That memo
shows, among other things, that some
money market funds invested more than
5% of their assets in the issuances of
specific corporate groups, or ‘‘parents’’
(as defined in the RSFI Diversification
Memo) between November 2010 and
November 2012. For example, the
analysis shows that the largest average
fund-level exposure of at least 5% to the
issuances of a single parent is 31. In
other words, 31 money market funds, on
average, invest at least 5% of their
portfolios in the issuances of the largest
parent. The analysis also shows that the
largest average fund-level exposure of at
least 7% to the issuances of one parent
is 14 while the largest average fundlevel exposure of at least 10% to the
issuances of one parent is 3. We expect,
therefore, that this proposal would
increase the diversification of at least
some money market funds. For example,
a money market fund that had invested
more than 5% of its assets in a parent
or corporate group would, when those
investments matured, have to reinvest
857 See
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some of the proceeds in a different
parent or corporate group (or in
unrelated issuers).858
The effect of this reinvestment on
competition, efficiency, or capital
formation would depend in part on how
money market funds choose to reinvest
their assets. It seems reasonable to
expect that a divestment by one money
market fund (because its exposure to a
particular group of affiliates is too great)
might become a purchasing opportunity
for another money market fund whose
holdings in that affiliated group do not
constrain it. If the credit qualities of the
investments were similar, there should
be no net effect on fund risk and yield,
issuers, or the economy. It is possible,
however, that some money market funds
would reinvest some or all of their
excess exposure in securities of higher
risk, albeit within the restrictions in rule
2a–7. In these instances, funds’ portfolio
risk would increase, their NAVs and
fund liquidity would likely become
more volatile, and yields would rise.
Money market funds in this instance
could become less stable than they are
today, investor demand for the funds
could fall (to the extent increased
volatility in money market funds is not
outweighed by any increase in fund
yield), and capital formation could be
reduced. Alternatively, money market
funds could reinvest excess exposure in
securities of lower risk. In these
instances, portfolio risk would fall, fund
NAVs and liquidity would likely
become less volatile, and yields would
fall. In this scenario, money market
funds would become more stable than
they are today, investor demand for the
funds could rise (to the extent increased
stability in money market funds is not
outweighed by any decrease in fund
yield), and capital formation might be
enhanced. We cannot predict how
money market funds would invest in
response to this proposal and we thus
do not have a basis for determining
money market funds’ likely
reinvestment strategies, and we
accordingly seek comment on these
issues below.
It also is important to note that money
market funds’ current exposures in
excess of what our proposal would
permit may reflect the overall risk
preferences of their managers. To the
extent that this proposal would reduce
the concentration of issuer risk, fund
managers that have particular risk
tolerances or preferences may shift their
funds’ remaining portfolio assets, within
858 Money market funds would not be required to
sell any of their portfolio securities as a result of
any of our diversification proposals because rule
2a–7’s diversification limits are measured at
acquisition. See, e.g., supra note 840.
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rule 2a–7’s restrictions, to higher risk
assets. If so, portfolio risk, although
more diversified, would increase (or
remain constant), and we would expect
portfolio yields to rise (or to remain
constant). If yields were to rise, money
market funds might be able to compete
more favorably with other short-term
investment products (to the extent the
increased yield is not outweighed by
any increased volatility).
At this time, we cannot predict or
quantify the precise effects this proposal
would have on competition, efficiency,
or capital formation. The effects would
depend on how money market funds,
their investors, and companies who
issue securities to money market funds
would adjust on a long-term basis to our
proposal. The ways in which these
groups could adjust, and the associated
effects, are too complex and interrelated
to allow us to predict them with
specificity or to quantify them at this
time.
For example, if a money market fund
must reallocate its investments under
our proposal, whether that would affect
capital formation would depend on
whether there are available alternative
investments the money market fund
could choose and the nature of any
alternatives. Assuming there are
alternative investments, the effects on
capital formation would depend on the
amount of yield the issuers of the
alternative investments would be
required to pay as compared to the
amount they would have paid absent
our proposal. For example, this proposal
could cause money market funds to seek
alternative investments and this
increased demand could allow their
issuers to pay a lower yield than they
would absent this increase in demand.
This would decrease issuers’ financing
costs, enhancing capital formation. But
it also could decrease the yield the
money market fund paid to its
shareholders, potentially making money
market funds less attractive and leading
to reduced aggregate investments by the
money market fund which, in turn,
could increase financing costs for
issuers of short-term debt. The
availability of alternative investments
and the ease with which they could be
identified could affect efficiency, in that
money market funds might find their
investment process less efficient if they
were required to expend additional
effort identifying alternative
investments. These same factors could
affect competition if more effort is
required to identify alternative
investments under our proposals and
larger money market funds are better
positioned to expend this additional
effort or to do so at a lower marginal
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cost than smaller money market funds.
These factors also could affect capital
formation in other ways, in that money
market funds could choose to invest in
lower quality securities under our
proposal if they are not able to identify
alternative investments with levels of
risk equivalent to the funds’ current
investments.
In addition to these effects, we
recognize that this proposal could
require money market funds to update
the systems they use to monitor their
compliance with rule 2a–7’s 5% issuer
diversification requirement in order to
aggregate exposures to affiliates.
Although we understand that most
money market funds today consider
their exposures to entities that are
affiliated with each other for risk
management purposes, any systems
money market funds currently have in
place for this purpose may not be
suitable for monitoring compliance with
a diversification requirement, as
opposed to a risk management
evaluation (which may entail less
regular or episodic monitoring).
Because money market funds differ
significantly in their current practices
and systems, we do not have the
information necessary to provide a point
estimate of the costs associated with this
proposal. But based on the activities
typically involved in making systems
modifications, and recognizing that
money market funds’ existing systems
currently have varying degrees of
functionality, we estimate that the onetime systems modifications costs
(including modifications to related
procedures and controls) for a money
market fund associated with this
proposal would range from
approximately $600,000 to
$1,200,000.859 We do not expect that
money market funds would incur
material ongoing costs to maintain and
modify their systems as a result of this
proposal because we expect
modifications required by this proposal
would be incremental changes to
existing systems that already perform
similar functions (track exposures for
purposes of monitoring compliance
with rule 2a–7’s 5% issuer
diversification limit). We also note that,
although we have estimated the costs
that a single money market fund could
incur as a result of this proposal, we
859 Staff estimates that these costs would be
attributable to the following activities: (i) planning,
coding, testing, and installing system modifications;
(ii) drafting, integrating, and implementing related
procedures and controls; and (iii) preparing training
materials and administering training sessions for
staff in affected areas. See also supra note 245
(discussing the bases of our staff’s estimates of
operational and related costs).
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expect that these costs would be shared
among various money market funds in
a complex. To the extent money market
funds use software or other solutions
purchased or licensed from third-party
vendors, the funds may be able to
purchase any needed upgrades at a
lower cost than would be required for
the funds to modify their systems
internally.
As we discuss above, we expect that
money market funds generally would be
able to determine affiliations under our
proposal, which uses a majority
ownership test, as part of their
evaluation of whether a security
presents minimal credit risks, or that
money market funds could readily
obtain this information from issuers or
the broker-dealers marketing the
issuance. We therefore do not expect
that money market funds would be
required to spend additional time
determining affiliations under our
proposal, or if an additional time
commitment would be required, we
expect that it would be minimal. We
estimate that the costs of this minimal
additional time commitment to a money
market fund, if it were to occur, would
range from approximately $5,000 to
$105,000 annually.860
860 In arriving at this estimate, we expect that any
required additional work generally would be
conducted each time a money market fund
determined whether to add a new issuer to the
approved list of issuers in which the fund may
invest. The frequency with which a money market
fund would make these determinations would
depend on its size and investment strategy. To be
conservative, and based on Form N–MFP data
concerning the number of securities held in money
market funds’ portfolios, we estimate that a money
market fund could be required to make such a
determination between 33 and 339 times each year.
This is based on our staff’s review of data filed on
Form N–MFP as of February 28, 2013, which
showed that the 10 smallest money market funds
by assets had an average of 33 investments and the
10 largest money market funds by assets had an
average of 339 investments. The number of a money
market fund’s investments should be a rough proxy
for the number of times each year that a money
market fund could add an issuer to its approved
list, although this will overstate the frequency of
these determinations (e.g., a fund may have a
number of separate investments in a single issuer).
We estimate that the additional time commitment
imposed by this proposal, if any, would be an
additional 1–2 hours of an analyst’s time each time
the fund determined whether to add an issuer to its
approved list. The estimated range of costs,
therefore, is calculated as follows: (33 evaluations
x 1 hour of a junior business analyst’s time at $155
per hour = $5,115) to (339 evaluations x 2 hours of
a junior business analyst’s time at $155 per hour =
$105,090). Finally, we recognize that some money
market funds do not use an approved list, but
instead evaluate each investment separately. We
believe that the number of a money market fund’s
investments also should be a rough proxy for the
number of times such a money market fund would
evaluate each investment. Such funds may be on
the higher end of the range, however, because the
extent to which a fund’s average number of
investments reflects the number of times such a
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We request comment on this analysis,
including the analysis contained in the
RSFI Diversification Memo.
• Do commenters expect that they
would incur operational costs in
addition to, or that differ from, the costs
we estimate above? Do commenters
expect they would be required to
expend additional time determining
affiliations, or that they would incur
additional or different costs in doing so?
• Do commenters expect that money
market funds would encounter any
difficulties in finding alternative
investments under our proposal? Why
or why not? In what types of assets are
money market funds likely to invest if
they are required to aggregate their
investments in entities that are affiliated
with each other as we propose? Are
money market funds likely to reinvest
excess exposure in assets that are
similar, more risky or less risky than
their original portfolios?
• How would this proposal (and our
diversification proposals collectively)
affect fund yields and the stability of
fund NAVs and liquidity? How would
they affect competition, efficiency, or
capital formation?
• Do commenters expect this
proposal would change the financing
costs of companies who issue their
securities to money market funds? If so,
why, and to what extent? If financing
costs increase, to what extent would
that increase be passed on to money
market fund investors in the form of
higher yields? Would any higher yields
then result in increased investments by
money market funds in the aggregate?
Would any aggregate increase offset or
mitigate any increase in issuers’
financing costs? Would the inverse
occur if issuers’ financing costs
decreased because of increased demand
from money market funds? How would
any associated increases or decreases in
money market funds’ volatility affect
investor demand for money market
funds and, in turn, capital formation
and issuers’ financing costs?
• Are there any benefits, costs, or
effects on competition, efficiency, and
capital formation that we have not
identified or discussed?
2. Asset-Backed Securities
In 2007, a number of money market
funds were exposed to substantial losses
fund purchases securities would depend on the rate
of the fund’s portfolio turnover. Whether any
additional analysis would be required as a result of
this proposal for such a fund also would depend
on whether the fund invested proceeds from
maturing securities in issuers for which a new
credit risk analysis was required or in issuers of
securities owned by the fund for which the analysis
may already have been done.
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resulting from investments in assetbacked commercial paper issued by
structured investment vehicles (‘‘SIVs’’),
a type of ABS.861 As we described in
some detail in the 2009 Proposing
Release, SIVs suffered severe liquidity
problems and significant losses in 2007
when risk-averse short-term investors
(including money market funds), fearing
increased exposure to liquidity risk and
residential mortgage defaults, began to
avoid the commercial paper the SIVs
issued, causing the paper to decline in
value.862 The decline in value of the
SIVs’ commercial paper threatened to
force a number of money market funds
to re-price below their $1.00 stable share
price, a result that was most likely
avoided in part because many of the
SIVs received support from their
sponsors.863
Thus, in addition to being exposed to
the SIVs directly, money market funds
also were exposed to the risk that the
SIVs’ sponsors would no longer support
the value of the funds’ troubled SIV
investments. In many cases, the
sponsors were banks to which money
market funds were already exposed
because the funds owned securities
issued by or subject to guarantees or
demand features from the banks. Money
market funds’ reliance on and exposure
to SIV sponsors regarding the SIVs’
ABCP in 2007 suggests a potential
weakness in the way in which rule 2a–
7’s diversification provisions apply to
ABSs, potentially permitting money
market funds to become overexposed to
sponsors of SIVs and ABS sponsors
more generally. We therefore propose to
amend rule 2a–7’s diversification
provisions to limit the amount of
exposure money market funds can have
to ABS sponsors that provide express or
implicit support for their ABSs.864
861 See, e.g., 2009 Proposing Release, supra note
31, at sections I.D and II.A.4. ABCP is commercial
paper issued by special purpose entities, or SPEs,
to finance the purchase of various financial assets.
Payments to ABCP investors are based on the
financial assets, and ABCP is therefore a type of
ABS. In some cases, the sponsor of the ABCP will
provide explicit liquidity or credit support to the
ABCP, whereas in other cases, such as the SIVs, the
sponsors provide no explicit support.
862 Id.
863 Id. See also, e.g., Dan Gallagher, Citigroup says
it will absorb SIV assets: Move bails out struggling
investment vehicles but could hurt capital base,
MarketWatch, Dec. 17, 2007, available at https://
articles.marketwatch.com/2007-12-13/news/
30731471_1_sivs-citigroup-capital-levels. In some
cases, where the SIVs’ sponsors were unable or
unwilling to support the SIVs, money market funds’
sponsors themselves supported the money market
funds by purchasing the SIV investments at their
amortized cost or providing some form of credit
support. See 2009 Proposing Release, supra note 31,
at text accompanying n.41.
864 See also infra notes 878–880 and
accompanying text (describing the treatment under
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In the 2009 Proposing Release, we
expressed concern about the substantial
number of money market funds that
owned ABCP and other asset-backed
debt securities issued by SIVs in 2007
and the stresses those SIV holdings
placed on many money market funds’
stable share prices.865 We sought
comment on these concerns in 2009,
and asked whether we should require
fund boards to consider particular
factors when evaluating ABSs, to limit
the types of ABSs in which funds could
invest, or to further tighten rule 2a–7’s
diversification limitations.866 Most
commenters did not address these
proposals, and those that addressed
some of them generally did not support
them.867
We are concerned that the experience
with SIVs suggests a potential weakness
in rule 2a–7’s diversification
requirements. The rule’s diversification
provisions require no diversification of
exposure to ABS sponsors because
special purpose entities (‘‘SPEs’’)—
rather than the sponsors themselves—
issue the ABS, and the support that ABS
sponsors provide, implicitly or
explicitly,868 typically does not meet the
this proposal of ABS sponsors who may not provide
support, explicit or implicit, for their ABSs).
865 See, e.g., 2009 Proposing Release, supra note
31, at section II.A.4 and nn.37–39 and
accompanying text. See also Perspectives on Money
Market Mutual Fund Reforms, Testimony of David
S. Scharfstein, Professor of Finance, Harvard
Business School before the Senate Committee on
Banking, Housing, and Urban Affairs (June 21,
2012) (noting that in the summer of 2007 concerns
about the quality of subprime loans underpinning
ABCP caused the ABCP’s interest rates to rise
dramatically, and that ‘‘[s]ome MMFs responded to
this spike in market risk by actually increasing
portfolio risk, taking on higher-yielding instruments
like ABCP in an effort to boost returns and attract
new investors’’) (emphasis in original).
866 See 2009 Proposing Release, supra note 31, at
sections II.A.4 and II.D.
867 See, e.g., Comment Letter of the American
Securitization Forum (Sept. 8, 2009) (available in
File No. S7–11–09) (‘‘ASF 2009 Comment Letter’’)
(opposing the proposal to require fund boards to
consider particular factors when evaluating ABSs,
noting that ‘‘a list of mandatory items may
inadvertently stifle innovation and unnecessarily
limit the development of new financial products
which may be needed in order to help the global
short-term markets recover and regain vibrancy and
vigor’’); Comment Letter of the Independent
Directors Council (Sept. 8, 2009) (available in File
No. S7–11–09) (‘‘IDC believes such detailed
direction from the Commission [to consider specific
factors when evaluating ABSs] could suggest that
fund boards be involved in an inappropriate level
of credit analysis, inconsistent with their oversight
role. . . . IDC recommends that the Commission
not adopt amendments requiring boards to evaluate
such specific factors.’’).
868 Explicit support includes, for example, a
liquidity facility provided by the ABS sponsor to
the SPE issuing the ABS under which the sponsor
is obligated to provide liquidity support to permit
the SPE to make payments on the ABS if the SPE
is unable to sell additional ABSs sufficient to cover
the payments to investors. Implicit support refers to
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rule’s definition of a ‘‘guarantee’’ or
‘‘demand feature.’’ 869 Nonetheless, we
understand that money market funds
investing in some types of ABCP (and
potentially other types of ABSs that may
be developed in the future for which
sponsor support may be particularly
relevant) rely on the ABCP sponsor for
liquidity and other support and make
investment decisions based, at least in
part, on the presumption that the
sponsor will take steps to prevent the
ABCP from defaulting, including
committing capital.870 In the case of
ABCP in particular, ABCP investors
likely will be repaid from sources other
than or in addition to the assets owned
by the SPE, including potentially
sponsor support, because the assets
owned by the SPE issuing the ABCP
generally will have greater maturities
than the ABCP (e.g., investors may be
due payment on the ABCP in 30 days
but the assets supporting the ABCP may
mature in 90 days).871 We have received
a number of comment letters on
unrelated rulemakings from
representatives of participants in the
ABSs markets explaining that ABCP
an ABS investor’s expectation (or a sponsor’s
willingness) that the ABS sponsor will provide
some form of support to permit an SPE issuing ABS
to make payments on the ABS as due even if the
sponsor is not formally obligated to do so, or that
the sponsor will provide support in excess of what
it may be formally obligated to provide.
869 A money market fund must treat as an issuer
of an ABS the SPE that issued it, as well as any
person whose obligations constitute 10% or more
of the principal amount of the qualifying assets of
the ABS (a ‘‘10% obligor’’) and, if a 10% obligor
is itself an SPE issuing ABS (‘‘secondary ABS’’), the
fund also must treat as an issuer any 10% obligor
of the secondary ABS. See rule 2a–7(c)(4)(ii)(D). In
each case, the 10% obligor must be treated as the
issuer of the portion of the ABS that its obligations
represent. Id. See also rule 2a–7(a)(17) (definition
of a guarantee); rule 2a–7(a)(9) (definition of a
demand feature).
870 See, e.g., Frank J. Fabozzi & Vinod Kothari,
Introduction to Securitization at 170 (2008)
(‘‘[T]here is almost necessarily an asset-liability
mismatch [in an ABCP program], requiring the bank
to provide liquidity support to the [ABCP]
conduit’’); Viral V. Acharya et al., Securitization
Without Risk Transfer, National Bureau of
Economic Research, Working Paper No. 15730 at 8–
9 (Feb. 10, 2010) (noting that conduits issuing
ABCP ‘‘typically exhibit a significant maturity
mismatch,’’ in that they hold medium- to long-term
assets but issue short term liabilities but are
considered safe investments in part because ‘‘the
conduit’s sponsor provides credit guarantees to the
conduit, which ensures that the sponsor repays
maturing asset-backed commercial paper in case the
conduit is unable to repay itself’’). The forms of
support provided to ABCP programs vary, and not
all ABCP programs are supported. See, e.g., Covitz,
supra note 71, at 8–9 (describing various types of
ABCP programs and the types of support typically
provided). The extent to which ABCP investors
value the ABCP’s support and its providers was
demonstrated in the financial crisis when
unsupported and less fully supported ABCP
programs and those with weaker sponsors suffered
disproportionate ‘‘runs.’’ See id. at 26–27.
871 See infra note 872.
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36959
investors analyze the structure of the
ABCP programs and the financial
wherewithal of their support providers
more than asset-level information about
the assets owned by the SPEs issuing
the ABCP.872
Because under rule 2a–7 each SPE is
considered a separate issuer and
because money market funds are not
required to diversify against implicit
ABS sponsor support (and even some
forms of explicit support), a money
market fund’s portfolio could consist
entirely of commercial paper issued by
multiple SPEs, all with a single sponsor
on which the fund could seek to rely to
provide liquidity and capital support, if
necessary. Such a result is inconsistent
with the purposes of rule 2a–7’s
diversification requirements and
permits funds to assume a substantial
concentration of risk to a single
economic enterprise, which may be
inconsistent with investors’
expectations of the level of risks posed
by a money market fund.873
We propose, therefore, to amend rule
2a–7 to provide that, subject to an
exception, money market funds
investing in ABSs, including ABCP, rely
on the ABSs sponsors’ financial strength
or their ability or willingness to provide
liquidity, credit, or other support to the
872 See, e.g., Comment Letter of the American
Securitization Forum (Aug. 2, 2010) (available in
File No. S7–08–10) (‘‘ASF August 2010 Comment
Letter’’) (stating that ‘‘ABCP investors understand
that the payments on the financed assets may not
be the source of payment on the short-term ABCP
they are buying and that they must continuously
monitor’’ ‘‘several factors, including the record of
the program, the conduit sponsor’s policies and
experience, the creditworthiness of the financial
institution(s) which provide liquidity and credit
support, the conduit’s investment guidelines, the
maturity of the investor’s portfolio, the conduit’s
disclosure practices and the circumstances in
which the conduit may be prohibited from issuing
ABCP’’; opposing proposed asset-level disclosure
requirements for ABCP because, among other
reasons, ‘‘ABCP investors focus less on asset-level
information than investors do in other categories of
asset-backed securities because an ABCP conduit’s
assets are not likely to be the primary source of
payment of the ABCP—rather, ABCP is expected to
be repaid from the proceeds of the issuance of
additional ABCP or the proceeds of the credit and
liquidity facilities that support the ABCP’’);
Comment Letter of the Securities Industry and
Financial Markets Association (June 10, 2011)
(available in File No. S7–14–11) (‘‘[C]ustomer
identity [i.e., the customer whose assets are being
financed] is irrelevant to the conduit investor, to
whom the reputation of the sponsor and
creditworthiness of the liquidity provider are of far
greater interest.’’). See also ASF 2009 Comment
Letter, supra note 867 (explaining that ‘‘most ABCP
programs (and unsecured corporate CP programs)
are supported by liquidity facilities’’ and that
‘‘ABCP investors cannot solely rely upon the cash
flow from the financed assets to assure timely
repayment of their securities since, in most cases,
ABCP maturities are not match-funded to the
underlying assets’’).
873 See also supra section III.J.1.
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ABSs.874 Subject to the exception, the
amendments would require funds to
treat the sponsor of an SPE issuing ABS
as a guarantor of the ABS subject to rule
2a–7’s diversification limitations
applicable to guarantors and demand
feature providers.875 As a result, a fund
could not invest in an ABS if,
immediately after the investment, it
would have invested more than 10% of
its total assets in securities issued by or
subject to demand features or guarantees
from the ABS sponsor.876
As discussed above, we understand
that money market funds investing in
ABS, including some types of ABCP
(and potentially other types of ABSs
that may be developed in the future for
which sponsor support may be
particularly relevant), rely on sponsors’
874 Although persons other than the sponsor
could support an ABS, we understand that, to the
extent an ABS has explicit support, it typically is
provided by the sponsor, and that investors in ABSs
without explicit support may view the sponsor as
providing implicit support. See, e.g., ASF August
2010 Comment Letter, supra note 872 (‘‘[T]he
liquidity and credit support for the vast majority of
ABCP conduits are provided by their financial
institution sponsors.’’).
875 See proposed (FNAV and Fees & Gates) rule
2a–7(a)(16)(ii) (definition of guarantee). Under this
proposal, the sponsor of an SPE for an ABS would
be deemed to guarantee the entire principal amount
of the ABS, with certain exceptions, 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 ABS’s quality or liquidity
and maintains a record of this determination. Id.
Treating the ABS sponsor as a guarantor—as
opposed to an issuer—recognizes that its support is
more analogous to a guarantee, as the fund’s
exposure to the ABS sponsor is indirect and is not
needed unless the assets underlying the ABS fail to
pay in the timeframe required. The sponsor would
not be deemed to have provided a guarantee for
purposes of the following paragraphs of proposed
(FNAV and Fees & Gates) rule 2a–7: (a)(11)(iii)
(definition of eligible security); (d)(2)(ii) (credit
substitution); (d)(3)(iv)(A) (fractional guarantees);
and (e) (guarantees not relied on). We also propose
a number of conforming amendments to other
provisions of rule 2a–7 to implement the treatment
of ABS sponsors as guarantors. See proposed
(FNAV and Fees & Gates) rule 2a–7(a)(17)(ii)
(defining a guarantee issued by a non-controlled
person); proposed (FNAV and Fees & Gates) rule
2a–7(f)(4)(iii) (defining defaults for purposes of
proposed rule 2a–7(f)(2) and (3) as applied to
guarantees issued by ABS sponsors); proposed
(FNAV) rule 2a–7(g)(6) and proposed (Fees & Gates)
rule 2a–7(g)(8) (requiring periodic re-evaluations of
any finding that the fund is not relying on the
sponsor’s financial strength or ability or willingness
to provide support in determining an ABS’s quality
or liquidity); and proposed (FNAV and Fees &
Gates) rule 2a–7(h)(6) (recordkeeping requirements
for the periodic re-evaluations).
876 See proposed (FNAV and Fees & Gates) rule
2a–7(d)(3)(iii) (diversification rules for demand
features and guarantees). Rule 2a–7 currently
applies a 10% diversification limitation on demand
features and guarantees to 75% of funds’ total
assets. As discussed in infra section III. J.3, we
propose to amend rule 2a–7 to apply the
diversification limitation to all of a fund’s assets
rather than only 75%.
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financial strength or their ability or
willingness to provide liquidity, credit
or other support to evaluate both the
creditworthiness and liquidity of ABSs.
• Is our understanding correct? If not,
is there a way to distinguish the
situations described by the authors of
the academic articles and comment
letters we refer to above?
• If funds do not rely significantly on
ABS sponsor support as described in
these sources, why not, and what other
factors do they consider? If funds do not
receive any significant information
about the underlying assets or obligors,
which we understand they generally do
not for ABCP, then on what are they
relying other than the ABS sponsor’s
support? How do funds evaluate any
mismatch between the time when the
SPE’s assets will be paid and the shorter
duration of the ABCP issued by the
SPE?
• This proposal assumes that, if an
ABS has support (implicit or explicit),
the support generally would be
provided by the ABS sponsor.877 Is this
correct? Do persons other than ABS
sponsor provide support for ABSs?
• Do money market funds today
follow internal guidelines to limit their
exposure to ABS sponsors beyond what
rule 2a–7 requires?
We propose to require that, subject to
an exception, all ABS sponsors be
deemed to guarantee their ABSs. We
have proposed to apply this requirement
to all ABS sponsors because we are
concerned that a proposal that applied
only to sponsors of certain types of
ABSs could become obsolete as new
forms of ABSs are introduced. We
recognize, however, that it may not be
appropriate to require money market
funds to treat ABS sponsors as
guarantors in all cases. Accordingly,
under our proposal, an ABS sponsor
would not be deemed to guarantee the
ABS if the money market fund’s board
of directors (or its delegate) determines
that the fund is not relying on the ABS
sponsor’s financial strength or its ability
or willingness to provide liquidity,
credit, or other support to determine the
ABS’s quality or liquidity.878 We believe
that any incremental burden to make
this determination should be minimal,
as the money market fund would
already have analyzed the security’s
credit quality and liquidity when
assessing whether the security posed
minimal credit risks and whether the
fund could purchase the security
e.g., supra note 874.
proposed (FNAV and Fees & Gates) rule
2a–7(a)(16)(ii). This determination must be
documented and retained by the money market
fund. See id.; and proposed (FNAV and Fees &
Gates) rule 2a–7(h)(6).
consistent with rule 2a–7’s limits on
investment in ‘‘illiquid securities.’’ 879
The exception would be analogous to
current rule 2a–7’s treatment of
guarantees and demand features that a
fund does not rely on and which may
be disregarded under the rule.880 We
request comment on our approach and
the proposed exception.
• Should we instead specify that only
certain types of ABS sponsors, such as
sponsors of ABCP, should be deemed to
guarantee the ABS? If so, which kinds
of ABS and why?
• Would the exception appropriately
identify situations in which a money
market fund should not be required to
treat an ABS sponsor as a guarantor?
• Are there other exceptions we
should consider? Should we, for
example, provide that an ABS sponsor
will not be deemed to guarantee the
ABS if the fund’s board of directors (or
its delegate) determines that the
sponsor’s financial strength or its ability
or willingness to provide liquidity,
credit, or other support did not play a
substantial role in the fund’s assessment
of the ABS’s quality or liquidity?
• Do commenters agree that any
incremental burden to determine if the
fund is relying on the ABS sponsor’s
financial strength or its ability or
willingness to provide liquidity, credit,
or other support to determine the ABS’s
quality or liquidity should be minimal?
If not, why not in light of the analysis
the money market fund would be
required to conduct of the ABS’s credit
quality and liquidity?
• Should we take a different
approach, and require a money market
fund to treat as a guarantor any provider
of liquidity or credit support, whether to
an ABS or any other type of security?
Would a focus on the nature of any
support, as opposed to the type of
security subject to the support, be more
effective than our proposed approach in
requiring money market funds to treat as
guarantors only providers of liquidity or
credit support on which they rely in a
way that is analogous to reliance on a
guarantor? If we were to take this
approach, should we include an
exception under which some providers
of liquidity or credit support would not
be treated as guarantors? Should we use
the same exception we propose for ABS
sponsor support?
We discuss and seek comment on the
economic effects of our ABS proposal
together with the effects of our proposal
877 See,
878 See
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879 Proposed (FNAV and Fees & Gates) rule 2a–
7(a)(11) (definition of ‘‘eligible security’’) and
proposed (FNAV and Fees & Gates) rule 2a–7(d)(4)
(portfolio liquidity).
880 See rule 2a–7(c)(6).
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to remove the twenty-five percent basket
in section III.J.3, below, because both of
these proposals would affect funds’
investments in securities subject to
guarantees (including ABS sponsors
under our proposal) and demand
features for purposes of rule 2a–7’s 10%
diversification requirement.
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3. The Twenty-Five Percent Basket
We also propose to amend rule 2a–7
to tighten the diversification
requirements applicable to guarantors
and providers of demand features. The
amendments would eliminate the socalled ‘‘twenty-five percent basket,’’
under which as much as 25% of the
value of securities held in a fund’s
portfolio may be subject to guarantees or
demand features from a single
institution.881
Since 2007, a number of events have
highlighted the risks to money market
funds caused by their substantial
exposure to providers of demand
features and guarantees. For example,
during the 2007–2008 financial crisis,
many funds, particularly tax-exempt
funds, were heavily exposed to bond
insurers. In 2008, as much as 30% of the
municipal securities held by tax-exempt
money market funds were supported by
bond insurance issued by monoline
insurance companies.882 This
concentration led to considerable stress
in the municipal markets when some of
these bond insurers were downgraded
during the financial crisis. For example,
a lack of confidence in the bond
insurers was a primary contributor to
the market ‘‘freeze’’ that occurred in
variable-rate demand notes in 2008
881 Rule 2a–7 currently applies a 10%
diversification limit on guarantees and demand
features only to 75% of a money market fund’s total
assets. See rule 2a–7(c)(4)(iii)(A). The money
market fund, however, may only use the twenty-five
percent basket to invest in demand features or
guarantees that are first tier securities issued by
non-controlled persons. See rule 2a–7(c)(4)(iii)(B)
and (C). Accordingly, in conforming amendments
we would delete rule 2a–7(a)(10), which defines a
demand feature issued by a non-controlled person,
because the term is used only in connection with
the twenty-five percent basket. We also propose
certain amendments to clarify that a fund must
comply with this 10% diversification limit
immediately after it acquires a security directly
issued by, or subject to guarantees or demand
features provided by, the institution that issued the
security or provided the demand feature or
guarantee. See proposed (FNAV and Fees & Gates)
rules 2a–7(d)(3)(i) and (iii). We believe this
amendment reflects funds’ current practices and is
consistent with rule 2a–7’s current requirements.
882 See, e.g., U.S. Securities and Exchange
Commission Division of Trading and Market’s
Director Erik R. Sirri, Testimony before the
Committee on Financial Services, U.S. House of
Representatives (Mar. 12, 2008), available at https://
www.sec.gov/news/testimony/2008/
ts031208ers.htm. A monoline insurance company
generally is an insurance company that only
provides guarantees to issuers of securities.
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when money market funds and other
investors reduced their purchases of
these securities or sold them to the
financial institutions that had provided
demand features for the securities.883
The freeze in turn strained the providers
of the demand feature and also
increased the interest the issuers of the
securities were required to pay.884 A
lack of confidence in the
creditworthiness of the bond insurers
also caused dislocations in the market
for tender option bonds, which use
short-term borrowings from money
market funds and others to finance
longer-term municipal bonds.885
Some money market funds also were
heavily exposed to a few major financial
institutions that served as liquidity
providers, including funds that owned
variable-rate demand notes and tender
option bonds as discussed above.886 For
example, some tax-exempt funds were
significantly exposed to Dexia SA
(‘‘Dexia’’), a European bank that
provided demand features and
guarantees for many municipal
securities held by money market funds,
when Dexia came under significant
strain but ultimately received
substantial support from various
governments.887 More recently, when
883 See, e.g., Joan Gralla, Variable-Rate Note
Market Now Freezing-Sources, Reuters, Feb. 26,
2008, available at https://www.reuters.com/article/
2008/02/26/sppage012-n25273728-oisbnidUSN2527372820080226?sp=true (‘‘One of the
main culprits causing the market for variable-rate
demand notes to seize up is the troubled bond
insurers that guarantee them. This is the same factor
that has caused the $330 billion auction-rate note
market to get hit with billions of dollars of failed
auctions every day since late January.’’).
884 Id. (‘‘ ‘I had heard there was tremendous stress
in the variable-rate demand notes because money
market (funds) and mutual investors have been
putting back a lot of their variable-rate demand
notes and dealers were getting overwhelmed on
their balance sheets,’ said Matt Fabian, managing
director of Municipal Market Advisors, in Concord,
Massachusetts.’’); Liz Rappaport, New Monkey,
Same Backs: Another Debt Market For Governments
Loses Buyers, and Rates Rise, Wall St. J., Feb. 28,
2008 (‘‘Just like many issuers of auction-rate
securities whose interest costs soared after auctions
for some of their debt failed, an increasing number
of municipalities are being hit with sharply higher
interest on their variable-rate demand notes because
dealers of the debt are having trouble selling it.’’).
885 Tom Lauricella and Liz Rappaport, How the
Crunch Has Hit Corner Of Muni Market: ‘Tender
Option Bonds’ Lose Investor Favor; Aberrations in
Yield, Wall St. J., Jan. 31, 2008 (noting that the lack
of buyers for some tender option bonds caused in
part by a lack of confidence in the bond insurers
caused billions of dollars of the bonds to
accumulate at banks and broker-dealers; caused
some hedge funds to suffer ‘‘double-digit losses’’;
caused the yield on the bonds to increase
significantly; and ‘‘caused dislocations in the wider
municipal-bond market’’).
886 See, e.g., supra notes 883–885 and
accompanying text; Markus K. Brunnermeier,
Deciphering the Liquidity and Credit Crunch 2007–
2008, 23 J. Econ. Perspectives 77, 87, Winter 2009.
887 See, e.g., Bob Ivry, Why a Foreign Bank
Feasted on Fed Funds, Bloomberg Businessweek,
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Dexia again came under stress during
the European debt crisis, many
municipal issuers had to quickly find
substitutes for demand features on
which they relied to shorten their
securities’ maturities.888 These events
highlighted the risk a money market
fund assumes when it relies heavily on
a single guarantor or demand feature
provider.889 Our proposal to remove the
twenty-five percent basket is designed
to reduce this risk by limiting the extent
to which a money market fund becomes
exposed to a single guarantor or demand
feature provider.
Our diversification proposals,
including the proposal to remove the
twenty-five percent basket,890 are
designed to provide a number of
benefits, as discussed in more detail in
section III.J.1 above. And although
because we do not have the information
necessary to provide a reasonable
estimate, and thus are unable to
quantify these benefits for the reasons
discussed in that section, we have
considered data filed on Form N–MFP
in assessing the impacts of these
proposals. Specifically, our staff’s
review of data filed on Form N–MFP
suggests that our ABS and twenty-five
percent basket diversification proposals
(treating only ABCP sponsors as
guarantors for purposes of this
analysis) 891 would have little impact on
the majority of money market funds,
which do not make use of the twentyfive percent basket, and would likely
Apr. 7, 2011, available at https://
www.businessweek.com/magazine/content/11_16/
b4224038555674.htm (‘‘If Dexia had gone
‘bankrupt, it could have been a catastrophe for
municipal finance and money funds.’ ’’). Dexia was
the ‘‘biggest recipient of funds from the Federal
Reserve discount window during the financial
crisis,’’ borrowing ‘‘as much as $37 billion.’’ Id.
(describing the support Dexia received from various
governments around the world and explaining
Dexia’s significance in the municipal market and
that ‘‘[d]emands to back up muni bonds sapped
Dexia so much that it was ‘two days from
bankruptcy.’ ’’).
888 See, e.g., Michael Corkery, Global Economic
Turmoil: Dexia’s Troubles Cross Atlantic, Cost U.S.
Cities, Towns, Wall St. J., Oct. 5, 2011.
889 Although we determined to further restrict
funds’ ability to acquire second tier securities in the
2010 Adopting Release, we did not at that time
consider eliminating the twenty-five percent basket.
See 2010 Adopting Release, supra note 92, at n.59.
890 See supra note 881.
891 Our staff assumed when reviewing the Form
N–MFP data that any fully or partially supported
ABCP owned by a fund would result in the sponsor
guaranteeing the ABCP. For this purpose, our staff
considered an ABCP program to be fully supported
when the program’s investors are protected against
asset performance deterioration and primarily rely
on the ABCP sponsor to provide credit, liquidity,
or some other form of support to ensure full and
timely repayment of ABCP, and considered an
ABCP program to be partially supported when the
ABCP sponsor, although not fully supporting the
program, provided some form of credit, liquidity, or
other form of support. See also infra note 893.
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have a minimal impact on those funds
that do. Approximately 109 funds, or
19% of all funds submitting Form N–
MFP for February 28, 2013, reported
that they made use of the twenty-five
percent basket for guarantees and
demand features, even when we treat
sponsors of ABCP as guarantors (and
thus subject to a 10% diversification
limitation).892 Thus, most money market
funds do not use the twenty-five percent
basket. Those funds that do use the
twenty-five percent basket do not make
significant use of it. The 109 funds that
used the twenty-five percent basket had,
on average, 3.9% of their assets invested
in excess of the 10% diversification
limitation we propose today (i.e., in the
twenty-five percent basket).893 And
although we understand that money
market funds may have made greater
use of the twenty-five percent basket in
the past (and might do so in the future
if we do not adopt this proposal), we are
concerned that funds were exposed to
concentrated risks inconsistent with the
purposes of rule 2a–7’s diversification
requirements in the past as discussed
above. Money market funds’ current
relatively limited use of the basket
suggests that this is an opportune time
to remove it.
The principal effect of the
amendments may be to restrain some
managers of money market funds from
892 Based on our review, only prime funds (which
tend to have relatively concentrated positions in
ABSs) and tax-exempt funds (which tend to have
relatively concentrated positions in securities
subject to demand features) used the twenty-five
percent basket.
893 This estimate likely overstates the number of
funds and the amount of money market funds’
assets that could be affected by our ABS proposals
for three reasons. First, it assumes that any fully or
partially supported ABCP owned by a fund would
result in the sponsor guaranteeing the ABCP. Under
our proposal, however, an ABCP (or other ABS)
sponsor would not be deemed to guarantee the
ABCP if the board (or its delegate) determines the
fund is not relying on the sponsor’s financial
strength or its ability or willingness to provide
support to determine the ABCP’s quality or
liquidity. We did not assume sponsors of other
types of ABSs guaranteed those ABSs because we
understand that other forms of ABS offered to
money market funds either do not typically have
sponsor support or, if they are supported, the
support typically is in the form of a guarantee or
demand feature, which would already be included
in our calculation of exposure to providers of
demand features and guarantees. Second, Form N–
MFP data does not differentiate between funds that
would have had exposure in excess of 10% upon
the acquisition of a demand feature or guarantee
(which would not be permitted under our proposed
amendments) and those funds that were under that
level of exposure at the time of acquisition but the
fund later decreased in size, increasing the fund’s
exposure above the 10% limit (which would be
permitted under our proposed amendments). Third,
where a fund owned securities issued by or subject
to demand features or guarantees from affiliated
institutions, we treated the separate affiliated
institutions as single institutions for purposes of
these estimates.
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making use of the twenty-five percent
basket in the future, under perhaps
different market conditions.894 Our
diversification proposals would deny
fund managers some flexibility in
managing fund portfolios and could
decrease the fund yields. To assess these
proposals’ effect on yield, we examined
whether the 7-day gross yields of funds
that use the twenty-five percent basket
were higher than the 7-day gross yields
for those funds that do not.895 We
found: (i) for national tax-exempt funds,
the average yield for funds using the
twenty-five percent basket was the same
(0.16%) as the average yield for national
tax-exempt funds that did not use the
twenty-five percent basket; (ii) for single
state funds, the average yield for funds
using the twenty-five percent basket was
the same (also 0.16%) as the average
yield for single state funds that did not
use the twenty-five percent basket; and
(iii) for prime money market funds, the
average yield for funds using the
twenty-five percent basket was 0.27% as
compared to the average yield for prime
money market funds that did not use the
twenty-five percent basket of 0.25%.896
The prime money market fund yield
differences may not, of course, be
caused by the use of the twenty-five
percent basket, but may instead reflect
the overall risk tolerance of fund
managers that take advantage of the
twenty-five percent basket.
Eliminating the twenty-five percent
basket also may increase the costs of
monitoring the credit risk of funds’
portfolios or make that monitoring less
efficient, to the extent they are more
diversified under our proposal and
money market fund advisers must
expend additional effort to monitor the
credit risks posed by a greater number
of guarantors and demand feature
providers. We are unable to quantify
these costs, however, because we do not
have the information necessary to
provide a reasonable estimate to predict
whether funds would be required to
expend more effort under our proposals
(or if so, how much more). A money
894 If we were to adopt the proposed amendments,
funds with investments in excess of those permitted
under the revised rule would not be required to sell
the excess investments to come into compliance.
The proposed amendments would require a fund to
calculate its exposure to issuers of demand features
and guarantees as of the time the fund acquires a
demand feature or guarantee or a security directly
issued by the issuer of the demand feature or
guarantee. See proposed (FNAV and Fees & Gates)
rule 2a–7(d)(3)(i) and (iii).
895 We assumed that any fully or partially
supported ABCP owned by a fund would result in
the sponsor guaranteeing the ABCP. See supra note
893.
896 These averages are derived from Form N–MFP
data as of February 28, 2013, weighted by money
market funds’ assets under management.
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market fund that could not acquire a
particular guarantee or demand feature
under our proposal could, for example,
be able to acquire a guarantee or
demand feature from another institution
in which the fund already was invested,
at no additional monitoring costs to the
fund.
Our proposed amendments would
require funds that use the twenty-five
percent basket, or that would use it in
the future, to either choose not to
acquire certain demand features or
guarantees (if the fund could not assume
additional exposure to the provider of
the demand feature or guarantee) or to
acquire them from different institutions.
Funds that choose the latter course
could thereby increase demand for
providers of demand features and
guarantees and increase competition
among their providers. If new entrants
do not enter the market for demand
features and guarantees in response to
this increased demand, eliminating the
twenty-five percent basket could result
in money market funds acquiring
guarantees and demand features from
lower quality providers than those the
funds use today. If new entrants do
enter the market (or if current
participants increase their
participation), the effect on money
market funds would depend on whether
these new entrants (or current
participants) are of high or low credit
quality as compared to the providers
money market funds would use absent
our proposal.
Although we recognize that money
market funds could use lower credit
quality guarantors and demand feature
providers under our proposals, our data
show that most funds do not use the
twenty-five percent basket (and funds
that use it do so to a limited extent) and
thus we believe that this negative effect
is unlikely to occur. And under our
proposals, money market funds would
not be required to include more than 10
guarantors or demand feature providers
in their portfolios, suggesting it is
unlikely that they would be forced to
resort to low credit quality guarantors or
demand feature providers. Indeed, our
staff’s review of Form N–MFP data
shows that, as of February 28, 2013, the
assets in money market funds’ twentyfive percent baskets (i.e., amounts in
excess of the rule’s 10% diversification
limit for guarantor and demand feature
providers) were invested in securities
subject to demand features and
guarantees from only 13 institutions, but
there were a total of 98 first tier
guarantors (including ABCP sponsors)
and demand feature providers held by
money market funds collectively as of
that date.
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Issuers also could incur costs if they
were required to engage different
providers of demand features or
guarantees under our proposal, which
could negatively affect capital
formation. This could occur because an
issuer might otherwise have sought a
guarantee or demand feature from a
particular bank, but might choose not to
use that bank because the money market
funds to which the issuer hoped to
market its securities could not assume
additional exposure to the bank. If
issuers were unable to receive demand
features or guarantees from banks (or
other institutions) to which they would
have turned absent our amendments,
they would have to engage different
banks, which could make the offering
process less efficient and result in
higher costs if the different banks
charged higher rates. Issuers of
securities with guarantees or demand
features (e.g., issuers of longer-term
securities that can be sold to money
market funds only with a demand
feature) also could be required to
broaden their investor base or seek out
different providers of guarantees or
demand features under our proposals,
which could make their offering process
less efficient or more costly.
We request comment on the impact
on portfolio management of our
proposed elimination of the twenty-five
percent basket together with our
proposal to remove the twenty-five
percent basket.
• As noted above, our review of Form
N–MFP data suggests that most funds do
not use the twenty-five percent basket.
Is this correct?
• Would our proposals increase
demand for providers of demand
features and guarantees?
• Would there be a significant impact
on fund yield, and if so, how
significant? Our review of Form N–MFP
data also suggests that our proposal
would have very little impact on funds
that use the twenty-five percent basket
today. Is this correct?
• To what extent might a money
market fund use lower credit quality or
higher cost guarantors and demand
feature providers in order to meet the
stricter diversification requirements that
we propose? Are there enough
guarantors and demand feature
providers to allow money market funds
to meet these diversification
limitations?
• As discussed in section III.E above,
concerns about the creditworthiness of
guarantors and demand feature
providers have reduced the amount of
VRDNs outstanding since 2010, and this
trend is likely to continue irrespective
of changes in the money market fund
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industry because of potential
downgrades to credit and liquidity
enhancement providers and potential
bank regulatory changes may increase
the cost to financial institutions of
providing such guarantees.897 How
would these factors affect money
markets funds’ ability to acquire
demand features and guarantees under
our proposal, and the cost and quality
of those guarantees and demand
features?
• How should we evaluate the
tradeoff between providing funds
flexibility and limiting the risks to funds
posed by concentrated exposures and
how might we quantify it? We request
commenters asserting that we retain the
twenty-five percent basket provide data
to help us evaluate these competing
considerations. We also request those
commenters to address the extent to
which their assets exceed the limits our
proposals would establish, and what
difficulties they would encounter in
identifying alternative securities with
credit qualities comparable to their
existing investments.
• To what extent would issuers of
securities with guarantees or demand
features (e.g., issuers of longer-term
securities that can be sold to money
market funds only with a demand
feature) be required to broaden their
investor base or seek out different
providers of guarantees or demand
features under our proposal? To what
extent would this increase issuers’ costs
or reduce the efficiency of the offering
process? Would some issuers reduce
their reliance on guarantees and
demand features? Would issuers incur
higher underwriting fees if placing
securities without guarantees or demand
features requires more effort? What
effect on capital formation would occur
if issuers are unable to find alternative
investors and/or have to sell their
securities at less favorable rates? Would
our proposals make offerings less
efficient if issuers need to spend more
time and effort identifying purchasers of
their securities, and if so, to what
extent?
• Would eliminating the twenty-five
percent basket make it difficult for
issuers of ABSs and securities subject to
demand features or guarantees to find
money market fund investors to
purchase their securities? As noted
above, most funds do not use the
twenty-five percent basket and, in
addition, many money market funds as
of February 28, 2013, had invested only
a small portion of their assets in ABSs
and securities subject to demand
features or guarantees, suggesting that
issuers have a ready supply of money
market fund investors eligible to
purchase their securities. Indeed, Form
N–MFP data as of February 28, 2013,
shows that over 99% of total money
market fund assets are not in funds’
twenty-five percent baskets. To the
extent issuers or underwriters believe
they would have any difficultly in
identifying money market investors as a
result of our proposal, we request that
they explain why and quantify any
resulting costs. As noted above, data on
Form N–MFP shows that many funds
would be eligible to purchase ABSs and
securities subject to demand features
and guarantees under our proposals.
• In assessing the impacts of our ABS
proposal and our proposal to eliminate
the twenty-five percent basket we have
considered, as noted above, that some
funds had investments as of February
28, 2013 in excess of the limits our
proposals would impose. We request
comment from any funds with
investments in excess of these limits on
whether their investments exceeded
these limits upon acquisition (which
would not be permitted under our
proposed amendments) or if the funds’
investments were below the limits at the
time of acquisition but the fund later
decreased in size (which would be
permitted under our proposed
amendments). For example, under our
proposal, a fund would not be permitted
to acquire ABCP sponsored by a bank if
immediately thereafter more than 10%
of its assets were invested in securities
issued by or subject to demand features
or guarantees from that bank. But the
investment would be permitted if
immediately after the investment the
fund was below the 10% limit, even if
the fund later decreased in size and the
investment later exceeded the 10%
limit.
• Although our proposal would
remove the twenty-five percent basket,
we are not proposing to change the
application of rule 2a–7’s 5% issuer
limit to single state funds, which today
applies only to 75% of a single state
fund’s total assets.898 We historically
have applied the issuer diversification
limitation differently to single state
funds, recognizing that ‘‘single state
funds face a limited choice of very high
quality issuers in which to invest’’ and,
therefore, that there is a risk that ‘‘too
stringent a diversification standard
could result in a net reduction in safety
for certain single state funds.’’ 899 The
898 See
897 See,
e.g., supra notes 601–602 and
accompanying text.
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rule 2a–7(c)(4)(i)(B).
1996 Adopting Release, supra note 247, at
text following n.38.
899 See
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market for demand features and
guarantees, in contrast, is national and
may not be subject to the same supply
constraints as is the market for issuers
in which single state funds may directly
invest. Should we nonetheless continue
to permit single state funds to continue
to use the twenty-five percent basket for
the same reasons that we historically
have applied rule 2a–7’s issuer
diversification limit differently to those
funds? Why or why not? Would single
state funds under our proposal have
difficulties in identifying high quality
issuers in which to invest even though
we do not propose to change rule 2a–
7’s issuer diversification limit as
applied to those funds? Why or why
not?
We do not expect that our ABS and
twenty-five percent basket
diversification proposals would result
in operational costs for funds. We
understand that money market funds
generally have systems to monitor their
exposures to guarantors (among other
things) and to monitor the funds’
compliance with rule 2a–7’s current
10% demand feature and guarantee
diversification limit. We expect that
money market funds could use those
systems to track exposures to ABS
sponsors under our proposal and could
continue to track the funds’ compliance
with a 10% demand feature and
guarantee diversification limit. To the
extent a money market fund did have to
modify its systems as a result of our
ABS and 25% basket diversification
proposals, we expect that the money
market fund would make those
modifications when modifying its
systems in response to our proposal to
require money market funds to aggregate
exposure to affiliated issuers for
purposes of rule 2a–7’s 5%
diversification limit, for which we
provide cost estimates above.900
Because the costs estimated above are
those associated with activities typically
involved in making systems
modifications, we expect they also
would cover any systems modifications
associated with our ABS and 25%
basket diversification proposals.
Finally, we note that Investment
Company Act rule 12d3–1 also refers to
the twenty-five percent basket. That rule
generally permits investment companies
to purchase certain securities issued by
companies engaged in securities-related
activities notwithstanding section
12(d)(3)’s limitations on these kinds of
transactions. Among other things, rule
12d3–1 provides that the acquisition of
a demand feature or guarantee as
defined in rule 2a–7 will not be deemed
900 See
supra note 859 and accompanying text.
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to be an acquisition of the securities of
a securities-related business provided
that ‘‘immediately after the acquisition
of any Demand Feature or Guarantee,
the company will not, with respect to 75
percent of the total value of its assets,
have invested more than ten percent of
the total value of its assets in securities
underlying Demand Features or
Guarantees from the same
institution.’’ 901
• Should we revise rule 12d3–1 to
apply this diversification requirement
with respect to all of an investment
company’s total assets, rather than just
75% of them, for consistency with our
amendments to rule 2a–7?
• Would conforming rule 12d3–1 to
rule 2a–7 as we propose to amend it
affect investment companies other than
money market funds, which also may
use rule 12d3–1? If so, how and to what
extent?
4. Additional Diversification
Alternatives Considered
We could require money market funds
to be more diversified by reducing rule
2a–7’s current 5% and 10%
diversification limits.902 We are
concerned that reducing these limits,
particularly in light of today’s
diversification proposals, could lead
money market funds to invest in
relatively lower quality securities.903
Doing so could increase the likelihood
of a default or other credit event
affecting a money market fund while
diminishing the impact of such an event
on the fund. We also recognize that
lowering the diversification limits
would not necessarily eliminate the
possibility of a default triggering
shareholder redemptions: The Reserve
Primary Fund held only 1.2% of its
assets in Lehman Brothers commercial
paper.904 Any amendments would need
to balance the potential benefits of
greater diversification that would result
from our reducing rule 2a–7’s current
5% and 10% diversification limits with
901 Rule 12d3–1(d)(7)(v). We are proposing to
amend rule 12d3–1 to update cross references in the
rule to rule 2a–7’s definitions of the terms ‘‘demand
feature’’ and ‘‘guarantee.’’ See infra note 967.
902 See, e.g., FSOC Proposed Recommendations,
supra note 114, at 55–57 (seeking comment on
reducing the rule 2a–7’s 5% issuer limit (and
consolidating exposures to affiliated entities) in
connection with a reform option under which
money market funds also would have risk-based
NAV buffers).
903 See, e.g., 2009 Proposing Release, supra note
31, at section II.D (noting that ‘‘[e]ven a
diversification limitation of one percent would not
preclude a fund from breaking a buck if the security
should sustain sufficient losses as did the securities
issued by Lehman Brothers,’’ and that ‘‘such a
diversification limit may force funds to invest in
relatively lower quality securities.’’
904 See, e.g., 2009 Proposing Release, supra note
31, at text following n.221.
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the potential negative effects that could
result from doing so and particularly
that lower limits could lead funds to
assume additional credit risk.
Nonetheless, there could be benefits
in reducing these limits. For example,
the 10% limit permits a money market
fund to have twice as much exposure to
a single provider of a demand feature or
guarantee than if the fund were to invest
in securities directly issued by the
provider, which direct investments
would be subject to the rule’s 5% limit.
Rule 2a–7 permits a money market fund
to take on greater indirect exposures to
providers of demand features and
guarantees (as opposed to direct
investments in them) because, rather
than looking solely to the issuer, the
money market fund would have two
potential sources of repayment—the
issuer whose securities are subject to the
demand features or guarantees and the
providers of those features if the issuer
defaults. Both the issuer and the
demand feature provider or guarantor
would have to default at the same time
for the money market fund to suffer a
loss. And if a guarantor or demand
feature provider were to come under
stress, the issuer may be able to obtain
a replacement.905
As discussed in more detail in section
III.K below, however, rule 2a–7 permits
a money market fund, when
determining if a security subject to a
guarantee meets the rule’s credit quality
standards, to rely exclusively on the
credit quality of the guarantor.906 That
the money market fund has two sources
of repayment—the issuer and the
guarantor—therefore may not
meaningfully reduce the risks of the
investment in all cases because the
issuer of the guaranteed securities need
not satisfy rule 2a–7’s credit quality
requirements. If the issuer of the
guaranteed securities is of lesser credit
quality, allowing the money market
fund to have up to 10% of its assets
indirectly exposed to the guarantor may
not be justified.
And although an issuer could attempt
to obtain a substitute guarantor or
demand feature provider if its current
provider came under stress, there is no
assurance the issuer would be
successful. Certain providers of
905 See, e.g., 1993 Proposing Release, supra note
54, at n.83 and accompanying text (observing that,
if the guarantor of one of the money market fund’s
securities comes under stress, ‘‘issuers or investors
generally can either put the instrument back on
short notice or persuade the issuer to obtain a
substitute for the downgraded institution’’).
906 Rule 2a–7(c)(3)(iii) (‘‘A security that is subject
to a Guarantee may be determined to be an Eligible
Security or a First Tier Security based solely on
whether the Guarantee is an Eligible Security or
First Tier Security, as the case may be.’’).
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guarantees or demand features may
limit themselves to providing such
features for only specific types of
securities, such as a state that only
provides these features for certain bonds
within the state. If a state came under
stress, the issuers of bonds within the
state may be unable to obtain substitute
guarantors. That certain providers of
guarantees or demand features may
limit themselves to providing such
features for only specific types of
securities also may create further
concentration risk, under which the
risks of the provider of the features may
be correlated with the risks of the
underlying securities.
We also considered proposing
industry concentration limits.907 Our
proposal to require money market funds
to aggregate their exposures to affiliated
issuers is designed to reduce the risks to
which a fund would be exposed if it
became overexposed to the group
collectively, but securities issued by
separate groups of affiliates in the same
industry also could come under stress at
the same time. For example, a financial
crisis or other event that affected the
financial sector disproportionately
likely would cause securities issued by
financial institutions generally to
decline in value even where the
financial institutions are not affiliated
with each other. This is relevant to
prime money market funds in particular
because, as a group, they invest a large
percentage of their assets in securities
issued by financial institutions.
Defining various industry sectors with
sufficient precision for a new industry
diversification requirement could be
difficult, however. In deciding not to
propose industry concentration limits
today, we also considered the comments
we received in response to our request
for comment in 2009 on whether to
reduce rule 2a–7’s current
diversification limits and whether to
introduce new industry diversification
requirements.908 Most commenters
opposed these reforms. Commenters
opposed reducing rule 2a–7’s current
5% and 10% diversification limits
because, among other reasons, the
reductions could increase risks to funds
907 Id. See also, e.g., Robert Comment FSOC
Comment Letter, supra note 67 (explaining that his
review of a sample of 50 prime funds showed that
‘‘bank issued money market instruments of all types
(notes, commercial paper, large CDs, time-deposits
and repo), comprised 53% of the holdings of prime
funds in mid-2008 and 8% in mid-2012 (46% and
45%, respectively, excluding repo),’’ with much of
this issued by non-U.S. banks, and concluding that
‘‘[s]ector diversification apparently is not relevant
to funds’ compliance with the diversification
provisions of rule 2a–7, but it plainly should be’’).
908 See 2009 Proposing Release, supra note 31, at
section II.D.
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by requiring the funds to invest in
relatively lower quality securities.909
Commenters opposed industry
diversification requirements because
they would be impractical, among other
reasons.910 At least one commenter
argued that our concerns could be better
addressed through what were then
proposals to further limit certain risks in
funds’ portfolios and to increase their
liquidity.911
We are proposing enhancements to
money market funds’ stress testing
processes, as discussed in more detail in
section III.L, below. Those
enhancements are designed, together
with all of the other changes we propose
today, to address some of the risk that
may result from a money market fund
concentrating its investments in
909 See, e.g., ICI 2009 Comment Letter, supra note
281 (‘‘Further restricting the diversification limits
would only heighten this problem by forcing money
market funds to use institutions they may be less
comfortable with to meet new diversity
requirements.’’); Schwab 2009 Comment Letter,
supra note 350 (stating that it ‘‘would not support
any changes to the diversification requirements set
forth in the current rule, as more stringent
diversification requirements may force a fund to
invest in lower quality securities than those in
which it might have otherwise invested’’);
Comment Letter of Stradley Ronon (Sept. 8, 2009)
(available in File No. S7–11–09) (‘‘Stradley Ronon
2009 Comment Letter’’) (‘‘We understand that a
fund might find it necessary to ease its quality
standards if it had to satisfy more stringent
diversification standards. This easing could
threaten share stability and increase the risk that
the fund will hold a defaulted security.’’). But see,
e.g., Comment Letter of James J. Angel (Sept. 8,
2009) (available in File No. S7–11–09) (noting that
‘‘[i]f a fund never holds more than 1⁄2 of one percent
of its assets in any paper issued by any one issuer,
then even a complete loss from that one issuer
would not result in that fund breaking the buck,’’
but stating that he is ‘‘not, however, proposing that
all funds be reduced to a maximum exposure of 1⁄2
of 1% to any issuer: This could be problematic for
smaller funds that might find it overly expensive to
buy smaller quantities of commercial paper’’).
910 See, e.g., Stradley Ronon 2009 Comment
Letter, supra note 909 (stating that ‘‘[a] more
stringent industry concentration requirement would
not provide a meaningful method to mitigate risk’’
because ‘‘[d]ifferent fund groups define industries
in a variety of ways, especially given the erosion
of boundaries between industries and the lack of
guidance from the Commission in this area’’; also
stating that ‘‘an industry concentration provision to
limit exposure to the financial sector is not
practical, because a significant proportion of money
market investments carries exposure to the financial
sector (including municipal securities, certificates
of deposit, repurchase agreements, commercial
paper and asset-backed commercial paper).’’);
Invesco 2009 Comment Letter, supra note 195 (‘‘We
also do not believe an industry concentration limit
in rule 2a–7 would be an effective risk management
control given the inconsistency of industry
classifications, which currently can differ between
advisers.’’).
911 See Invesco 2009 Comment Letter, supra note
195 (‘‘The Commission’s proposals to limit portfolio
quality risk and increase available liquidity are
stronger and more appropriate tools [than industry
diversification requirements] for the Commission to
employ in reducing the risk of redemption
pressures to money market fund shareholders.’’).
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particular industries, or having
exposures within the rule’s 5% and
10% diversification limits. For example,
we propose to require money market
funds’ advisers to assume as part of
their stress testing that the funds’
portfolio securities will present
correlated risks. Our structural reforms
are designed to better position a money
market fund to bear a credit loss. Our
liquidity fees and gates proposal is
designed to provide the fund with tools
to mitigate the harm that can result from
a credit event. Our floating NAV
proposal is designed to more fairly
apportion such a loss, thereby reducing
the incentive to redeem in anticipation
of it.
We request comment on the
alternative approaches we considered.
• Should we reduce rule 2a–7’s
current 5% diversification limits? If so,
to what extent? Would lower
diversification limits increase the
likelihood of a default or other credit
event affecting a money market fund
while diminishing the impact of such an
event on the fund? We request that
commenters address the tradeoffs of
lower diversification limits for different
types of money market funds.
• Should we reduce rule 2a–7’s
current 10% diversification limits on
securities with a guarantee or demand
feature from any one provider? Would
lowering this limit increase the
likelihood of a default or other credit
event affecting a money market fund or
diminish the impact of such an event on
the fund?
• Should we continue to distinguish
between a fund’s exposure to guarantors
and demand feature providers and
direct issuers by providing different
diversification limitations for these
exposures? Does the difference in the
nature of a fund’s exposure to a
guarantor or demand feature provider as
opposed to a direct issuer warrant
disparate diversification requirements?
If we were to adopt a single
diversification limitation that aggregated
direct investments and guarantees and
demand features, should we use the
rule’s current 5% threshold for direct
investments? If not, should it be higher
or lower? At what level and why?
Should we continue to apply different
diversification limitations but use
limitations other than 5% (direct
investments) and 10% (securities
subject to demand features and
guarantees)?
• What types of providers that are not
affiliated with the issuer of a security
provide such guarantees or demand
features? To what extent do providers of
guarantees and demand features limit
themselves to providing features for
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specific types of securities? Does this
limitation pose any particular risks? If
so, what are they?
• Should we impose industry
diversification requirements on money
market funds? If so, what level of
concentration in a single industry
would be appropriate? How would we
define industries for this purpose?
• We request that commenters
address how any risks that may result
from a money market fund
concentrating its investments to an
extent in particular industries, or from
having exposures within the rule’s 5%
and 10% diversification limits, would
(or would not) be mitigated by the other
amendments that we propose today.
• If we were to reduce rule 2a–7’s
current diversification limits, could that
result in more homogeneity and
increased correlation among money
market fund portfolios? If so, what
effect, if any, would there be on
systemic risk?
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K. Issuer Transparency
In 2008, monoline insurers that
provided bond insurance to municipal
issuers were downgraded, forcing some
advisers to tax-exempt money market
funds to quickly obtain information
about issuers of VRDNs and other
municipal securities they held to
determine whether the securities
continued to present minimal credit
risks (and whether to exercise demand
features).912 Two years later, in 2010,
we amended our rules to improve the
transparency of information about
VRDNs to advisers to money market
funds and other investors by prohibiting
broker-dealers from underwriting
VRDNs unless the issuer had committed
to provide ongoing information about
itself and the securities, including
financial data, through the Municipal
Securities Rulemaking Board’s
Electronic Municipal Market Access
system.913 Last year, we reported our
912 To our knowledge, none of these funds
experienced difficulty in maintaining their stable
net asset value or received support from an affiliate.
A monoline insurance company generally is an
insurance company that only provides guarantees to
issuers of securities. See supra note 882.
913 See Amendment to Municipal Securities
Disclosure, Exchange Act Release No. 62184A (May
26, 2010) [75 FR 33100 (June 10, 2010) (‘‘Municipal
Disclosure Release’’), at nn.110–111 (noting that
‘‘most holders of [variable rate demand notes] are
money market funds’’ and that the ‘‘availability of
continuing disclosure information should facilitate
the fulfillment’’ of the funds’ ‘‘obligation to monitor
the securities in their funds’’). See also Comment
Letter of the Investment Company Institute (Sept. 8,
2009) (available in File No. S7–15–09) ([T]he
availability of continuing disclosure information
regarding [variable rate demand notes] would
greatly benefit investors by enhancing their ability
to make and monitor their investment decisions and
protect themselves from misrepresentations and
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concern that issuers’ compliance with
their continuing contractual disclosure
obligations has been inconsistent, at
times leaving money market fund and
investors exposed.914 We recommended
that Congress give us greater authority
to require municipal issuers to provide
the market with better information, but
such authority, if forthcoming, could
not be implemented for some time.915
Rule 2a–7 permits a money market
fund when determining if a security
subject to a guarantee meets the rule’s
credit quality standards to rely
exclusively on the credit quality of the
guarantor.916 As a result of this and the
rule’s treatment of exposures to
guarantors and demand feature
providers for diversification purposes
(the 10% limit on providers of
guarantees and demand features
compared to the 5% issuer limit), a
money market fund can have greater
indirect exposure to a guarantor than
the money market fund could assume if
it were investing in the guarantor
directly,917 and may have minimal
information about the issuer subject to
the guarantee. We request comment on
whether we should require money
market funds to obtain financial data on
the underlying issuers whose securities
are subject to guarantees.918
questionable conduct in this segment of the
municipal securities market.’’).
914 See U.S. Securities and Exchange
Commission, Report on the Municipal Securities
Market (July 31, 2012), at 62, available at https://
www.sec.gov/news/studies/2012/
munireport073112.pdf.
915 See id. at section V (legislative
recommendations).
916 Rule 2a–7(c)(3)(iii) (‘‘A security that is subject
to a Guarantee may be determined to be an Eligible
Security or a First Tier Security based solely on
whether the Guarantee is an Eligible Security or
First Tier Security, as the case may be.’’). See also
Technical Revisions to the Rules and Forms
Regulating Money Market Funds, Investment
Company Act Release No. 22921 (Dec. 2, 1997) [62
FR 64968 (Dec. 9, 1997)] (‘‘1997 Adopting
Release’’), at section I.B.1.b. A guarantee includes
an unconditional demand feature that is not
provided by the issuer of the underlying security.
Rule 2a–7(a)(17).
917 As discussed above, a money market fund
could invest not more than 5% of its assets in
securities directly issued by a bank, but could
invest up to 10% of its assets in securities issued
by or subject to guarantees provided by the bank.
See supra notes 838–840 and accompanying text.
918 This data could be important to a money
market fund if a guarantor came under stress,
putting the fund and its adviser in a better position
to evaluate the underlying issuer’s
creditworthiness, and whether to dispose of the
security by exercising any demand feature. See also
rule 2a–7(c)(7)(i)(C) (‘‘In the event that after giving
effect to a rating downgrade, more than 2.5% of the
fund’s Total Assets are invested in securities issued
by or subject to Demand Features from a single
institution that are Second Tier Securities, the fund
shall reduce its investment in securities issued by
or subject to Demand Features from that institution
to no more than 2.5% of its Total Assets by
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• If we were to require money market
funds to obtain financial data about the
issuers of securities subject to
guarantees, should we specify in detail
the data a fund must obtain? If the
security is an ABS, what kind of
information should we require funds to
obtain about the assets held by the SPE
that issued the ABS? Should we only
require a money market fund to obtain
the financial data when the security is
subject to a guarantee from a guarantor
to which the fund has a greater than 5%
exposure?
• Should we require money market
funds to obtain this data only when it
is available? Such an approach would
prevent money market funds from
forgoing investment opportunities solely
because financial data is not available.
Should we specify when financial data
would be available for this purpose? If
so, in what circumstances do
commenters expect financial data would
be readily available? In what ways could
they make better use of that data?
Should we specify, for example, that
financial data would be available for
this purpose if it were available on the
Municipal Securities Rulemaking
Board’s Electronic Municipal Market
Access system? Have money market
funds found data currently available on
that system to be helpful? If so, in what
ways do money market funds use that
data?
• Should we specify how current any
financial data must be? Should we
specifically require money market funds
to review the data when the fund
acquires the security or simply to retain
it for use should there be a problem
with the guarantor? Would money
market funds have to hire additional
credit analysts to meet such a
requirement? What costs would this
impose?
• Would requiring money market
funds to have financial data about these
issuers support our continuing to
provide different diversification
limitations for direct and indirect
exposures, as discussed above? Would
the data be useful to money market
funds if a guarantor came under stress?
Should we adopt a more stringent
diversification limit (e.g., a single 5%
limit that included direct and indirect
exposures) and also require money
market funds to obtain financial data
about the issuers whose securities are
guaranteed?
exercising the Demand Features at the next
succeeding exercise date(s), absent a finding by the
board of directors that disposal of the portfolio
security would not be in the best interests of the
money market fund.’’).
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L. Stress Testing
In 2010, we adopted amendments to
rule 2a–7 that, for the first time,
required the board of directors of each
money market fund to adopt procedures
providing for periodic stress testing of
the money market fund’s portfolio,
which we refer to as the stress testing
requirements.919 We adopted this
requirement based on our belief that
‘‘stress testing procedures would
provide money market fund boards a
better understanding of the risks to
which the fund is exposed and would
give managers a tool to better manage
those risks.’’ 920
Under these amendments, we
required that the fund adopt procedures
providing for periodic testing of the
fund’s ability to maintain a stable price
per share based on (but not limited to)
certain hypothetical events.921 These
hypothetical events include a change in
short-term interest rates, an increase in
shareholder redemptions, a downgrade
of or default on portfolio securities, and
the widening or narrowing spreads
between yields on an appropriate
benchmark selected by the fund for
overnight interest rates and commercial
paper and other types of securities held
by the fund.922 At the time, we declined
to specify further tests that a money
market fund should conduct to fully
assess its ability to maintain a stable
value, leaving it to the fund’s board (and
the fund manager) to establish
additional scenarios or assumptions on
which the tests should be based and to
tailor the tests, as appropriate, for
different market conditions and
different money market funds.923
Since 2010, we and our staff have
continued to monitor the stress testing
requirement and how different fund
groups are approaching its
implementation in the marketplace.
Through our staff’s examinations of
money market fund stress testing
procedures, we have observed
disparities in the quality and
comprehensiveness of stress tests, the
types of hypothetical circumstances
tested, and the effectiveness of materials
produced by the fund’s manager to
explain the stress testing results to the
board. For example, although some
funds actively embrace the spirit of the
requirement by testing a variety of
additional hypothetical events and
919 See
2010 Adopting Release, supra note 92, at
section II.C.4.
920 See 2009 Proposing Release, supra note 31, at
section II.C.3.
921 See rule 2a–7(c)(10)(v)(A).
922 Id.
923 See 2010 Adopting Release, supra note 92, at
nn.260–261 and accompanying text.
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tailoring their stress testing to the
particular market conditions and
potential risks that they may face, other
funds test only for the events
specifically listed in the rule. Some
funds test for combinations of events, as
well as for correlations between events
and between portfolio holdings,
whereas others do not. We also have
examined how funds share information
about stress testing results with their
boards.
Since adopting the stress testing
requirement in 2010, we have had
several opportunities to assess its
effectiveness during periods of market
stress, including the 2011 Eurozone debt
crisis and the 2011 U.S. debt ceiling
impasse. Our staff observed, for
example, that during the 2011 Eurozone
debt crisis, funds that had strong stress
testing procedures were able to use the
results of those tests to better manage
their portfolios and minimize the risks
associated with the crisis.
After considering this information
and experience, we believe that certain
enhancements to our stress testing
requirements may be warranted. We
also note that our floating NAV proposal
and our liquidity fees and gates
proposal may have different
implications regarding the need for and
nature of stress testing of a money
market fund’s portfolio. Accordingly,
we are proposing a variety of
amendments and enhancements to our
stress testing requirements. The
amendments and enhancements we are
proposing to the stress testing
requirements would largely be identical
under either reform alternative we
might adopt, except that for floating
NAV money market funds we would
remove the standard to test against
preserving a stable share price if we
were to adopt the floating NAV
alternative, as further discussed below.
1. Stress Testing Under the Floating
NAV Alternative
As discussed above, we acknowledge
that requiring that money market funds
transact with a floating NAV mitigates
but does not eliminate the possibility of
heavy shareholder redemptions. We
understand that in times of broad
financial market stress, shareholders in
floating NAV money market funds may
still have an incentive to redeem shares
because of funds’ limited internal
liquidity or because of overall flights to
quality, liquidity, or transparency.
Accordingly, stress testing the liquidity
of floating NAV funds could enhance a
fund board’s understanding of risks and
fund management of those risks.
If we adopt the floating NAV
alternative, we propose to amend the
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current stress testing requirement as it
would apply to floating NAV money
market funds to require that such funds
test the impact of certain market
conditions on fund liquidity, instead of
requiring that they test the fund’s ability
to maintain a stable price per share.924
More specifically, we are proposing that
each floating NAV money market fund
stress test its ability to avoid having its
weekly liquid assets fall below 15% of
all fund assets. This requirement also
would be in accord with the proposed
requirement, discussed in the next
section, that would require funds to
stress test their ability to avoid crossing
the same 15% weekly liquid asset
threshold because it could trigger fees or
gates. We selected this 15% weekly
liquid asset test for similar reasons that
we selected that threshold under our
liquidity fees and gates alternative—that
a money market fund falling below this
liquidity threshold can indicate stress
on the fund.925 Funds that go below the
15% weekly liquid asset threshold may
face significant adverse consequences,
and thus fund boards and advisers
should understand and be aware of
what could cause a fund to cross such
a threshold. We understand that when
a fund tests its ability to maintain a
stable price (the metric that stress tests
currently require), a fund also tests its
ability to avoid crossing liquidity
thresholds, such as the 15% weekly
liquid asset test that we are proposing
today. Accordingly, because we
understand that funds already test their
ability to avoid crossing a 15% weekly
liquid asset threshold as part of their
current stress tests, we do not expect
that replacing the stable NAV test for
floating NAV money market funds with
a liquidity test will impose significant
costs on funds.
For a money market fund that would
be exempt from the floating NAV
requirement under our proposal (a
government or retail money market
fund), we propose requiring that it stress
test for both its ability to avoid having
its weekly liquid assets fall below 15%
of its total assets and its ability to
maintain a stable share price.926 This
would augment the current testing that
these funds conduct to test not just
against stresses that could cause these
924 Proposed
(FNAV) rule 2a–7(g)(7)(i).
supra section III.B. We note that we have
also proposed a 15% weekly liquid assets trigger for
use of rule 22e–3 (permitting suspension of
redemptions when liquidating of a fund) under our
liquidity fees and gates and floating NAV
alternatives. See supra sections III.A.5 and III.B.1—
III.B.4.
926 See proposed (FNAV) rule 2a–7(g)(7)(i).
925 See
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funds to ‘‘break the buck’’ but also for
liquidity stresses.
We request comment on this proposed
amendment to the stress-testing
requirement for money market funds
under the floating NAV alternative.
• Should we continue to require
funds with a floating NAV to stress test
their portfolio? If not, why not?
• Is the level of weekly liquid assets
an appropriate measure of risk for
floating NAV funds to stress test
against? Should it also (or alternatively)
stress test against the level of daily
liquid assets? If so, what daily liquid
asset threshold should be tested: 5%,
2%, or some other number?
• Is the threshold of 15% weekly
liquid assets the right level to test stress
on the fund? Should it be higher or
lower, such as 10% weekly liquid assets
or 20%?
• Should we require that government
and retail money market funds test
against both their ability to maintain a
stable share price and falling below 15%
weekly liquid assets? Are there other
stress testing factors that would be more
appropriate for these exempt funds?
• Are we correct in concluding that
funds already stress test their liquidity
when testing their ability to maintain a
stable NAV? Would there be any costs
for a fund to switch to using a weekly
liquid asset test instead?
Instead of amending the current stress
testing requirement to test liquidity, we
could require a floating NAV money
market fund to stress test its ability to
meet other or additional metrics or
standards. For example, we could
require testing a floating NAV fund’s
ability to meet its investment objective,
avoid significant losses, or maintain low
volatility. If we were to require stress
testing for a fund’s ability to meet its
investment objectives, funds might be
able to craft tests that are particularly
suited to their particular circumstances.
On the other hand, funds investment
objectives may be too general for an
appropriate test to be created. In
addition, requiring testing against
investment objectives may create
significant disparities in stress tests
between similar funds. Requiring testing
against the ability for a fund to avoid
significant losses or maintaining low
volatility may have the advantage of
directly testing for the circumstances
with which fund investors may be most
concerned, but may create difficulties in
establishing the appropriate metrics
applicable to all funds. We expect that
a floating NAV fund might regularly
experience minor fluctuations in its
NAV, and establishing a meaningful
stress test standard related to losses or
volatility while still accommodating
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these potential fluctuations may not be
workable.
We request comment on whether
instead of amending the current stress
testing requirement for floating NAV
money market funds to focus only on
liquidity, we should replace it (or
supplement it) with a requirement to
stress test to a different or additional
metric or standard.
• Are there alternative or additional
metrics or standards other than liquidity
that would provide sufficient guidance
for a fund to run effective stress tests?
• Should we instead use a metric,
such as the ability for a floating NAV
fund to avoid losses greater than 25 or
50 basis points in a certain period of
time? If we were to use a different
metric, what should it be and how
should it be set? Are there any other
potential metrics or standards that we
could use? The fund’s ability to
minimize principal volatility or losses?
We also are proposing that money
market funds include factors such as
correlations among securities returns
and concurrences of events in their
stress tests.927 Our staff’s review of
money market fund stress testing and its
use during periods of market stress, as
well as recent evidence on portfolio
asset return correlations provided by the
staff, indicates many money market
funds face significant correlated risk in
their portfolios. We note that some
commenters have agreed that
correlations among securities and
concurrences of events are important
factors to consider when stress
testing.928 Others have highlighted the
correlations among many money market
fund portfolio securities, and noted the
relevance of such correlations when
examining money market fund risk.929
As noted above, we observe that
although some funds test for likely
concurrences of events and potential
correlations among securities returns,
others do not. We believe that an
evaluation of such correlations and
concurrences is an important part of a
fund’s stress testing, and accordingly are
proposing to require that they be
included as part of the required stress
927 Proposed
(FNAV) rule 2a–7(g)(7)(i).
e.g., Comment Letter of Chris Barnard
(Jan. 4, 2013) (available in File No. FSOC–2012–
0003) (‘‘I would recommend that regulators
specifically emphasize [sic] the importance of
considering dependencies and correlations under
stress testing, particularly as typically observed and
expected dependencies may not apply in the tail
conditions and events that underlie many stress
conditions and scenarios.’’).
929 See, e.g., Robert Comment FSOC Comment
Letter, supra note 67 (noting the correlated credit
risk in money market funds); Harvard Business
School FSOC Comment Letter, supra note 24
(same).
928 See,
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testing procedures.930 Specifically, we
propose to require that stress testing
procedures provide for testing of
‘‘[c]ombinations of these and any other
events the adviser deems relevant,
assuming a positive correlation of risk
factors . . . .’’ 931 Such testing should
include an evaluation of the effect of
hypothetical events on issuers that
operate in a similar industry, are based
in a similar geographic region, or have
other related attributes. It should
include an evaluation of the likelihood
that one event may influence or lead to
another event. It should also test the
effect of correlations of issuer and
guarantor exposures on liquidity.
As part of our effort to ensure that
funds consider portfolio correlations,
we also propose to revise the stress
testing requirement relating to the effect
of downgrades or defaults of portfolio
securities to require an evaluation of the
effect that such an event could have on
other securities held by the fund.932
Security downgrades and defaults often
occur in tandem with downgrades and
defaults of other similar securities, and
evaluating the effect of a single security
event in isolation may not provide a
sufficient picture of the effect of such a
downgrade or default on the other
securities held by the fund.933
We also are proposing to require that
funds test not just for increases in
redemptions in isolation, but also reflect
how the fund will likely meet the
redemptions, taking into consideration
assumptions regarding the prices for
which portfolio securities could be sold,
historical experience in handling
redemptions, the relatively liquidity of
the fund’s securities, and any other
relevant factors.934 We designed this
930 In our 2009 Proposing Release, we stated
‘‘Boards should, for example, consider procedures
that require the fund to test for the concurrence of
multiple hypothetical events, e.g., where there is a
simultaneous increase in interest rates and
substantial redemptions.’’ See 2009 Proposing
Release, supra note 31, text following n.209; rule
2a–7(c)(10)(v).
931 In full, under the proposed new requirement,
funds would test for: ‘‘Combinations of these and
any other events the adviser deems relevant,
assuming a positive correlation of risk factors (e.g.,
assuming that a security default likely will be
followed by increased redemptions) and taking into
consideration the extent to which the fund’s
portfolio securities are correlated such that adverse
events affecting a given security are likely to also
affect one or more other securities (e.g., a
consideration of whether issuers in the same or
related industries or geographic regions would be
affected by adverse events affecting issuers in the
same industry or geographic region).’’ Proposed
(FNAV) rule 2a–7(g)(7)(i)(F).
932 Proposed (FNAV) rule 2a–7(g)(7)(i)(C).
933 For example, a default by one financial
institution may lead to a re-examination of other
similar companies that may result in additional
downgrades or defaults.
934 Proposed (FNAV) rule 2a–7(g)(7)(i)(B).
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requirement to help assist funds in
taking into account consequences of
how the fund responds to shareholder
redemptions.
In addition to the enhancements
described above, we also are proposing
certain clarifications of our stress testing
requirements, based on our experience
in money market fund use of these
requirements since 2010, that would
enhance the usefulness of stress testing
as a monitoring tool for funds. First, we
propose to clarify that a fund is required
only to stress test for increases (rather
than changes) in the general level of
short-term interest rates.935 Although a
decrease in short-term interest rates
might cause a fund’s price per share to
rise above $1.00, the fund’s board can
return the fund to its desired stable
price by distributing the gains to
shareholders. As a result, we are
proposing to amend the provision to
clarify that a fund is required only to
stress test for increases in the general
level of short-term interest rates.
Second, we propose to require that
funds stress test for the ‘‘widening or
narrowing of spreads among the indexes
to which interest rates of portfolio
securities are tied.’’ 936 This requirement
would compel funds to stress test their
entire portfolios for a broad range of
risks that may affect specific asset
classes of portfolio securities (e.g., a
change in the shape of the yield curve
or a change in the interest rates of
particular asset classes). The current
rule requires stress testing for
‘‘widening or narrowing of spreads
between yields on an appropriate
benchmark the fund has selected for
overnight interest rates and commercial
paper and other types of securities held
by the fund.’’ See rule 2a–7(c)(10)(v)(A).
However, this stress test gives similar
results to the current requirement that
funds test for a change in the level of
short-term interest rates. The proposed
clarification would better enable funds
to test for changes in spreads that may
affect specific asset classes held by the
fund, rather than for just short-term
interest rate changes.
Finally, we are proposing to add
another related hypothetical event for
funds to test, namely ‘‘[o]ther
movements in interest rates that may
affect fund portfolio securities, such as
parallel and non-parallel shifts in the
yield curve.’’ 937 This new requirement
could help funds better understand the
exposure of various floating rate
935 Proposed
(FNAV) rule 2a–7(g)(7)(i)(A).
936 Proposed (FNAV) rule 2a–7(g)(7)(i)(D).
937 Proposed (FNAV) rule 2a–7(g)(7)(i)(E).
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portfolio securities to changes in
interest rates.
We do not intend the enhancements
and clarifications to stress testing
procedures that we are proposing today
to serve as a comprehensive list of
events to consider when funds engage in
stress testing, but as a minimum set.
Funds should carefully consider if any
other events not described in the rule
may affect their ability to maintain at
least 15% weekly liquid assets, and test
for those as well.938
We request comment on our proposed
enhancements and clarifications to
money market fund stress testing
procedures.
• Are the proposed clarifications
appropriate? Are there other clarifying
changes that we should consider?
• Should we include any other
required hypothetical events in the rule?
If so, which other events should we
include and why?
• Should we require funds to test for
combinations of hypothetical events in
their stress testing? Instead of leaving it
to the discretion of the fund, should we
specify which events should be
combined (e.g., increases in shareholder
redemptions and increases in short-term
interest rates, or increases in
shareholder redemptions and a default
or downgrade of a portfolio security (or
security correlated to a portfolio asset
class), or both)? What additional costs
would funds incur for testing a
combination of hypothetical events?
• Should we make any other changes
to the stress testing requirements, such
as requiring a minimum frequency that
funds should conduct their stress tests?
In addition to the enhancements to
the specific hypothetical events that
money market funds’ stress testing
would have to include, we are
proposing a clarification to the
requirement that a fund’s adviser
provide the fund’s board an assessment
of the results of the stress tests. We
propose to require that the adviser
provide not only such an assessment,
but also ‘‘such information as may
reasonably be necessary for the board of
directors to evaluate the stress testing
conducted by the adviser and the results
of the testing.’’ 939 We are proposing this
requirement because we have observed
that in some cases advisers have not
provided sufficient context and
additional information for fund boards
as part of this assessment to effectively
evaluate the stress test results and take
appropriate action. For example, a
938 Funds should consider concurrences of such
additional events and correlations of any additional
factors as well as the ones described above.
939 Proposed (FNAV) rule 2a–7(g)(7)(ii)(B).
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fund’s stress testing showing the effects
of various levels of redemptions may
not be meaningful to the fund’s board
without sufficient context such as fund
shareholder concentrations levels and
historical redemption activity. We
designed this proposed change to assist
fund boards to seek out and receive any
additional information that they may
need to effectively evaluate and make
use of money market fund stress tests.
We request comment on this proposed
change.
• Are fund boards receiving sufficient
context and necessary information about
money market funds’ stress testing? Is
there additional information that they
should receive?
• How many funds would need to
change their stress test information
dissemination procedures to their
boards?
Finally, we are requesting comment
on certain aspects of money market fund
stress testing as it relates to our
obligation under section 165(i)(2) of the
Dodd-Frank Act to specify certain stress
testing requirements for financial
companies 940 that have total
consolidated assets of more than $10
billion and are regulated by a primary
federal financial regulatory agency.
Under this section of the Dodd-Frank
Act, among other matters, we must
‘‘establish methodologies for the
conduct of stress tests . . . that shall
provide for at least three different sets
of conditions, including baseline,
adverse, and severely adverse.’’ 941
Although we expect to propose these
stress testing requirements in detail in a
separate rulemaking, we request general
comment at this time on the
methodologies we should consider
proposing regarding this stress testing
requirement as it may relate to money
market funds with over $10 billion in
total consolidated assets, and in
particular on the different scenarios that
we must establish for such stress testing.
In connection with this request for
940 For a definition of ‘‘nonbank financial
companies’’ for these purposes, see Definition of
‘‘Predominantly Engaged in Financial Activities’’
and ‘‘Significant’’ Nonbank Financial Company
and Bank Holding Company, Board of Governors of
the Federal Reserve System, [78 FR 20756 (Apr. 5,
2013)].
941 Under this section of the Dodd-Frank Act, we
also must define the term ‘‘stress test’’ for purposes
of that section, establish the form and content of the
report to the Federal Reserve Board and the
Commission regarding such stress testing, and
require companies subject to this requirement to
publish a summary of the results of the required
stress tests. We note that under this section of the
Dodd-Frank Act, we must design stress testing not
just for certain money market funds, but also other
types of funds and investment advisers that we
regulate and that meet the $10 billion total
consolidated assets test.
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comment, we note that we could
consider the approach taken by the U.S.
banking regulators for stress testing of
banks, in which the Board of Governors
of the Federal Reserve System annually
publishes a set of hypothetical
economic scenarios, including baseline,
adverse, and severely adverse scenarios,
that are to be used in bank stress testing,
with appropriate modifications.942
• How should we define what set of
events qualify as baseline, adverse, or
severely adverse? Should we require
funds to use or look to the scenarios
published annually by the Federal
Reserve?
• Are the scenarios published by the
Federal Reserve appropriate for money
market funds? Should we specify more
or fewer or different scenarios than the
3 scenarios specified in section 165(i)(2)
of the Dodd-Frank Act?
• To what extent should we provide
guidance regarding what might
reasonably constitute each of these
scenarios with regards to money market
funds?
• How should such a stress testing
requirement be specifically tailored to
money market funds as opposed to
banks or other types of funds? Should
money market funds have to assess the
impact of such a scenario given the
fund’s investment profile and its
historical pattern of shareholder
redemptions?
2. Stress Testing Under the Liquidity
Fees and Gates Alternative
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If we adopt our liquidity fees and
gates alternative proposal, we are
proposing that money market funds
stress test against the potential for a
money market fund’s level of weekly
liquid assets to fall below 15% of its
total assets, in addition to stress testing
against the fund’s ability to maintain a
stable share price.943 If we adopt this
alternative, we would also adopt the
same enhancements and clarifications to
the stress testing provisions of rule 2a–
7 discussed above under our floating
NAV proposal.944
Money market funds currently must
stress test their ability to maintain a
942 See Annual Company-Run Stress Test
Requirements for Banking Organizations With Total
Consolidated Assets Over $10 Billion Other Than
Covered Companies, Board of Governors of the
Federal Reserve System [77 FR 62396 (Oct. 12,
2012)]; Supervisory and Company-Run Stress Test
Requirements for Covered Companies, Board of
Governors of the Federal Reserve System [77 FR
62378 (Oct. 12, 2012)].
943 See Proposed (Fees & Gates) rule 2a–7(g)(9)(i).
We discuss our proposed changes to MMF stress
testing requirements under the floating NAV
alternative above.
944 Proposed (Fees & Gates) rule 2a–7(g)(9)(i)(A)–
(F).
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stable NAV per share, because failing to
maintain such stability may result in
significant adverse consequences for its
investors, as discussed above.945 Under
our liquidity fees and gates alternative,
if a fund’s level of weekly liquid assets
falls below 15%, we would require a
fund to impose liquidity fees (unless the
board determines otherwise) and a fund
may impose a gate. Much like the
inability to maintain a stable price, the
triggering of such fees or gates may
result in significant consequences for a
fund and its shareholders. Accordingly,
we are proposing an additional metric
against which the fund would have to
stress test: the fund’s level of weekly
liquidity assets falling below 15%.
Requiring funds to stress test their
ability to avoid crossing this threshold
should help inform boards and fund
managers of the circumstances that
could cause a fund to trigger fees or
gates and provide them a tool to help
avoid doing so.
Generally, we expect that a fund
would use similar hypothetical
circumstances when testing its ability to
avoid triggering fees and gates that it
uses when stress testing its ability to
maintain a stable price. However, some
funds may identify different
circumstances that are more relevant to
testing one standard than another, and
thus may use different versions of the
hypothetical scenarios, or weigh them
differently for each. For example,
certain events, such as significant
shareholder redemptions in a short time
period, may more strongly affect the
ability of a fund to avoid crossing the
15% weekly liquid asset threshold than
the ability to maintain a stable price.
Other events, such as a credit default in
a portfolio security, may more strongly
affect the ability of a fund to maintain
a stable price than avoid crossing the
liquidity threshold. Stress tests should
thus account for a variety of
circumstances that affect the ability of a
fund to meet each standard.
We request comment on our proposed
inclusion of a fund’s ability to maintain
at least 15% weekly liquid assets as an
additional stress testing metric.
• Should we include this additional
metric? Why or why not? Would the
proposed requirement help fund
managers better manage the risks of a
stable price fund with standby liquidity
fees and gates? Should we include any
other metrics or standards for stress
testing? If so, which ones and why?
• Should a fund also (or
alternatively?) stress test against the
level of daily liquid assets? If so, what
945 See
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daily liquid asset threshold should be
tested: 5%, 2%, or some other number?
• Is the threshold of 15% weekly
liquid assets the right level to test stress
on for a fund? Should it be higher or
lower, such as 10% weekly liquid assets
or 20%?
If we were to adopt the liquidity fees
and gates alternative, we would also
adopt the same enhancements and
clarifications to the stress testing
requirements described in our floating
NAV alternative.946 We believe that the
amendments and enhancements to the
stress testing requirements that we are
proposing under the floating NAV
alternative would provide the same
benefits as under our liquidity fees and
gates alternative and would help funds
with fees and gates better test their
portfolios for risks. As discussed in
detail above, these enhancements
include (among others) requirements to
test for concurrences of events and
correlations among returns, the ability
of a fund to meet redemptions, and
other revised and additional
hypothetical events.947
We request comment on whether we
should include these enhancements to a
fund stress testing procedures if we
were to adopt our liquidity fees and
gates alternative.
• Should we revise any of the
proposed enhancements to account for
the circumstances of a fund with
standby liquidity fees and gates? If so,
how? Should we include any additional
enhancements? Should we eliminate
any of the proposed enhancements?
• Should we adopt these
enhancements even if we do not add the
additional liquidity metric? Should we
adopt these enhancements even if we do
not adopt the liquidity fees and gates or
floating NAV proposals at all? Why or
why not?
3. Economic Analysis
As previously discussed, we expect
that the costs and benefits of the
proposed stress testing amendments
would be largely identical under both
alternatives.948 Our baseline for the
economic analysis we discuss below is
946 See
supra section III.L.1.
(Fees & Gates) rule 2a–7(g)(9)(i).
948 We expect that the costs and benefits of our
proposed new liquidity metric and other
enhancements to fund stress testing would be
similar under either our floating NAV or liquidity
fees and gates alternative, except that some funds
under the floating NAV alternative may realize
minor savings in avoiding have to test for the ability
maintain a stable share price. The only substantive
difference between the proposals is that we would
eliminate the requirement for floating NAV money
market funds to test for the ability to maintain a
stable share price under our floating NAV
alternative.
947 Proposed
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the current stress testing requirements
for money market funds. The costs and
benefits, and effects on competition,
efficiency, and capital formation are
measured in increments over the current
stress testing requirement baseline. The
benefits of the proposed stress test
requirements will depend in part on the
extent to which funds already engage in
stress tests that are similar to the
proposed requirements. For example,
the staff understands that most money
market funds currently test for changes
in general levels of short-term interest
rates. We do not, therefore, anticipate
that the proposed requirement to test for
increases in general levels of short-term
interest rates will confer many
additional benefits on funds, although
funds may experience negligible savings
because the proposed amendment
would be limited to increases (rather
than changes) in short-term interest
rates. Similarly, many funds, including
those that use a service provider to
conduct their stress testing, already test
for effects on portfolios of spread
changes among indexes to which
interest rates of portfolio securities are
tied and other factors as well. In this
case, we anticipate the proposed
changes will confer benefits only on
those funds that currently do not
perform these types of stress tests.949
The additional information generated
from the stress test should help fund
managers, advisers, and boards monitor,
evaluate, and manage fund risk, and
thus better protect the fund and its
investors from the adverse
consequences that may result in failing
to maintain a stable price per share or
crossing the 15% weekly liquid assets
threshold. We cannot quantify the
expected benefits of our proposed stress
testing requirements because we do not
have sufficient data as to the extent to
which funds already include these
factors in their stress tests today.
Because funds are currently required
to meet a stress testing requirement, we
do not anticipate significant additional
costs to funds under either proposed
requirement. We note, however, that
under our floating NAV alternative, we
would replace the requirement to test
for a stable NAV for floating NAV
money market funds and replace it with
a liquidity test, but under our liquidity
fees and gates alternative funds would
be required to test for both conditions.
The cost of the proposed requirement
949 Although as we have discussed previously,
money market funds can experience the risk of
general heavy redemption contagion, and
accordingly improved stress testing that reduces the
risks of a single fund may correspondingly have
some benefits in reducing the risks of contagion
across all funds.
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therefore, would depend on the
difference in cost of stress testing for
liquidity rather than NAV. We ask
below for comment on differences in
cost. We believe that there likely would
be no difference in costs in testing to
either metric.
Generally, we expect that funds
would use similar hypothetical
circumstances when testing their ability
to avoid going below 15% weekly liquid
assets that they use when stress testing
their ability to maintain a stable price.
We understand that although some
funds currently test for all the new and
amended hypothetical circumstances
we are proposing today, others do not.
Funds that would need to alter their
stress testing procedures to include the
new and amended hypothetical
circumstances we are proposing would
incur some additional costs. For
example, we understand that some
funds do not currently stress test for
correlations among portfolio securities
returns and concurrences of events.
These funds may incur greater costs in
modifying their stress testing
procedures and systems to add such
tests, than those who already include
those circumstances in their tests.950
Below we estimate a range of
operational costs that funds may incur
in implementing the amendments and
enhancements to fund stress testing that
we are proposing.
The staff estimates that a fund that
currently already tests for all of the
amendments and enhancements to the
hypothetical circumstances that we are
proposing today would incur no new
additional costs to comply. On the other
hand, the staff estimates that a fund that
does not currently stress test for any of
the new and amended hypothetical
circumstances would incur one-time
costs to implement our proposed
amendments. These paper-related costs
are discussed in greater detail in section
IV below. As we discuss there, our staff
estimates that the proposed
amendments to stress testing would
involve 8,464 burden hours, at an
average one-time cost of $3.9 million for
all money market funds and funds
would not incur any additional ongoing
costs.951
At this time, we believe any new costs
for stress testing would be so small as
950 Staff estimates that these costs would be
attributable to the following activities: (i) planning,
coding, testing, and installing system modifications;
(ii) drafting, integrating, and implementing related
procedures and controls; and (iii) preparing training
materials and administering training sessions for
staff in affected areas. See also supra note 245
(discussing the bases of our staff’s estimates of
operational and related costs).
951 See infra sections IV.A.1.e and IV.B.1.e.
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compared to the fund’s overall operating
expenses, that any effect on competition
would be insignificant. This new
requirement may increase allocative
efficiency if the information it provides
to the fund manager, adviser, and board
of directors improves the fund
manager’s and adviser’s ability to
manage the fund’s risk and the board’s
oversight of fund risk management.
Money market fund investors also may
view positively enhanced stress testing
requirements, and this could increase
investors’ demand for money market
funds and correspondingly the level of
the funds’ investment in the short-term
financing markets. We do not have the
information necessary to provide a
reasonable estimate of the effects the
proposed amendments would likely
have on capital formation because we
do not know to what extent these
proposed changes would result in
increases or decreases in investments in
money market funds or in money
market funds’ allocation of investments
among different types of short-term debt
securities.
We request comment on our
assumptions about the costs of
implementing our proposed changes to
money market fund stress testing
procedures and the effects of the
proposed stress testing amendments on
efficiency, competition, and capital
formation.
• Would there be any increase in
costs for firms to stress test against a
liquidity metric instead of a stable share
price test? If so, what would they be?
• Are our estimates for the range of
operational costs of adding the new and
amended hypothetical circumstances to
a funds stress testing procedures
correct? Are they too high or too low,
and if so, why? Would these costs only
be one-time costs as we estimate or
would there also be ongoing costs? If
there are ongoing costs, what would
they be?
• How many funds would need to
change their stress tests for:
Æ weekly liquidity levels,
Æ factors such as correlations among
securities returns and concurrences of
events,
Æ hypothetical events that might
occur to issuers that operate in a similar
industry, are based in a similar
geographic region, or have other related
attributes,
Æ the effect of downgrades or defaults
of portfolio securities on the
performance of other securities held by
the fund,
Æ shareholder redemptions,
Æ risks that may affect specific asset
classes of portfolio securities (e.g., a
change in the shape of the yield curve
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or a change in the interest rates of
particular asset classes), as well as other
movements in interest rates that may
affect fund portfolio securities, such as
parallel and non-parallel shifts in the
yield curve?
• What impact would amending this
requirement have on efficiency,
competition, or capital formation?
2010.952 These clarifying amendments
would apply under either our floating
NAV alternative or the standby liquidity
fees and gates alternative. We note that
the Commission could choose to adopt
these clarifying amendments even if it
does not adopt the other reforms to
money market fund regulation proposed
in this Release.
4. Combined Approach
1. Definitions of Daily Liquid Assets and
Weekly Liquid Assets
We are proposing amendments to
clarify certain characteristics of
instruments that qualify as a ‘‘daily
liquid asset’’ or ‘‘weekly liquid asset.’’
First, we are proposing to make clear
that money market funds cannot use the
maturity-shortening provisions in
current paragraph (d) of rule 2a–7
regarding interest rate readjustments 953
when determining whether a security
satisfies the maturity requirements of a
daily liquid asset or weekly liquid
asset,954 which include securities that
will mature within one or five business
days, respectively.955 Using an interest
rate readjustment to determine maturity
as permitted under current paragraph
(d) for these purposes would allow
funds to include as daily or weekly
liquid assets securities that the fund
Finally, we note that in section III.C
we request comment on whether we
should combine our floating NAV and
liquidity fees and gates proposals. This
raises the question of what we would
require regarding stress testing if we
combined these alternatives, given that
under the floating NAV alternative we
have proposed stress testing for a loss of
liquidity for floating NAV funds,
whereas under the liquidity fees and
gates alternative we have proposed to
include a liquidity test as well as a test
relating to maintaining the current
stable price. If we were to pursue a
combined approach, we would likely
not include any stress testing
requirements related to maintaining a
stable price for floating NAV funds.
Instead, we would only require those
funds to stress test against their ability
to avoid imposing liquidity fees and
redemption gates under a number of
hypothetical scenarios. We would also
expect to adopt the enhancements and
clarifications to fund stress testing
procedures discussed previously.
We request comment on what we
should require regarding stress testing
under a combined approach.
• If we were to adopt a combined
approach, would funds stress testing
liquidity be useful? Should we instead
not require funds to stress test at all? If
so, why not?
• Alternatively, under a combined
approach should we require floating
NAV funds to also stress test their
ability to minimize principal volatility
or losses or against some other
additional metric or standard? If so, to
what extent and against which metric or
standard?
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M. Clarifying Amendments
Since our adoption of amendments to
rule 2a–7 in 2010, a number of
questions have arisen regarding the
application of certain of those
amendments. We are taking this
opportunity to propose a number of
amendments to clarify the operation of
these provisions. In addition, we are
also proposing an additional
amendment to state more clearly a limit
we imposed on money market funds’
investments in second tier securities in
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952 In addition, we are proposing technical,
conforming amendments to rule 419(b)(2)(iv) under
the Securities Act of 1933 (17 CFR 230.419(b)(2)(iv),
which references certain paragraphs in rule 2a–7
the location of which would change under our
proposed amendments. Specifically, we propose to
replace references to ‘‘paragraphs (c)(2), (c)(3), and
(c)(4)’’ with ‘‘paragraph (d)’’.
953 See rule 2a–7(d) (providing a number of
exceptions to the general requirement that the
maturity of a portfolio security be deemed to be the
period remaining (from the trade date) until the
date on which, in accordance with the terms of the
security, the principal amount must
unconditionally be paid; the exceptions generally
provide that a fund may shorten the maturity date
of certain securities to the period remaining until
the next readjustment of the interest rate or the
period remaining until the principal amount can be
recovered through demand).
954 Proposed (FNAV and Fees & Gates) rule 2a–
7(a)(8); proposed (FNAV and Fees & Gates) rule 2a–
7(a)(31). As proposed, the amended definitions
would require funds to determine a security’s
maturity in the same way they must calculate for
purposes of determining WAL under proposed
(FNAV and Fees & Gates) rule 2a–7(d)(1)(iii).
955 Rule 2a–7(a)(8) defines ‘‘daily liquid assets’’ to
include (i) cash, (ii) direct obligations of the U.S.
government, or (iii) securities that will mature or
are subject to a demand feature that is exercisable
and payable within one business day. Rule 2a–
7(a)(32) defines ‘‘weekly liquid assets’’ to include
(i) cash; (ii) direct obligations of the U.S.
government; (iii) securities that will mature or are
subject to a demand feature that is exercisable and
payable within five business days; or (iv)
Government securities (as defined in section
2(a)(16) of the Act) that are issued by a person
controlled or supervised by and acting as an
instrumentality of the U.S. government that are
issued at a discount to the principal amount to be
repaid at maturity and have a remaining maturity
date of 60 days or less.
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would not have a legal right to convert
to cash in one or five business days.
This would not be consistent with the
purposes of the minimum daily and
weekly liquidity requirements, which
are designed to increase a fund’s ability
to pay redeeming shareholders in times
of market stress when the fund cannot
rely on the market or a dealer to provide
immediate liquidity.956
Second, we propose to require that an
agency discount note with a remaining
maturity of 60 days or less qualifies as
a ‘‘weekly liquid asset’’ only if the note
is issued without an obligation to pay
additional interest on the principal
amount.957 Our proposed amendment
would clarify that interest-bearing
agency notes that are issued at a
discount do not qualify.958 We
understand that these interest-bearing
agency notes issued at a discount are
extremely rare. We do not believe that
interest bearing agency notes are among
the very short-term agency discount
notes that appeared to be relatively
liquid during the 2008 market events
and that we determined could qualify as
weekly liquid assets.959
Finally, we propose to include in the
definitions of daily and weekly liquid
assets amounts receivable that are due
unconditionally within one or five
business days, respectively, on pending
sales of portfolio securities.960 These
receivables, like certain other securities
that qualify as daily or weekly liquid
assets, provide liquidity for the fund
because they give a fund the legal right
to receive cash in one to five business
days. We would expect that a fund (or
its adviser) would include these
receivables in daily and weekly liquid
assets only if the fund (or its adviser)
has no reason to believe that the buyer
might not perform.
We understand that the instruments
that most, if not all, money market
funds currently hold as daily and
weekly liquid assets currently conform
956 See 2010 Adopting Release, supra note 92, at
text following n.213.
957 Proposed (FNAV and Fees & Gates) rule 2a–
7(a)(31)(iii).
958 We understand that an interest-bearing agency
note might be issued at a discount to facilitate a
rounded coupon rate (i.e., 2.75% or 3.5%) when
yield demanded on the note would otherwise
require a coupon rate that is not rounded.
959 See 2010 Adopting Release, supra note 92, at
text accompanying and following nn.251–55. Our
determination was informed by average daily yields
of 30 day and 60 day agency discount notes during
the fall of 2008. We believe that interest-bearing
agency notes issued at a discount were not included
the indices of the agency discount notes on which
we based our analysis or if they were included,
there were too few to have affected the indices’
averages.
960 Proposed (FNAV and Fees & Gates) rule 2a–
7(a)(8)(iv); proposed (FNAV and Fees & Gates) rule
2a–7(a)(31)(v).
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to the amendments we are proposing
and that these practices would be
consistent with positions our staff has
taken in informal guidance to money
market funds.961 The proposed
amendments are designed to clarify that
securities with maturities determined
according to interest rate resets and
interest bearing agency notes issued at
a discount do not qualify as daily or
weekly liquid assets, as applicable.
Because both of these types of securities
are less liquid than the limited types of
instruments that do qualify, any funds
that alter their future portfolio
investments to conform to these
requirements would benefit from
increased liquidity and ability to absorb
larger amounts of redemptions. The
proposal to include certain receivables
as daily and weekly assets should
benefit funds because it will
appropriately increase the types of
assets that can satisfy those liquidity
requirements. Because we believe that
most funds already comply with our
proposed amendments, we have not
quantified any potential benefits to
funds and shareholders.
We do not believe there would be any
costs associated with our proposed
amendments to the definitions of daily
and weekly liquid assets. We do not
anticipate that there would be
operational costs for any funds that
currently hold securities that would no
longer qualify as daily or weekly assets
because those securities likely would
mature before the proposed compliance
date for our proposal.962 Because these
amendments would clarify assets that
qualify as daily and weekly liquid assets
and, we believe, most money market
funds are currently complying with
these proposed amendments, we do not
anticipate that they will have any effect
on efficiency or capital formation. To
the extent that some funds’ practices do
not already conform, however, the
proposed clarifications may eliminate
any competitive advantages that may
have resulted from those practices. We
request comment on the proposed
amendments and the benefits we have
described.
• Do the proposed amendments
comport with current fund practices?
• Would there be any costs to funds
that may not conform to these proposed
amendments?
961 See Staff Responses to Questions About
Money Market Fund Reform, (revised Nov. 24,
2010) (https://www.sec.gov/divisions/investment/
guidance/mmfreform-imqa.htm) (‘‘Staff Responses
to MMF Questions’’), Questions II.1, II.2, II.4.
962 An eligible security must have a remaining
maturity of no more than 397 days. Rule 2a–
7(a)12)(i).
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• Would the amendments have any
effect on efficiency, competition, or
capital formation?
2. Definition of Demand Feature
We are proposing to amend the
definition of demand feature in rule 2a–
7 to mean a feature permitting the
holder of a security to sell the security
at an exercise price equal to the
approximate amortized cost of the
security plus accrued interest, if any, at
the time of exercise, paid within 397
calendar days of exercise.963 Our
proposed amendment would eliminate
the requirement that a demand feature
be exercisable at any time on no more
than 30 calendar days’ notice.964
Eliminating the requirement that a
demand feature be exercisable at any
time on no more than 30 days’ notice
would clarify the operation of rule 2a–
7 by removing a provision that has
become obsolete. In 1986, the
Commission expanded the notice period
from seven days to 30 days for all types
of demand features and emphasized that
the notice requirement was at least in
part designed to ensure that money
market funds maintain adequate
liquidity.965 Because, as discussed in
section II.D.1 above, the 2010
amendments added significant new
provisions to enhance the liquidity of
money market funds, we believe it is
unnecessary to continue to require that
demand features be exercised at any
963 Proposed (FNAV and Fees & Gates) rule 2a–
7(a)(9).
964 A demand feature is currently defined to mean
(i) a feature permitting the holder of a security to
sell the security at an exercise price equal to the
approximate amortized cost of the security plus
accrued interest, if any, at the time of exercise. A
Demand Feature must be exercisable either: (a) At
any time on no more than 30 calendar days’ notice;
or (b) At specified intervals not exceeding 397
calendar days and upon no more than 30 calendar
days’ notice; or (ii) A feature permitting the holder
of an Asset-Backed Security unconditionally to
receive principal and interest within 397 calendar
days of making demand. See rule 2a–7(a)(9).
965 See Acquisition and Valuation of Certain
Portfolio Instruments by Registered Investment
Companies, Investment Company Act Release No.
14983 (Mar. 12, 1986) [51 FR 9773 (Mar. 21, 1986)]
(‘‘The Commission still believes that some limit
must be placed on the extent to which funds relying
on the rule will have to anticipate their cash and
investment needs more than seven days in advance.
However, the Commission believes that funds
should be able to invest in the demand instruments
that are being marketed with notice periods of up
to 30 days, as long as the directors are cognizant
of their responsibility to maintain an adequate level
of liquidity.’’). Liquidity was also a concern when
the Commission added the definition of demand
feature for asset-backed securities and noted that it
was done, in part, to make clear the date on which
there was a binding obligation to pay (and not just
the scheduled maturity). See 1996 Adopting
Release, supra note 247, at accompanying nn.151–
52.
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time on no more than 30 days’ notice.966
As proposed, the demand feature
definition would focus on funds’ ability
to receive payment within 397 calendar
days of exercise of the demand feature.
Eliminating the 30-day notice
requirement may improve efficiency by
simplifying the operation of rule 2a–7
regarding demand features and
providing issuers with more flexibility.
Our proposed amendment may also
promote competition between issuers
and facilitate capital formation by
permitting funds to purchase securities
with demand features from a larger pool
of issuers. We do not expect that our
proposed amendment would impose
costs on funds.967
We request comment on our proposed
amendment to eliminate the 30-day
notice requirement and specific
reference to asset-backed securities.
• Do commenters agree that the 30day notice requirement is unnecessary
when considering the enhanced
liquidity requirements adopted as part
of our 2010 amendments? Why or why
not?
• Do commenters agree with our
economic analysis? Would our proposal
have other economic effects, other than
those we describe above? If so, please
describe.
3. Short-Term Floating Rate Securities
We are also proposing to clarify the
method for determining WAL for shortterm floating rate securities.968 WAL is
similar to a fund’s WAM, except that
WAL is determined without reference to
interest rate readjustments.969 Under
current rule 2a–7, a short-term variable
rate security, the principal of which
966 Our proposal today would also be consistent
with a position our staff has taken in the past. See,
e.g., SEC No-Action Letter to Citigroup Global
Markets, Inc. (May 28, 2009), available at https://
www.sec.gov/divisions/investment/noaction/2009/
citigroupglobal052809-2a7.htm.
967 We note that demand features and guarantees
are referenced in rule 12d3–1(d)(7)(v) (providing
that, subject to a diversification limitation, the
acquisition of a demand feature or guarantee is not
an acquisition of securities of a securities related
business (that would otherwise be prohibited
pursuant to section 12(d)(3) of the Act)) and rule
31a–1(b)(1) (requiring that a fund’s detailed records
of daily purchase and sale records include the name
and nature of any demand feature provider or
guarantor). We do not believe that our proposed
amendment would provide any benefits or impose
any costs with respect to these rules, other than
those described above. We also propose to update
the cross references to the definition of the terms
‘‘demand feature’’ and ‘‘guarantee’’ in rule 12d3–
1(d)(7)(v), which defines these terms by reference
to rule 2a–7 (replacing the references to ‘‘rule 2a–
7(a)(8)’’ and ‘‘rule 2a–7(a)(15)’’ with ‘‘§ 270.2a–
7(a)(9)’’ and ‘‘§ 270.2a–7(a)(16)’’) and rule 31a–
1(b)(1) (replacing the references to ‘‘rule 2a–7(a)(8)’’
and ‘‘rule 2a–7(a)(15)’’ with ‘‘§ 270.2a–7(a)(9)’’ and
‘‘§ 270.2a–7(a)(16)’’).
968 See rule 2a–7(d)(4).
969 See rule 2a–7(c)(2)(iii).
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must unconditionally be paid in 397
calendar days or less, is ‘‘deemed to
have a maturity equal to the earlier of
the period remaining until the next
readjustment of the interest rate or the
period remaining until the principal
amount can be recovered through
demand.’’ 970 A short-term floating rate
security, the principal amount of which
must unconditionally be paid in 397
calendar days or less, is ‘‘deemed to
have a maturity of one day’’ because the
interest rate for a floating rate security
will change on any date there is a
change in the specified interest rate.971
Despite the difference in wording of
the maturity-shortening provisions for
floating rate and variable rate securities,
the Commission has always intended for
these provisions to work in parallel and
provide the same results.972 The
omission of an explicit reference to
demand features in the maturityshortening provision for short-term
floating rate securities, however, has
created uncertainty in determining the
maturity of short-term floating rate
securities with a demand feature for
purposes of calculating a fund’s
WAL.973 Therefore, we are proposing to
amend rule 2a–7(d)(4) to provide that,
for purposes of determining WAL, a
short-term floating rate security shall be
deemed to have a maturity equal to the
period remaining until the principal
amount can be recovered through
demand.974
We understand that most money
market funds currently determine
maturity for short-term floating rate
securities consistent with the proposed
amendment.975 Accordingly, we believe
that our proposed amendment would
likely not result in costs to funds. Any
funds that currently limit or avoid
970 See
rule 2a–7(d)(2).
rule 2a–7(d)(4). Rule 2a–7 distinguishes
between floating rate and variable rate securities
based on whether the securities’ interest rate adjusts
(i) when there is a change in a specified interest rate
(floating rate securities), or (ii) on set dates (variable
rate securities); rule 2a–7(a)(15) (defining ‘‘floating
rate security’’); rule 2a–7(a)(31) (defining ‘‘variable
rate security’’).
972 See 1996 Adopting Release, supra note 247, at
n.154 (the maturity of a floating rate security subject
to a demand feature is the period remaining until
principal can be recovered through demand).
973 Long-term floating rate securities that are
subject to a demand feature are deemed to have a
maturity equal to the period remaining until the
principal amount can be recovered through
demand. Rule 2a–7(d)(5).
974 Proposed (FNAV and Fees & Gates) rule 2a–
7(i)(4).
975 Such a determination would be consistent
with informal guidance that the staff has provided.
See Investment Company Institute, Request for
Interpretation under rule 2a–7 (Aug. 10, 2010)
(incoming letter and response) at https://
www.sec.gov/divisions/investment/noaction/2010/
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investments in short-term floating rate
securities because they would look to
the security’s stated final maturity date
rather than the demand feature for
purposes of determining WAL (which
could significantly increase the WAL),
may benefit if they increase investments
in short-term floating rate securities that
are higher yielding than alternative
investments in the fund’s portfolio. To
the extent that those funds may have
experienced any competitive yield
disadvantage because they limited or
avoided these investments, the
proposed amendments should address
those effects. Because we believe that
most funds interpret the maturity
requirements as we propose, we do not
believe our proposed changes would
produce quantifiable benefits or result
in a significant, if any, impact on capital
formation. We request comment on our
proposed amendment to clarify the
method for determining WAL for shortterm floating rate securities.
• Is our assumption that money
market funds currently determine
maturity for short-term floating rate
securities consistent with our proposed
amendment correct? If so, would our
proposed amendment have any impact
on fund efficiency? If not, how would
our proposed amendment affect
efficiency?
• Do commenters agree that our
proposed amendment would likely not
result in a cost to funds? Is our analysis
of costs and benefits, including the
effects on competition and capital
formation accurate?
4. Second Tier Securities
In 2010, we amended rule 2a–7 to
limit money market funds to acquiring
second tier securities with remaining
maturities of 45 days or less.976 As we
explained then, ‘‘[s]ecurities of shorter
maturity will pose less credit spread
risk and liquidity risk to the fund
because there is a shorter period of
credit exposure and a shorter period
until the security will mature and pay
cash.’’ 977 We also explained that second
tier securities with shorter maturities
are less likely to be downgraded—and
the data underlying this analysis looked
at final legal maturities (and not
maturities reflecting interest rate
readjustments).978 Finally, we
referenced the fact that the market
typically demanded that second tier
securities be issued at shorter legal
maturities than first tier securities.979
976 See 2010 Adopting Release, supra note 92, at
nn.65–69 and accompanying text.
977 Id. at text preceding n.67.
978 Id. at n.67 and accompanying text.
979 Id. at n.68 and accompanying text.
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Accordingly, all of our analysis in
adopting this requirement was focused
primarily on second tier securities’
credit risk, credit spread risk, and
liquidity, all of which are more
appropriately measured by the
security’s final legal maturity, rather
than its maturity recognizing interest
rate readjustments, which focuses on
interest rate risk. Thus to state more
clearly the way in which this limitation
operates, we propose to amend rule 2a–
7 to state specifically that the 45-day
limit applicable to second tier securities
must be determined without reference
to the maturity-shortening provisions in
rule 2a–7 for interest rate
readjustments.980
We understand that most money
market funds currently determine the
remaining maturity for second tier
securities consistent with the proposed
amendment. Accordingly, we believe
that our proposed amendment would
likely not result in costs to funds or
impact competition, efficiency, or
capital formation. Any funds that
currently hold securities that would no
longer qualify as second tier securities
would not incur costs because those
securities likely would mature before
the proposed compliance date for our
proposal.981 We request comment on
our proposal to state more explicitly the
way in which the 45-day limit on
second tier securities operates.
N. Proposed Compliance Date
Currently, we anticipate the following
compliance dates for our proposed
amendments as set forth below.982 With
respect to any proposed amendments
requiring certain historical disclosures,
we propose that funds would be
required only to disclose events that
occur following the respective
compliance date.983 Generally, we are
proposing a compliance period of 2
years for the proposed floating NAV
alternative, 1 year for the liquidity fees
and gates alternative, and 9 months for
the other proposed amendments that are
not specifically related to the
implementation of either alternative.
980 See proposed (FNAV and Fees & Gates) rule
2a–7(d)(2)(ii).
981 See supra note 962.
982 We expect to provide more nuanced guidance
on the compliance periods for each particular
amended provision in the adopting release once
commenters have had a chance to provide input
and a particular alternative has been chosen.
983 See, e.g., proposed (FNAV) Item 16(g) of Form
N–1A (Historical Disclosure of Financial Support
Provided to Money Market Funds); proposed (Fees
& Gates) Item 16(g)(2) of Form N–1A (Historical
Disclosure of Financial Support Provided to Money
Market Funds); proposed (Fees & Gates) Item
16(g)(1) of Form N–1A (Historical Disclosure of
Imposition of Fees and/or Gates).
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1. Compliance Period for Amendments
Related to Floating NAV
If we were to adopt our floating NAV
proposal, we expect that 2 years should
provide an adequate period of time for
money market funds, intermediaries,
and other service providers 984 to
conduct the requisite operational
changes to their systems to implement
the floating NAV and for fund sponsors
to restructure or establish new money
market funds if they chose to rely on
any available exemptions. It would also
provide an extended length of time for
money market fund shareholders 985 to
consider the reforms and make any
corresponding changes to their
investments and for any resulting
impacts on the short-term financing
markets and capital formation to be
gradually absorbed.
Accordingly, if we were to adopt the
floating NAV alternative, the
compliance date would be 2 years after
the effective date of the adoption with
respect to any amendments specifically
related to the floating NAV proposal,986
including any related amendments to
disclosure. We therefore propose that
the compliance date would be 2 years
after the effective date of adoption of
new rule 30b1–8, new Form N–CR, and
the proposed amendments to rule 2a–7,
rule 30b1–7, rule 482, Form N–MFP and
Form N–1A under the floating NAV
alternative.
2. Compliance Period for Amendments
Related to Liquidity Fees and Gates
If we were to adopt the standby
liquidity fees and gates alternative, we
expect that 1 year should allow
sufficient time for money market funds
and their sponsors and service providers
to conduct the requisite operational
changes to their systems to implement
these provisions, in particular the
ability to impose standby liquidity fees
and gates, and for fund sponsors to
restructure or establish new money
market funds if they chose to rely on
any exemptions available. It would also
provide a substantial amount of time for
money market fund shareholders to
consider the reforms and make any
corresponding changes to their
investments and for any resulting
impacts on the short-term financing
markets and capital formation to be
gradually absorbed.
Accordingly, if we were to adopt our
standby liquidity fees and redemption
gates alternative, the compliance date
would be 1 year after the effective date
984 See
supra section III.A.9.
of the adoption with respect to any
amendments specifically related to the
standby liquidity fees and gates
alternative,987 including any related
amendments to disclosure. We therefore
propose that the compliance date would
be 1 year after the effective date of the
adoption of new rule 30b1–8 and new
Form N–CR and the amendments to rule
2a–7, rule 30b1–7, rule 482, Form N–
MFP and Form N–1A under the
liquidity fees and redemption gates
alternative.
3. Compliance Period for Other
Amendments to Money Market Fund
Regulation
With respect to any amendments not
specifically related to either of the two
proposed alternatives, we expect that 9
months should allow sufficient time for
money market funds and their sponsors
and service providers to implement any
applicable disclosure requirements and
conduct any applicable requisite
operational changes to their systems to
implement these provisions.
Accordingly, except as otherwise
discussed above, we propose a general
compliance date of 9 months after the
effective date of adoption for all other
proposed amendments to money market
fund regulation not specifically related
to either proposed alternative.
4. Request for Comment
We request comment on the proposed
compliance period for money market
funds to comply with the proposed
amendments.
• Should we provide a longer or
shorter compliance period with respect
to any of our proposed amendments? If
so, why and of what length? How long
would it take to implement each
provision of our proposed amendments?
Are there any provisions that should go
into effect immediately? Others that
should be provided an even longer
compliance period?
• Would our proposed compliance
periods and transition times provide
sufficient time for fund groups to
determine their preferred approach to
implementing any regulatory changes
and conduct any necessary operational
changes?
• Would our anticipated compliance
dates and transition times allow
investors sufficient time to evaluate the
changes and determine their preferred
course of action?
• If any of the proposed amendments
were to result in investors substantially
reallocating capital, are there other steps
we could take that we have not
985 Id.
986 See supra section III.A (Floating NAV
Alternative).
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987 See supra section III.B (Standby Liquidity Fees
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considered to mitigate any adverse
effects on the short-term financing
markets and capital formation during
the transition?
O. Request for Comment and Data
The Commission requests comment
on the amendments proposed in this
Release. Commenters are requested to
provide empirical data to support their
views. The Commission also requests
suggestions for additional changes to
existing rules or forms, and comments
on other matters that might have an
effect on the proposals contained in this
Release.
We specifically request comment on
the feasibility of any alternatives to our
proposed amendments that would
minimize reporting and recordkeeping
burdens on funds, the utility and
necessity of the additional information
we propose to require in relation to the
associated costs and in view of the
public benefits derived, and the effects
that additional recordkeeping
requirements would have on internal
compliance policies and procedures.988
Consideration of Impact on the
Economy. For purposes of the Small
Business Regulatory Enforcement
Fairness Act of 1996, or ‘‘SBREFA,’’ 989
the Commission must advise OMB
whether a proposed regulation
constitutes a ‘‘major’’ rule. Under
SBREFA, a rule is considered ‘‘major’’
where, if adopted, it results in or is
likely to result in: (1) An annual effect
on the economy of $100 million or
more; (2) a major increase in costs or
prices for consumers or individual
industries; or (3) significant adverse
effects on competition, investment or
innovation.
We request comment on the potential
impact of our proposals on the economy
on an annual basis. Commenters are
requested to provide empirical data and
other factual support for their views to
the extent possible.
IV. Paperwork Reduction Act Analysis
Certain provisions of the proposed
amendments contain ‘‘collections of
information’’ within the meaning of the
Paperwork Reduction Act of 1995
(‘‘PRA’’).990 The titles for the existing
collections of information are: ‘‘Rule 2a–
7 under the Investment Company Act of
1940, ‘‘Money market funds’’ (Office of
Management and Budget (‘‘OMB’’)
Control No. 3235–0268); ‘‘Rule 12d3–1
under the Investment Company Act of
988 See sections 30(c)(2)(A), 30(c)(2)(B), and
31(a)(2) of the Investment Company Act.
989 Public Law 104–121, Title II, 110 Stat. 857
(1996) (codified in various sections of 5 U.S.C., 15
U.S.C. and as a note to 5 U.S.C. 601).
990 44 U.S.C. 3501–3521.
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1940, Exemption of acquisitions of
securities issued by persons engaged in
securities related businesses’’ (OMB
Control No. 3235–0561); ‘‘Rule 18f–3
under the Investment Company Act of
1940, Multiple class companies’’ (OMB
Control No. 3235–0441); ‘‘Rule 22e–3
under the Investment Company Act of
1940, Exemption for liquidation of
money market funds’’ (OMB Control No.
3235–0658); ‘‘Rule 30b1–7 under the
Investment Company Act of 1940,
Monthly report for money market
funds’’ (OMB Control No. 3235–0657);
‘‘Rule 31a–1 under the Investment
Company Act of 1940, Records to be
maintained by registered investment
companies, certain majority-owned
subsidiaries thereof, and other persons
having transactions with registered
investment companies’’ (OMB Control
No. 3235–0178); ‘‘Rule 34b–1(a) under
the Investment Company Act of 1940,
Sales Literature Deemed to be
Misleading’’ (OMB Control No. 3235–
0346); ‘‘Rule 204(b)–1 under the
Investment Advisers Act of 1940,
Reporting by investment advisers to
private funds’’ (OMB Control No. 3235–
0679); ‘‘Rule 482 under the Securities
Act of 1933, Advertising by an
Investment Company as Satisfying
Requirements of Section 10’’ (OMB
Control No. 3235–0565); ‘‘Form N–1A
under the Securities Act of 1933 and
under the Investment Company Act of
1940, Registration statement of openend management investment
companies’’ (OMB Control No. 3235–
0307); ‘‘Form N–MFP, Monthly
schedule of portfolio holdings of money
market funds’’ (OMB Control No. 3235–
0657); and ‘‘Form PF, Reporting Form
for Investment Advisers to Private
Funds and Certain Commodity Pool
Operators and Commodity Trading
Advisers’’ (OMB Control No. 3235–
0679). We are also submitting new
collections of information for new rule
30b1–8 and new Form N–CR under the
Investment Company Act of 1940.991
The Commission is submitting these
collections of information to the OMB
for review in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11. An agency
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless it
displays a currently valid control
number.
We are proposing two alternatives as
part of our money market reform
proposal, discussed separately below.
991 We also are proposing additional amendments
that do not affect the relevant rules’ paperwork
collections (e.g., we propose to amend Investment
Company Act rule 12d3–1 solely to update cross
references in that rule to provisions of rule 2a–7).
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Under the first alternative, we are
proposing to require that certain money
market funds have a floating NAV.
Under the second alternative, we
propose to require money market funds
whose liquidity levels fell below a
specified threshold to impose a liquidity
fee unless the fund’s board of directors
determines such a fee would not be in
the best interest of the fund, and permit
the funds to suspend redemptions
temporarily, i.e., to ‘‘gate’’ the fund.
Certain of the amendments we are
proposing today would apply under
either alternative.
A. Alternative 1: Floating Net Asset
Value
1. Rule 2a–7
Under our floating NAV proposal,
money market funds (other than
government and retail money market
funds) would no longer be permitted to
use amortized cost or penny-rounding to
maintain a stable price per share;
instead, money market funds would be
required to compute their share price by
rounding the fund’s current price per
share to the fourth decimal place (in the
case of a fund with a $1.0000 share
price). Under this first alternative, we
are proposing to amend rule 2a–7 (and
consequently, amend or establish new
collection of information burdens) by:
(a) Requiring that retail money market
funds seeking to rely on the exemption
from our floating NAV proposal
implement policies and procedures
reasonably designed to allow the
conclusion that Omnibus Account
Holders do not permit beneficial owners
of the fund from redeeming more than
the permissible daily amount; (b)
requiring money market funds to be
diversified with respect to the sponsors
of asset-backed securities by deeming
the sponsor to guarantee the assetbacked security unless the fund’s board
of directors makes a special finding
otherwise; (c) replacing the requirement
that funds promptly notify the
Commission via electronic mail of
defaults and other events with
disclosure on new Form N–CR; (d)
eliminating the required procedure that
money market funds’ boards adopt
written procedures that include shadow
pricing; (e) amending the stress testing
requirements; and (f) amending the
disclosures that money market funds are
required to post on their Web sites.
Unless otherwise noted, the estimated
burden hours discussed below are based
on estimates of Commission staff with
experience in similar matters. Several of
the proposed amendments would create
new collection of information
requirements. The respondents to these
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collections of information would be
money market funds, investment
advisers and other service providers to
money market funds, including
financial intermediaries, as noted
below. The currently approved burden
for rule 2a–7 is 517,228 hours.
a. Retail Exemption From Floating NAV
Under our floating NAV proposal,
retail money market funds would be
exempt from floating their price per
share; instead, retail funds would be
permitted to maintain a stable price per
share by computing its current price per
share using the penny-rounding
method. A retail money market fund
would mean a money market fund that
does not permit any shareholder of
record to redeem more than $1 million
each business day.992 Our proposed
amendment would permit a shareholder
of record to redeem more than $1
million on any one business day if the
shareholder of record is a broker, dealer,
bank, or other person that holds
securities issued by the money market
fund in nominee name (‘‘Omnibus
Account Holder’’) and the fund (or
others in the intermediary chain) has
policies and procedures reasonably
designed to allow the conclusion that
the Omnibus Account Holder does not
permit any beneficial owner of the
fund’s shares, directly or indirectly, to
redeem more than the daily permitted
amount.993 This requirement is a
collection of information under the
PRA, and is designed to address
operational difficulties presented by
Omnibus Account Holders and ensure
that the $1 million daily redemption
limit is not circumvented. The new
collections of information would be
mandatory for money market funds that
rely on the exemption in proposed rule
2a–7(c)(3), and to the extent that the
Commission receives confidential
information pursuant to this collection
of information, such information would
be kept confidential, subject to the
provisions of applicable law.994
For purposes of the PRA, staff
estimates that approximately 100 money
market fund complexes would rely on
the proposed retail fund exemption and
992 See
Proposed (FNAV) rule 2a–7(c)(3)(i).
Proposed (FNAV) rule 2a–7(c)(3)(ii).
994 See, e.g., 5 U.S.C. 552 (Exemption 4 of the
Freedom of Information Act provides an exemption
for ‘‘trade secrets and commercial or financial
information obtained from a person and privileged
or confidential.’’ 5 U.S.C. 552(b)(4). Exemption 8 of
the Freedom of Information Act provides an
exemption for matters that are ‘‘contained in or
related to examination, operating, or condition
reports prepared by, or on behalf of, or for the use
of an agency responsible for the regulation or
supervision of financial institutions.’’ 5 U.S.C.
552(b)(8)).
993 See
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therefore be required to adopt written
policies and procedures to ensure that
Omnibus Account Holders apply the
daily redemption limit to beneficial
owners.995 Staff estimates that it would
take approximately 12 hours of a fund
attorney’s time to prepare the
procedures and one hour for a board to
adopt the procedures, at a time cost of
approximately $8,548 per fund
complex.996 Therefore, staff estimates
the one-time burden to prepare and
adopt these procedures would be
approximately 1,300 hours 997 at
$854,800 in total time costs for all fund
complexes.998 Amortized over a threeyear period, this would result in an
average annual burden of approximately
433 hours and time costs of $284,933 for
all funds.999 Staff estimates that there
would be no external costs associated
with implementing this collection of
information.
b. Asset-Backed Securities
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Under the proposed amendments,
funds would be required to treat the
sponsor of an SPE issuing ABS as a
guarantor of the ABS subject to rule 2a–
7’s diversification limitations applicable
to guarantors and demand feature
providers, unless the 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.1000
The board of directors would be
required to adopt written procedures
requiring periodic evaluation of this
995 For purposes of the PRA, staff estimates that
those money market funds that self-reported as
‘‘retail’’ funds as of February 28, 2013 (based on
iMoney.net data) would likely rely on the proposed
retail exemption from our floating NAV proposal.
996 This estimate is based on the following
calculation: ([12 hours × $379 per hour for an
attorney = $4,548] + [1 hour × $4,000 per hour for
a board of 8 directors = $4,000] = $8,548). All
estimated wage figures discussed here and
throughout section IV of this Release are based on
published rates have been taken from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2012, available at https://
www.sifma.org/research/item.aspx?id=8589940603,
modified by Commission staff to account for an
1800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits,
and overhead.
997 This estimate is based on the following
calculation: 12 burden hours to prepare written
procedures + 1 burden hour to adopt procedures =
13 burden hours per money market fund complex;
13 burden hours per fund complex × 100 fund
complexes = 1,300 total burden hours for all fund
complexes.
998 This estimate is based on the following
calculation: 100 fund complexes × $8,548 in total
costs per fund complex = $854,800.
999 This estimate is based on the following
calculation: 1,300 burden hours ÷ 3 = 433 average
annual burden hours; $854,800 burden costs ÷ 3 =
$284,933 average annual burden cost.
1000 Proposed (FNAV) rule 2a–7(a)(16)(ii).
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determination.1001 Furthermore, for a
period of not less than three years from
the date when the evaluation was most
recently made, the fund must preserve
and maintain in an easily accessible
place a written record of the
evaluation.1002 This requirement is a
collection of information under the
PRA, and is designed to help ensure that
the objectives of the diversification
limitations are achieved. This new
collection of information would be
mandatory for money market funds that
rely on rule 2a–7, and to the extent that
the Commission receives confidential
information pursuant to this collection
of information, such information would
be kept confidential, subject to the
provisions of applicable law.1003
Based on its review of reports on
Form N–MFP, Commission staff
estimates that approximately 183 money
market funds hold asset-backed
securities and would be required to
adopt written procedures regarding the
periodic evaluation of determinations
made by the fund as to ABS not subject
to guarantees. Staff estimates that it
would take approximately eight hours of
a fund attorney’s time to prepare the
procedures and one hour for a board to
adopt the procedures. Therefore, staff
estimates the one-time burden to
prepare and adopt these procedures
would be approximately nine hours per
money market fund, at a time cost of
approximately $7,032 per fund.1004
Therefore, staff estimates the one-time
burden to prepare and adopt these
procedures would be approximately
1,647 hours 1005 at $1.2 million in total
time costs for all money market
funds.1006 Amortized over a three-year
period, this would result in an average
annual burden of approximately 549
hours and time costs of $400,000 for all
funds.1007 Commission staff further
estimates that the 183 money market
funds we estimate would adopt such
written procedures would spend, on an
1001 Proposed
(FNAV) rule 2a–7(g)(6).
(FNAV) rule 2a–7(h)(6).
1003 See supra note 994.
1004 This estimate is based on the following
calculation: [8 hours × $379 per hour for an attorney
= $3,032] + [1 hour × $4,000 per hour for a board
of 8 directors = $4,000] = $7,032.
1005 This estimate is based on the following
calculation: 8 burden hours to prepare written
procedures + 1 burden hour to adopt procedures =
9 burden hours per money market fund required to
adopt procedures; 9 burden hours per money
market fund × 183 funds expected to adopt
procedures = 1,647 total burden hours.
1006 This estimate is based on the following
calculation: 183 money market funds × $7,032 in
total costs per fund complex = $1.2 million.
1007 This estimate is based on the following
calculations: 1,647 burden hours ÷ 3 = 549 average
annual burden hours; $1.2 million burden costs ÷
3 = $400,000 average annual burden cost.
1002 Proposed
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annual basis, (i) two hours of a fund
attorney’s time to prepare materials for
the board’s review of new and existing
determinations, (ii) one hour for the
board to review those materials and
make the required determinations, and
(iii) one hour of a fund attorney’s time
per year, on average, to prepare the
written records of such
determinations.1008 Therefore, staff
estimates that the average annual
burden to prepare materials and written
records for a board’s required review of
new and existing determinations would
be approximately four hours per
fund 1009 at a time cost of approximately
$5,137 per fund.1010 Therefore, staff
estimates the annual burden would be
approximately 732 burden hours 1011
and $940,071 in total time costs for all
money market funds.1012 Amortized
over a three-year period, this would
result in an average annual burden of
approximately 244 hours and time costs
of $313,357 for all funds.1013 There
would be no external costs associated
with this collection of information.
c. Notice to the Commission
Rule 2a–7 currently requires that
money market funds promptly notify
the Commission by electronic mail of
any default or event of insolvency with
respect to the issuer of one or more
portfolio securities (or any issuer of a
demand feature or guarantee) where
immediately before the default the
securities comprised one half of one
percent or more of the fund’s total
assets.1014 In addition, money market
funds must also provide notice to the
Commission of any purchase of its
securities by an affiliated person in
1008 This estimate includes documenting, if
applicable, the fund board’s determination that the
fund is not relying on the fund sponsor’s financial
strength or its ability or willingness to provide
liquidity or other credit support to determine the
ABS’s quality or liquidity. See proposed (FNAV)
rule 2a–7(a)(16)(ii) and proposed (FNAV) rule 2a–
7(h)(6).
1009 This estimate is based on the following
calculation: 2 hours to adopt + 1 hour for board
review + 1 hour for record preparation = 4 hours
per year.
1010 This estimate is based on the following
calculations: [3 hours × $379 per hour for an
attorney = $1,137] + [1 hour × $4,000 per hour for
a board of 8 directors = $4,000] = $5,137.
1011 This estimate is based on the following
calculation: 4 burden hours per money market fund
× 183 funds = 732 total burden hours.
1012 This estimate is based on the following
calculation: 183 money market funds × $5,137 in
total costs per fund complex = $940,071.
1013 This estimate is based on the following
calculation: 732 burden hours ÷ 3 = 244 average
annual burden hours; $940,071 burden costs ÷ 3 =
$313,357 average annual burden cost.
1014 Rule 2a–7(c)(7)(iii)(A) (requiring that the
notice include a description of the actions the
money market fund intends to take in response to
the event).
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reliance on rule 17a–9 under the
Investment Company Act.1015 Based on
conversations with individuals in the
mutual fund industry, staff has
previously estimated that the burden
associated with these requirements is (1)
.5 burden hours of professional legal
time per response for each notification
of an event of default or insolvency, and
(2) 1.0 burden hours of professional
legal time per response for each
notification of the purchase of a money
market fund’s portfolio security by
certain affiliated persons in reliance on
rule 17a–9. The new collection of
information would be mandatory for
money market funds that rely on rule
2a–7, and to the extent that the
Commission receives confidential
information pursuant to this collection
of information, such information would
be kept confidential, subject to the
provisions of applicable law.1016
We are proposing to eliminate the rule
2a–7 requirements that money market
funds provide electronic notice of any
event of default or insolvency of a
portfolio security and any purchase by
a fund of a portfolio security by an
affiliate in reliance on rule 17a–9.1017
Staff estimates that elimination of these
requirements would reduce the current
annual burden by 0.5 hours for notices
of default or insolvency and 1 hour for
notices of purchases in reliance on rule
17a–9. Based on our prior estimate of 20
money market funds per year that
would be required to provide the
notification of an event of default or
insolvency, staff estimates that the
proposed amendment would reduce the
current collection of information by
approximately 10 hours annually, at a
total time cost savings of $3,790.1018
Based on our prior estimate of 25 money
market fund complexes per year that
would be required to provide the
notification of a purchase of a portfolio
security in reliance on rule 17a–9, staff
estimates that the proposed amendment
would reduce the current collection of
information by approximately 25 hours
annually, at a total time cost savings of
$9,475.1019 There would be no external
1015 Rule 2a–7(c)(7)(iii)(B) (requiring that the
notice include identification of the security, its
amortized cost, the sale price, and the reasons for
the purchase).
1016 See supra note 994.
1017 These requirements are being replaced by
new disclosure required on proposed Form N–CR.
See Section IV.A.4 below.
1018 This estimate is based on the following
calculations: 20 funds × 0.5 reduction in hours per
fund = reduction of 10 hours; 10 burden hours ×
$379 per hour for an attorney = $3,790.
1019 This estimate is based on the following
calculations: 25 fund complexes × 1 reduction in
hours per fund = reduction of 25 hours; 25 hours
× $379 per hour for an attorney = 9,475.
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cost savings associated with these
proposed amendments to the collection
of information burdens.
d. Required Procedures
Rule 2a–7 currently requires that
money market funds establish written
procedures designed to stabilize the
fund’s NAV 1020 and guidelines and
procedures relating to the board’s
delegation of authority.1021 Based on
conversations with individuals in the
mutual fund industry, staff has
previously estimated that the burden
associated with these requirements is a
one-time 15.5 burden hours per
response for each new money market
fund to formulate and establish these
written procedures and guidelines.1022
The new collection of information
would be mandatory for money market
funds that rely on rule 2a–7, and to the
extent that the Commission receives
confidential information pursuant to
this collection of information, such
information would be kept confidential,
subject to the provisions of applicable
law.1023
The Commission is proposing to
eliminate the requirement that money
market funds establish written
procedures providing for the board’s
periodic review of the fund’s shadow
price, the methods used for calculating
the shadow price, and what action, if
any, the board should initiate if the
fund’s shadow price exceeds amortized
cost by more than 1⁄2 of 1%.1024 Staff
estimates that elimination of this
requirement would eliminate the
current one-time 15.5 burden hours for
each new money market fund to
formulate and establish these written
procedures and guidelines. Based on
our prior estimate of 10 new money
market funds per year that would be
required to formulate and establish
these written procedures and
guidelines, staff estimates that the
proposed amendments would reduce
the current collection of information by
approximately 155 hours, at a total time
cost savings of $60,940.1025 There
would be no external cost savings
associated with these proposed
1020 See
rule 2a–7(c)(8)(ii).
rule 2a–7(e)(1).
1022 The 15.5 hours is comprised of: 0.5 hours of
the board of directors’ time; 7.2 hours of
professional legal time; and 7.8 hours of support
staff time.
1023 See supra note 994.
1024 See rule 2a–7(c)(8)(ii).
1025 This estimate is based on the following
calculations: 10 funds × 15.5 reduction in hours per
fund = reduction of 155 hours; 10 funds × ([0.5
hours × $4,000 per hour for board time] + [7.2 hours
× $379 per hour for an attorney] + [7.8 hours × $175
for a Paralegal]) = $60,940.
1021 See
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amendments to the collection of
information burdens.
e. Stress Testing
We are proposing to amend the stress
testing provision of rule 2a–7 to
enhance the hypothetical events for
which a fund (or its adviser) is required
to stress test, including: (i) Increases
(rather than changes) in the general
level of short-term interest rates; (ii)
downgrades or defaults of portfolio
securities, and the effects these events
could have on other securities held by
the fund; (iii) ‘‘widening or narrowing of
spreads among the indexes to which
interest rates of portfolio securities are
tied’’; (iv) other movements in interest
rates that may affect the fund’s portfolio
securities, such as shifts in the yield
curve; and (v) combinations of these and
any other events the adviser deems
relevant, assuming a positive correlation
of risk factors.1026 Floating NAV money
market funds would be required to
replace their current stress test for the
ability to maintain a stable price per
share with a test of the fund’s ability to
maintain 15% of its total assets in
weekly liquid assets. Funds that are
exempt from our floating NAV
requirement would continue to test the
fund’s ability to maintain a stable share
price as well. A written copy of the
procedures, and any modifications
thereto, must be maintained and
preserved for a period of not less than
six years following the replacement of
such procedures with new procedures,
the first two years in an easily accessible
place.1027 This requirement is a
collection of information under the
PRA, and is designed to address
disparities in the quality and
comprehensiveness of stress tests. The
new collection of information would be
mandatory for money market funds that
rely on rule 2a–7, and to the extent that
the Commission receives confidential
information pursuant to this collection
of information, such information would
be kept confidential, subject to the
provisions of applicable law.1028
We understand that most money
market funds, in their normal course of
risk management, include the elements
we are proposing in their stress testing.
Nevertheless, some smaller funds that
perform their own stress testing (rather
than use a third party service provider)
may incur a one-time internal burden to
reprogram an existing system to provide
the required reports of stress testing
results based on our proposed
amendments. Staff estimates that each
1026 Proposed
(FNAV) rule 2a–7(g)(7).
(FNAV) rule 2a–7(h)(8).
1028 See supra note 994.
1027 Proposed
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fund that would have to implement the
proposed stress testing changes would
incur an average one-time burden of 92
hours at a time cost of $42,688.1029
Based on an estimate of 92 funds that
would incur this one-time burden,1030
staff estimates that the aggregate onetime burden for all money market funds
to implement the proposed amendments
to stress testing would be 8,464 hours at
a total time cost of $3.9 million.1031
Amortized over a three-year period, this
would result in an average annual
burden of 2,821 burden hours and $1.3
million total time cost for all funds.1032
There would be no external costs
associated with this collection of
information.
f. Web Site Disclosure
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We are proposing four amendments to
the information money market funds are
required to disclose on their Web sites.
These amendments would promote
transparency to investors of money
market funds’ risks and risk
management by:
• Harmonizing the specific portfolio
holdings information that rule 2a–7
currently requires funds to disclose on
the fund’s Web site with the
corresponding portfolio holdings
information proposed to be reported on
Form N–MFP 1033;
• Requiring that a fund disclose on its
Web site a schedule, chart, graph, or
other depiction showing the percentage
of the fund’s total assets that are
invested in daily and weekly liquid
assets, as well as the fund’s net inflows
or outflows, as of the end of each
business day during the preceding six
months (which depiction must be
1029 Staff estimates that these systems
modifications would include the following costs: (i)
project planning and systems design (24 hours ×
$291 (hourly rate for a senior systems analyst) =
$6,984); (ii) systems modification integration,
testing, installation, and deployment (32 hours ×
$282 (hourly rate for a senior programmer) =
$9,024); (iii) drafting, integrating, implementing
procedures and controls (24 hours × $327 (blended
hourly rate for assistant general counsel ($467),
chief compliance officer ($441), senior EDP auditor
($273) and operations specialist ($126)) = $7,848);
and (iv) preparation of training materials ((8 hours
× $354 (hourly rate for an assistant compliance
director)) + (4 hours (4 hour training session for
board of directors) × $4,000 (hourly rate for board
of 8 directors)) = $18,832). Therefore, staff estimates
an average one-time burden of 92 hours (24 + 32
+ 24 + 8 + 4), at a total cost per fund of $42,688
($6,984 + $9,024 + $7,848 + $18,832).
1030 This estimate is based on staff experience and
discussions with industry.
1031 This estimate is based on the following
calculations: 92 funds × 92 hours per fund = 8,464
hours; 92 funds × $42,688 = $3.9 million.
1032 This estimate is based on the following
calculations: 8,464 hours ÷ 3 = 2,821 burden hours;
$3.9 million ÷ 3 = $1.3 million burden cost.
1033 Proposed (FNAV) rule 2a–7(h)(10)(i).
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updated each business day as of the end
of the preceding business day) 1034;
• Requiring that a fund disclose on its
Web site a schedule, chart, graph, or
other depiction showing the fund’s
daily current NAV per share,1035 as of
the end of each business day during the
preceding six months (which depiction
must be updated each business day as
of the end of the preceding business
day) 1036; and
• Requiring a fund to disclose on its
Web site substantially the same
information that the fund is required to
report to the Commission on Form N–
CR regarding the provision of financial
support to the fund.1037
These new collections of information
would be mandatory for money market
funds that rely on rule 2a–7, and to the
extent that the Commission receives
confidential information pursuant to
these collections of information, such
information would be kept confidential,
subject to the provisions of applicable
law.1038
i. Disclosure of Portfolio Holdings
Information
Because the new information that a
fund would be required to disclose on
its Web site overlaps with the
information that a fund would be
required to disclose on Form N–MFP,
we anticipate that the burden for each
fund to draft and finalize the disclosure
that would appear on its Web site would
largely be incurred when the fund files
Form N–MFP.1039 Commission staff
estimates that a fund would incur an
additional burden of 1 hour each time
that it updates its Web site to include
the new disclosure. Using an estimate of
586 money market funds that would be
required to include the proposed new
portfolio holdings disclosure on the
fund’s Web site,1040 staff estimates that
each fund would incur 12 additional
hours of internal staff time per year (1
hour per monthly filing), at a time cost
of $2,484,1041 to update the Web site to
include the new disclosure, for a total
of 7,032 aggregate hours per year,1042 at
1034 Proposed
(FNAV) rule 2a–7(h)(10)(ii).
supra notes 644 and 645 and
accompanying text for discussion of the definition
of ‘‘current NAV.’’
1036 Proposed (FNAV) rule 2a–7(h)(10)(iii).
1037 Proposed (FNAV) rule 2a–7(h)(10)(v).
1038 See supra note 994.
1039 See section IV.A.3 below.
1040 This estimate is based on a staff review of
reports on Form N–MFP filed with the Commission
for the month ended February 28, 2013.
1041 This estimate is based on the following
calculation: 12 hours × $207 per hour for a
webmaster = $2,484.
1042 This estimate is based on the following
calculation: 12 hours per year × 586 money market
funds = 7,032 hours.
1035 See
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a total aggregate time cost of
$1,455,624.1043 There would be no
external costs associated with this
collection of information.
ii. Disclosure of Daily Liquid Assets and
Weekly Liquid Assets
The burdens associated with the
proposed requirement for a fund to
disclose on its Web site a schedule,
chart, graph, or other depiction showing
the percentage of the fund’s total assets
that are invested in daily and weekly
liquid assets, as well as the fund’s net
inflows or outflows, include one-time
burdens as well as ongoing burdens.
Commission staff expects that each
money market fund would incur a onetime burden of 70 hours,1044 at a time
cost of $20,150,1045 to design the
required schedule, chart, graph, or other
depiction, and to make the necessary
software programming changes to the
fund’s Web site to disclose the
percentage of the fund’s total assets that
are invested in daily liquid assets and
weekly liquid assets, as well as the
fund’s net inflows or outflows, as of the
end of each business day during the
preceding six months. Using an estimate
of 586 money market funds,1046 staff
estimates that money market funds
would incur, in aggregate, a total onetime burden of 41,020 hours,1047 at a
1043 This estimate is based on the following
calculation: 7,032 hours × $207 per hour for a
webmaster = $1,455,624.
1044 In the economic analysis sections of this
Release, Commission staff estimates that the lower
bound of the range of the initial, one-time hour
burden to design and present the historical
depiction of daily and weekly liquid assets and the
fund’s net inflows and outflows would include the
following: 16 hours (project assessment) + 40 hours
(project development, implementation, and testing)
= 56 hours. Commission staff estimates that the
upper bound of the range of the initial, one-time
hour burden to design and present the historical
depiction of daily and weekly liquid assets and the
fund’s net inflows and outflows would include the
following: 24 hours (project assessment) + 60 hours
(project development, implementation, and testing)
= 84 hours.
Because we do not have the information
necessary to provide a point estimate, we are unable
to estimate the costs to modify a particular fund’s
systems and thus have provided ranges of estimated
costs in our economic analysis. See section III.F.2.b
and accompanying notes. Likewise, for purposes of
our estimates for the PRA analysis, we have taken
the midpoint of the range discussed above (midpoint of 56 hours and 84 hours = 70 hours).
1045 This estimate is based on the following
calculations: (20 hours (mid-point of 16 hours and
24 hours for project assessment) × $290 (blended
rate for a compliance manager and a compliance
attorney) = $5,800) + (50 hours (mid-point of 40
hours and 60 hours for project development,
implementation, and testing) × $287 (blended rate
for a Senior Systems Analyst and senior
programmer) = $14,350) = $20,150 per fund.
1046 See supra note 1040.
1047 This estimate is based on the following
calculation: 70 hours × 586 money market funds =
41,020 hours.
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time cost of $11,807,900,1048 to comply
with these Web site disclosure
requirements. Commission staff
estimates that each fund would incur an
ongoing annual burden of 32 hours,1049
at a time cost of $9,184,1050 to update
the depiction of daily and weekly liquid
assets and the fund’s net inflows or
outflows on the fund’s Web site each
business day during that year; in
aggregate, staff estimates that money
market funds would incur an average
ongoing annual burden of 18,752
hours,1051 at a time cost of
$5,381,824,1052 to comply with this
disclosure requirement. Amortizing
these hourly and cost burdens over
three years results in an average annual
increased burden of 26,175 burden
hours 1053 at a time cost of
$7,523,849.1054 There would be no
external costs associated with this
collection of information.
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iii. Disclosure of Daily Current NAV
The burdens associated with the
proposed requirement for a fund to
disclose on its Web site a schedule,
chart, graph, or other depiction showing
the fund’s daily current NAV 1055 as of
the end of the previous business day
1048 This estimate is based on the following
calculation: $20,150 per fund × 586 money market
funds = $11,807,900.
1049 Commission staff estimates that the lower
bound of the range of the ongoing annual hour
burden to update the required Web site information
would be 21 hours per year (5 minutes per day ×
252 business days in a year = 1,260 minutes, or 21
hours). Commission staff estimates that the upper
bound of the range of the ongoing annual hour
burden to update the required Web site information
would be 42 hours per year (10 minutes per day ×
252 business days in a year = 2,520 minutes, or 42
hours).
Because we do not have the information
necessary to provide a point estimate of the costs
to modify a particular fund’s systems we thus have
provided ranges of estimated costs in our economic
analysis. See section III.F.2.b and accompanying
notes. Likewise, for purposes of our estimates for
the PRA analysis, we have taken the mid-point of
the range discussed above (mid-point of 21 hours
and 42 hours = 32 hours).
1050 This estimate is based on the following
calculation: 32 hours (mid-point of 21 hours and 42
hours) × $287 (blended rate for a senior systems
analyst and senior programmer) = $9,184.
1051 This estimate is based on the following
calculation: 32 hours × 586 money market funds =
18,752 hours.
1052 This estimate is based on the following
calculation: $9,184 per fund × 586 money market
funds = $5,381,824.
1053 This estimate is based on the following
calculation: (41,020 burden hours (year 1) + 18,752
burden hours (year 2) + 18,752 burden hours (year
3)) ÷ 3 = 26,175 hours.
1054 This estimate is based on the following
calculation: ($11,807,900 (year 1 monetized burden
hours) + $5,381,824 (year 2 monetized burden
hours) + $5,381,824 (year 3 monetized burden
hours)) ÷ 3 = $7,523,849.
1055 See supra notes 644 and 645 and
accompanying text for discussion of the definition
of ‘‘current NAV.’’
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include one-time burdens as well as
ongoing burdens. Commission staff
expects that these one-time and ongoing
burdens will be substantially similar to
the burdens associated with the
proposed requirement regarding Web
site disclosure of daily liquid assets and
weekly liquid assets, discussed above.
This is because staff expects the core
activities associated with both of these
Web site disclosure requirements
(designing the required schedule, chart,
graph, or other depiction; making
necessary software programming
changes; and updating the Web site
disclosure each day) would be identical
for each requirement, and expects that
the burdens associated with these
activities will not vary substantially
based on the substance of the disclosure
necessitated by each requirement. As
discussed below, staff believes that
funds will incur no additional burden
obtaining current NAV data for
purposes of the proposed requirement
regarding Web site disclosure of the
fund’s daily current NAV.
Commission staff expects that each
money market fund would incur a onetime burden of 70 hours,1056 at a time
cost of $20,150,1057 to design the
required schedule, chart, graph, or other
depiction, and to make the necessary
software programming changes to the
fund’s Web site to disclose the fund’s
daily current NAV as of the end of each
business day during the preceding six
months. Using an estimate of 586 money
market funds,1058 Commission staff
estimates that money market funds
would incur, in aggregate, a total one1056 Commission staff estimates that the lower
bound of the range of the initial, one-time hour
burden to design and present the historical
depiction of the fund’s daily current NAV would
include the following: 16 hours (project assessment)
+ 40 hours (project development, implementation,
and testing) = 56 hours. Commission staff estimates
that the upper bound of the range of the initial, onetime hour burden to design and present the
historical depiction of daily liquid assets and
weekly liquid assets would include the following:
24 hours (project assessment) + 60 hours (project
development, implementation, and testing) = 84
hours.
Because we do not have the information
necessary to provide a point estimate of the costs
to modify a particular fund’s systems we thus have
provided ranges of estimated cost in our economic
analysis. See supra section III.F.3.b and
accompanying notes. Likewise, for purposes of our
estimates for the PRA analysis, we have taken the
midpoint of the range discussed above (mid-point
of 56 hours and 84 hours = 70 hours).
1057 This estimate is based on the following
calculations: (20 hours (mid-point of 16 hours and
24 hours for project assessment) × $290 (blended
rate for a compliance manager and a compliance
attorney) = $5,800) + (50 hours (mid-point of 40
hours and 60 hours for project development,
implementation, and testing) × $287 (blended rate
for a senior systems analyst and senior programmer)
= $14,350) = $20,150 per fund.
1058 See supra note 1040.
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time burden of 41,020 hours,1059 at a
time cost of $11,807,900,1060 to comply
with these Web site disclosure
requirements. Commission staff
estimates that each fund would incur an
annual ongoing burden of 32 hours,1061
at a time cost of $9,184,1062 to update
the depiction of the fund’s daily current
NAV on the fund’s Web site each
business day during that year; in
aggregate, staff estimates that money
market funds would incur an ongoing
annual burden on 18,752 hours,1063 at a
time cost of $5,381,824,1064 to comply
with this disclosure requirement.
Amortizing these hourly and cost
burdens over three years results in an
average annual increased burden of
26,175 burden hours 1065 at a time cost
of $7,523,849.1066 There would be no
external costs associated with this
collection of information.
Because floating NAV money market
funds would be required to calculate
their redemption price each day, these
funds should incur no additional
burdens in obtaining this data for
purposes of the proposed disclosure
requirements. Stable price money
market funds (including government
money market funds and retail funds if
1059 This estimate is based on the following
calculation: 70 hours × 586 money market funds =
41,020 hours.
1060 This estimate is based on the following
calculation: $20,150 per fund × 586 money market
funds = $11,807,900.
1061 Commission staff estimates that the lower
bound of the range of the ongoing annual hour
burden to update the required Web site information
would be 21 hours per year (5 minutes per day ×
252 business days in a year = 1,260 minutes, or 21
hours). Commission staff estimates that the upper
bound of the range of the ongoing annual hour
burden to update the required Web site information
would be 42 hours per year (10 minutes per day ×
252 business days in a year = 2,520 minutes, or 42
hours).
Because we do not have the information
necessary to provide a point estimate of the costs
to modify a particular fund’s systems we thus have
provided ranges of estimated costs in our economic
analysis. See supra section III.F.3.b and
accompanying notes. Likewise, for purposes of our
estimates for the PRA analysis, we have taken the
mid-point of the range discussed above (mid-point
of 21 hours and 42 hours = 32 hours).
1062 This estimate is based on the following
calculation: 32 hours (mid-point of 21 hours and 42
hours) × $287 (blended rate for a senior systems
analyst and senior programmer) = $9,184.
1063 This estimate is based on the following
calculation: 32 hours × 586 money market funds =
18,752 hours.
1064 This estimate is based on the following
calculation: $9,184 × 586 money market funds =
$5,381,824.
1065 This estimate is based on the following
calculation: 41,020 burden hours (year 1) + 18,752
burden hours (year 2) + 18,752 burden hours (year
3) ÷ 3 = 26,175 hours.
1066 This estimate is based on the following
calculation: $11,807,900 (year 1 monetized burden
hours) + $5,381,824 (year 2 monetized burden
hours) + $5,381,824 (year 3 monetized burden
hours) ÷ 3 = $7,523,849.
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we adopt the floating NAV proposal,
and all money market funds if we adopt
the fees and gates proposal), which
would be required to calculate their
current NAV per share daily pursuant to
proposed amendments to rule 2a–7,
likewise should incur no additional
burdens in obtaining this data for
purposes of the proposed disclosure
requirements.1067
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iv. Disclosure of Financial Support
Provided to Money Market Funds
Commission staff estimates that the
Commission would receive 40 reports
per year filed in response to an event
specified on Part C (‘‘Provision of
financial support to Fund’’) of Form N–
CR.1068 Because the required Web site
disclosure overlaps with the
information that a fund must disclose
on Form N–CR when the fund receives
financial support from a sponsor or fund
affiliate, we anticipate that the burdens
a fund would incur to draft and finalize
the disclosure that would appear on its
Web site would largely be incurred
when the fund files Form N–CR.1069
Commission staff estimates that a fund
would incur an additional burden of 1
hour, at a time cost of $207,1070 each
time that it updates its Web site to
include the new disclosure.
Accordingly, Commission staff
estimates that the requirement to
disclose information about financial
support received by a money market
fund on the fund’s Web site would
result in a total aggregate burden of 40
hours per year,1071 at a total aggregate
time cost of $8,280.1072 There would be
1067 See supra section III.F.5 (discussing the
proposed requirement for stable price money
market funds to calculate their current NAV per
share daily, as well as the operational costs
associated with this proposed daily calculation
requirement).
1068 Commission staff estimates this figure based
in part by reference to our estimate of the average
number of notifications of security purchases in
reliance on rule 17a–9 that money market funds
currently file each year. See supra note 1019 and
accompanying text. Because money market funds
would be required to file a report in response to an
event specified on Part C of Form N–CR if the fund
receives any form of financial support from the
fund’s sponsor or other affiliated person (which
support includes, but is not limited to, a rule 17a–
9 security purchase), staff estimates that the
Commission would receive a greater number of
Form N–CR Part C reports than the number of
notifications of rule 17a–9 security purchases that
it currently receives.
1069 See infra section IV.A.4.
1070 This estimate is based on the following
calculation: 1 hour per Web site update × $207 per
hour for a webmaster = $207.
1071 This estimate is based on the following
calculation: 1 hour per Web site update × 40 Web
site updates made by money market funds = 40
hours.
1072 This estimate is based on the following
calculation: 40 hours per year × $207 per hour for
a webmaster = $8,280.
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no external costs associated with this
collection of information.
v. Change in Burden
The aggregate additional annual
burden associated with the proposed
Web site disclosure requirements
discussed above is 59,422 hours 1073 at
a time cost of $16,511,602.1074
Amortized over a three-year period, this
would result in an average annual
burden of 19,807 burden hours and
$5,503,867 total time cost for all
funds.1075 There would be no change in
the external cost burden associated with
this collection of information.
g. Total Burden for Rule 2a–7
The currently approved burden for
rule 2a–7 is 517,228 hours. The net
aggregate additional burden hours
associated with the proposed
amendments to rule 2a–7 would
increase the burden estimate to 540,892
hours annually for all funds.1076
2. Rule 22e–3
Rule 22e–3 under the Investment
Company Act exempts money market
funds from section 22(e) of the Act to
permit them to suspend redemptions
and postpone payment of redemption
proceeds in order to facilitate an orderly
liquidation of the fund, provided that
certain conditions are met.1077 Rule
22e–3 is intended to facilitate an orderly
liquidation, reduce the vulnerability of
shareholders to the harmful effects of a
disorderly fund liquidation, and
minimize the potential for market
disruption.
The rule requires a money market
fund to provide prior notification to the
1073 This estimate is based on the following
calculation: 7,032 hours (annual aggregate burden
for disclosure of portfolio holdings information) +
26,175 (annual aggregate burden for disclosure of
daily liquid assets and weekly liquid assets) +
26,175 (annual aggregate burden for disclosure of
daily current NAV) + 40 hours (annual aggregate
burden for disclosure of financial support provided
to money market funds) = 59,422 hours.
1074 This estimate is based on the following
calculation: $1,455,624 (annual aggregate costs
associated with disclosure of portfolio holdings
information) + $7,523,849 (annual aggregate costs
associated with disclosure of daily liquid assets and
weekly liquid assets) + $7,523,849 (annual
aggregate costs associated with disclosure of daily
current NAV) + $8,280 (annual aggregate costs
associated with disclosure of financial support
provided to money market funds) = $16,511,602.
1075 This estimate is based on the following
calculation: 59,422 hours ÷ 3 = 19,807 burden
hours; $16,511,602 ÷ 3 = $5,503,867 burden cost.
1076 This estimate is based on the following
calculation: 517,228 hours (currently approved
burden) + 433 hours (retail exemption) + (549 hours
+ 244 hours) (ABS determination & recordkeeping)
¥ (10 hours + 25 hours) (notice to the Commission)
¥ 155 hours (required procedures) + 2,821 hours
(stress testing) + 19,807 hours (Web site disclosure)
= 540,892 hours.
1077 Rule 22e–3(a).
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36981
Commission of its decision to suspend
redemptions and liquidate.1078 This
requirement is a collection of
information under the PRA, and is
designed to assist Commission staff in
monitoring a money market fund’s
suspension of redemptions. The new
collection of information would be
mandatory for any fund that holds itself
out as a money market fund in reliance
on rule 2a–7 and any conduit funds that
rely on the rule,1079 and to the extent
that the Commission receives
confidential information pursuant to
this collection of information, such
information would be kept confidential,
subject to the provisions of applicable
law.1080
The current approved annual
aggregate collection of information for
rule 22e–3 is approximately 30 minutes
to provide the required notification
under the rule. To provide shareholders
with protections comparable to those
currently provided by the rule while
also updating the rule to make it
consistent with our proposed
amendments to rule 2a–7, we are
proposing to amend rule 22e–3 under
our floating NAV proposal to allow a
money market fund to invoke the
exemption in rule 22e–3 if: (1) The
fund, at the end of a business day, has
invested less than 15% of its total assets
in weekly liquid assets; or (2) in the case
of a fund relying on the exemption for
government money market funds or
retail money market funds, the money
market fund’s price per share has
deviated from the stable price
established by the board of directors or
the fund’s board of directors, including
a majority of directors who are not
interested persons of the fund,
determines that such a deviation is
likely to occur.1081
These amendments are designed to
permit a money market fund to suspend
redemptions under our floating NAV
proposal when the fund is under
significant stress, as the funds may do
today under rule 22e–3. We do not
expect that money market funds would
invoke the exemption provided by rule
22e–3 more frequently under our
floating NAV proposal than they do
today because, although we propose to
change the circumstances under which
a money market fund may invoke the
exemption provided by rule 22e–3, the
rule as we propose to amend it still
1078 Rule
22e–3(a)(3).
rule permits funds that invest in a money
market fund pursuant to section 12(d)(1)(E) of the
Act (‘‘conduit funds’’) to rely on the rule, and
requires the conduit fund to notify the Commission
of its reliance on the rule. See rule 22e–3(b).
1080 See supra note 994.
1081 Proposed (FNAV) rule 22e–3(a)(1).
1079 The
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would permit a money market fund to
invoke the exemption only when the
fund is under significant stress, and our
staff estimates that a money market fund
is likely to experience that level of stress
and choose to suspend redemptions in
reliance on rule 22e–3 with the same
frequency that funds today may do so.
Therefore, we are not revising rule
22e–3’s current approved annual
collection of information. The rule’s
current approved annual aggregate
burden is approximately 30 minutes, as
discussed above, and is based on our
staff’s estimates that: (1) on average, one
money market fund would break the
buck and liquidate every six years; 1082
(2) there are an average of two conduit
funds that may be invested in a money
market fund that breaks the buck; 1083
and (3) each money market fund and
conduit fund would spend
approximately one hour of an in-house
attorney’s time every six years to
prepare and submit the notice required
by the rule.1084 There is no change in
the external cost burden associated with
this collection of information.
3. Rule 30b1–7 and Form N–MFP
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Rule 30b1–7 under the Investment
Company Act currently requires money
market funds to file electronically a
monthly report on Form N–MFP within
five business days after the end of each
month. The information required by the
form must be data-tagged in XML format
and filed through EDGAR. The rule is
designed to improve transparency of
information about money market funds’
portfolio holdings and facilitate
Commission oversight of money market
funds. Preparing a report on Form N–
MFP is a collection of information
under the PRA.1085 This new collection
1082 This estimate is based upon the
Commission’s experience with the frequency with
which money market funds have historically
required sponsor support. Although many money
market fund sponsors have supported their money
market funds in times of market distress, for
purposes of this estimate Commission staff
conservatively estimates that one or more sponsors
may not provide support.
1083 These estimates are based on a staff review
of filings with the Commission. Generally, rule 22e–
3 permits conduit funds to suspend redemptions in
reliance on rule 22e–3 and requires that they notify
the Commission if they elect to do so. See supra
note 1079.
1084 This estimate is based on the following
calculations: (1 hour ÷ 6 years) = 10 minutes per
year for each fund and conduit fund that is required
to provide notice under the rule. 10 minutes per
year × 3 (combined number of affected funds and
conduit funds) = 30 minutes. The estimated costs
associated with the estimated burden hours ($189)
are based on the following calculations: $378/hour
(hourly rate for an in-house attorney) × 30 minutes
= $189.
1085 For purposes of the PRA analysis, the current
burden associated with the requirements of rule
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of information would be mandatory for
money market funds that rely on rule
2a–7, and to the extent that the
Commission receives confidential
information pursuant to these
collections of information, such
information would be kept confidential,
subject to the provisions of applicable
law.1086 The Commission staff estimates
that 586 money market funds are
required to file reports on Form N–MFP
on a monthly basis.1087
a. Discussion of Proposed Amendments
For the reasons discussed in detail in
section III.H above, we are proposing a
number of amendments to Form N–MFP
which would include new and amended
collections of information. These
changes include:
Structural Changes to Form N–MFP.
The proposed amendments would
renumber the items of Form N–MFP to
separate the items into four separate
sections to allow Commission staff to
reference, add or delete items in the
future without having to re-number all
subsequent items in the form.1088 We
expect that these modifications would
be made regardless of what action, if
any, we take regarding the proposed
alternatives to money market reform.
Amendments Related to Rule 2a–7
Reforms. The proposed amendments
would make a number of conforming
changes to reflect the proposed
amendments to rule 2a–7 under either
alternative proposal. Our proposed
amendments would also delete or
modify items related to amortized cost
and shadow prices that would no longer
be applicable under either proposal.
New Reporting Requirements. We are
proposing a number of new reporting
requirements designed to improve the
Commission’s and others ability to
monitor money market funds. The
proposed amendments would amend
Form N–MFP to require the following
new items: (1) The Legal Entity
Identifier (‘‘LEI’’) of the registrant (if
available); (2) contact information for
the person authorized to receive
information and respond to questions
about Form N–MFP; (3) in addition to
the CUSIP for each security, the LEI that
corresponds to each security and at least
one other security identifier; (4) the
level measurement (level 1, level 2,
30b1–7 is included in the collection of information
requirements of Form N–MFP.
1086 See supra note 994.
1087 This estimate is based on a staff review of
reports on Form N–MFP filed with the Commission
for the month ended February 28, 2013.
1088 See Proposed Form N–MFP. The proposed
four sections are: (i) general information; (ii)
information about each series of the fund; (iii)
information about each class of the fund; and (iv)
information about portfolio securities.
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level 3) each security valuation is based
upon in the fair value hierarchy under
U.S. GAAP, the amount of cash held,
the total value of the fund’s ‘‘daily
liquid assets’’ and ‘‘weekly liquid
assets’’ reported as of the close of
business on each Friday during the
month reported, the weekly gross
subscriptions and weekly gross
redemptions for each share class as of
the close of business for each Friday
during the month reported, and whether
a security is a ‘‘daily liquid asset’’ or
‘‘weekly liquid asset;’’ (5) whether any
person paid for or waived all or part of
the fund’s operating expenses or
management fees and the total
percentage of shares outstanding held
by the 20 largest shareholders of record;
and (6) additional information about
certain types of securities held by the
fund. Finally, the proposed
amendments would include new
disclosure items regarding each security
held by the fund series, and sold by the
fund series, reported separately for each
lot purchased. We expect that these
modifications would be made regardless
of what action, if any, we take regarding
the proposed alternative to money
market reform.
Clarifying Amendments. The
proposed amendments to Form N–MFP
would also include amendments to the
current instructions and items of Form
N–MFP designed to: (1) Clarify in the
general instructions to Form N–MFP
that a fund may report information on
Form N–MFP as of the last business day
or any later calendar day of the month;
(2) clarify in the definition of ‘‘masterfeeder fund’’ that ‘‘Feeder Fund’’
includes unregistered funds; (3) cross
reference WAM and WAL as used in
Form N–MFP with those terms as
defined in rule 2a–7; (4) clarify that
disclosure in Part B (Class-Level
Information about the Fund) is required
for each class of the series, regardless of
the number of shares outstanding in the
class; (5) clarify the required disclosure
related to repurchase agreements, and
(6) remove the reference to disclosure of
the coupon or yield from the
requirement that funds disclose the title
of the issue. We expect that these
modifications would be made regardless
of what action, if any, we take regarding
the proposed alternative to money
market reform.
b. Current Burden
The current approved collection of
information for Form N–MFP is 45,214
annual aggregate hours and $4,424,480
in external costs.
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c. Change in Burden
Staff understands that approximately
35% of the 586 1089 (for a total of
205 1090) money market funds that
report information on Form N–MFP
license a software solution from a third
party that is used to assist the funds to
prepare and file the required
information. Staff also understands that
approximately 65% of the 586 1091 (for
a total of 381) money market funds that
report information on Form N–MFP
retain the services of a third party to
provide data aggregation and validation
services as part of the preparation and
filing of reports on Form N–MFP on
behalf of the fund. Staff estimates that,
in the first year, each fund (regardless of
whether the fund licenses the software
or uses a third-party service provider)
will incur an additional average annual
burden of 85 hours, at a time cost of
$22,045 per fund,1092 to prepare and file
the report on Form N–MFP (as
proposed) and an average of
approximately 60 additional burden
hours (five hours per fund, per filing),
at a time cost of $15,562 per fund 1093
each year thereafter.
1089 This estimate is based on staff review of
reports on Form N–MFP filed with the Commission
for the month ended February 28, 2013.
1090 The staff estimated this 35% in the current
burden. This estimate is based on the following
calculation: 586 funds × 35% = 205 funds.
1091 The staff estimated this 65% in the current
burden. This estimate is based on the following
calculation: 586 funds × 65% = 381 funds.
1092 This estimate is based on the following
calculations: [30 hours for the initial monthly filing
at a total cost of $7,800 per fund (8 hours × $243
blended average hourly rate for a financial reporting
manager ($294 per hour) and fund senior
accountant ($192 per hour) = $1,944 per fund) + (4
hours × $155 per hour for an intermediate
accountant = $620 per fund) + (6 hours × $314 per
hour for a senior database administrator = $1,884
per fund) + (4 hours × $300 for a senior portfolio
manager = $1,200 per fund) + (8 hours × $269 per
hour for a compliance manager = $2,152 per fund)]
+ [55 hours (5 hours per fund × 11 monthly filings)
at a total cost of $14,245 per fund ($259 average cost
per fund per burden hour × 55 hours)]. The
additional average annual burden per fund for the
first year is 85 hours (30 hours (initial monthly
filing) + 55 hours (remaining 11 monthly filings))
and the additional average cost burden per fund for
the first year is $22,045 ($7,800 (initial monthly
filing) + $14,245 (remaining 11 monthly filings =
$22,045).
1093 This estimate is based on the following
calculations: (16 hours × $243 blended average
hourly rate for a financial reporting manager ($294
per hour) and fund senior accountant ($192 per
hour) = $3,888 per fund) + (9 hours × $155 per hour
for an intermediate accountant = $1,395 per fund)
+ (13 hours × $314 per hour for a senior database
administrator = $4,082 per fund) + (9 hours × $300
for a senior portfolio manager = $2,700 per fund)
+ (13 hours × $269 per hour for a compliance
manager = $3,497 per fund) = 60 hours (16 + 9 +
13 + 9 + 13) at a total cost of $15,562 per fund
($3,888 + $1,395 + $4,082 + $2,700 + $3,497).
Therefore, the additional average cost per fund per
burden hour is approximately $259 ($15,562/60
burden hours).
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Staff also understands that software
service providers (whether provided by
a licensor or third-party service
provider) are likely to incur additional
external costs to modify their software
and may pass those costs down to
money market funds in the form of
higher annual licensing fees. Although
we do not have the information
necessary to provide a point estimate of
the external costs or the extent to which
the software service providers will pass
down any external costs to funds, we
can estimate a range of costs, from 5%
to 10% of current annual licensing fees.
Accordingly, staff estimates that 35% of
funds (205 funds) would pay $336 in
additional external licensing costs each
year and 65% of funds (381 funds)
would pay $800 in additional external
licensing costs each year because of our
proposed amendments.1094
Staff therefore estimates that our
proposed amendments to Form N–MFP
would result in a first-year aggregate
additional 49,810 burden hours 1095 at a
total time cost of $12.9 million 1096 plus
$373,680 in total external costs 1097 for
all funds, and 35,160 burden hours 1098
at a total time cost of $9.1 million 1099
plus $373,680 in total external costs 1100
for all funds each year hereafter.
Amortizing these additional hourly and
cost burdens over three years results in
an average annual aggregate burden of
approximately 40,043 hours at a total
time cost of $10.4 million plus $373,680
in external costs for all funds.1101
Finally, staff estimates that our
proposed amendments to Form N–MFP
would result in a total aggregate annual
collection of information burden of
1094 Staff estimates that the annual licensing fee
for 35% of money market funds is $3,360: A 5%
to 10% increase = $168–$336 in increased costs;
staff estimates that the annual licensing fee for 65%
of money market funds is $8,000: A 5% to 10%
increase = $400–$800 in increased costs.
1095 This estimate is based on the following
calculation: 586 funds × 85 hours = 49,810 burden
hours in year 1.
1096 This estimate is based on the following
calculation: 586 funds × $22,045 annual cost per
fund in the initial year = $12.9 million.
1097 This estimate is based on the following
calculation: (205 funds × $336 additional external
costs) + (381 funds × $800 additional external costs)
= $373,680.
1098 This estimate is based on the following
calculation: 586 funds × 60 hours per fund = 35,160
hours.
1099 This estimate is based on the following
calculation: 586 funds × $15,562 annual cost per
fund in subsequent years = $9.1 million.
1100 See supra note 1097.
1101 This estimate is based on the following
calculation: (49,810 hours (year 1) + 35,160 hours
(year 2) + 35,160 hours (year 3)) ÷ 3 = 40,043 hours;
($12.9 million (year 1) + $9.1million (year 2) + $9.1
million (year 3)) ÷ 3 = $10.4 million in time costs;
+ ($373,680 (year 1) + $373,680 (year 2) + $373,680
(year 3)) ÷ 3 = $373,680 million in external costs.
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36983
85,257 hours 1102 and $4,798,160 in
external costs.1103
4. Rule 30b1–8 and Form N–CR
a. Discussion of New Reporting
Requirements
As outlined above, proposed new rule
30b1–8 would require money market
funds to file new Form N–CR with the
Commission when certain events occur.
Similar to Form 8–K under the
Exchange Act,1104 Form N–CR would
require disclosure, by means of a
current report filed with the
Commission, of certain specific
reportable events. Under the floating
NAV alternative, the information
reported on Form N–CR would include
instances of portfolio security default,
sponsor support of funds, and certain
significant deviations in net asset
value.1105 This requirement is a
collection of information under the
PRA, and is designed to enhance the
Commission’s oversight of money
market funds and its ability to respond
to market events. This new collection of
information would be mandatory for
money market funds that rely on rule
2a–7, and to the extent that the
Commission receives confidential
information pursuant to these
collections of information, such
information would be kept confidential,
subject to the provisions of applicable
law.1106
b. Estimated Burden
The staff estimates that the
Commission would receive, in the
aggregate, an average of 20 reports 1107
per year filed in response to an event
specified on Part B (‘‘Default or Event of
Insolvency of Portfolio Security
Issuer’’), an average of 40 reports 1108
1102 This estimate is based on the following
calculation: current approved burden of 45,214
hours + 40,043 in additional burden hours as a
result of our proposed amendments = 85,257 hours.
1103 This estimate is based on the following
calculation: current approved burden of $4,424,480
in external costs + $373,680 in additional external
costs as a result of our proposed amendments =
$4,798,160.
1104 17 CFR 249.308.
1105 See proposed (FNAV) Form N–CR Parts A–
D; see also section III.G.1.
1106 See supra note 994.
1107 Commission staff estimates this figure based
in part by reference to our current estimate of an
average of 20 notifications to the Commission of an
event of default or insolvency that money market
funds currently file pursuant to rule 2a–7(c)(7)(iii)
each year. See Submission for OMB Review,
Comment Request, Extension: Rule 2a–7, OMB
Control No. 3235–0268, Securities and Exchange
Commission [77 FR 236 (Dec. 7, 2012)].
1108 Commission staff estimates this figure based
in part by reference to our current estimate of an
average of 25 notifications to the Commission of
certain security purchases that money market funds
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per year filed in response to an event
specified on Part C (‘‘Provision of
Financial Support to Fund’’), and an
average of 1 report filed every 6
years 1109 in response to an event
specified on Part D (‘‘Deviation Between
Current Net Asset Value Per Share and
Intended Stable Price Per Share’’) of
Form N–CR.
When filing a report on Form N–
CR,1110 staff estimates that a fund would
spend on average approximately 4
hours 1111 of an in-house attorney’s and
one hour of in-house accountant’s time
to prepare, review and submit Form N–
CR, at a total time cost of $1,708.1112
Accordingly, in the aggregate, staff
estimates that compliance with new rule
30b1–8 and Form N–CR would result in
a total annual burden of approximately
301 burden hours and total annual time
costs of approximately $102,765.1113
Given an estimated 586 money market
funds that would be required to comply
with new rule 30b1–8 and Form N–
CR,1114 this would result in an annual
burden of approximately 0.51 burden
hours and annual time costs of
approximately $175 on a per-fund basis.
Staff estimates that there will be no
currently file in reliance on rule 17a–9 each year.
See Submission for OMB Review, Comment
Request, Extension: Rule 2a–7, OMB Control No.
3235–0268, Securities and Exchange Commission
[77 FR 236 (Dec. 7, 2012)]. Because money market
funds would be required to file a report in response
to an event specified on Part C of Form N–CR if the
fund receives any form of financial support from
the fund’s sponsor or other affiliated person (which
support includes, but is not limited to, a rule 17a–
9 security purchase), the staff estimates that the
Commission will receive a greater number of
reports on Form N–CR Part C than the number of
notifications of rule 17a–9 security purchases that
it currently receives.
1109 Staff currently estimates that on average, one
money market fund would break the buck and
liquidate every six years. See supra note 1082.
1110 For purposes of this estimate the staff expects
that it would take approximately the same amount
of time to prepare and file a report on Form N–CR,
regardless under which Part of Form N–CR it is
filed.
1111 This estimate is derived in part from our
current PRA estimate for Form 8–K.
1112 This estimate is based on the following
calculations: (4 hours × $379/hour for an attorney
= $1,516), plus (1 hour × $192/hour for a fund
senior accountant = $192), for a combined total of
5 hours and total time costs of $1,708.
1113 This estimate is based on the following
calculations: (20 reports filed per year in respect of
Part B) + (40 reports filed per year in respect of Part
C) + (0.167 reports filed per year in respect of Part
D) = 60.167 reports filed per year. 60.167 reports
filed per year × 5 hours per report = approximately
301 total annual burden hours. 60.167 reports filed
per year × $1,708 in costs per report = $102,765
total annual costs.
1114 This estimate is based on a staff review of
reports on Form N–MFP filed with the Commission
for the month ended February 28, 2013. For
purposes of this PRA, the staff assumes that the
universe of money market funds affected by the
amendments to rule 482(b)(4) would be the same as
the current universe for Form N–MFP.
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external costs associated with this
collection of information.
subject to the provisions of applicable
law.1118
5. Rule 34b–1(a)
a. Discussion of the Proposed
Amendments
If implemented, the floating NAV
alternative would change the
investment expectations and experience
of money market fund investors,
rendering the current rule 482(b)(4) risk
disclosures in advertisements for money
market funds out of date. Accordingly,
we are proposing to amend the
particular wording of the rule 482(b)(4)
risk disclosures in money market funds’
advertisements (including requiring that
they be disclosed prominently on a
fund’s Web site).1119
Rule 34b–1 under the Act is an
antifraud provision governing sales
material that accompanies or follows the
delivery of a statutory prospectus.
Among other things, rule 34b–1 deems
to be materially misleading any
advertising material by a money market
fund required to be filed with the
Commission by section 24(b) of the Act
that includes performance data, unless
such advertising also includes the rule
482(b)(4) risk disclosures already
discussed in section IV.A.6 below.
Because we are amending the wording
of the rule 482(b)(4) risk disclosures,
rule 34b–1(a) is indirectly affected by
our proposed amendments. However,
we are proposing no changes to rule
34b–1(a) itself.
We already account for the burdens
associated with the wording changes to
the risk disclosures in money market
fund advertising when discussing our
amendments to rule 482(b)(4).1115 By
complying with our amendments to rule
482(b)(4), money market funds would
also automatically remain in
compliance with respect to how our
proposed changes would affect rule
34b–1(a). Therefore, any burdens
associated with rule 34b–1(a) as a result
of our proposed amendment to rule
482(b)(4) are already accounted for in
section IV.A.6 below.
6. Rule 482
Rule 482 applies to advertisements or
other sales materials with respect to
securities of an investment company
registered under the Investment
Company Act that is selling or
proposing to sell its securities pursuant
to a registration statement that has been
filed under the Investment Company
Act.1116 In particular, rule 482(b)
describes the information that is
required to be included in an
advertisement, including a cautionary
statement under rule 482(b)(4)
disclosing the particular risks associated
with investing in a money market
fund.1117 This new collection of
information would be mandatory for
money market funds that rely on rule
2a–7, and to the extent that the
Commission receives confidential
information pursuant to these
collections of information, such
information would be kept confidential,
1115 See
supra section IV.A.6.
rule 482(a).
1117 See rule 482(b)(4).
1116 See
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b. Change in Burden
The current approved collection of
information for rule 482 is 301,179
annual aggregate hours. Given that the
proposed amendments are one-time
updates to the wording of the risk
disclosures already required under
current rule 482(b)(4), staff estimates
that, once funds have made these onetime changes, the amendments to rule
482(b)(4) would only require money
market funds to incur the same costs
and hour burdens on an ongoing basis
as under current rule 482(b)(4).
For each money market fund, staff
estimates that internal marketing staff
and in-house counsel would spend, on
a one-time basis,1120 an average of 4
hours to update and review the wording
of the rule 482(b)(4) risk disclosures for
each fund’s printed advertising and
sales materials, resulting in one-time
time costs of $1,162.1121 In addition, for
1118 See
supra note 994.
respect to non-government money
market funds and non-retail money market funds,
see proposed (FNAV) rule 482(b)(4)(i). With respect
to government money market funds and retail
money market funds, see proposed (FNAV) rule
482(b)(4)(ii).
1120 Under the floating NAV alternative, the
compliance period for updating rule 482(b)(4) risk
disclosures would be 2 years. The staff understands
that money market funds commonly update and
issue new advertising materials on a relatively
periodic and frequent basis. Accordingly, given the
extended compliance period proposed, the staff
expects that funds should be able to amend the
wording of their rule 482(b)(4) risk disclosures as
part of one of their general updates of their
advertising materials. Similarly, the staff believes
that funds could update the corresponding risk
disclosures on their Web sites when performing
other periodic Web site maintenance. The staff
therefore accounts only for the incremental change
in burden that amending the rule 482(b)(4) risk
disclosures would cause in the context of a larger
update to a fund’s advertising materials or Web site.
1121 This estimate is based on the following
calculation: 3 hours spent by a marketing manager
to update the wording of the risk disclosures for
each fund’s marketing materials + 1 hour spent by
an attorney reviewing the amended rule 482(b)(4)
risk disclosures. Accordingly, the estimated costs
are based on the following: $261/hour for a
1119 With
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each money market fund, staff estimates
that internal information technology
staff and in-house counsel would spend,
on a one-time basis, an average of 1.25
hours to post and review the wording of
the rule 482(b)(4) risk disclosures on a
fund’s Web site, resulting in one-time
time costs of approximately $302.1122 In
the aggregate, staff estimates that each
money market fund would spend a total
of 5.25 hours and incur total time costs
of approximately $1,464 on a one-time
basis to comply with the amendments to
rule 482(b)(4). Staff estimates that there
would be no external costs incurred in
complying with the proposed
amendment.
Using an estimate of 586 money
market funds that would be required to
comply with the amendments to rule
482(b)(4),1123 staff estimates that in the
aggregate, these proposed amendments
would result in a total one-time burden
of approximately 3,077 burden
hours 1124 at a total one-time time cost
of approximately $857,904.1125
Amortized over a three-year period, this
would result in an average annual
burden of approximately 1,026 burden
hours at a total annual time cost of
approximately $285,968 for all funds.
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7. Form N–1A
We are also proposing amendments to
Form N–1A in connection with our
alternative proposal for money market
funds to move to a floating NAV. These
new collections of information would be
mandatory for money market funds that
rely on rule 2a–7, and to the extent that
the Commission receives confidential
information pursuant to these
collections of information, such
information would be kept confidential,
subject to the provisions of applicable
law.1126
marketing manager × 3 hours = $783, plus $379/
hour for an attorney × 1 hour = $379, for a
combined total of $1,162.
1122 This estimate is based on the following
calculation: 1 hour spent by a webmaster to update
a fund’s Web site’s risk disclosures, plus 15 minutes
spent by an attorney reviewing the amended risk
disclosures. The estimated costs are based on the
following calculations: $207/hour for a webmaster
× 1 hour = $207, plus $378/hour for an attorney ×
0.25 hours = approximately $95, for a combined
total of approximately $302.
1123 This estimate is based on a staff review of
reports on Form N–MFP filed with the Commission
for the month ended February 28, 2013. For
purposes of this PRA, the staff assumes that the
universe of money market funds affected by the
amendments to rule 482(b)(4) would be the same as
the current universe for Form N–MFP.
1124 This estimate is based on the following
calculation: 5.25 burden hours per fund × 586 funds
= approximately 3,077 total burden hours.
1125 This estimate is based on the following
calculation: approximately $1,464 total costs per
fund × 586 funds = approximately $857,904 total
costs.
1126 See supra note 994.
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a. Discussion of Proposed Amendments
The move to a floating NAV would be
designed to change fundamentally the
investment expectations and experience
of money market fund investors.
Because of the significance of this
change, we propose to require that each
money market fund, other than a
government or retail fund, include a
new bulleted statement disclosing the
particular risks associated with
investing in a floating NAV money
market fund in the summary section of
the statutory prospectus (and,
accordingly, in any summary
prospectus, if used). We also propose to
include wording designed to inform
investors about the primary general
risks of investing in money market
funds in this bulleted disclosure
statement.1127 With respect to money
market funds that are not government or
retail funds, we propose to remove
current requirements that money market
funds state that they seek to preserve the
value of shareholder investments at
$1.00 per share. This disclosure, which
was adopted to inform investors in
money market funds that a stable net
asset value does not indicate that the
fund will be able to maintain a stable
NAV, will not be relevant once funds
are required to ‘‘float’’ their net asset
value. We propose to require
government and retail funds, which the
floating NAV proposal would exempt
from the floating NAV requirement, to
include a new bulleted disclosure
statement in the summary section of the
fund’s statutory prospectus (and,
accordingly, in any summary
prospectus, if used) that does not
discuss the risks of a floating NAV, but
that would be designed to inform
investors about the risks of investing in
money market funds generally.
The proposed requirement that money
market funds transition to a floating
NAV would entail certain additional
tax- and operations-related disclosure,
which disclosure requirements would
not necessitate rule and form
amendments. However, we expect that,
pursuant to current disclosure
requirements, floating NAV money
market funds would include disclosure
in their prospectuses about the tax
consequences to shareholders of buying,
holding, exchanging, and selling the
shares of the floating NAV fund. In
1127 As discussed above in section III.A.8, while
money market funds are currently required to
include a similar disclosure statement on their
advertisements and sales materials, we propose
amending this disclosure statement to emphasize
that money market fund sponsors are not obligated
to provide financial support, and that money
market funds may not be an appropriate investment
option for investors who cannot tolerate losses.
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36985
addition, we expect that a floating NAV
money market fund would update its
prospectus and SAI disclosure regarding
the purchase, redemption, and pricing
of fund shares, to reflect any procedural
changes resulting from the fund’s use of
a floating NAV.
For the reasons discussed above in
section III.F.1.a, we are also proposing
amendments to Form N–1A that would
require all money market funds to
provide SAI disclosure regarding
historical instances in which the fund
has received financial support from a
sponsor or fund affiliate. Specifically,
the proposed amendments would
require each money market fund to
disclose any occasion during the last ten
years on which an affiliated person,
promoter, or principal underwriter of
the fund, or an affiliated person of such
person, provided any form of financial
support to the fund.
b. Change in Burden
The current approved collection of
information for Form N–1A is 1,578,689
annual aggregate hours and the total
annual external cost burden is
$122,730,472. The respondents to this
collection of information are open-end
management investment companies
registered with the Commission. The
entities that would be affected by the
proposed amendments to Form N–1A
discussed above include all money
market funds. However, various aspects
of these amendments would only affect
floating NAV money market funds, or
alternatively would only affect
government and retail money market
funds relying on the proposed
government fund exemption and retail
fund exemption from the floating NAV
requirement. For purposes of the PRA,
staff estimates that, of the estimated 586
total money market funds,1128 165 funds
would rely on the proposed government
fund exemption,1129 and 100 funds
would rely on the proposed retail fund
exemption.1130
The burdens associated with the
proposed amendments to Form N–1A
include one-time burdens as well as
ongoing burdens. Commission staff
estimates that each floating NAV money
market fund would incur a one-time
burden of 5 hours,1131 at a time cost of
1128 This estimate is based on a staff review of
reports on Form N–MFP filed with the Commission
for the month ended February 28, 2013.
1129 This estimate is based on the number of
money market funds that self-reported as
Government/Agency or Treasury funds on Form N–
MFP as of February 28, 2013.
1130 See supra note 995.
1131 This estimate is based on the following
calculation: 1 hour to update registration statement
to include bulleted disclosure statement + 3 hours
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$1,480,1132 to draft and finalize the
required disclosure and amend its
registration statement. In aggregate, staff
estimates that floating NAV money
market funds would incur a one-time
burden of 1,605 hours,1133 at a time cost
of $475,080,1134 to comply with the
proposed Form N–1A disclosure
requirements. In addition, Commission
staff estimates that each floating NAV
money market fund would incur an
ongoing burden of 0.5 hours, at a time
cost of $148,1135 each year to review and
update the SAI disclosure regarding
historical instances in which the fund
has received financial support from a
sponsor or fund affiliate. In aggregate,
staff estimates that floating NAV money
market funds would incur an annual
burden of approximately 161 hours,1136
at a time cost of $47,656,1137 to comply
with the proposed Form N–1A
disclosure requirements.
Amortizing these one-time and
ongoing hour and cost burdens over
three years results in an average annual
increased burden of approximately 2
hours per floating NAV fund,1138 at a
time cost of $592 per fund.1139 In
to update registration statement to include tax- and
operations-related disclosure about floating NAV +
1 hour to update registration statement to include
disclosure about financial support received by the
fund = 5 hours.
1132 This estimate is based on the following
calculations: (1 hour (to update registration
statement to include bulleted disclosure statement)
× $296 (blended rate for a compliance attorney and
a senior programmer) = $296) + (3 hours (to update
registration statement to include tax- and
operations-related disclosure about floating NAV) ×
$296 (blended rate for a compliance attorney and
a senior programmer) = $888) + (1 hour (to update
registration statement to include disclosure about
financial support received by the fund) × $296
(blended rate for a compliance attorney and a senior
programmer) = $296 = $1,480.
1133 This estimate is based on the following
calculations: 5 hours × 321 funds (586 total money
market funds—165 funds that would rely on the
proposed government fund exemption—100 funds
that would rely on the proposed retail fund
exemption) = 1,605 hours.
1134 This estimate is based on the following
calculation: 1,605 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$475,080.
1135 This estimate is based on the following
calculation: 0.5 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$148.
1136 This estimate is based on the following
calculation: 0.5 hours × 321 funds (586 total money
market funds—165 funds that would rely on the
proposed government fund exemption—100 funds
that would rely on the proposed retail fund
exemption) = approximately 161 hours.
1137 This estimate is based on the following
calculation: 161 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$47,656.
1138 This estimate is based on the following
calculation: 5 burden hours (year 1) + 0.5 burden
hours (year 2) + 0.5 burden hours (year 3) ÷ 3 = 2
hours.
1139 This estimate is based on the following
calculation: $1,480 (year 1 monetized burden hours)
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aggregate, staff estimates that floating
NAV money market funds would incur
an average annual increased burden of
642 hours,1140 at a time cost of
$190,032,1141 to comply with the
proposed Form N–1A disclosure
requirements.
Commission staff estimates that each
government or retail money market fund
would incur a one-time burden of 2
hours,1142 at a time cost of $592,1143 to
draft and finalize the required
disclosure and amend its registration
statement. In aggregate, staff estimates
that government and retail money
market funds would incur a one-time
burden of 530 hours,1144 at a time cost
of $156,880,1145 to comply with the
proposed Form N–1A disclosure
requirements. In addition, Commission
staff estimates that each government or
retail money market fund would incur
an ongoing burden of 0.5 hours, at a
time cost of $148,1146 each year to
review and update the SAI disclosure
regarding historical instances in which
the fund has received financial support
from a sponsor or fund affiliate. In
aggregate, staff estimates that
government and retail money market
funds would incur an annual burden of
approximately 133 hours,1147 at a time
+ $148 (year 2 monetized burden hours) + $148
(year 3 monetized burden hours) ÷ 3 = $592.
1140 This estimate is based on the following
calculation: 2 hours × 321 funds (586 total money
market funds—165 funds that would rely on the
proposed government fund exemption—100 funds
that would rely on the proposed retail fund
exemption) = 642 hours.
1141 This estimate is based on the following
calculation: 642 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$190,032.
1142 This estimate is based on the following
calculation: 1 hour to update registration statement
to include bulleted disclosure statement + 1 hour
to update registration statement to include
disclosure about financial support received by the
fund = 2 hours.
1143 This estimate is based on the following
calculation: (1 hour (to update registration
statement to include bulleted disclosure statement)
× $296 (blended rate for a compliance attorney and
a senior programmer) = $296) + (1 hour (to update
registration statement to include disclosure about
financial support received by the fund) × $296
(blended rate for a compliance attorney and a senior
programmer) = $296) = $592.
1144 This estimate is based on the following
calculation: 2 hours × 265 funds (165 funds that
would rely on the proposed government fund
exemption + 100 funds that would rely on the
proposed retail fund exemption) = 530 hours.
1145 This estimate is based on the following
calculation: 530 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$156,880.
1146 This estimate is based on the following
calculation: 0.5 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$148.
1147 This estimate is based on the following
calculation: 0.5 hours × 265 funds (165 funds that
would rely on the proposed government fund
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cost of $39,368,1148 to comply with the
proposed Form N–1A disclosure
requirements.
Amortizing these one-time and
ongoing hour and cost burdens over
three years results in an average annual
increased burden of 1 hour per
government or retail fund,1149 at a time
cost of $296.1150 In aggregate, staff
estimates that government and retail
fund money market funds would incur
an average annual increased burden of
265 hours,1151 at a time cost of
$78,440,1152 to comply with the
proposed Form N–1A disclosure
requirements.
In total, the staff estimates that all
money market funds (floating NAV
funds, as well as government and retail
funds that rely on the proposed
government and retail exemptions)
would incur an annual increased
burden of 907 hours,1153 at a time cost
of $268,472,1154 to comply with the
proposed Form N–1A disclosure
requirements. Additionally, the staff
estimates that there would be one-time
aggregate external costs (in the form of
printing costs) of $3,134,588 associated
with the proposed Form N–1A
disclosure requirements; amortizing
these external costs over three years
results in annual aggregate external
costs of $1,044,863.1155
exemption + 100 funds that would rely on the
proposed retail fund exemption) = approximately
133 hours.
1148 This estimate is based on the following
calculation: 133 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$39,368.
1149 This estimate is based on the following
calculation: 2 burden hours (year 1) + 0.5 burden
hours (year 2) + 0.5 burden hours (year 3) ÷ 3 = 1
hour.
1150 This estimate is based on the following
calculation: $592 (year 1 monetized burden hours)
+ $148 (year 2 monetized burden hours) + $148
(year 3 monetized burden hours) ÷ 3 = $296.
1151 This estimate is based on the following
calculation: 1 hour × 265 funds (165 funds that
would rely on the proposed government fund
exemption + 100 funds that would rely on the
proposed retail fund exemption) = 265 hours.
1152 This estimate is based on the following
calculation: 265 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$78,440.
1153 This estimate is based on the following
calculation: 642 hours + 265 hours = 907 hours. See
supra notes 1140 and 1151.
1154 This estimate is based on the following
calculation: $190,032 + $78,440 = $268,472. See
supra notes 1141 and 1152.
1155 We expect that a fund that must include
disclosure regarding historical instances in which
the fund has received financial support from a
sponsor or fund affiliate would need to add 1–4
pages of new disclosure to its registration statement.
Adding this new disclosure would therefore
increase the number of pages in, and change the
printing costs of, the fund’s registration statement.
Commission staff calculates the external costs
associated with the proposed Form N–1A
disclosure requirements as follows: 2.5 pages (mid-
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8. Advisers Act Rule 204(b)–1 and Form
PF
Advisers Act rule 204(b)–1 requires
SEC-registered private fund advisers
that have at least $150 million in private
fund assets under management to report
certain information regarding the
private funds they advise on Form PF.
The rule implements sections 204 and
211 of the Advisers Act, as amended by
the Dodd-Frank Act, which direct the
Commission (and the CFTC) to supply
FSOC with information for use in
monitoring systemic risk by establishing
reporting requirements for private fund
advisers. Form PF divides respondents
into groups based on their size and the
types of private funds they manage,
with some groups of advisers required
to file more information than others or
more frequently than others. Large
liquidity fund advisers—the only group
of advisers that would be affected by
today’s proposed amendments to Form
PF—must provide information
concerning their liquidity funds on
Form PF each quarter. Form PF contains
a collection of information under the
PRA.1156 This new collection of
information would be mandatory for
large liquidity fund advisers, and would
be kept confidential to the extent
discussed above in section III.I. Based
on data filed on Form PF and Form
ADV, Commission staff estimates that,
as of February 28, 2013, there were 25
large liquidity fund advisers subject to
this quarterly filing requirement that
collectively advised 43 liquidity funds.
a. Discussion of Proposed Amendments
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Under the proposed amendments to
Form PF, for each liquidity fund it
manages, a large liquidity fund adviser
would be required to provide, quarterly
and with respect to each portfolio
security, the following additional
point of 1 page and 4 pages) × $0.045 per page ×
27,863,000 money market fund registration
statements printed annually = $3,134,588 one-time
aggregate external costs. Amortizing these external
costs over three years results in aggregate annual
external costs of $1,044,863. Our estimate of
potential printing costs ($0.045 per page: $0.035 for
ink + $0.010 for paper) is based on data provided
by Lexecon Inc. in response to Investment Company
Act Release No. 27182 (Dec. 8, 2005) [70 FR 74598
(Dec. 15, 2005)]. See Lexecon Inc. Letter (Feb. 13,
2006), available at https://www.sec.gov/rules/
proposed/s71005/dbgross9453.pdf. For purposes of
this analysis, our best estimate of the number of
money market fund registration statements printed
annually is based on 27,863,000 money market fund
shareholder accounts in 2012. See Investment
Company Institute, 2013 Investment Company Fact
Book, at 178, available at https://www.ici.org/pdf/
2013_factbook.pdf.
1156 For purposes of the PRA analysis, the current
burden associated with the requirements of rule
204(b)–1 is included in the collection of
information requirements of Form PF.
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information for each month of the
reporting period:
• The name of the issuer;
• The title of the issue;
• The CUSIP number;
• The legal entity identifier, or LEI, if
available;
• At least one of the following other
identifiers, in addition to the CUSIP and
LEI, if available: ISIN, CIK, or any other
unique identifier;
• The category of investment (e.g.,
Treasury debt, U.S. government agency
debt, asset-backed commercial paper,
certificate of deposit, repurchase
agreement 1157);
• If the rating assigned by a credit
rating agency played a substantial role
in the liquidity fund’s (or its adviser’s)
evaluation of the quality, maturity or
liquidity of the security, the name of
each credit rating agency and the rating
each credit rating agency assigned to the
security;
• The maturity date used to calculate
weighted average maturity;
• The maturity date used to calculate
weighted average life;
• The final legal maturity date;
• Whether the instrument is subject
to a demand feature, guarantee, or other
enhancements, and information about
any of these features and their
providers;
• For each security, reported
separately for each lot purchased, the
total principal amount; the purchase
date(s); the yield at purchase and as of
the end of each month during the
reporting period for floating or variable
rate securities; and the purchase price as
a percentage of par;
• The value of the fund’s position in
the security and, if the fund uses the
amortized cost method of valuation, the
amortized cost value, in both cases with
and without any sponsor support;
• The percentage of the liquidity
fund’s assets invested in the security;
• Whether the security is categorized
as a level 1, 2, or 3 asset or liability on
Form PF; 1158
• Whether the security is an illiquid
security, a daily liquid asset, and/or a
weekly liquid asset, as defined in rule
2a–7; and
• Any explanatory notes.1159
1157 For repurchase agreements we are also
proposing to require large liquidity fund advisers to
provide additional information regarding the
underlying collateral and whether the repurchase
agreement is ‘‘open’’ (i.e., whether the repurchase
agreement has no specified end date and, by its
terms, will be extended or ‘‘rolled’’ each business
day (or at another specified period) unless the
investor chooses to terminate it).
1158 See Question 14 of Form PF. See also infra
notes 758–761 and accompanying and following
text.
1159 We also propose to define the following terms
in Form PF: conditional demand feature; credit
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Our proposed amendments to Form
PF are designed, as discussed in more
detail in section III.I above, to assist
FSOC in its monitoring and assessment
of systemic risk; to provide information
for FSOC’s use in determining whether
and how to deploy its regulatory tools;
and to collect data for use in our own
regulatory program. The additional
information we are proposing to require
large liquidity fund advisers to provide
with respect to the liquidity funds they
advise is virtually the same information
that money market funds must file on
Form N–MFP as we propose to amend
it, and should be familiar to large
liquidity fund advisers because, as of
February 28, 2013, virtually all of the 25
large liquidity funds advisers already
manage a money market fund or have a
related person that manages a money
market fund. Because advisers would be
required to report this information about
their portfolio holdings, the proposed
amendments to Form PF also would
remove current Questions 56 and 57 on
Form PF, which generally require large
liquidity fund advisers to provide
information about their liquidity funds’
portfolio holdings broken out by asset
class (rather than security by security).
We also proposing to require large
liquidity fund advisers to provide
information about any securities sold by
their liquidity funds during the
reporting period, including sale and
purchase prices. Finally, the
amendments would require large
liquidity fund advisers to identify any
money market fund advised by the
adviser or its related persons that
pursues substantially the same
investment objective and strategy and
invests side by side in substantially the
same positions as a liquidity fund the
adviser reports on Form PF.
b. Current Burden
The current approved collection of
information for Form PF is 258,000
annual aggregate hours and $25,684,000
in aggregate external costs. In estimating
these total approved burdens,
Commission staff estimated that the
amortized average annual burden of
Form PF for large liquidity fund
advisers in particular would be 290
hours per large liquidity fund adviser
for each of the first three years, resulting
in an aggregate amortized annual
burden of 23,200 hours for large
liquidity fund advisers for each of the
first three years.1160 Staff estimated that
rating agency; demand feature; guarantee;
guarantor; and illiquid security. See proposed Form
PF: Glossary of Terms.
1160 See Form PF Adopting Release, supra note
799, at n.411 (‘‘290 burden hours on average per
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the external cost burden would range
from $0 to $50,000 per large private
fund adviser, which resulted in
aggregate estimated external costs
attributable to large liquidity fund
advisers of $4,000,000. The external cost
estimates also included estimates for
filing fees, which were are $150 per
annual filing and $150 per quarterly
filing, resulting in annual filings costs
for large liquidity fund advisers of
$48,000.1161
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c. Change in Burden
Our staff estimates that the paperwork
burdens associated with Form N–MFP
(as we propose to amend it) are
representative of the burdens that large
liquidity fund advisers could incur as a
result of our proposed amendments to
Form PF because advisers would be
required to file on Form PF virtually the
same information money market funds
would file on Form N–MFP as we
propose to amend it and because, as
discussed above, virtually all of the 25
large liquidity funds advisers already
manage a money market fund or have a
related person that manages a money
market fund. Therefore, we believe that
large liquidity fund advisers—when
required to compile and report for their
liquidity funds generally the same
information virtually all of them already
report for their money market funds—
likely will use the same (or comparable)
staff and/or external service providers to
provide portfolio holdings information
on Form N–MFP and Form PF.
Our staff accordingly estimates that
our proposed amendments to Form PF
would result in paperwork burden
hours and external costs determined as
follows. First, as discussed in the PRA
analysis for our amendments to Form
N–MFP, our staff estimates that the
average annual amortized burdens per
money market fund imposed by Form
N–MFP as we propose to amend it are
145 hours 1162 and $8,187 in external
costs.1163 Our staff estimates that large
year × 80 large hedge fund advisers = 23,200
hours.’’).
1161 This estimate is based on the following
calculation: ($150 quarterly filing fee × 4 quarters)
× 80 large liquidity fund advisers) = $48,000.
1162 As discussed in the PRA analysis for Form
N–MFP, our staff estimates that Form N–MFP, as
we propose to amend it, would result in an
aggregate collection of information burden of 85,257
hours. See supra note 1102 and accompanying text.
Based on the staff’s estimated 586 money market
fund respondents, this results in a per fund annual
burden of approximately 145 hours.
1163 As discussed in the PRA analysis for Form
N–MFP, our staff estimates that Form N–MFP, as
we propose to amend it, would result in an
aggregate external cost burden of $4,798,160. See
supra note 1103. Based on the staff’s estimated 586
money market fund respondents, this results in a
per fund annual external cost burden of
approximately $8,187.
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liquidity fund advisers would incur
these burdens for each of their liquidity
funds, for the reasons discussed above,
and would incur a time cost of $36,730
associated with the 145 estimated
burden hours.1164 Because our staff
estimates that there were 25 large
liquidity fund advisers that collectively
advised 43 liquidity funds as of
February 28, 2013 as discussed above,
this would result in increased annual
burdens per large liquidity fund adviser
of 290 burden hours, at a total time cost
of $73,460, and $16,374 in external
costs.1165 This would result in increased
aggregate burden hours across all large
liquidity fund advisers of 7,250 burden
hours,1166 at a time cost of
$1,836,500,1167 and $409,350 in external
costs.1168 Finally, the aggregate
paperwork burden for Form PF under
our proposed amendments therefore
1164 Our staff estimates, as discussed above, that
large liquidity fund advisers are likely to use the
same (or comparable) staff and/or external service
providers to provide portfolio holdings information
on Form N–MFP and Form PF. Accordingly, our
staff estimates that large liquidity fund advisers
would use the same professionals, and in
comparable proportions (conservatively based on
the professionals used for the Form N–MFP initial
filings), for purposes of the staff’s estimate of time
costs associated with our proposed amendments to
Form PF. See supra note 1092. This results in the
following estimated time cost for the staff’s
estimated 145 per liquidity fund hour burdens: (85
hours × $243 blended average hourly rate for a
financial reporting manager ($294 per hour) and
fund senior accountant ($192 per hour) = $20,655
per fund) + (10 hours × $155 per hour for an
intermediate accountant = $1,550 per fund) + (17
hours × $314 per hour for a senior database
administrator = $5,338 per fund) + (10 hours × $300
for a senior portfolio manager = $3,000 per fund)
+ (23 hours × $269 per hour for a compliance
manager = $6,187 per fund) = $36,730.
1165 This estimate assumes for purposes of the
PRA that each large liquidity fund adviser advises
two large liquidity funds (43 total liquidity funds
divided by 25 large liquidity fund advisers). Each
large liquidity fund adviser therefore would incur
the following burdens: 145 estimated burden hours
per fund × 2 large liquidity funds = 290 burden
hours per large liquidity fund adviser; $36,730
estimated time cost per fund × 2 large liquidity
funds = $73,460 time cost per large liquidity fund
adviser; and $8,187 estimated external costs per
fund × 2 large liquidity funds = $16,374 external
costs per large liquidity fund adviser.
1166 This estimate is based on the following
calculation: 290 estimated additional burden hours
per large liquidity fund adviser × 25 large liquidity
fund advisers = 7,250.
1167 This estimate is based on the following
calculation: $73,460 estimated time cost per large
liquidity fund adviser × 25 large liquidity fund
advisers = $1,836,500.
1168 This estimate is based on the following
calculation: $16,374 estimated external costs per
large liquidity fund adviser × 25 large liquidity fund
advisers = $409,350.
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would be 249,300 burden hours 1169 and
$23,310,350 in external costs.1170
B. Alternative 2: Standby Liquidity Fees
and Gates
As discussed above, we are proposing
an alternative to our floating NAV
proposal. Under this alternative, we
propose to require that, in the event that
a money market fund’s weekly liquid
assets fell below 15% of its total assets,
the money market fund would be
required to institute a liquidity fee and
permitted to impose a redemption gate.
1. Rule 2a–7
a. Board Determinations
Under the proposed liquidity fees and
gates proposal, if a money market fund’s
weekly liquid assets fall below 15% of
total assets, the fund’s board may be
required to make and document a
number of determinations, when in the
best interest of the fund, regarding the
imposition of liquidity fees and gates,
including (i) whether to impose the
liquidity fee, and if so, what the amount
of the liquidity fee should be (not to
exceed 2%); (ii) whether to impose a
redemption gate; (iii) when to remove a
liquidity fee put in place (subject to
other rule requirements); and (iv) when
1169 Form PF’s current approved burden includes
23,200 aggregate burden hours associated with large
liquidity fund advisers, based on 80 large liquidity
fund advisers and an estimated 290 burden hours
per large liquidity fund adviser. Our amendments
to Form PF would increase the estimated 290
burden hours per large liquidity fund adviser by
290 hours, as discussed above, resulting in a total
of 580 burden hours per large liquidity fund
adviser. Multiplying 580 by the current estimated
number of 25 large liquidity fund advisers results
in 14,500 burden hours attributable to large
liquidity fund advisers, a 8,700 reduction from the
approved burden hours attributable to large
liquidity fund advisers. This therefore results in
249,300 total burden hours for all of Form PF
(current approved 258,000 burden hours—8,700
reduction = 249,300).
1170 Form PF’s current approved burden includes
$25,684,000 in external costs, which includes
$4,000,000 attributable to large liquidity fund
advisers for certain costs ($50,000 per adviser), and
$48,000 (or $600 per adviser) for filing fees, in both
cases assuming 80 large liquidity fund adviser
respondents. Form PF’s approved burden therefore
includes a total of $4,048,000 in external costs
attributable to large liquidity fund advisers.
Reducing these estimates to reflect our staff’s
current estimate of 25 large liquidity fund adviser
respondents results in costs of $1,250,000 (25 large
liquidity fund advisers × $50,000 per adviser) and
$15,000 (25 large liquidity fund advisers × $600),
respectively, for an aggregate cost of $1,265,000.
These costs, plus the additional external costs
associated with our proposed amendments to Form
PF ($409,350 as estimated above), result in total
external costs attributable to large liquidity fund
advisers of $1,674,350, a reduction of $2,373,650
from the currently approved external costs
attributable to large liquidity fund advisers. This
therefore results in total external cost for all of Form
PF of $23,310,350 (current approved external cost
burden of $25,684,000 ¥ $2,373,650 reduction =
$23,310,350).
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to lift a redemption gate put in place
(subject to other rule requirements).1171
This requirement is a collection of
information under the PRA, and is
designed to ensure that a fund that
imposes a liquidity fee or gate does so
only when, as determined by the fund’s
board, it is in the best interest of the
fund to do so. This new collection of
information would be mandatory for
money market funds that rely on rule
2a–7, and to the extent that the
Commission receives confidential
information pursuant to these
collections of information, such
information would be kept confidential,
subject to the provisions of applicable
law.1172
As discussed above, staff analysis of
Form N–MFP data shows that, between
March 2011 and October 2012, four
prime money market funds had weekly
liquid assets below 15% of total assets,
the trigger for board determinations
regarding the imposition of liquidity
fees and gates. Commission staff
estimates that the four money market
funds we estimate would satisfy the
triggering event would spend, on an
annual basis, (i) four hours of a fund
attorney’s time to prepare materials for
the board’s determinations, (ii) two
hours for the board to review those
materials and make the required
determinations, and (iii) one hour of a
fund attorney’s time per year, on
average, to prepare the written records
of such determinations.1173 Therefore,
staff estimates that the average annual
burden to prepare materials and written
records for a board’s required
determinations would be approximately
seven hours per fund 1174 at a time cost
of approximately $9,895 per fund.1175
Therefore, staff estimates the annual
burden would be approximately 28
burden hours 1176 and $39,580 in total
time costs for all money market
funds.1177 Amortized over a three-year
1171 See Proposed (Fees and Gates) rule 2a–
7(c)(2)(i), (ii).
1172 See supra note 994.
1173 This estimate includes preparing and
evaluating materials relevant to the determinations
required in imposing (and removing) either or both
liquidity fees and redemption gates. See supra note
1171.
1174 This estimate is based on the following
calculation: 4 hours to adopt + 2 hours for board
review + 1 hour for record preparation = 7 hours
per year.
1175 This estimate is based on the following
calculation: [5 hours × $379 per hour for an attorney
= $1,895] + [2 hours × $4,000 per hour for a board
of 8 directors = $8,000] = $9,895.
1176 This estimate is based on the following
calculation: 7 burden hours per money market fund
× 4 funds = 28 total burden hours.
1177 This estimate is based on the following
calculation: 4 money market funds × $9,895 in total
costs per fund complex = $39,580.
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period, this would result in an average
annual burden of approximately 9 hours
and a time cost of $13,193 for all
funds.1178 There would be no external
costs associated with this collection of
information.
b. Retail Exemption
As discussed above in section III.B.5,
we are not proposing a retail money
market fund exemption from our
liquidity fees and gates proposal.
Accordingly, there would be no
collection of information burden related
to the retail exemption.
c. Asset-Backed Securities
As outlined above, we are proposing
certain amendments relating to ABS
securities that would be adopted if the
first alternative (requiring money market
funds to float their NAV per share) is
adopted.1179 Under the proposal, the
board of directors would be required to
adopt written procedures requiring
periodic evaluation of its determination
that the fund is not relying on an ABS
sponsor’s financial strength or its ability
or willingness to provide liquidity. We
are also proposing that these
amendments would be adopted if the
liquidity fees and gates alternative is
adopted. Therefore, staff estimates that,
under the liquidity fees and gates
alternative, the one-time burden to
adopt written procedures regarding the
periodic evaluation of determinations
made by the fund as to ABS not subject
to guarantees would be approximately
1,647 hours and $1.2 million in total
time costs for all money market funds.
Amortized over a three-year period, this
would result in an average annual
burden of approximately 549 hours and
time costs of $400,000 for all funds. In
addition, staff estimates the annual
burden to prepare materials and written
records for a board’s required review of
new and existing determinations would
be approximately 732 burden hours and
$940,071 in total time costs for all
money market funds. Amortized over a
three-year period, this would result in
an average annual burden of
approximately 244 hours and time costs
of $313,357 for all funds. There would
be no external costs associated with this
collection of information.
d. Notice to Commission
As outlined above, we propose to
eliminate the requirements that money
market funds provide electronic notice
of any event of default or insolvency of
1178 This estimate is based on the following
calculation: 28 burden hours ÷ 3 = 9 average annual
burden hours; $39,580 burden costs ÷ 3 = $13,193
average annual burden cost.
1179 See Section IV.A.1.b above.
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36989
a portfolio security and any purchase by
a fund of a portfolio security by an
affiliate in reliance on rule 17a–9.1180
We are also proposing that these
amendments would be adopted if the
second alternative requiring liquidity
fees and gates is adopted. Therefore,
staff estimates that the proposed
amendment to eliminate electronic
notice of any event of default or
insolvency would reduce the current
collection of information by
approximately 10 hours annually, at a
total time cost savings of $3,790. Staff
further estimates that the proposed
amendment to eliminate electronic
notification of a purchase of a portfolio
security in reliance on rule 17a–9 would
reduce the current collection of
information by approximately 25 hours
annually, at a total time cost savings of
$9,475.1181 There would be no external
cost savings associated with this
collection of information.
e. Stress Testing
As outlined above, we are proposing
amendments to the stress testing
provision of rule 2a–7 to enhance the
hypothetical events for which a fund (or
its adviser) is required to test. The
amendments and enhancements we are
proposing to the stress testing
requirements would largely be identical
under either reform alternative we
might adopt, except that for floating
NAV money market funds we would
remove the standard to test against
preserving a stable share price if we
were to adopt the floating NAV
alternative, as discussed above in more
detail. Therefore, staff estimates that the
aggregate one-time burden for all money
market funds to implement the
proposed amendments to stress testing
would be the same as under our floating
NAV alternative (8,464 hours at a total
time cost of $3.9 million). Amortized
over a three-year period, this would
result in an average annual burden of
2,821 burden hours and $1.3 million
total time cost for all funds.1182 There
would be no external costs associated
with this collection of information.
f. Web site Disclosure
We are proposing four amendments to
the information money market funds are
required to disclose on their Web sites.
These amendments would promote
transparency of money market funds’
risks and risk management by:
• Harmonizing the specific portfolio
holdings information that rule 2a–7
1180 See
supra section IV.A.1.c.
1181 Id.
1182 See supra section IV.A.1.e note 1032 and
accompanying text.
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currently requires funds to disclose on
the fund’s Web site with the
corresponding portfolio holdings
information proposed to be reported on
Form N–MFP; 1183
• Requiring that a fund disclose on its
Web site a schedule, chart, graph, or
other depiction showing the percentage
of the fund’s total assets that are
invested in daily and weekly liquid
assets, as well as the fund’s net inflows
or outflows, as of the end of each
business day during the preceding six
months (which depiction must be
updated each business day as of the end
of the preceding business day); 1184
• Requiring that a fund disclose on its
Web site a schedule, chart, graph, or
other depiction showing the fund’s
daily current NAV per share, as of the
end of each business day during the
preceding six months (which depiction
must be updated each business day as
of the end of the preceding business
day); 1185 and
• Requiring a fund to disclose on its
Web site substantially the same
information that the fund is required to
report to the Commission on Form N–
CR regarding the provision of financial
support to the fund, the imposition and
removal of liquidity fees, and the
suspension and resumption of fund
redemptions.1186
This new collection of information
would be mandatory for money market
funds that rely on rule 2a–7, and to the
extent that the Commission receives
confidential information pursuant to
these collections of information, such
information would be kept confidential,
subject to the provisions of applicable
law.1187
i. Disclosure of Portfolio Holdings
Information
As outlined above, we are proposing
amendments to the portfolio holdings
information that rule 2a–7 currently
requires money market funds to disclose
on the fund’s Web site to harmonize this
information with the corresponding
portfolio holdings information proposed
to be reported on Form N–MFP. We are
proposing substantially similar
amendments under both the floating
NAV alternative and the liquidity fees
and gates alternative. Therefore, the
burdens associated with the proposed
amendments would be the same as
those discussed in section IV.A.1.f.i
above (7,032 aggregate hours per year, at
a total aggregate time cost of
1183 Proposed
(Fees & Gates) rule 2a–7(h)(10)(i).
(Fees & Gates) rule 2a–7(h)(10)(ii).
1185 Proposed (Fees & Gates) rule 2a–7(h)(10)(iii).
1186 Proposed (FNAV) rule 2a–7(h)(10)(iv).
1187 See supra note 994.
1184 Proposed
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$1,455,624). There would be no external
costs associated with this collection of
information.
ii. Disclosure of Daily Liquid Assets and
Weekly Liquid Assets
We are proposing to require money
market funds to disclose on the fund’s
Web site a schedule, chart, graph, or
other depiction showing the percentage
of the fund’s total assets that are
invested in daily and weekly liquid
assets, as well as the fund’s net inflows
or outflows, and to update this
depiction each business day, as
discussed above. We are proposing
identical requirements under both the
floating NAV alternative and the
liquidity fees and gates alternative.
Therefore, the burdens associated with
the proposed requirements would be the
same as those discussed in Section
IV.A.1.f.ii above (26,175 aggregate hours
per year, at a total aggregate time cost of
$7,523,849). There would be no external
costs associated with this collection of
information.
iii. Disclosure of Daily Current NAV
We are proposing to require a money
market fund to disclose on the fund’s
Web site a schedule, chart, graph, or
other depiction showing the fund’s
daily current NAV as of the end of the
previous business day, and to update
this depiction each business day, as
discussed above. We are proposing
substantially similar requirements
under both the floating NAV alternative
and the liquidity fees and gates
alternative. Therefore, the burdens
associated with the proposed
requirements would be the same as
those discussed in Section IV.A.1.f.iii
above (26,175 aggregate hours per year,
at a total aggregate time cost of
$7,523,849). There would be no external
costs associated with this collection of
information.
iv. Disclosure Regarding Financial
Support Received by the Fund, the
Imposition and Removal of Liquidity
Fees, and the Suspension and
Resumption of Fund Redemptions
As outlined above, we are proposing
to require money market fund to
disclose on the fund’s Web site
substantially the same information that
the fund is required to report to the
Commission on Form N–CR regarding
the provision of financial support to the
fund. We are proposing identical
requirements under both the floating
NAV alternative and the liquidity fees
and gates alternative. Therefore, the
burdens associated with these proposed
requirements would be the same as
those discussed in Section IV.A.1.f.iv
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above (40 aggregate hours per year, at a
total aggregate time cost of $8,280).
There would be no external costs
associated with this collection of
information.
In connection with the fees and gates
alternative, we are also proposing to
require money market funds to disclose
on the fund’s Web site substantially the
same information that the fund is
required to report to the Commission on
Form N–CR regarding the imposition
and removal of liquidity fees, and the
suspension and resumption of fund
redemptions. Commission staff
estimates that the Commission would
receive, in aggregate, an average of 8
reports per year filed in response to
events specified on Part E (‘‘Imposition
of liquidity fee’’), Part F (‘‘Suspension of
Fund redemptions’’), and Part G
(‘‘Removal of liquidity fees and/or
resumption of Fund redemptions’’) of
Form N–CR.1188 Because the required
Web site disclosure overlaps with the
information that a fund must disclose
on Form N–CR when the fund imposes
or removes liquidity fees, or suspends
and resumes fund redemptions, we
anticipate that the burdens a fund
would incur to draft and finalize the
disclosure that would appear on its Web
site would largely be incurred when the
fund files Form N–CR.1189 Commission
staff estimates that a fund would incur
an additional burden of 1 hour, at a time
cost of $207,1190 each time that it
updates its Web site to include the new
disclosure. Accordingly, Commission
staff estimates that the requirement to
disclose information about the
imposition and removal of liquidity
1188 This estimate is based on staff’s analysis of
Form N–MFP data that shows that, between March
2011 and October 2012, 4 prime money market
funds had weekly liquid assets below 15% at the
time of filing. We assume that the Commission
would receive 4 reports on Form N–CR filed in
response to events specified on Part E (which
requires filing when the 15% threshold is crossed,
regardless of whether the fund imposes the default
liquidity fee) and Part F (which requires filing when
the 15% threshold is crossed and the fund imposes
a redemption gate). Assuming that each time a fund
crosses the 15% threshold, it would impose a fee
or gate, and that it would eventually remove this
fee or gate, we assume that the Commission would
additionally receive 4 reports on Form N–CR filed
in response to events specified on Part G (which
requires filing when a fund that has imposed a
liquidity fee and/or suspended the fund’s
redemptions determines to remove such fee and/or
resume fund redemptions).
However, this is a conservative estimate, because
we expect that funds would be less likely to cross
the 15% threshold if we adopt our proposal, since
we expect that the funds would increase their risk
management around their level of weekly liquid
assets in response to the fee and gate requirements.
1189 See infra section IV.B.4.
1190 This estimate is based on the following
calculation: 1 hour per Web site update × $207 per
hour for a webmaster = $207.
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fees, and the suspension and
resumption of fund redemptions, on the
fund’s Web site would result in a total
aggregate burden of 8 hours per year,1191
at a total aggregate time cost of
$1,656.1192 There would be no external
costs associated with this collection of
information.
v. Change in Burden
The aggregate additional annual
burden associated with the proposed
Web site disclosure requirements
discussed above is 59,430 hours 1193 at
a time cost of $16,513,258.1194
Amortized over a three-year period, this
would result in an average annual
burden of 19,810 burden hours and
$5,504,419 total cost for all funds.1195
There would be no external costs
associated with this collection of
information.
g. Total Burden for Rule 2a–7
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The currently approved burden for
rule 2a–7 is 517,228 hours. The net
aggregate additional burden hours
associated with the proposed
amendments to rule 2a–7 would
increase the burden estimate to 540,626
hours annually for all funds.1196
1191 This estimate is based on the following
calculation: 1 hour per Web site update × 8 Web
site updates made by money market funds = 8
hours.
1192 This estimate is based on the following
calculation: 8 hours per year × $207 per hour for
a webmaster = $1,656.
1193 This estimate is based on the following
calculation: 7,032 hours (annual aggregate burden
for disclosure of portfolio holdings information) +
26,175 (annual aggregate burden for disclosure of
daily liquid assets and weekly liquid assets) +
26,175 (annual aggregate burden for disclosure of
daily market-based NAV) + 40 hours (annual
aggregate burden for disclosure of financial support
provided to money market funds) + 8 hours (annual
aggregate burden for disclosure of the imposition
and removal of liquidity fees, and the suspension
and resumption of fund redemptions) = 59,430
hours.
1194 This estimate is based on the following
calculation: $1,455,624 (annual aggregate costs
associated with disclosure of portfolio holdings
information) + $7,523,849 (annual aggregate costs
associated with disclosure of daily liquid assets and
weekly liquid assets) + $7,523,849 (annual
aggregate costs associated with disclosure of daily
market-based NAV) + $8,280 (annual aggregate
costs associated with disclosure of financial support
provided to money market funds) + $1,656 (annual
aggregate costs associated with disclosure of the
imposition and removal of liquidity fees, and the
suspension and resumption of fund redemptions) =
$16,513,258.
1195 This estimate is based on the following
calculation: 59,430 hours ÷ 3 = 19,810 burden
hours; $16,513,258 ÷ 3 = $5,504,419 burden cost.
1196 This estimate is based on the following
calculation: 517,228 hours (currently approved
burden) + 9 hours (board determinations) + (549
hours + 244 hours) (ABS determination &
recordkeeping)—(10 hours + 25 hours) (notice to
the Commission) + 2,821 hours (stress testing) +
19,810 hours (Web site disclosure) = 540,626 hours.
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2. Rule 22e–3
As outlined above, rule 22e–3 under
the Investment Company Act exempts
money market funds from section 22(e)
of the Act to permit them to suspend
redemptions and postpone payment of
redemption proceeds in order to
facilitate an orderly liquidation of the
fund, provided that certain conditions
are met. To provide shareholders with
protections comparable to those
currently provided by the rule while
also updating the rule to make it
consistent with our proposed
amendments to rule 2a–7, we are
proposing to amend rule 22e–3 under
our fees and gates proposal to permit a
money market fund to invoke the
exemption in rule 22e–3 if the fund, at
the end of a business day, has invested
less than 15% of its total assets in
weekly liquid assets.1197 As under the
current rule, a money market fund
would continue to be able to invoke the
exemption in rule 22e–3 if it had broken
the buck or was about to break the
buck.1198
The proposed amendments to rule
22e–3 under our fees and gates
proposal, like the amendments we
propose to rule 22e–3 under our floating
NAV proposal, are designed to permit a
money market fund to suspend
redemptions when the fund is under
significant stress, as the funds may do
today under rule 22e–2. As with our
proposed amendments to rule 22e–3
under our floating NAV proposal, we do
not expect that money market funds
would invoke the exemption provided
by rule 22e–3 more frequently under our
fees and gates proposal than they do
today. Although we propose to change
the circumstances under which a money
market fund may invoke the exemption
provided by rule 22e–3, the rule as we
propose to amend it still would permit
a money market fund to invoke the
exemption only when the fund is under
significant stress, and our staff estimates
that a money market fund is likely to
experience that level of stress and
choose to suspend redemptions in
reliance on rule 22e–3 with the same
frequency that funds today may do so.
Therefore, we are not revising rule 22e–
3’s current approved annual aggregate
collection of information, which would
remain approximately 30 minutes.
There would be no change in the
external cost burden associated with
this collection of information.
3. Rule 30b1–7 and Form N–MFP
As outlined above, we are also
proposing that these amendments
1197 Proposed
1198 Proposed
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(Fees & Gates) rule 2a–7(a)(1)(i).
Fmt 4701
Sfmt 4702
36991
would be adopted if the second
alternative, requiring money market
funds whose liquidity levels fell below
a specified threshold to consider
imposing a liquidity fee and permit the
funds to suspend redemptions
temporarily, were adopted. Therefore, as
discussed above under the floating NAV
proposal, Commission staff estimates
that, under our fees and gates proposal,
our proposed amendments to Form N–
MFP would result in all money market
funds, incurring, in aggregate, 40,043
hours at a total time cost of $10.4
million plus $373,680 in external costs
for all funds.1199 Staff estimates that our
proposed amendments to Form N–MFP
would result in a total aggregate annual
collection of information burden of
85,257 hours and $4,798,160 in external
costs.1200
4. Rule 30b1–8 and Form N–CR
As discussed above, we are proposing
to adopt new Form N–CR under the
floating NAV alternative, which would
require disclosure, by means of a
current report filed with the
Commission, of certain specific
reportable events. Similarly, we are also
proposing to adopt new Form N–CR if
the liquidity fees and gates alternative is
adopted. Albeit with some variations,
under both alternatives the information
reported on Form N–CR would include
instances of portfolio security default,
sponsor support of funds, and certain
significant deviations in net asset
value.1201 In addition, under the
liquidity fees and gates alternative, we
would also require that money market
funds file a report on Form N–CR in
response to events specified on Part E
(‘‘Imposition of Liquidity Fee’’), Part F
(‘‘Suspension of Fund Redemptions’’)
and Part G (‘‘Removal of Liquidity Fees
and/or Resumption of Fund
Redemptions’’).
Under the liquidity fees and gates
alternative, the staff estimates that on
average the Commission would receive
the same number of reports filed per
year in response to the events specified
on Parts B, C, and D as under the
floating NAV alternative. In addition,
the staff estimates that on average the
Commission would an additional 8
reports per year filed in response to
events specified on Parts E, F, and G of
Form N–CR.1202
1199 See
supra note 1101 and accompanying text.
supra notes 1102 and 1103 and
accompanying text.
1201 See proposed (FNAV) Form N–CR Parts A–
D; proposed (Fees & Gates) Form N–CR Part A–D;
see also section III.G.1.
1202 This estimate is based on staff’s analysis of
Form N–MFP data that shows that, between March
1200 See
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As discussed above, the staff
estimates that a fund would spend on
average approximately 5 hours 1203 of an
in-house attorney’s and an accountant’s
time to prepare, review and submit
Form N–CR, at a total time cost of
$1,708.1204 In the aggregate, the staff
estimates that compliance with new rule
30b1–8 and Form N–CR would result in
a total annual burden of approximately
341 burden hours and total annual time
costs of approximately $116,429.1205
Given an estimated 586 money market
funds that would be required to comply
with new rule 30b1–8 and Form N–
CR,1206 this would result in an average
annual burden of approximately 0.58
burden hours and average annual time
costs of approximately $199 on a perfund basis. The staff estimates that there
will be no external costs associated with
this collection of information.
2011 and October 2012, 4 prime money market
funds had weekly liquid assets below 15% at the
time of filing. The staff assumes that the
Commission would receive 4 reports on Form N–
CR filed in response to events specified on Part E
(which requires filing when the 15% threshold is
crossed, regardless of whether the fund imposes the
default liquidity fee) and Part F (which requires
filing when the 15% threshold is crossed and the
fund imposes a redemption gate). Solely for
purposes of this estimate, the staff counts the filings
of the initial as well as amended report under Parts
E and F as one report. See instructions to proposed
(Fees & Gates) Form N–CR Parts E, F. Assuming that
each time a fund crosses the 15% threshold, it
would impose a fee or gate, and that it would
eventually remove this fee or gate, the staff assumes
that the Commission would additionally receive 4
reports on Form N–CR filed in response to events
specified on Part G (which requires filing when a
fund that has imposed a liquidity fee and/or
suspended the fund’s redemptions determines to
remove such fee and/or resume fund redemptions).
However, this is a conservative estimate, because
the staff expects that funds would be less likely to
cross the 15% threshold if the Commission adopts
our proposal, since the staff expects that the funds
would increase their risk management around their
level of weekly liquid assets in response to the fee
and gate requirements.
1203 This estimate is derived in part from our
current PRA estimate for Form 8–K. In addition, the
staff expects that it would take approximately the
same amount of time to prepare and file a report
on Form N–CR, regardless under which Part of
Form N–CR it is filed.
1204 This estimate is based on the following
calculation: (4 hours × $379/hour for an attorney =
$1,516), plus (1 hour × 192/hour for a fund senior
accountant = $192), for a combined total of 5 hours
(4 hours for an attorney + 1 hour for a fund senior
accountant) and total time costs of $1,708.
1205 This estimate is based on the following
calculations: (20 reports filed per year in respect of
Part B) + (40 reports filed per year in respect of Part
C) + (0.167 reports filed per year in respect of Part
D (1 report every 6 years divided by 6 years)) + (8
reports filed per year in respect of Parts E, F and
G) = 68.167 reports filed per year. 68.167 reports
filed per year × 5 hours per report = approximately
341 total annual burden hours. 68.167 reports filed
per year × $1,708 in costs per report =
approximately $116,429 total annual costs.
1206 See supra note 1114.
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5. Rule 34b–1(a)
As outlined above,1207 because we are
amending the wording of the rule
482(b)(4) risk disclosures in money
market funds’ advertisements, rule 34b–
1(a) is indirectly affected by our
proposed amendments because it
references rule 482. However, we are
proposing no changes to rule 34b–1(a)
itself.
We already account for the burdens
associated with the wording changes to
the risk disclosures in money market
fund advertising when discussing our
amendments to rule 482(b)(4).1208 By
complying with our amendments to rule
482(b)(4), money market funds would
also automatically remain in
compliance with respect to how our
proposed changes would affect rule
34b–1(a). Therefore, any burdens
associated with rule 34b–1(a) as a result
of our proposed amendment to rule
482(b)(4) are already accounted for in
section IV.B.6 below.
6. Rule 482
As outlined above, we are proposing
to amend the wording of the rule
482(b)(4) risk disclosures in money
market funds’ advertisements that
would be adopted under the floating
NAV alternative.1209 Similarly, we are
also proposing to amend the wording of
the rule 482(b)(4) risk disclosures in
money market funds’ advertisements
(including prominently on a fund’s Web
site) if the liquidity fees and gates
alternative is adopted.1210 For purposes
of the estimated burden of the proposed
amendments under the liquidity fees
and gates alternative, however,
Commission staff estimates the same
burden as under the floating NAV
alternative as discussed in Section
IV.A.6 above.1211 Therefore, using an
estimate of 586 money market funds
that would be required to comply with
the amendments to rule 482(b)(4),1212
1207 See
supra section IV.A.5.
infra section IV.B.6.
1209 See supra section IV.A.6.
1210 See (Fees & Gates) rule 482(b)(4)(i); (Fees &
Gates) rule 482(b)(4)(ii).
1211 In supra note 1120, we discuss how the
proposed compliance period of 2 years under the
floating NAV alternative should allow funds
sufficient time to amend the wording of their rule
482(b)(4) risk disclosures as part of a more general,
periodic update of their advertising materials and
Web site. While shorter than under the floating
NAV alternative, the staff expects that making these
changes as part of a more general update should
still be possible with a compliance period of only
1 year as proposed under the liquidity fees and
gates alternative.
1212 This estimate is based on a staff review of
reports on Form N–MFP filed with the Commission
for the month ended February 28, 2013. For
purposes of this PRA, the staff assumes that the
universe of money market funds affected by the
1208 See
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the staff estimates that in the aggregate,
the proposed amendments would result
in a total one-time burden of
approximately 3,077 burden hours 1213
at a total one-time time cost of
approximately $857,904.1214 Amortized
over a three-year period, this would
result in an average annual burden of
approximately 1,026 burden hours at an
annual time cost of approximately
$285,968 for all funds. The staff
estimates that there would be no
external costs incurred in complying
with the proposed amendment.
7. Form N–1A
We are proposing amendments to
Form N–1A in connection with the
liquidity fees and gates alternative
proposal. This new collection of
information would be mandatory for
money market funds that rely on rule
2a–7, and to the extent that the
Commission receives confidential
information pursuant to these
collections of information, such
information would be kept confidential,
subject to the provisions of applicable
law.1215
a. Discussion of Proposed Amendments
The Commission’s fees and gates
alternative proposal would permit funds
to charge liquidity fees and impose
redemption restrictions on money
market fund investors. To inform
investors about these potential
restrictions, we propose to require that
each money market fund (other than
government money market funds that
have chosen to rely on the proposed
rule 2a–7 exemption for government
money market funds from the fee and
gate requirements) include a bulleted
statement, disclosing the particular risks
associated with investing in a fund that
may impose liquidity fees or
redemption restrictions, in the summary
section of the statutory prospectus (and,
accordingly, in any summary
prospectus, if used). We also propose to
include wording designed to inform
investors about the primary general
risks of investing in money market
funds in this bulleted disclosure
statement.1216
amendments to rule 482(b)(4) would be the same as
the current universe for Form N–MFP.
1213 This estimate is based on the following
calculation: 5.25 burden hours per fund × 586 funds
= approximately 3,077 total burden hours.
1214 This estimate is based on the following
calculation: approximately $1,464 total costs per
fund × 586 funds = approximately $857,904 total
costs.
1215 See supra note 994.
1216 As discussed above in section III.B.8, while
money market funds are currently required to
include a similar disclosure statement on their
advertisements and sales materials, we propose
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The liquidity fees and gates proposal
would exempt government money
market funds from any fee or gate
requirement, but a government money
market fund would be permitted to
impose fees or gates if the ability to
impose fees or gates were disclosed in
the fund’s prospectus. Accordingly, the
proposed amendments to Form N–1A
would require government money
market funds that have chosen to rely
on this exemption to include a bulleted
disclosure statement in the summary
section of the fund’s statutory
prospectus (and, accordingly, in any
summary prospectus, if used) that does
not include discussion of the risks of
liquidity fees and gates, but that
includes additional detail about the
risks of investing in money market
funds generally.
Currently, funds are required to
disclose any restrictions on fund
redemptions in their registration
statements. We expect that, to comply
with these requirements, money market
funds (besides government money
market funds that have chosen to rely
on the proposed rule 2a–7 exemption
from the fee and gate requirements)
would disclose in the statutory
prospectus, as well as in the SAI, as
applicable, the effects that the potential
imposition of fees and/or gates may
have on a shareholder’s ability to
redeem shares of the fund. We also
expect that, promptly after a money
market fund imposes a redemption fee
or gate, it would inform prospective
investors of any fees or gates currently
in place by means of a prospectus
supplement.
For the reasons discussed above in
section III.B.8.c, we are also proposing
amendments to Form N–1A that would
require all money market funds (except
government money market funds that
have chosen to rely on the proposed
rule 2a–7 exemption from the fee and
gate requirements) to provide SAI
disclosure regarding the historical
occasions in which the fund’s weekly
liquid assets have fallen below 15% or
the fund has imposed liquidity fees or
redemption gates.
Finally, for the reasons discussed
above in section III.F.1.a, we are
proposing amendments to Form N–1A
that would require all money market
funds to provide SAI disclosure
regarding historical instances in which
the fund has received financial support
from a sponsor or fund affiliate.
Specifically, the proposed amendments
amending this disclosure statement to emphasize
that money market fund sponsors are not obligated
to provide financial support, and that money
market funds may not be an appropriate investment
option for investors who cannot tolerate losses.
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would require each money market fund
to disclose any occasion during the last
ten years on which an affiliated person,
promoter, or principal underwriter of
the fund, or an affiliated person of such
person, provided any form of financial
support to the fund.
b. Change in Burden
The current approved collection of
information for Form N–1A is 1,578,689
annual aggregate hours, and the total
annual external cost burden is
$122,730,472. The respondents to this
collection of information are open-end
management investment companies
registered with the Commission. The
entities that would be affected by the
proposed amendments to Form N–1A
discussed above include all money
market funds. However, various aspects
of these amendments would only affect
those money market funds that are not
government funds that rely on the
proposed rule 2a–7 exemption from the
fee and gate requirements, while others
would only affect government funds
relying on the proposed exemption. For
purposes of the PRA, staff estimates
that, of the estimated 586 total money
market funds,1217 165 funds would rely
on the proposed government fund
exemption.1218
The burdens associated with the
proposed amendments to Form N–1A
include one-time burdens as well as
ongoing burdens. Commission staff
estimates that each money market fund
(except government money market
funds that have chosen to rely on the
proposed rule 2a–7 exemption from the
fee and gate requirements) would incur
a one-time burden of 5 hours,1219 at a
time cost of $1,480,1220 to draft and
1217 See
supra note 1040.
estimate is based on the number of
money market funds that self-reported as
Government/Agency or Treasury funds on Form N–
MFP as of February 28, 2013.
1219 This estimate is based on the following
calculation: 1 hour to update registration statement
to include bulleted disclosure statement + 3 hours
to update registration statement to include
disclosure about effects that fees/gates may have on
shareholder redemptions, and disclosure about
historical occasions in which the fund’s weekly
liquid assets have fallen below 15% or the fund has
imposed fees/gates + 1 hour to update registration
statement to include disclosure about financial
support received by the fund = 5 hours.
1220 This estimate is based on the following
calculation: (1 hour (to update registration
statement to include bulleted disclosure statement)
× $296 (blended rate for a compliance attorney and
a senior programmer) = $296) + (3 hours (to update
registration statement to include disclosure about
effects that fees/gates may have on shareholder
redemptions, and disclosure about historical
occasions in which the fund’s weekly liquid assets
have fallen below 15% or the fund has imposed
fees/gates) × $296 (blended rate for a compliance
attorney and a senior programmer) = $888) + (1
hour (to update registration statement to include
1218 This
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36993
finalize the required disclosure and
amend its registration statement. In
aggregate, staff estimates that these
funds would incur a one-time burden of
2,105 hours,1221 at a time cost of
$623,080,1222 to comply with the
proposed Form N–1A disclosure
requirements. In addition, Commission
staff estimates that each money market
fund (except government money market
funds relying on the proposed
government fund exemption) would
incur an ongoing burden of 1 hour, at
a time cost of $296,1223 each year to: 1)
review and update the SAI disclosure
regarding historical occasions in which
the fund’s weekly liquid assets have
fallen below 15% or the fund has
imposed liquidity fees or redemption
gates; 2) review and update the SAI
disclosure regarding historical instances
in which the fund has received financial
support from a sponsor or fund affiliate;
and 3) inform prospective investors of
any fees or gates currently in place (as
appropriate) by means of a prospectus
supplement. In aggregate, staff estimates
that these funds would incur an annual
burden of 421 hours,1224 at a time cost
of $124,616,1225 to comply with the
proposed Form N–1A requirements.
Amortizing these one-time and
ongoing hour and cost burdens over
three years results in an average annual
increased burden of approximately 2
hours per fund (except government
money market funds that have chosen to
rely on the proposed rule 2a–7
disclosure about financial support received by the
fund) × $296 (blended rate for a compliance
attorney and a senior programmer) = $296) =
$1,480.
1221 This estimate is based on the following
calculation: 5 hours × 421 funds (586 total money
market funds—165 funds that would rely on the
proposed government fund exemption) = 2,105
hours.
1222 This estimate is based on the following
calculation: 2,105 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$623,080.
1223 This estimate is based on the following
calculation: (0.5 hours (to review and update the
SAI disclosure regarding historical occasions in
which the fund’s weekly liquid assets have fallen
below 15% or the fund has imposed liquidity fees
or redemption gates, and to inform prospective
investors of any fees or gates currently in place (as
appropriate) by means of a prospectus supplement)
× $296 (blended rate for a compliance attorney and
a senior programmer) = $148) + (0.5 hours (to
review and update the SAI disclosure regarding
historical instances in which the fund has received
financial support from a sponsor or fund affiliate)
× $296 (blended rate for a compliance attorney and
a senior programmer) = $148) = $296.
1224 This estimate is based on the following
calculation: 1 hours × 421 funds (586 total money
market funds—165 funds that would rely on the
proposed government fund exemption) = 421 hours.
1225 This estimate is based on the following
calculation: 421 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$124,616.
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exemption from the fee and gate
requirements),1226 at a time cost of
approximately $691 per fund.1227 In
aggregate, staff estimates that these
funds would incur an average annual
increased burden of 842 hours,1228 at a
time cost of $249,232,1229 to comply
with the proposed Form N–1A
disclosure requirements.
Commission staff estimates that each
government money market fund that has
chosen to rely on the proposed rule 2a–
7 exemption from the fee and gate
requirements would incur a one-time
burden of 2 hours,1230 at a time cost of
$592,1231 to draft and finalize the
required disclosure and amend its
registration statement. In aggregate, staff
estimates that these government funds
would incur a one-time burden of 330
hours,1232 at a time cost of $97,680,1233
to comply with the proposed Form N–
1A disclosure requirements. In addition,
Commission staff estimates that each
government fund relying on the
proposed government fund exemption
would incur an ongoing burden of 0.5
hours, at a time cost of $148,1234 each
year to review and update the SAI
disclosure regarding historical instances
in which the fund has received financial
support from a sponsor or fund affiliate.
1226 This estimate is based on the following
calculation: (5 burden hours (year 1) + 1 burden
hour (year 2) + 1 burden hours (year 3)) ÷ 3 =
approximately 2 hours.
1227 This estimate is based on the following
calculation: ($1,480 (year 1 monetized burden
hours) + $296 (year 2 monetized burden hours) +
$296 (year 3 monetized burden hours)) ÷ 3 =
approximately $691.
1228 This estimate is based on the following
calculation: 2 hours × 421 funds (586 total money
market funds—165 funds that would rely on the
proposed government fund exemption) = 842 hours.
1229 This estimate is based on the following
calculation: 842 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$249,232.
1230 This estimate is based on the following
calculation: 1 hour to update registration statement
to include bulleted disclosure statement + 1 hour
to update registration statement to include
disclosure about financial support received by the
fund = 2 hours.
1231 This estimate is based on the following
calculation: (1 hour (to update registration
statement to include bulleted disclosure statement)
× $296 (blended rate for a compliance attorney and
a senior programmer) = $296) + (1 hour (to update
registration statement to include disclosure about
financial support received by the fund) × $296
(blended rate for a compliance attorney and a senior
programmer) = $296) = $592.
1232 This estimate is based on the following
calculation: 2 hours × 165 funds that would rely on
the proposed government fund exemption = 330
hours.
1233 This estimate is based on the following
calculation: 330 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$97,680.
1234 This estimate is based on the following
calculation: 0.5 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$148.
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In aggregate, staff estimates that
government funds would incur an
annual burden of approximately 83
hours,1235 at a time cost of $24,568,1236
to comply with the proposed Form N–
1A disclosure requirements.
Amortizing these one-time and
ongoing hour and cost burdens over
three years results in an average annual
increased burden of 1 hour per
government fund that has chosen to rely
on the proposed rule 2a–7
exemption,1237 at a time cost of $296 per
fund.1238 In aggregate, staff estimates
that these government funds would
incur an average annual increased
burden of 165 hours,1239 at a time cost
of $48,840,1240 to comply with the
proposed Form N–1A disclosure
requirements.
In total, the staff estimates that all
money market funds would incur an
average annual increased burden of
1,007 hours,1241 at a time cost of
$298,072,1242 to comply with the
proposed Form N–1A disclosure
requirements. Additionally, the staff
estimates that there would be one-time
aggregate external costs (in the form of
printing costs) of $6,269,175 associated
with the proposed Form N–1A
disclosure requirements; amortizing
these costs over three years results in
annual aggregate external costs of
$2,089,725.1243
1235 This estimate is based on the following
calculation: 0.5 hours × 165 funds that would rely
on the proposed government fund exemption =
approximately 83 hours.
1236 This estimate is based on the following
calculation: 83 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$24,568.
1237 This estimate is based on the following
calculation: 2 burden hours (year 1) + 0.5 burden
hours (year 2) + 0.5 burden hours (year 3) ÷ 3 = 1
hour.
1238 This estimate is based on the following
calculation: $592 (year 1 monetized burden hours)
+ $148 (year 2 monetized burden hours) + $148
(year 3 monetized burden hours) ÷ 3 = $296.
1239 This estimate is based on the following
calculation: 1 hour × 165 funds that would rely on
the proposed government fund exemption = 165
hours.
1240 This estimate is based on the following
calculation: 165 hours × $296 (blended rate for a
compliance attorney and a senior programmer) =
$48,840.
1241 This estimate is based on the following
calculation: 842 hours + 165 hours = 1,007 hours.
See supra notes 1228 and 1239.
1242 This estimate is based on the following
calculation: $249,232 + $48,840 = $298,072.
1243 We expect that a fund that must include
disclosure about historical occasions in which the
fund’s weekly liquid assets have fallen below 15%
or the fund has imposed fees/gates, or historical
instances in which the fund has received financial
support from a sponsor or fund affiliate, would
need to add 2–8 pages of new disclosure to its
registration statement. Adding this new disclosure
would therefore increase the number of pages in,
and change the printing costs of, the fund’s
registration statement.
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8. Advisers Act Rule 204(b)–1 and Form
PF
We are proposing the same
amendments to Form PF under both the
floating NAV and fees and gates
proposals. Staff estimates that the
estimated paperwork burdens associated
with our amendments to Form PF as
discussed above in connection with our
floating NAV proposal apply equally to
our fees and gates proposal. Therefore,
as discussed above under our floating
NAV proposal, our staff estimates that
the proposed amendments to Form PF
under our fees and gates proposal also
would result in (1) increased annual
burdens per large liquidity fund
advisers of 290 burden hours, at a total
time cost of $73,460, and $16,374 in
external costs; 1244 (2) increased
aggregate annual burden hours across all
large liquidity fund advisers of 7,250
burden hours, at a total time cost of
$1,836,500, and $409,350 in external
costs; 1245 and (3) the aggregate
paperwork burden for Form PF being
revised to 249,300 burden hours and
$23,310,350 in external costs.1246
C. Request for Comments
We request comment on whether our
estimates for the change in burden
hours and associated costs, as well as
any external costs for the proposed
amendments described above under our
first alternative proposal—floating
NAV—are reasonable. We also request
comment on whether our estimates for
the change in burden hours associated
costs, as well as any external costs for
the proposed amendments described
above under our second alternative
proposal—liquidity fees and gates—are
reasonable. Pursuant to 44 U.S.C.
3506(c)(2)(B), the Commission solicits
comments in order to: (i) Evaluate
Commission staff calculates the external costs
associated with the proposed Form N–1A
disclosure requirements as follows: 5 pages (midpoint of 2 pages and 8 pages) × $0.045 per page ×
27,863,000 money market fund registration
statements printed annually = $6,269,175 one-time
aggregate external costs. Amortizing these external
costs over three years results in aggregate annual
external costs of $2,089,725. Our estimate of
potential printing ($0.045 per page: $0.035 for ink
+ $0.010 for paper) is based on data provided by
Lexecon Inc. in response to Investment Company
Act Release No. 27182 (Dec. 8, 2005) [70 FR 74598
(Dec. 15, 2005)]. See Lexecon Inc. Letter (Feb. 13,
2006), available at https://www.sec.gov/rules/
proposed/s71005/dbgross9453.pdf. For purposes of
this analysis, our best estimate of the number of
money market fund registration statements printed
annually is based on 27,863,000 money market fund
shareholder accounts in 2012. See Investment
Company Institute, 2013 Investment Company Fact
Book, at 178, available at https://www.ici.org/pdf/
2013_factbook.pdf.
1244 See infra note 1165.
1245 See infra notes 1166–1168.
1246 See infra notes 1169–1170.
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whether the proposed collections of
information are necessary for the proper
performance of the functions of the
Commission, including whether the
information will have practical utility;
(ii) evaluate the accuracy of the
Commission’s estimate of the burden of
the proposed collections of information;
(iii) determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected; and (iv) determine whether
there are ways to minimize the burden
of the collections of information on
those who are to respond, including
through the use of automated collection
techniques or other forms of information
technology.
The agency has submitted the
proposed collection of information to
OMB for approval. Persons wishing to
submit comments on the collection of
information requirements of the
proposed amendments should direct
them to the Office of Management and
Budget, Attention Desk Officer for the
Securities and Exchange Commission,
Office of Information and Regulatory
Affairs, Washington, DC 20503, and
should send a copy to Elizabeth M.
Murphy, Secretary, Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC 20549–1090, with
reference to File No. S7–03–13. OMB is
required to make a decision concerning
the collections of information between
30 and 60 days after publication of this
Release; therefore, a comment to OMB is
best assured of having its full effect if
OMB receives it within 30 days after
publication of this Release. Requests for
materials submitted to OMB by the
Commission with regard to these
collections of information should be in
writing, refer to File No. S7–03–13, and
be submitted to the Securities and
Exchange Commission, Office of
Investor Education and Advocacy, 100 F
Street NE., Washington, DC 20549–
0213.
V. Regulatory Flexibility Act
Certification
Section 3(a) of the Regulatory
Flexibility Act of 1980 1247 (‘‘RFA’’)
requires the Commission to undertake
an initial regulatory flexibility analysis
(‘‘IRFA’’) of the proposed rule
amendments on small entities unless
the Commission certifies that the rule, if
adopted, would not have a significant
economic impact on a substantial
number of small entities.1248 Pursuant
to 5 U.S.C. section 605(b), the
Commission hereby certifies that new
rule 30b1–8 and Form N–CR under the
1247 5
1248 5
U.S.C. 603(a).
U.S.C. 605(b).
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Investment Company Act of 1940 and
the proposed amendments to rules 2a–
7, 12d3–1, 18f–3, 22e–3, 30b1–7, and
31a–1 and Forms N–MFP and N–1A
under the Investment Company Act,
Form PF under the Investment Advisers
Act of 1940, and rules 482 and 419
under the Securities Act of 1933, would
not, if adopted have a significant
economic impact on a substantial
number of small entities.
The proposal would amend rule 2a–
7 under the Investment Company Act to:
• Require money market funds other
than government and retail money
market funds: (a) to ‘‘float’’ their net
asset values; or (b) under an alternative
proposal, to impose, under certain
circumstances, a liquidity fee, and
permit funds to impose a redemption
gate.
• Require that money market funds
disclose on the fund’s Web site daily
and weekly liquidity, the funds’ daily
market-based NAV per share (or current
NAV per share under our floating NAV
proposal), and certain information that
the fund is required to report to the
Commission on new Form N–CR
regarding the imposition and
subsequent removal of liquidity fees or
gates (where applicable).
• Require money market funds to
treat certain affiliates as single issuers
when applying rule 2a–7’s 5% issuer
diversification requirement.
• Require money market funds to
treat the sponsors of asset-backed
securities as guarantors subject to rule
2a–7’s diversification requirements
unless the fund’s board of directors
determines the fund is not relying on
the sponsor’s support when determining
the asset-backed security’s credit quality
or liquidity.
• Require money market funds to
apply rule 2a–7’s diversification
restrictions applicable to demand
features and guarantees (including
guarantees deemed issued by sponsors
of asset-backed securities) to all of the
funds’ total assets, rather than 75% of
the funds’ total assets as provided in
current rule 2a–7.
• Amend the stress testing
requirements to require funds to adopt
procedures providing for periodic
testing (and reporting of results to fund
boards) of money market funds’ ability
to maintain 15% of its total assets in
weekly liquid assets (and, under the
floating NAV proposal, eliminate the
current requirement to test a fund’s
ability to maintain a stable NAV per
share), based on specified amended
hypothetical events.
• Make clarifying amendments to: (a)
Certain characteristics of instruments
that qualify as daily or weekly liquid
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assets; (b) the definition of demand
feature; (c) the method for determining
weighted average life for short-term
floating rate securities; and (d) the
method for determining the 45-day
remaining maturity when complying
with rule 2a–7’s limitation on the
acquisition of second tier securities.
We also are proposing to amend rule
22e–3, which exempts money market
funds from section 22(e) to permit them
to suspend redemptions in order to
facilitate an orderly liquidation of fund
assets. Under both proposals, we
propose to amend the rule to provide
that money market funds be permitted
to suspend redemptions, when, among
other requirements, the fund, at the end
of a business day, has less than 15% of
its total assets in weekly liquid assets.
We are also proposing new rule 30b1–
8 that would require money market
funds to file reports with the
Commission on new Form N–CR upon
the occurrence of specific events, which
reports would immediately be made
public. New Form N–CR would require
all money market funds to make prompt
public disclosure of instances of
portfolio security default and sponsor
support. If we adopt our liquidity fees
and gates proposal, money market funds
would be required to disclose a decline
in the fund’s weekly liquid assets below
15% of total assets, imposition and
removal of liquidity fees and/or gates,
and a decline in the market-based price
of the fund below $0.9975. If we adopt
our floating NAV proposal, money
market funds would be required to
disclose a decline in the market-based
price of the fund below $0.9975 (for a
government or retail money market fund
that retains a stable price per share).
We also are proposing to amend rule
30b1–7 by (i) requiring that money
market funds file Form N–MFP with the
Commission, current as of the last
business day or any subsequent
calendar day of the preceding month;
and (ii) making information filed on
Form N–MFP publicly available
immediately upon filing, rather than 60
days after the end of the month to which
the information pertains. We also are
proposing to amend Form N–MFP to
reflect the proposed amendments to rule
2a–7 discussed above, request certain
additional information that would be
useful for our oversight of money
market funds, and make technical and
clarifying changes based on our
experience with filings submitted
during the past year and a half.
We are also proposing to amend Form
PF to require registered investment
advisers to certain ‘‘qualifying’’
liquidity funds to provide certain
information with respect to those funds’
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portfolio holdings, similar to the
information we require money market
funds to disclose on Form N–MFP.
We are also proposing to amend rule
482 under the Securities Act of 1933 to
require that money market funds amend
any ‘‘advertisements’’ to notify investors
that the fund may impose a liquidity fee
and/or gate under certain circumstances
and include specific language informing
investors about the potential risks of
investing in money market funds (under
our proposed liquidity fees and gates
proposal). Similarly, if we adopt our
alternative floating NAV proposal, we
would amend rule 482 to provide
enhanced disclosure to investors about
the potential for fluctuation in the value
of the fund shares and the possibility for
losses.
We also are proposing under either
alternative proposal to amend Form N–
1A to require that money market funds
include the revised risk disclosures
(discussed above in proposing to amend
rule 482) pursuant to Item 4 and also
disclose historic instances of sponsor
support. In addition, if we adopt our
liquidity fees and gates proposal, we
propose to amend Item 3 of Form N–1A
to make clear that ‘‘redemption fees’’
would not include any liquidity fee
imposed.
Finally, we are proposing to amend
rules 12d3–1, 18f–3, 31a–1, and 419, in
each case simply to update cross
references in those rules to reflect our
proposed amendments to rule 2a–7.
Based on information in filings
submitted to the Commission, we
believe that there are no money market
funds that are small entities.1249 For this
reason, the Commission believes the
new rule 30b1–8 and the proposed
amendments to rules 2a–7, 12d3–1, 18f–
3, 22e–3, 30b1–7, 31a–1, 419 and 482,
and Forms N–CR, N–MFP, PF and N–
1A, would not, if adopted, have a
significant economic impact on a
substantial number of small entities.
We encourage written comments
regarding this certification. We solicit
comment as to whether new rule 30b1–
8 and the proposed amendments to
rules 2a–7, 12d3–1, 18f–3, 22e–3, 30b1–
7, 31a–1, 419 and 482, and Forms N–CR,
N–MFP, PF and N–1A could have an
effect on small entities that has not been
considered. We request that commenters
describe the nature of any impact on
small entities and provide empirical
1249 Under the Investment Company Act, an
investment company is considered a small business
or small organization if it, together with other
investment companies in the same group of related
investment companies, has net assets of $50 million
or less as of the end of its most recent fiscal year.
See 17 CFR 270.0–10.
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data to support the extent of such
impact.
Advisers Act [15 U.S.C. 80b–4 and 15
U.S.C. 80b–11].
VI. Statutory Authority
The Commission is proposing
amendments to rule 419 under the
rulemaking authority set forth in
sections 3, 4, 5, 7, and 19 of the
Securities Act [15 U.S.C. 77c, 77d, 77e,
77g, and 77s]. The Commission is
proposing amendments to rule 482
pursuant to authority set forth in
sections 5, 10(b), 19(a), and 28 of the
Securities Act [15 U.S.C. 77e, 77j(b),
77s(a), and 77z–3] and sections 24(g)
and 38(a) of the Investment Company
Act [15 U.S.C. 80a–24(g) and 80a–37(a)].
The Commission is proposing
amendments to rule 2a–7 under the
exemptive and rulemaking authority set
forth in sections 6(c), 8(b), 22(c), 35(d),
and 38(a) of the Investment Company
Act of 1940 [15 U.S.C. 80a–6(c), 80a–
8(b), 80a–22(c), 80a–35(d), and 80a–
37(a)]. The Commission is proposing
amendments to rule 12d3–1 pursuant to
the authority set forth in sections 6(c)
and 38(a)] of the Investment Company
Act [15 U.S.C. 80a–6(c) and 80a–37(a)].
The Commission is proposing
amendments to rule 18f–3 pursuant to
the authority set forth in sections 6(c)
and 38(a) of the Investment Company
Act [15 U.S.C. 80a–6(c) and 80a–37(a)].
The Commission is proposing
amendments to rule 22e–3 pursuant to
the authority set forth in sections 6(c),
22(e) and 38(a) of the Investment
Company Act [15 U.S.C. 80a–6(c), 80a–
22(e), and 80a–37(a)]. The Commission
is proposing amendments to rule 30b1–
7 and Form N–MFP pursuant to
authority set forth in Sections 8(b),
30(b), 31(a), and 38(a) of the Investment
Company Act [15 U.S.C. 80a–8(b), 80a–
29(b), 80a–30(a), and 80a–37(a)]. The
Commission is proposing new rule
30b1–8 and Form N–CR pursuant to
authority set forth in Sections 8(b),
30(b), 31(a), and 38(a) of the Investment
Company Act [15 U.S.C. 80a–8(b), 80a–
29(b), 80a–30(a), and 80a–37(a)]. The
Commission is proposing amendments
to rule 31a–1 pursuant to authority set
forth in sections 6(c) and 38(a)] of the
Investment Company Act [15 U.S.C.
80a–6(c) and 80a–37(a)]. The
Commission is proposing amendments
to Form N–1A pursuant to authority set
forth in Sections 5, 6, 7, 10, and 19(a)
of the Securities Act [15 U.S.C. 77e, 77f,
77g, 77j and 77s(a)] and Sections 8,
24(a), 24(g), 30, and 38 of the
Investment Company Act [15 U.S.C.
80a–8, 80a–24(a), 80a–24(g), 80a–29,
and 80a–37]. The Commission is
proposing amendments to Form PF
pursuant to authority set forth in
Sections 204(b) and 211(e) of the
List of Subjects in 17 CFR Parts 230,
239, 270, 274, and 279
Investment companies, Reporting and
recordkeeping requirements, Securities.
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Text of Proposed Rules and Forms
For reasons set out in the preamble,
Title 17, Chapter II of the Code of
Federal Regulations is proposed to be
amended as follows:
PART 230—GENERAL RULES AND
REGULATIONS, SECURITIES ACT OF
1933
1. The general authority citation for
Part 230 continues to read, in part, as
follows:
■
Authority: 15 U.S.C. 77b, 77b note, 77c,
77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z–3, 77sss,
78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o–7 note,
78t, 78w, 78ll(d), 78mm, 80a–8, 80a–24, 80a–
28, 80a–29, 80a–30, and 80a–37, unless
otherwise noted.
*
*
*
*
*
2. Section 230.419(b)(2)(iv)(B) is
amended by removing the phrase
‘‘paragraphs (c)(2), (c)(3), and (c)(4)’’
and adding in its place ‘‘paragraph (d)’’.
■ 3. Section 230.482(b)(3)(i) is amended
under Alternative 1 by adding after ‘‘An
advertisement for a money market fund’’
the phrase ‘‘that is subject to the
exemption provisions of § 270.2a–7(c)(2)
of this chapter or § 270.2a–7(c)(3) of this
chapter’’.
■ 4. Section 230.482(b)(4) is revised to
read as follows:
■
Alternative 1
§ 230.482 Advertising by an investment
company as satisfying requirements of
section 10.
*
*
*
*
*
(b) * * *
(4) Money market funds.
(i) An advertisement for an
investment company that holds itself
out to be a money market fund, and that
is not subject to the exemption
provisions of § 270.2a–7(c)(2) of this
chapter or § 270.2a–7(c)(3) of this
chapter, must include the following
statement, presented as prescribed in
Item 4(b) of Form N–1A (§ 274.11A of
this chapter):
You could lose money by investing in the
Fund.
You should not invest in the Fund if you
require your investment to maintain a stable
value.
The value of shares of the Fund will
increase and decrease as a result of changes
in the value of the securities in which the
Fund invests. The value of the securities in
which the Fund invests may in turn be
affected by many factors, including interest
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rate changes and defaults or changes in the
credit quality of a security’s issuer.
An investment in the Fund is not insured
or guaranteed by the Federal Deposit
Insurance Corporation or any other
government agency.
The Fund’s sponsor has no legal obligation
to provide financial support to the Fund, and
you should not expect that the sponsor will
provide financial support to the Fund at any
time.
(ii) An advertisement for an
investment company that holds itself
out to be a money market fund, and that
is subject to the exemption provisions of
§ 270.2a–7(c)(2) of this chapter or
§ 270.2a–7(c)(3) of this chapter, must
include the following statement,
presented as prescribed in Item 4(b) of
Form N–1A (§ 274.11A of this chapter):
You could lose money by investing in the
Fund.
The Fund seeks to preserve the value of
your investment at $1.00 per share, but
cannot guarantee such stability.
An investment in the Fund is not insured
or guaranteed by the Federal Deposit
Insurance Corporation or any other
government agency.
The Fund’s sponsor has no legal obligation
to provide financial support to the Fund, and
you should not expect that the sponsor will
provide financial support to the Fund at any
time.
Note to paragraph (b)(4). If an affiliated
person, promoter, or principal underwriter of
the Fund, or an affiliated person of such a
person, has entered into an agreement to
provide financial support to the Fund, the
statement may omit the last sentence (‘‘The
Fund’s sponsor has no legal obligation to
provide financial support to the Fund, and
you should not expect that the sponsor will
provide financial support to the Fund at any
time.’’) for the term of the agreement. For
purposes of this Note, the term ‘‘financial
support’’ includes, for example, any capital
contribution, purchase of a security from the
Fund in reliance on § 270.17a–9, purchase of
any defaulted or devalued security at par,
purchase of Fund shares, execution of letter
of credit or letter of indemnity, capital
support agreement (whether or not the Fund
ultimately received support), or performance
guarantee, or any other similar action to
increase the value of the fund’s portfolio or
otherwise support the fund during times of
stress.
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Alternative 2
§ 230.482 Advertising by an investment
company as satisfying requirements of
section 10.
*
*
*
*
*
(b) * * *
(4) Money market funds.
(i) An advertisement for an
investment company that holds itself
out to be a money market fund
(including any money market fund that
is subject to the exemption provisions of
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§ 270.2a–7(c)(2)(iii) of this chapter, but
that has chosen not to rely on the
exemption provided by rule § 270.2a–
7(c)(2)(iii) of this chapter) must include
the following statement, presented as
prescribed in Item 4(b) of Form N–1A
(§ 274.11A of this chapter):
You could lose money by investing in the
Fund.
The Fund seeks to preserve the value of
your investment at $1.00 per share, but
cannot guarantee such stability.
The Fund may impose a fee upon sale of
your shares when the Fund is under
considerable stress.
The Fund may temporarily suspend your
ability to sell shares of the Fund when the
Fund is under considerable stress.
An investment in the Fund is not insured
or guaranteed by the Federal Deposit
Insurance Corporation or any other
government agency.
The Fund’s sponsor has no legal obligation
to provide financial support to the Fund, and
you should not expect that the sponsor will
provide financial support to the Fund at any
time.
(ii) An advertisement for an
investment company that holds itself
out to be a money market fund, and that
is subject to the exemption provisions of
§ 270.2a–7(c)(2)(iii) of this chapter and
has chosen to rely on the exemption
provided by § 270.2a–7(c)(2)(iii) of this
chapter, must include the following
statement, presented as prescribed in
Item 4(b) of Form N–1A (§ 274.11A of
this chapter):
You could lose money by investing in the
Fund.
The Fund seeks to preserve the value of
your investment at $1.00 per share, but
cannot guarantee such stability.
An investment in the Fund is not insured
or guaranteed by the Federal Deposit
Insurance Corporation or any other
government agency.
The Fund’s sponsor has no legal obligation
to provide financial support to the Fund, and
you should not expect that the sponsor will
provide financial support to the Fund at any
time.
Note to paragraph (b)(4). If an affiliated
person, promoter, or principal underwriter of
the Fund, or an affiliated person of such a
person, has entered into an agreement to
provide financial support to the Fund, the
statement may omit the last sentence (‘‘The
Fund’s sponsor has no legal obligation to
provide financial support to the Fund, and
you should not expect that the sponsor will
provide financial support to the Fund at any
time.’’) for the term of the agreement. For
purposes of this Note, the term ‘‘financial
support’’ includes, for example, any capital
contribution, purchase of a security from the
Fund in reliance on § 270.17a–9, purchase of
any defaulted or devalued security at par,
purchase of Fund shares, execution of letter
of credit or letter of indemnity, capital
support agreement (whether or not the Fund
ultimately received support), or performance
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guarantee, or any other similar action to
increase the value of the Fund’s portfolio or
otherwise support the Fund during times of
stress.
PART 270—RULES AND
REGULATIONS, INVESTMENT
COMPANY ACT OF 1940
5. The authority citation for Part 270
continues to read, in part, as follows:
■
Authority: 15 U.S.C. 80a–1 et seq., 80a–
34(d), 80a–37, and 80a–39, unless otherwise
noted.
*
*
*
*
*
6. Section 270.2a–7 is revised to read
as follows:
■
Alternative 1
§ 270.2a–7
Money market funds.
(a) Definitions.
(1) Acquisition (or acquire) means any
purchase or subsequent rollover (but
does not include the failure to exercise
a Demand Feature).
(2) Amortized cost means the value of
a security at the fund’s acquisition cost
as adjusted for amortization of premium
or accretion of discount rather than at
the security’s value based on current
market factors.
(3) Asset-backed security means a
fixed income security (other than a
government security) issued by a special
purpose entity (as defined in this
paragraph (a)(3)), substantially all of the
assets of which consist of qualifying
assets (as defined in this paragraph
(a)(3)). Special purpose entity means a
trust, corporation, partnership or other
entity organized for the sole purpose of
issuing securities that entitle their
holders to receive payments that depend
primarily on the cash flow from
qualifying assets, but does not include
a registered investment company.
Qualifying assets means financial assets,
either fixed or revolving, that by their
terms convert into cash within a finite
time period, plus any rights or other
assets designed to assure the servicing
or timely distribution of proceeds to
security holders.
(4) Business day means any day, other
than Saturday, Sunday, or any
customary business holiday.
(5) Collateralized fully has the same
meaning as defined in § 270.5b–3(c)(1)
except that § 270.5b–3(c)(1)(iv)(C) and
(D) shall not apply.
(6) Conditional demand feature
means a demand feature that is not an
unconditional demand feature. A
conditional demand feature is not a
guarantee.
(7) Conduit security means a security
issued by a municipal issuer (as defined
in this paragraph (a)(7)) involving an
arrangement or agreement entered into,
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directly or indirectly, with a person
other than a municipal issuer, which
arrangement or agreement provides for
or secures repayment of the security.
Municipal issuer means a state or
territory of the United States (including
the District of Columbia), or any
political subdivision or public
instrumentality of a state or territory of
the United States. A conduit security
does not include a security that is:
(i) Fully and unconditionally
guaranteed by a municipal issuer;
(ii) Payable from the general revenues
of the municipal issuer or other
municipal issuers (other than those
revenues derived from an agreement or
arrangement with a person who is not
a municipal issuer that provides for or
secures repayment of the security issued
by the municipal issuer);
(iii) Related to a project owned and
operated by a municipal issuer; or
(iv) Related to a facility leased to and
under the control of an industrial or
commercial enterprise that is part of a
public project which, as a whole, is
owned and under the control of a
municipal issuer.
(8) Daily liquid assets means:
(i) Cash;
(ii) Direct obligations of the U.S.
Government;
(iii) Securities that will mature, as
determined without reference to the
exceptions in paragraph (i) of this
section regarding interest rate
readjustments, or are subject to a
demand feature that is exercisable and
payable, within one business day; or
(iv) Amounts receivable and due
unconditionally within one business
day on pending sales of portfolio
securities.
(9) Demand feature means a feature
permitting the holder of a security to
sell the security at an exercise price
equal to the approximate amortized cost
of the security plus accrued interest, if
any, at the later of the time of exercise
or the settlement of the transaction, paid
within 397 calendar days of exercise.
(10) Designated NRSRO means any
one of at least four nationally
recognized statistical rating
organizations, as that term is defined in
section 3(a)(62) of the Securities
Exchange Act of 1934 (15 U.S.C.
78c(a)(62)), that:
(i) The money market fund’s board of
directors:
(A) Has designated as an NRSRO
whose credit ratings with respect to any
obligor or security or particular obligors
or securities will be used by the fund to
determine whether a security is an
eligible security; and
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(B) Determines at least once each
calendar year issues credit ratings that
are sufficiently reliable for such use;
(ii) Is not an ‘‘affiliated person,’’ as
defined in section 2(a)(3)(C) of the Act
(15 U.S.C. 80a–2(a)(3)(C)), of the issuer
of, or any insurer or provider of credit
support for, the security; and
(iii) The fund discloses in its
statement of additional information is a
designated NRSRO, including any
limitations with respect to the fund’s
use of such designation.
(11) Eligible security means:
(i) A rated security with a remaining
maturity of 397 calendar days or less
that has received a rating from the
requisite NRSROs in one of the two
highest short-term rating categories
(within which there may be subcategories or gradations indicating
relative standing); or
(ii) An unrated security that is of
comparable quality to a security meeting
the requirements for a rated security in
paragraph (a)(11)(i) of this section, as
determined by the money market fund’s
board of directors; provided, however,
that: a security that at the time of
issuance had a remaining maturity of
more than 397 calendar days but that
has a remaining maturity of 397
calendar days or less and that is an
unrated security is not an eligible
security if the security has received a
long-term rating from any designated
NRSRO that is not within the designated
NRSRO’s three highest long-term ratings
categories (within which there may be
sub-categories or gradations indicating
relative standing), unless the security
has received a long-term rating from the
requisite NRSROs in one of the three
highest rating categories.
(iii) In addition, in the case of a
security that is subject to a demand
feature or guarantee:
(A) The guarantee has received a
rating from a designated NRSRO or the
guarantee is issued by a guarantor that
has received a rating from a designated
NRSRO with respect to a class of debt
obligations (or any debt obligation
within that class) that is comparable in
priority and security to the guarantee,
unless:
(1) The guarantee is issued by a
person that, directly or indirectly,
controls, is controlled by or is under
common control with the issuer of the
security subject to the guarantee (other
than a sponsor of a special purpose
entity with respect to an asset-backed
security);
(2) The security subject to the
guarantee is a repurchase agreement that
is collateralized fully; or
(3) The guarantee is itself a
government security; and
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(B) The issuer of the demand feature
or guarantee, or another institution, has
undertaken promptly to notify the
holder of the security in the event the
demand feature or guarantee is
substituted with another demand
feature or guarantee (if such substitution
is permissible under the terms of the
demand feature or guarantee).
(12) Event of insolvency has the same
meaning as defined in § 270.5b–3(c)(2).
(13) First tier security means any
eligible security that:
(i) Is a rated security that has received
a short-term rating from the requisite
NRSROs in the highest short-term rating
category for debt obligations (within
which there may be sub-categories or
gradations indicating relative standing);
(ii) Is an unrated security that is of
comparable quality to a security meeting
the requirements for a rated security in
paragraph (a)(13)(i) of this section, as
determined by the fund’s board of
directors;
(iii) Is a security issued by a registered
investment company that is a money
market fund; or
(iv) Is a government security.
(14) Floating rate security means a
security the terms of which provide for
the adjustment of its interest rate
whenever a specified interest rate
changes and that, at any time until the
final maturity of the instrument or the
period remaining until the principal
amount can be recovered through
demand, can reasonably be expected to
have a market value that approximates
its amortized cost.
(15) Government security has the
same meaning as defined in section
2(a)(16) of the Act (15 U.S.C. 80a–
2(a)(16)).
(16) Guarantee:
(i) Means an unconditional obligation
of a person other than the issuer of the
security to undertake to pay, upon
presentment by the holder of the
guarantee (if required), the principal
amount of the underlying security plus
accrued interest when due or upon
default, or, in the case of an
unconditional demand feature, an
obligation that entitles the holder to
receive upon the later of exercise or the
settlement of the transaction the
approximate amortized cost of the
underlying security or securities, plus
accrued interest, if any. A guarantee
includes a letter of credit, financial
guaranty (bond) insurance, and an
unconditional demand feature (other
than an unconditional demand feature
provided by the issuer of the security).
(ii) The sponsor of a special purpose
entity with respect to an asset-backed
security shall be deemed to have
provided a guarantee with respect to the
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entire principal amount of the assetbacked security for purposes of this
section, except paragraphs (a)(11)(iii)
(definition of eligible security),
(d)(2)(iii) (credit substitution),
(d)(3)(iv)(A) (fractional guarantees) and
(e) (guarantees not relied on) of this
section, unless the money market fund’s
board of directors has determined 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
quality (pursuant to paragraph (d)(2) of
this section) or liquidity (pursuant to
paragraph (d)(4) of this section) of the
asset-backed security, and maintains a
record of this determination (pursuant
to paragraphs (g)(6) and (h)(6) of this
section).
(17) Guarantee issued by a noncontrolled person means a guarantee
issued by:
(i) A person that, directly or
indirectly, does not control, and is not
controlled by or under common control
with the issuer of the security subject to
the guarantee (control has the same
meaning as defined in section 2(a)(9) of
the Act) (15 U.S.C. 80a–2(a)(9)); or
(ii) A sponsor of a special purpose
entity with respect to an asset-backed
security if the money market fund’s
board of directors has made the findings
described in paragraph (g)(6) of this
section.
(18) Illiquid security means a security
that cannot be sold or disposed of in the
ordinary course of business within
seven calendar days at approximately
the value ascribed to it by the fund.
(19) Penny-rounding method of
pricing means the method of computing
an investment company’s price per
share for purposes of distribution,
redemption and repurchase whereby the
current net asset value per share is
rounded to the nearest one percent.
(20) Rated security means a security
that meets the requirements of
paragraphs (a)(20)(i) or (ii) of this
section, in each case subject to
paragraph (a)(20)(iii) of this section:
(i) The security has received a shortterm rating from a designated NRSRO,
or has been issued by an issuer that has
received a short-term rating from a
designated NRSRO with respect to a
class of debt obligations (or any debt
obligation within that class) that is
comparable in priority and security with
the security; or
(ii) The security is subject to a
guarantee that has received a short-term
rating from a designated NRSRO, or a
guarantee issued by a guarantor that has
received a short-term rating from a
designated NRSRO with respect to a
class of debt obligations (or any debt
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obligation within that class) that is
comparable in priority and security with
the guarantee; but
(iii) A security is not a rated security
if it is subject to an external credit
support agreement (including an
arrangement by which the security has
become a refunded security) that was
not in effect when the security was
assigned its rating, unless the security
has received a short-term rating
reflecting the existence of the credit
support agreement as provided in
paragraph (a)(20)(i) of this section, or
the credit support agreement with
respect to the security has received a
short-term rating as provided in
paragraph (a)(20)(ii) of this section.
(21) Refunded security has the same
meaning as defined in § 270.5b–3(c)(4).
(22) Requisite NRSROs means:
(i) Any two designated NRSROs that
have issued a rating with respect to a
security or class of debt obligations of
an issuer; or
(ii) If only one designated NRSRO has
issued a rating with respect to such
security or class of debt obligations of
an issuer at the time the fund acquires
the security, that designated NRSRO.
(23) Second tier security means any
eligible security that is not a first tier
security.
(24) Single state fund means a tax
exempt fund that holds itself out as
seeking to maximize the amount of its
distributed income that is exempt from
the income taxes or other taxes on
investments of a particular state and,
where applicable, subdivisions thereof.
(25) Tax exempt fund means any
money market fund that holds itself out
as distributing income exempt from
regular federal income tax.
(26) Total assets means the total value
of the money market fund’s assets, as
defined in section 2(a)(41) of the Act (15
U.S.C. 80a–2(a)(41)) and the rules
thereunder.
(27) Unconditional demand feature
means a demand feature that by its
terms would be readily exercisable in
the event of a default in payment of
principal or interest on the underlying
security or securities.
(28) United States dollardenominated means, with reference to a
security, that all principal and interest
payments on such security are payable
to security holders in United States
dollars under all circumstances and that
the interest rate of, the principal amount
to be repaid, and the timing of payments
related to such security do not vary or
float with the value of a foreign
currency, the rate of interest payable on
foreign currency borrowings, or with
any other interest rate or index
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expressed in a currency other than
United States dollars.
(29) Unrated security means a security
that is not a rated security.
(30) Variable rate security means a
security the terms of which provide for
the adjustment of its interest rate on set
dates (such as the last day of a month
or calendar quarter) and that, upon each
adjustment until the final maturity of
the instrument or the period remaining
until the principal amount can be
recovered through demand, can
reasonably be expected to have a market
value that approximates its amortized
cost.
(31) Weekly liquid assets means:
(i) Cash;
(ii) Direct obligations of the U.S.
Government;
(iii) Government securities that are
issued by a person controlled or
supervised by and acting as an
instrumentality of the government of the
United States pursuant to authority
granted by the Congress of the United
States that:
(A) Are issued at a discount to the
principal amount to be repaid at
maturity without provision for the
payment of interest; and
(B) Have a remaining maturity date of
60 days or less;
(iv) Securities that will mature, as
determined without reference to the
exceptions in paragraph (i) of this
section regarding interest rate
readjustments, or are subject to a
demand feature that is exercisable and
payable, within five business days; or
(v) Amounts receivable and due
unconditionally within five business
days on pending sales of portfolio
securities.
(b) Holding out and use of names and
titles.
(1) It shall be an untrue statement of
material fact within the meaning of
section 34(b) of the Act (15 U.S.C. 80a–
33(b)) for a registered investment
company, in any registration statement,
application, report, account, record, or
other document filed or transmitted
pursuant to the Act, including any
advertisement, pamphlet, circular, form
letter, or other sales literature addressed
to or intended for distribution to
prospective investors that is required to
be filed with the Commission by section
24(b) of the Act (15 U.S.C. 80a–24(b)),
to hold itself out to investors as a money
market fund or the equivalent of a
money market fund, unless such
registered investment company
complies with this section.
(2) It shall constitute the use of a
materially deceptive or misleading
name or title within the meaning of
section 35(d) of the Act (15 U.S.C. 80a–
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34(d)) for a registered investment
company to adopt the term ‘‘money
market’’ as part of its name or title or the
name or title of any redeemable
securities of which it is the issuer, or to
adopt a name that suggests that it is a
money market fund or the equivalent of
a money market fund, unless such
registered investment company
complies with this section.
(3) For purposes of paragraph (b)(2) of
this section, a name that suggests that a
registered investment company is a
money market fund or the equivalent
thereof includes one that uses such
terms as ‘‘cash,’’ ‘‘liquid,’’ ‘‘money,’’
‘‘ready assets’’ or similar terms.
(c) Share price.
(1) Level of accuracy. Except as
provided in paragraphs (c)(2) and (c)(3)
of this section, the money market fund
must compute its price per share for
purposes of distribution, redemption
and repurchase by rounding the fund’s
current net asset value per share to the
fourth decimal place in the case of a
fund with a $1.0000 share price or an
equivalent level of accuracy for money
market funds with a different share
price (e.g. $10.000 or $100.00 per share).
(2) Exemption for funds investing
primarily in government securities. A
money market fund may,
notwithstanding section 2(a)(41) of the
Act (15 U.S.C. 80a–2(a)(41)) and
§§ 270.2a–4 and 270.22c–1, compute the
current price per share of its redeemable
securities for purposes of distribution,
redemption and repurchase by use of
the penny-rounding method if and so
long as eighty percent or more of the
money market fund’s total assets are
invested in cash, government securities,
and/or repurchase agreements that are
collateralized fully.
(3) Exemption for retail money market
funds.
(i) General. A money market fund
may, notwithstanding section 2(a)(41) of
the Act (15 U.S.C. 80a–2(a)(41)) and
§§ 270.2a–4 and 270.22c–1, compute the
current price per share of its redeemable
securities for purposes of distribution,
redemption and repurchase by use of
the penny-rounding method if, subject
to paragraph (c)(3)(ii) of this section, the
fund does not permit any shareholder of
record to redeem more than $1,000,000
of redeemable securities on any one
business day.
(ii) Omnibus account holders. A
money market fund may permit a
shareholder of record to redeem more
than $1,000,000 of redeemable
securities on any one business day if the
shareholder of record is a broker, dealer,
bank, or other person that holds
securities issued by the fund in nominee
name (‘‘omnibus account holder’’) and
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the money market fund has policies and
procedures reasonably designed to
allow the conclusion that the omnibus
account holder does not permit any
beneficial owner of the money market
fund’s shares, directly or indirectly, (or
the omnibus account holder itself
investing for its own account) to redeem
more than $1,000,000 of redeemable
securities on any one business day.
(iii) Exemptions.
(A) A money market fund is exempt
from the requirements of sections
18(f)(1) and 22(e) of the Act (15 U.S.C.
80a–18(f)(1) and 80a–22(e)) to the extent
necessary to permit the money market
fund to limit redemptions in excess of
$1,000,000 of redeemable securities on
any one business day as provided in
paragraphs (c)(3)(i) and (ii) of this
section.
(B) A registered separate account
funding variable insurance contracts
and the sponsoring insurance company
of such account are exempt from the
requirements of section 27(i)(2)(A) of
the Act (15 U.S.C. 80a–27(i)(2)(A)) to the
extent necessary to permit the separate
account or the sponsoring insurance
company of such account to apply the
limitations on redemptions as provided
in paragraphs (c)(3)(i) and (ii) of this
section to contract owners who allocate
all or a portion of their contract value
to a subaccount of the separate account
that is either a money market fund or
that invests all of its assets in shares of
a money market fund.
(d) Risk-limiting conditions.
(1) Portfolio maturity. The money
market fund must maintain a dollarweighted average portfolio maturity
appropriate to its investment objectives;
provided, however, that the money
market fund must not:
(i) Acquire any instrument with a
remaining maturity of greater than 397
calendar days;
(ii) Maintain a dollar-weighted
average portfolio maturity (‘‘WAM’’)
that exceeds 60 calendar days; or
(iii) Maintain a dollar-weighted
average portfolio maturity that exceeds
120 calendar days, determined without
reference to the exceptions in paragraph
(i) of this section regarding interest rate
readjustments (‘‘WAL’’).
(2) Portfolio quality.
(i) General. The money market fund
must limit its portfolio investments to
those United States dollar-denominated
securities that the fund’s board of
directors determines present minimal
credit risks (which determination must
be based on factors pertaining to credit
quality in addition to any rating
assigned to such securities by a
designated NRSRO) and that are at the
time of acquisition eligible securities.
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(ii) Second tier securities. No money
market fund may acquire a second tier
security with a remaining maturity of
greater than 45 calendar days,
determined without reference to the
exceptions in paragraph (i) of this
section regarding interest rate
readjustments. Immediately after the
acquisition of any second tier security,
a money market fund must not have
invested more than three percent of its
total assets in second tier securities.
(iii) Securities subject to guarantees.
A security that is subject to a guarantee
may be determined to be an eligible
security or a first tier security based
solely on whether the guarantee is an
eligible security or first tier security, as
the case may be.
(iv) Securities subject to conditional
demand features. A security that is
subject to a conditional demand feature
(‘‘underlying security’’) may be
determined to be an eligible security or
a first tier security only if:
(A) The conditional demand feature is
an eligible security or first tier security,
as the case may be;
(B) At the time of the acquisition of
the underlying security, the money
market fund’s board of directors has
determined that there is minimal risk
that the circumstances that would result
in the conditional demand feature not
being exercisable will occur; and
(1) The conditions limiting exercise
either can be monitored readily by the
fund or relate to the taxability, under
federal, state or local law, of the interest
payments on the security; or
(2) The terms of the conditional
demand feature require that the fund
will receive notice of the occurrence of
the condition and the opportunity to
exercise the demand feature in
accordance with its terms; and
(C) The underlying security or any
guarantee of such security (or the debt
securities of the issuer of the underlying
security or guarantee that are
comparable in priority and security with
the underlying security or guarantee)
has received either a short-term rating or
a long-term rating, as the case may be,
from the requisite NRSROs within the
NRSROs’ two highest short-term or
long-term rating categories (within
which there may be sub-categories or
gradations indicating relative standing)
or, if unrated, is determined to be of
comparable quality by the money
market fund’s board of directors to a
security that has received a rating from
the requisite NRSROs within the
NRSROs’ two highest short-term or
long-term rating categories, as the case
may be.
(3) Portfolio diversification.
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(i) Issuer diversification. The money
market fund must be diversified with
respect to issuers of securities acquired
by the fund as provided in paragraphs
(d)(3)(i) and (d)(3)(ii) of this section,
other than with respect to government
securities and securities subject to a
guarantee issued by a non-controlled
person.
(A) Taxable and national funds.
Immediately after the acquisition of any
security, a money market fund other
than a single state fund must not have
invested more than:
(1) Five percent of its total assets in
securities issued by the issuer of the
security, provided, however, that such a
fund may invest up to twenty-five
percent of its total assets in the first tier
securities of a single issuer for a period
of up to three business days after the
acquisition thereof; provided, further,
that the fund may not invest in the
securities of more than one issuer in
accordance with the foregoing proviso
in this paragraph at any time; and
(2) Ten percent of its total assets in
securities issued by or subject to
demand features or guarantees from the
institution that issued the demand
feature or guarantee.
(B) Single state funds. Immediately
after the acquisition of any security, a
single state fund must not have
invested:
(1) With respect to seventy-five
percent of its total assets, more than five
percent of its total assets in securities
issued by the issuer of the security; and
(2) With respect to all of its total
assets, more than ten percent of its total
assets in securities issued by or subject
to demand features or guarantees from
the institution that issued the demand
feature or guarantee.
(C) Second tier securities.
Immediately after the acquisition of any
second tier security, a money market
fund must not have invested more than
one half of one percent of its total assets
in the second tier securities of any
single issuer, and must not have
invested more than 2.5 percent of its
total assets in second tier securities
issued by or subject to demand features
or guarantees from the institution that
issued the demand feature or guarantee.
(ii) Issuer diversification calculations.
For purposes of making calculations
under paragraph (d)(3)(i) of this section:
(A) Repurchase agreements. The
acquisition of a repurchase agreement
may be deemed to be an acquisition of
the underlying securities, provided the
obligation of the seller to repurchase the
securities from the money market fund
is collateralized fully and the fund’s
board of directors has evaluated the
seller’s creditworthiness.
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(B) Refunded securities. The
acquisition of a refunded security shall
be deemed to be an acquisition of the
escrowed government securities.
(C) Conduit securities. A conduit
security shall be deemed to be issued by
the person (other than the municipal
issuer) ultimately responsible for
payments of interest and principal on
the security.
(D) Asset-backed securities.
(1) General. An asset-backed security
acquired by a fund (‘‘primary ABS’’)
shall be deemed to be issued by the
special purpose entity that issued the
asset-backed security, provided,
however:
(i) Holdings of primary ABS. Any
person whose obligations constitute ten
percent or more of the principal amount
of the qualifying assets of the primary
ABS (‘‘ten percent obligor’’) shall be
deemed to be an issuer of the portion of
the primary ABS such obligations
represent; and
(ii) Holdings of secondary ABS. If a
ten percent obligor of a primary ABS is
itself a special purpose entity issuing
asset-backed securities (‘‘secondary
ABS’’), any ten percent obligor of such
secondary ABS also shall be deemed to
be an issuer of the portion of the
primary ABS that such ten percent
obligor represents.
(2) Restricted special purpose entities.
A ten percent obligor with respect to a
primary or secondary ABS shall not be
deemed to have issued any portion of
the assets of a primary ABS as provided
in paragraph (d)(3)(ii)(D)(1) of this
section if that ten percent obligor is
itself a special purpose entity issuing
asset-backed securities (‘‘restricted
special purpose entity’’), and the
securities that it issues (other than
securities issued to a company that
controls, or is controlled by or under
common control with, the restricted
special purpose entity and which is not
itself a special purpose entity issuing
asset-backed securities) are held by only
one other special purpose entity.
(3) Demand features and guarantees.
In the case of a ten percent obligor
deemed to be an issuer, the fund must
satisfy the diversification requirements
of paragraphs (d)(3)(iii) of this section
with respect to any demand feature or
guarantee to which the ten percent
obligor’s obligations are subject.
(E) Shares of other money market
funds. A money market fund that
acquires shares issued by another
money market fund in an amount that
would otherwise be prohibited by
paragraph (d)(3)(i) of this section shall
nonetheless be deemed in compliance
with this section if the board of
directors of the acquiring money market
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37001
fund reasonably believes that the fund
in which it has invested is in
compliance with this section.
(F) Treatment of certain affiliated
entities. The money market fund, when
calculating the amount of its total assets
invested in securities issued by any
particular issuer for purposes of
paragraph (d)(3)(i) of this section, must
treat as a single issuer two or more
issuers of securities owned by the
money market fund if one issuer
controls the other, is controlled by the
other issuer, or is under common
control with the other issuer, provided
that ‘‘control’’ for this purpose means
ownership of more than 50 percent of
the issuer’s voting securities.
(iii) Diversification rules for demand
features and guarantees. The money
market fund must be diversified with
respect to demand features and
guarantees acquired by the fund as
provided in paragraphs (d)(3)(iii) and
(d)(3)(iv) of this section, other than with
respect to a demand feature issued by
the same institution that issued the
underlying security, or with respect to
a guarantee or demand feature that is
itself a government security.
(A) General. Immediately after the
acquisition of any demand feature or
guarantee, any security subject to a
demand feature or guarantee, or a
security directly issued by the issuer of
a demand feature or guarantee, a money
market fund must not have invested
more than ten percent of its total assets
in securities issued by or subject to
demand features or guarantees from the
institution that issued the demand
feature or guarantee.
(B) Second tier demand features or
guarantees. Immediately after the
acquisition of any demand feature or
guarantee, any security subject to a
demand feature or guarantee, a security
directly issued by the issuer of a
demand feature or guarantee, or a
security after giving effect to the
demand feature or guarantee, in all
cases that is a second tier security, a
money market fund must not have
invested more than 2.5 percent of its
total assets in securities issued by or
subject to demand features or guarantees
from the institution that issued the
demand feature or guarantee.
(iv) Demand feature and guarantee
diversification calculations.
(A) Fractional demand features or
guarantees. In the case of a security
subject to a demand feature or guarantee
from an institution by which the
institution guarantees a specified
portion of the value of the security, the
institution shall be deemed to guarantee
the specified portion thereof.
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(B) Layered demand features or
guarantees. In the case of a security
subject to demand features or guarantees
from multiple institutions that have not
limited the extent of their obligations as
described in paragraph (d)(3)(iv)(A) of
this section, each institution shall be
deemed to have provided the demand
feature or guarantee with respect to the
entire principal amount of the security.
(v) Diversification safe harbor. A
money market fund that satisfies the
applicable diversification requirements
of paragraphs (d)(3) and (e) of this
section shall be deemed to have
satisfied the diversification
requirements of section 5(b)(1) of the
Act (15 U.S.C. 80a–5(b)(1)) and the rules
adopted thereunder.
(4) Portfolio liquidity. The money
market fund must hold securities that
are sufficiently liquid to meet
reasonably foreseeable shareholder
redemptions in light of the fund’s
obligations under section 22(e) of the
Act (15 U.S.C. 80a–22(e)) and any
commitments the fund has made to
shareholders; provided, however, that:
(i) Illiquid securities. The money
market fund may not acquire any
illiquid security if, immediately after
the acquisition, the money market fund
would have invested more than five
percent of its total assets in illiquid
securities.
(ii) Minimum daily liquidity
requirement. The money market fund
may not acquire any security other than
a daily liquid asset if, immediately after
the acquisition, the fund would have
invested less than ten percent of its total
assets in daily liquid assets. This
provision does not apply to tax exempt
funds.
(iii) Minimum weekly liquidity
requirement. The money market fund
may not acquire any security other than
a weekly liquid asset if, immediately
after the acquisition, the fund would
have invested less than thirty percent of
its total assets in weekly liquid assets.
(e) Demand features and guarantees
not relied upon. If the fund’s board of
directors has determined that the fund
is not relying on a demand feature or
guarantee to determine the quality
(pursuant to paragraph (d)(2) of this
section), or maturity (pursuant to
paragraph (i) of this section), or
liquidity of a portfolio security
(pursuant to paragraph (d)(4) of this
section), and maintains a record of this
determination (pursuant to paragraphs
(g)(3) and (h)(7) of this section), then the
fund may disregard such demand
feature or guarantee for all purposes of
this section.
(f) Downgrades, defaults and other
events.
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(1) Downgrades.
(i) General. Upon the occurrence of
either of the events specified in
paragraphs (f)(1)(i)(A) and (B) of this
section with respect to a portfolio
security, the board of directors of the
money market fund shall reassess
promptly whether such security
continues to present minimal credit
risks and shall cause the fund to take
such action as the board of directors
determines is in the best interests of the
money market fund:
(A) A portfolio security of a money
market fund ceases to be a first tier
security (either because it no longer has
the highest rating from the requisite
NRSROs or, in the case of an unrated
security, the board of directors of the
money market fund determines that it is
no longer of comparable quality to a first
tier security); and
(B) The money market fund’s
investment adviser (or any person to
whom the fund’s board of directors has
delegated portfolio management
responsibilities) becomes aware that any
unrated security or second tier security
held by the money market fund has,
since the security was acquired by the
fund, been given a rating by a
designated NRSRO below the
designated NRSRO’s second highest
short-term rating category.
(ii) Securities to be disposed of. The
reassessments required by paragraph
(f)(1)(i) of this section shall not be
required if the fund disposes of the
security (or it matures) within five
business days of the specified event
and, in the case of events specified in
paragraph (f)(1)(i)(B) of this section, the
board is subsequently notified of the
adviser’s actions.
(iii) Special rule for certain securities
subject to demand features. In the event
that after giving effect to a rating
downgrade, more than 2.5 percent of the
fund’s total assets are invested in
securities issued by or subject to
demand features from a single
institution that are second tier
securities, the fund shall reduce its
investment in securities issued by or
subject to demand features from that
institution to no more than 2.5 percent
of its total assets by exercising the
demand features at the next succeeding
exercise date(s), absent a finding by the
board of directors that disposal of the
portfolio security would not be in the
best interests of the money market fund.
(2) Defaults and other events. Upon
the occurrence of any of the events
specified in paragraphs (f)(2)(i) through
(iv) of this section with respect to a
portfolio security, the money market
fund shall dispose of such security as
soon as practicable consistent with
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achieving an orderly disposition of the
security, by sale, exercise of any
demand feature or otherwise, absent a
finding by the board of directors that
disposal of the portfolio security would
not be in the best interests of the money
market fund (which determination may
take into account, among other factors,
market conditions that could affect the
orderly disposition of the portfolio
security):
(i) The default with respect to a
portfolio security (other than an
immaterial default unrelated to the
financial condition of the issuer);
(ii) A portfolio security ceases to be an
eligible security;
(iii) A portfolio security has been
determined to no longer present
minimal credit risks; or
(iv) An event of insolvency occurs
with respect to the issuer of a portfolio
security or the provider of any demand
feature or guarantee.
(3) Notice to the Commission. The
money market fund must notify the
Commission of the occurrence of certain
material events, as specified in Form N–
CR (§ 274.222 of this chapter).
(4) Defaults for purposes of
paragraphs (f)(2) and (3) of this section.
For purposes of paragraphs (f)(2) and (3)
of this section, an instrument subject to
a demand feature or guarantee shall not
be deemed to be in default (and an event
of insolvency with respect to the
security shall not be deemed to have
occurred) if:
(i) In the case of an instrument subject
to a demand feature, the demand feature
has been exercised and the fund has
recovered either the principal amount or
the amortized cost of the instrument,
plus accrued interest;
(ii) The provider of the guarantee is
continuing, without protest, to make
payments as due on the instrument; or
(iii) The provider of a guarantee with
respect to an asset-backed security
pursuant to paragraph (a)(16)(ii) of this
section is continuing, without protest, to
provide credit, liquidity or other
support as necessary to permit the assetbacked security to make payments as
due.
(g) Required procedures. The money
market fund’s board of directors must
adopt written procedures including the
following:
(1) General. In supervising the money
market fund’s operations and delegating
special responsibilities involving
portfolio management to the money
market fund’s investment adviser, the
money market fund’s board of directors,
as a particular responsibility within the
overall duty of care owed to its
shareholders, must establish written
procedures reasonably designed, taking
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into account current market conditions,
to achieve the fund’s investment
objectives of earning short-term yields,
consistent with the preservation of
capital and, for a money market that
relies on the exemptions provided by
paragraph (c)(2) or (c)(3) of this section,
to assure to the extent reasonably
practicable that the money market
fund’s price per share, as computed for
the purpose of distribution, redemption
and repurchase, rounded to the nearest
one percent, will not deviate from the
stable price established by the board of
directors.
(2) Securities for which maturity is
determined by reference to demand
features. In the case of a security for
which maturity is determined by
reference to a demand feature, written
procedures shall require ongoing review
of the security’s continued minimal
credit risks, and that review must be
based on, among other things, financial
data for the most recent fiscal year of the
issuer of the demand feature and, in the
case of a security subject to a
conditional demand feature, the issuer
of the security whose financial
condition must be monitored under
paragraph (d)(2)(iv) of this section,
whether such data is publicly available
or provided under the terms of the
security’s governing documentation.
(3) Securities subject to demand
features or guarantees. In the case of a
security subject to one or more demand
features or guarantees that the fund’s
board of directors has determined that
the fund is not relying on to determine
the quality (pursuant to paragraph (d)(2)
of this section), maturity (pursuant to
paragraph (i) of this section) or liquidity
(pursuant to paragraph (d)(4) of this
section) of the security subject to the
demand feature or guarantee, written
procedures must require periodic
evaluation of such determination.
(4) Adjustable rate securities without
demand features. In the case of a
variable rate or floating rate security that
is not subject to a demand feature and
for which maturity is determined
pursuant to paragraph (i)(1), (i)(2) or
(i)(4) of this section, written procedures
shall require periodic review of whether
the interest rate formula, upon
readjustment of its interest rate, can
reasonably be expected to cause the
security to have a market value that
approximates its amortized cost value.
(5) Ten percent obligors of assetbacked securities. In the case of an
asset-backed security, written
procedures must require the fund to
periodically determine the number of
ten percent obligors (as that term is used
in paragraph (d)(3)(ii)(D) of this section)
deemed to be the issuers of all or a
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portion of the asset-backed security for
purposes of paragraph (d)(3)(ii)(D) of
this section; provided, however, written
procedures need not require periodic
determinations with respect to any
asset-backed security that a fund’s board
of directors has determined, at the time
of acquisition, will not have, or is
unlikely to have, ten percent obligors
that are deemed to be issuers of all or
a portion of that asset-backed security
for purposes of paragraph (d)(3)(ii)(D) of
this section, and maintains a record of
this determination.
(6) Asset-backed securities not subject
to guarantees. In the case of an assetbacked security for which the fund’s
board of directors has determined that
the fund is not relying on the sponsor’s
financial strength or its ability or
willingness to provide liquidity, credit
or other support in connection with the
asset-backed security to determine the
quality (pursuant to paragraph (d)(2) of
this section) or liquidity (pursuant to
paragraph (d)(4) of this section) of the
asset-backed security, written
procedures must require periodic
evaluation of such determination.
(7) Stress Testing. Written procedures
must provide for:
(i) The periodic testing, at such
intervals as the board of directors
determines appropriate and reasonable
in light of current market conditions, of
the money market fund’s ability to have
invested at least fifteen percent of its
total assets in weekly liquid assets and,
in the case of a money market fund
relying on the exemptions provided by
paragraph (c)(2) or (3) of this section,
the fund’s ability to maintain the stable
price per share established by the board
of directors for the purpose of
distribution, redemption, and
repurchase, based upon specified
hypothetical events that include, but are
not limited to:
(A) Increases in the general level of
short-term interest rates;
(B) An increase in shareholder
redemptions, together with an
assessment of how the fund would meet
the redemptions, taking into
consideration assumptions regarding the
relative liquidity of the fund’s portfolio
securities, the prices for which portfolio
securities could be sold, the fund’s
historical experience meeting
redemption requests, and any other
relevant factors;
(C) A downgrade or default of
portfolio securities, and the effects these
events could have on other securities
held by the fund;
(D) The widening or narrowing of
spreads among the indexes to which
interest rates of portfolio securities are
tied;
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37003
(E) Other movements in interest rates
that may affect the fund’s portfolio
securities, such as parallel and nonparallel shifts in the yield curve; and
(F) Combinations of these and any
other events the adviser deems relevant,
assuming a positive correlation of risk
factors (e.g., assuming that a security
default likely will be followed by
increased redemptions) and taking into
consideration the extent to which the
fund’s portfolio securities are correlated
such that adverse events affecting a
given security are likely to also affect
one or more other securities (e.g., a
consideration of whether issuers in the
same or related industries or geographic
regions would be affected by adverse
events affecting issuers in the same
industry or geographic region).
(ii) A report on the results of such
testing to be provided to the board of
directors at its next regularly scheduled
meeting (or sooner, if appropriate in
light of the results), which report must
include:
(A) The date(s) on which the testing
was performed and the magnitude of
each hypothetical event that would
cause the money market fund to have
invested less than fifteen percent of its
total assets in weekly liquid assets and,
in the case of a money market fund
relying on the exemptions provided by
paragraph (c)(2) or (3) of this section,
that would cause the fund’s price per
share for purposes of distribution,
redemption and repurchase to deviate
from the stable price per share
established by the board of directors;
and
(B) An assessment by the fund’s
adviser of the fund’s ability to withstand
the events (and concurrent occurrences
of those events) that are reasonably
likely to occur within the following
year, including such information as may
reasonably be necessary for the board of
directors to evaluate the stress testing
conducted by the adviser and the results
of the testing.
(h) Recordkeeping and reporting.
(1) Written procedures. For a period of
not less than six years following the
replacement of such procedures with
new procedures (the first two years in
an easily accessible place), a written
copy of the procedures (and any
modifications thereto) described in
paragraphs (g) and (j) of this section
must be maintained and preserved.
(2) Board considerations and actions.
For a period of not less than six years
(the first two years in an easily
accessible place) a written record must
be maintained and preserved of the
board of directors’ considerations and
actions taken in connection with the
discharge of its responsibilities, as set
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forth in this section, to be included in
the minutes of the board of directors’
meetings.
(3) Credit risk analysis. For a period
of not less than three years from the date
that the credit risks of a portfolio
security were most recently reviewed, a
written record of the determination that
a portfolio security presents minimal
credit risks and the designated NRSRO
ratings (if any) used to determine the
status of the security as an eligible
security, first tier security or second tier
security shall be maintained and
preserved in an easily accessible place.
(4) Determinations with respect to
adjustable rate securities. For a period
of not less than three years from the date
when the assessment was most recently
made, a written record must be
preserved and maintained, in an easily
accessible place, of the determination
required by paragraph (g)(4) of this
section (that a variable rate or floating
rate security that is not subject to a
demand feature and for which maturity
is determined pursuant to paragraph
(i)(1), (i)(2) or (i)(4) of this section can
reasonably be expected, upon
readjustment of its interest rate at all
times during the life of the instrument,
to have a market value that
approximates its amortized cost).
(5) Determinations with respect to
asset-backed securities. For a period of
not less than three years from the date
when the determination was most
recently made, a written record must be
preserved and maintained, in an easily
accessible place, of the determinations
required by paragraph (g)(5) of this
section (the number of ten percent
obligors (as that term is used in
paragraph (d)(3)(ii)(D) of this section)
deemed to be the issuers of all or a
portion of the asset-backed security for
purposes of paragraph (d)(3)(ii)(D) of
this section). The written record must
include:
(i) The identities of the ten percent
obligors (as that term is used in
paragraph (d)(3)(ii)(D) of this section),
the percentage of the qualifying assets
constituted by the securities of each ten
percent obligor and the percentage of
the fund’s total assets that are invested
in securities of each ten percent obligor;
and
(ii) Any determination that an assetbacked security will not have, or is
unlikely to have, ten percent obligors
deemed to be issuers of all or a portion
of that asset-backed security for
purposes of paragraph (d)(3)(ii)(D) of
this section.
(6) Evaluations with respect to assetbacked securities not subject to
guarantees. For a period of not less than
three years from the date when the
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evaluation was most recently made, a
written record must be preserved and
maintained, in an easily accessible
place, of the evaluation required by
paragraph (g)(6) of this section
(regarding asset-backed securities not
subject to guarantees).
(7) Evaluations with respect to
securities subject to demand features or
guarantees. For a period of not less than
three years from the date when the
evaluation was most recently made, a
written record must be preserved and
maintained, in an easily accessible
place, of the evaluation required by
paragraph (g)(3) of this section
(regarding securities subject to one or
more demand features or guarantees).
(8) Reports with respect to stress
testing. For a period of not less than six
years (the first two years in an easily
accessible place), a written copy of the
report required under paragraph
(g)(7)(ii) of this section must be
maintained and preserved.
(9) Inspection of records. The
documents preserved pursuant to
paragraph (h) of this section are subject
to inspection by the Commission in
accordance with section 31(b) of the Act
(15 U.S.C. 80a–30(b)) as if such
documents were records required to be
maintained pursuant to rules adopted
under section 31(a) of the Act (15 U.S.C.
80a–30(a)).
(10) Web site disclosure of portfolio
holdings and other fund information.
The money market fund must post
prominently on its Web site the
following information:
(i) For a period of not less than six
months, beginning no later than the fifth
business day of the month, a schedule
of its investments, as of the last business
day or subsequent calendar day of the
preceding month, that includes the
following information:
(A) With respect to the money market
fund and each class of redeemable
shares thereof:
(1) The WAM; and
(2) The WAL.
(B) With respect to each security held
by the money market fund:
(1) Name of the issuer;
(2) Category of investment (indicate
the category that most closely identifies
the instrument from among the
following: U.S. Treasury Debt; U.S.
Government Agency Debt; Non U.S.
Sovereign Debt; Non U.S. Sub-Sovereign
Debt; Variable Rate Demand Note; Other
Municipal Debt; Financial Company
Commercial Paper; Asset-Backed
Commercial Paper; Other Asset-Backed
Security; Non-Financial Company
Commercial Paper; Collateralized
Commercial Paper; Certificate of Deposit
(including Time Deposits and Euro
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Time Deposits); Structured Investment
Vehicle Note; Other Note; U.S. Treasury
Repurchase Agreement; Government
Agency Repurchase Agreement; Other
Repurchase Agreement; Insurance
Company Funding Agreement;
Investment Company; Other
Instrument);
(3) CUSIP number (if any);
(4) Principal amount;
(5) The maturity date determined by
taking into account the maturity
shortening provisions in paragraph (i) of
this section (i.e., the maturity date used
to calculate WAM under paragraph
(d)(1)(ii) of this section);
(6) The maturity date determined
without reference to the exceptions in
paragraph (i) of this section regarding
interest rate readjustments (i.e., the
maturity used to calculate WAL under
paragraph (d)(1)(iii) of this section);
(7) Coupon or yield; and
(8) Value.
(ii) A schedule, chart, graph, or other
depiction, which must be updated each
business day as of the end of the
preceding business day, showing, as of
the end of each business day during the
preceding six months:
(A) The percentage of the money
market fund’s total assets invested in
daily liquid assets;
(B) The percentage of the money
market fund’s total assets invested in
weekly liquid assets; and
(C) The money market fund’s net
inflows or outflows.
(iii) A schedule, chart, graph, or other
depiction showing the money market
fund’s net asset value per share (which
each fund relying on the exemption
provided by paragraph (c)(2) or (c)(3) of
this section must calculate based on
current market factors before applying
the penny rounding method), rounded
to the fourth decimal place in the case
of funds with a $1.0000 share price or
an equivalent level of accuracy for funds
with a different share price (e.g.,
$10.000 or $100.00 per share), as of the
end of each business day during the
preceding six months, which must be
updated each business day as of the end
of the preceding business day.
(iv) A link to a Web site of the
Securities and Exchange Commission
where a user may obtain the most recent
12 months of publicly available
information filed by the money market
fund pursuant to § 270.30b1–7.
(v) For a period of not less than one
year, beginning no later than the first
business day following the occurrence
of any event specified in Part C of Form
N–CR (§ 274.222 of this chapter), the
same information that the money market
fund is required to report to the
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Commission on Part C of Form N–CR
concerning such event.
(i) Maturity of portfolio securities. For
purposes of this section, the maturity of
a portfolio security shall be deemed to
be the period remaining (calculated
from the trade date or such other date
on which the fund’s interest in the
security is subject to market action)
until the date on which, in accordance
with the terms of the security, the
principal amount must unconditionally
be paid, or in the case of a security
called for redemption, the date on
which the redemption payment must be
made, except as provided in paragraphs
(i)(1) through (i)(8) of this section:
(1) Adjustable rate government
securities. A government security that is
a variable rate security where the
variable rate of interest is readjusted no
less frequently than every 397 calendar
days shall be deemed to have a maturity
equal to the period remaining until the
next readjustment of the interest rate. A
government security that is a floating
rate security shall be deemed to have a
remaining maturity of one day.
(2) Short-term variable rate securities.
A variable rate security, the principal
amount of which, in accordance with
the terms of the security, must
unconditionally be paid in 397 calendar
days or less shall be deemed to have a
maturity equal to the earlier of the
period remaining until the next
readjustment of the interest rate or the
period remaining until the principal
amount can be recovered through
demand.
(3) Long-term variable rate securities.
A variable rate security, the principal
amount of which is scheduled to be
paid in more than 397 calendar days,
that is subject to a demand feature, shall
be deemed to have a maturity equal to
the longer of the period remaining until
the next readjustment of the interest rate
or the period remaining until the
principal amount can be recovered
through demand.
(4) Short-term floating rate securities.
A floating rate security, the principal
amount of which, in accordance with
the terms of the security, must
unconditionally be paid in 397 calendar
days or less shall be deemed to have a
maturity of one day, except for purposes
of determining WAL under paragraph
(d)(1)(iii) of this section, in which case
it shall be deemed to have a maturity
equal to the period remaining until the
principal amount can be recovered
through demand.
(5) Long-term floating rate securities.
A floating rate security, the principal
amount of which is scheduled to be
paid in more than 397 calendar days,
that is subject to a demand feature, shall
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be deemed to have a maturity equal to
the period remaining until the principal
amount can be recovered through
demand.
(6) Repurchase agreements. A
repurchase agreement shall be deemed
to have a maturity equal to the period
remaining until the date on which the
repurchase of the underlying securities
is scheduled to occur, or, where the
agreement is subject to demand, the
notice period applicable to a demand for
the repurchase of the securities.
(7) Portfolio lending agreements. A
portfolio lending agreement shall be
treated as having a maturity equal to the
period remaining until the date on
which the loaned securities are
scheduled to be returned, or where the
agreement is subject to demand, the
notice period applicable to a demand for
the return of the loaned securities.
(8) Money market fund securities. An
investment in a money market fund
shall be treated as having a maturity
equal to the period of time within which
the acquired money market fund is
required to make payment upon
redemption, unless the acquired money
market fund has agreed in writing to
provide redemption proceeds to the
investing money market fund within a
shorter time period, in which case the
maturity of such investment shall be
deemed to be the shorter period.
(j) Delegation. The money market
fund’s board of directors may delegate
to the fund’s investment adviser or
officers the responsibility to make any
determination required to be made by
the board of directors under this section
other than the determinations required
by paragraphs (a)(10)(i) (designation of
NRSROs), (f)(2) (defaults and other
events), (g)(1) (general required
procedures), and (g)(7) (stress testing
procedures) of this section.
(1) Written guidelines. The board of
directors must establish and
periodically review written guidelines
(including guidelines for determining
whether securities present minimal
credit risks as required in paragraph
(d)(2) of this section) and procedures
under which the delegate makes such
determinations.
(2) Oversight. The board of directors
must take any measures reasonably
necessary (through periodic reviews of
fund investments and the delegate’s
procedures in connection with
investment decisions and prompt
review of the adviser’s actions in the
event of the default of a security or
event of insolvency with respect to the
issuer of the security or any guarantee
or demand feature to which it is subject
that requires notification of the
Commission under paragraph (f)(3) of
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37005
this section by reference to Form N–CR
(§ 274.222 of this chapter)) to assure that
the guidelines and procedures are being
followed.
Alternative 2
§ 270.2a–7
Money market funds.
(a) Definitions.
(1) Acquisition (or Acquire) means
any purchase or subsequent rollover
(but does not include the failure to
exercise a demand feature).
(2) Amortized cost means the value of
a security at the fund’s acquisition cost
as adjusted for amortization of premium
or accretion of discount rather than at
the security’s value based on current
market factors.
(3) Asset-backed security means a
fixed income security (other than a
government security) issued by a special
purpose entity (as defined in this
paragraph (a)(3)), substantially all of the
assets of which consist of qualifying
assets (as defined in this paragraph
(a)(3)). Special purpose entity means a
trust, corporation, partnership or other
entity organized for the sole purpose of
issuing securities that entitle their
holders to receive payments that depend
primarily on the cash flow from
qualifying assets, but does not include
a registered investment company.
Qualifying assets means financial assets,
either fixed or revolving, that by their
terms convert into cash within a finite
time period, plus any rights or other
assets designed to assure the servicing
or timely distribution of proceeds to
security holders.
(4) Business day means any day, other
than Saturday, Sunday, or any
customary business holiday.
(5) Collateralized fully has the same
meaning as defined in § 270.5b–3(c)(1)
except that § 270.5b–3(c)(1)(iv)(C) and
(D) shall not apply.
(6) Conditional demand feature
means a demand feature that is not an
unconditional demand feature. A
conditional demand feature is not a
guarantee.
(7) Conduit security means a security
issued by a municipal issuer (as defined
in this paragraph (a)(7)) involving an
arrangement or agreement entered into,
directly or indirectly, with a person
other than a municipal issuer, which
arrangement or agreement provides for
or secures repayment of the security.
Municipal issuer means a state or
territory of the United States (including
the District of Columbia), or any
political subdivision or public
instrumentality of a state or territory of
the United States. A conduit security
does not include a security that is:
(i) Fully and unconditionally
guaranteed by a municipal issuer;
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(ii) Payable from the general revenues
of the municipal issuer or other
municipal issuers (other than those
revenues derived from an agreement or
arrangement with a person who is not
a municipal issuer that provides for or
secures repayment of the security issued
by the municipal issuer);
(iii) Related to a project owned and
operated by a municipal issuer; or
(iv) Related to a facility leased to and
under the control of an industrial or
commercial enterprise that is part of a
public project which, as a whole, is
owned and under the control of a
municipal issuer.
(8) Daily liquid assets means:
(i) Cash;
(ii) Direct obligations of the U.S.
Government;
(iii) Securities that will mature, as
determined without reference to the
exceptions in paragraph (i) of this
section regarding interest rate
readjustments, or are subject to a
demand feature that is exercisable and
payable, within one business day; or
(iv) Amounts receivable and due
unconditionally within one business
day on pending sales of portfolio
securities.
(9) Demand feature means a feature
permitting the holder of a security to
sell the security at an exercise price
equal to the approximate amortized cost
of the security plus accrued interest, if
any, at the later of the time of exercise
or the settlement of the transaction, paid
within 397 calendar days of exercise.
(10) Designated NRSRO means any
one of at least four nationally
recognized statistical rating
organizations, as that term is defined in
section 3(a)(62) of the Securities
Exchange Act of 1934 (15 U.S.C.
78c(a)(62)), that:
(i) The money market fund’s board of
directors:
(A) Has designated as an NRSRO
whose credit ratings with respect to any
obligor or security or particular obligors
or securities will be used by the fund to
determine whether a security is an
eligible security; and
(B) Determines at least once each
calendar year issues credit ratings that
are sufficiently reliable for such use;
(ii) Is not an ‘‘affiliated person,’’ as
defined in section 2(a)(3)(C) of the Act
(15 U.S.C. 80a–2(a)(3)(C)), of the issuer
of, or any insurer or provider of credit
support for, the security; and
(iii) The fund discloses in its
statement of additional information is a
designated NRSRO, including any
limitations with respect to the fund’s
use of such designation.
(11) Eligible security means:
(i) A rated security with a remaining
maturity of 397 calendar days or less
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that has received a rating from the
requisite NRSROs in one of the two
highest short-term rating categories
(within which there may be subcategories or gradations indicating
relative standing); or
(ii) An unrated security that is of
comparable quality to a security meeting
the requirements for a rated security in
paragraph (a)(11)(i) of this section, as
determined by the money market fund’s
board of directors; provided, however,
that: a security that at the time of
issuance had a remaining maturity of
more than 397 calendar days but that
has a remaining maturity of 397
calendar days or less and that is an
unrated security is not an eligible
security if the security has received a
long-term rating from any designated
NRSRO that is not within the designated
NRSRO’s three highest long-term ratings
categories (within which there may be
sub-categories or gradations indicating
relative standing), unless the security
has received a long-term rating from the
requisite NRSROs in one of the three
highest rating categories.
(iii) In addition, in the case of a
security that is subject to a demand
feature or guarantee:
(A) The guarantee has received a
rating from a designated NRSRO or the
guarantee is issued by a guarantor that
has received a rating from a designated
NRSRO with respect to a class of debt
obligations (or any debt obligation
within that class) that is comparable in
priority and security to the guarantee,
unless:
(1) The guarantee is issued by a
person that, directly or indirectly,
controls, is controlled by or is under
common control with the issuer of the
security subject to the guarantee (other
than a sponsor of a special purpose
entity with respect to an asset-backed
security);
(2) The security subject to the
guarantee is a repurchase agreement that
is collateralized fully; or
(3) The guarantee is itself a
government security; and
(B) The issuer of the demand feature
or guarantee, or another institution, has
undertaken promptly to notify the
holder of the security in the event the
demand feature or guarantee is
substituted with another demand
feature or guarantee (if such substitution
is permissible under the terms of the
demand feature or guarantee).
(12) Event of insolvency has the same
meaning as defined in § 270.5b–3(c)(2).
(13) First tier security means any
eligible security that:
(i) Is a rated security that has received
a short-term rating from the requisite
NRSROs in the highest short-term rating
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category for debt obligations (within
which there may be sub-categories or
gradations indicating relative standing);
(ii) Is an unrated security that is of
comparable quality to a security meeting
the requirements for a rated security in
paragraph (a)(13)(i) of this section, as
determined by the fund’s board of
directors;
(iii) Is a security issued by a registered
investment company that is a money
market fund; or
(iv) Is a government security.
(14) Floating rate security means a
security the terms of which provide for
the adjustment of its interest rate
whenever a specified interest rate
changes and that, at any time until the
final maturity of the instrument or the
period remaining until the principal
amount can be recovered through
demand, can reasonably be expected to
have a market value that approximates
its amortized cost.
(15) Government security has the
same meaning as defined in section
2(a)(16) of the Act (15 U.S.C. 80a–
2(a)(16)).
(16) Guarantee:
(i) Means an unconditional obligation
of a person other than the issuer of the
security to undertake to pay, upon
presentment by the holder of the
guarantee (if required), the principal
amount of the underlying security plus
accrued interest when due or upon
default, or, in the case of an
unconditional demand feature, an
obligation that entitles the holder to
receive upon the later of exercise or the
settlement of the transaction the
approximate amortized cost of the
underlying security or securities, plus
accrued interest, if any. A guarantee
includes a letter of credit, financial
guaranty (bond) insurance, and an
unconditional demand feature (other
than an unconditional demand feature
provided by the issuer of the security).
(ii) The sponsor of a special purpose
entity with respect to an asset-backed
security shall be deemed to have
provided a guarantee with respect to the
entire principal amount of the assetbacked security for purposes of this
section, except paragraphs (a)(11)(iii)
(definition of eligible security),
(d)(2)(iii) (credit substitution),
(d)(3)(iv)(A) (fractional guarantees) and
(e) (guarantees not relied on) of this
section, unless the money market fund’s
board of directors has determined 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
quality (pursuant to paragraph (d)(2) of
this section) or liquidity (pursuant to
paragraph (d)(4) of this section) of the
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asset-backed security, and maintains a
record of this determination (pursuant
to paragraphs (g)(6) and (h)(6) of this
section).
(17) Guarantee issued by a noncontrolled person means a guarantee
issued by:
(i) A person that, directly or
indirectly, does not control, and is not
controlled by or under common control
with the issuer of the security subject to
the guarantee (control has the same
meaning as defined in section 2(a)(9) of
the Act) (15 U.S.C. 80a–2(a)(9)); or
(ii) A sponsor of a special purpose
entity with respect to an asset-backed
security if the money market fund’s
board of directors has made the findings
described in paragraph (g)(6) of this
section.
(18) Illiquid security means a security
that cannot be sold or disposed of in the
ordinary course of business within
seven calendar days at approximately
the value ascribed to it by the fund.
(19) Penny-rounding method of
pricing means the method of computing
an investment company’s price per
share for purposes of distribution,
redemption and repurchase whereby the
current net asset value per share is
rounded to the nearest one percent.
(20) Rated security means a security
that meets the requirements of
paragraphs (a)(20)(i) or (ii) of this
section, in each case subject to
paragraph (a)(20)(iii) of this section:
(i) The security has received a shortterm rating from a designated NRSRO,
or has been issued by an issuer that has
received a short-term rating from a
designated NRSRO with respect to a
class of debt obligations (or any debt
obligation within that class) that is
comparable in priority and security with
the security; or
(ii) The security is subject to a
guarantee that has received a short-term
rating from a designated NRSRO, or a
guarantee issued by a guarantor that has
received a short-term rating from a
designated NRSRO with respect to a
class of debt obligations (or any debt
obligation within that class) that is
comparable in priority and security with
the guarantee; but
(iii) A security is not a rated security
if it is subject to an external credit
support agreement (including an
arrangement by which the security has
become a refunded security) that was
not in effect when the security was
assigned its rating, unless the security
has received a short-term rating
reflecting the existence of the credit
support agreement as provided in
paragraph (a)(20)(i) of this section, or
the credit support agreement with
respect to the security has received a
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short-term rating as provided in
paragraph (a)(20)(ii) of this section.
(21) Refunded security has the same
meaning as defined in § 270.5b–3(c)(4).
(22) Requisite NRSROs means:
(i) Any two designated NRSROs that
have issued a rating with respect to a
security or class of debt obligations of
an issuer; or
(ii) If only one designated NRSRO has
issued a rating with respect to such
security or class of debt obligations of
an issuer at the time the fund acquires
the security, that designated NRSRO.
(23) Second tier security means any
eligible security that is not a first tier
security.
(24) Single state fund means a tax
exempt fund that holds itself out as
seeking to maximize the amount of its
distributed income that is exempt from
the income taxes or other taxes on
investments of a particular state and,
where applicable, subdivisions thereof.
(25) Tax exempt fund means any
money market fund that holds itself out
as distributing income exempt from
regular federal income tax.
(26) Total assets means the total value
of the money market fund’s assets, as
defined in section 2(a)(41) of the Act (15
U.S.C. 80a–2(a)(41)) and the rules
thereunder.
(27) Unconditional demand feature
means a demand feature that by its
terms would be readily exercisable in
the event of a default in payment of
principal or interest on the underlying
security or securities.
(28) United States dollardenominated means, with reference to a
security, that all principal and interest
payments on such security are payable
to security holders in United States
dollars under all circumstances and that
the interest rate of, the principal amount
to be repaid, and the timing of payments
related to such security do not vary or
float with the value of a foreign
currency, the rate of interest payable on
foreign currency borrowings, or with
any other interest rate or index
expressed in a currency other than
United States dollars.
(29) Unrated security means a security
that is not a rated security.
(30) Variable rate security means a
security the terms of which provide for
the adjustment of its interest rate on set
dates (such as the last day of a month
or calendar quarter) and that, upon each
adjustment until the final maturity of
the instrument or the period remaining
until the principal amount can be
recovered through demand, can
reasonably be expected to have a market
value that approximates its amortized
cost.
(31) Weekly liquid assets means:
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(i) Cash;
(ii) Direct obligations of the U.S.
Government;
(iii) Government securities that are
issued by a person controlled or
supervised by and acting as an
instrumentality of the government of the
United States pursuant to authority
granted by the Congress of the United
States that:
(A) Are issued at a discount to the
principal amount to be repaid at
maturity without provision for the
payment of interest; and
(B) Have a remaining maturity date of
60 days or less;
(iv) Securities that will mature, as
determined without reference to the
exceptions in paragraph (i) of this
section regarding interest rate
readjustments, or are subject to a
demand feature that is exercisable and
payable, within five business days; or
(v) Amounts receivable and due
unconditionally within five business
days on pending sales of portfolio
securities.
(b) Holding out and use of names and
titles.
(1) It shall be an untrue statement of
material fact within the meaning of
section 34(b) of the Act (15 U.S.C. 80a–
33(b)) for a registered investment
company, in any registration statement,
application, report, account, record, or
other document filed or transmitted
pursuant to the Act, including any
advertisement, pamphlet, circular, form
letter, or other sales literature addressed
to or intended for distribution to
prospective investors that is required to
be filed with the Commission by section
24(b) of the Act (15 U.S.C. 80a–24(b)),
to hold itself out to investors as a money
market fund or the equivalent of a
money market fund, unless such
registered investment company
complies with this section.
(2) It shall constitute the use of a
materially deceptive or misleading
name or title within the meaning of
section 35(d) of the Act (15 U.S.C. 80a–
34(d)) for a registered investment
company to adopt the term ‘‘money
market’’ as part of its name or title or the
name or title of any redeemable
securities of which it is the issuer, or to
adopt a name that suggests that it is a
money market fund or the equivalent of
a money market fund, unless such
registered investment company
complies with this section.
(3) For purposes of paragraph (b)(2) of
this section, a name that suggests that a
registered investment company is a
money market fund or the equivalent
thereof includes one that uses such
terms as ‘‘cash,’’ ‘‘liquid,’’ ‘‘money,’’
‘‘ready assets’’ or similar terms.
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(c) Share price calculations. The
current price per share, for purposes of
distribution, redemption and
repurchase, of any redeemable security
issued by any registered investment
company (‘‘money market fund’’ or
‘‘fund’’), notwithstanding the
requirements of section 2(a)(41) of the
Act (15 U.S.C. 80a–2(a)(41)) and of
§§ 270.2a–4 and 270.22c–1, may be
computed by use of the penny-rounding
method; provided, however, that:
(1) Board findings. The board of
directors of the money market fund
must determine, in good faith, that it is
in the best interests of the money market
fund to maintain a stable price per share
by virtue of the penny-rounding
method.
(2) Liquidity fees and temporary
suspensions of redemptions. Except as
provided in paragraph (c)(2)(iii) of this
section, and notwithstanding sections
22(e) and 27(i) of the Act (15 U.S.C.
80a–22(e) and 80a–27(i)) and § 270.22c–
1:
(i) Liquidity fees. If, at the end of a
business day, the money market fund
has invested less than fifteen percent of
its total assets in weekly liquid assets,
the fund must institute a liquidity fee,
effective as of the beginning of the next
business day, as described in paragraphs
(c)(2)(i)(A) and (B) of this section, unless
the fund’s board of directors, including
a majority of the directors who are not
interested persons of the fund,
determines that imposing the fee is not
in the best interest of the fund.
(A) Amount of liquidity fee. The
liquidity fee shall be two percent of the
value of shares redeemed unless the
money market fund’s board of directors,
including a majority of the directors
who are not interested persons of the
fund, determines that a lower fee level
is in the best interest of the fund. If a
liquidity fee remains in effect for more
than one business day, the board of
directors, including a majority of the
directors who are not interested persons
of the fund, may vary the level of the
liquidity fee (provided that the liquidity
fee may not exceed two percent of the
value of shares redeemed) if it
determines that the new fee level is in
the best interest of the fund, with the
new fee level taking effect as of the
beginning of the next business day.
(B) Duration and application of
liquidity fee. Once imposed, a liquidity
fee, which must be applied to all shares
redeemed, shall remain in effect until
the money market fund’s board of
directors, including a majority of the
directors who are not interested persons
of the fund, determines that imposing
the liquidity fee is not in the best
interest of the fund, provided that if, at
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the end of a business day, the money
market fund has invested thirty percent
or more of its total assets in weekly
liquid assets, the fund must cease
charging the liquidity fee, effective as of
the beginning of the next business day.
(ii) Temporary suspension of
redemptions. If, at the end of a business
day, the money market fund has
invested less than fifteen percent of its
total assets in weekly liquid assets, the
fund’s board of directors, including a
majority of the directors who are not
interested persons of the fund, may
determine to suspend the right of
redemption temporarily, effective at the
beginning of the next business day, if
the board determines that doing so is in
the best interest of the fund. The
temporary suspension of redemptions
may remain in effect until the fund’s
board of directors, including a majority
of the directors who are not interested
persons of the fund, determines to
restore the right of redemption,
provided that the fund must restore the
right of redemption within thirty
calendar days of suspending
redemptions (or the next business day
following such day) or on such earlier
business day if, at the end of the
preceding business day, the money
market fund has invested thirty percent
or more of its total assets in weekly
liquid assets. The money market fund
may not suspend the right of
redemption pursuant to this paragraph
for more than thirty days in any ninetyday period.
(iii) Exemption for government money
market funds. A money market fund is
not required to comply with paragraphs
(c)(2)(i) and (ii) of this section if and so
long as eighty percent or more of the
money market fund’s total assets are
invested in cash, government securities,
and/or repurchase agreements that are
collateralized fully, but such a fund may
choose not to rely on the exemption
provided by this paragraph, and may
impose liquidity fees and suspend
redemptions temporarily, provided that
the fund must then comply with
paragraphs (c)(2)(i) and (ii) of this
section and any other requirements that
apply to liquidity fees and temporary
suspensions of redemptions (e.g., Item
4(b)(1)(ii) of Form N–1A (§ 274.11A of
this chapter)).
(iv) Variable contracts. A variable
insurance contract sold by a registered
separate account funding variable
insurance contracts or the sponsoring
insurance company of such separate
account may apply a liquidity fee or
temporary suspension of redemptions
pursuant to paragraph (c)(2) of this
section to contract owners who allocate
all or a portion of their contract value
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to a subaccount of the separate account
that is either a money market fund or
that invests all of its assets in shares of
a money market fund.
(d) Risk-limiting conditions.
(1) Portfolio maturity. The money
market fund must maintain a dollarweighted average portfolio maturity
appropriate to its objective of
maintaining a stable price per share;
provided, however, that the money
market fund must not:
(i) Acquire any instrument with a
remaining maturity of greater than 397
calendar days;
(ii) Maintain a dollar-weighted
average portfolio maturity (‘‘WAM’’)
that exceeds 60 calendar days; or
(iii) Maintain a dollar-weighted
average portfolio maturity that exceeds
120 calendar days, determined without
reference to the exceptions in paragraph
(i) of this section regarding interest rate
readjustments (‘‘WAL’’).
(2) Portfolio quality.
(i) General. The money market fund
must limit its portfolio investments to
those United States dollar-denominated
securities that the fund’s board of
directors determines present minimal
credit risks (which determination must
be based on factors pertaining to credit
quality in addition to any rating
assigned to such securities by a
designated NRSRO) and that are at the
time of acquisition eligible securities.
(ii) Second tier securities. No money
market fund may acquire a second tier
security with a remaining maturity of
greater than 45 calendar days,
determined without reference to the
exceptions in paragraph (i) of this
section regarding interest rate
readjustments. Immediately after the
acquisition of any second tier security,
a money market fund must not have
invested more than three percent of its
total assets in second tier securities.
(iii) Securities subject to guarantees.
A security that is subject to a guarantee
may be determined to be an eligible
security or a first tier security based
solely on whether the guarantee is an
eligible security or first tier security, as
the case may be.
(iv) Securities subject to conditional
demand features. A security that is
subject to a conditional demand feature
(‘‘underlying security’’) may be
determined to be an eligible security or
a first tier security only if:
(A) The conditional demand feature is
an eligible security or first tier security,
as the case may be;
(B) At the time of the acquisition of
the underlying security, the money
market fund’s board of directors has
determined that there is minimal risk
that the circumstances that would result
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in the conditional demand feature not
being exercisable will occur; and
(1) The conditions limiting exercise
either can be monitored readily by the
fund or relate to the taxability, under
federal, state or local law, of the interest
payments on the security; or
(2) The terms of the conditional
demand feature require that the fund
will receive notice of the occurrence of
the condition and the opportunity to
exercise the demand feature in
accordance with its terms; and
(C) The underlying security or any
guarantee of such security (or the debt
securities of the issuer of the underlying
security or guarantee that are
comparable in priority and security with
the underlying security or guarantee)
has received either a short-term rating or
a long-term rating, as the case may be,
from the requisite NRSROs within the
NRSROs’ two highest short-term or
long-term rating categories (within
which there may be sub-categories or
gradations indicating relative standing)
or, if unrated, is determined to be of
comparable quality by the money
market fund’s board of directors to a
security that has received a rating from
the requisite NRSROs within the
NRSROs’ two highest short-term or
long-term rating categories, as the case
may be.
(3) Portfolio diversification.
(i) Issuer diversification. The money
market fund must be diversified with
respect to issuers of securities acquired
by the fund as provided in paragraphs
(d)(3)(i) and (d)(3)(ii) of this section,
other than with respect to government
securities and securities subject to a
guarantee issued by a non-controlled
person.
(A) Taxable and national funds.
Immediately after the acquisition of any
security, a money market fund other
than a single state fund must not have
invested more than:
(1) Five percent of its total assets in
securities issued by the issuer of the
security, provided, however, that such a
fund may invest up to twenty-five
percent of its total assets in the first tier
securities of a single issuer for a period
of up to three business days after the
acquisition thereof; provided, further,
that the fund may not invest in the
securities of more than one issuer in
accordance with the foregoing proviso
in this paragraph at any time; and
(2) Ten percent of its total assets in
securities issued by or subject to
demand features or guarantees from the
institution that issued the demand
feature or guarantee.
(B) Single state funds. Immediately
after the acquisition of any security, a
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single state fund must not have
invested:
(1) With respect to seventy-five
percent of its total assets, more than five
percent of its total assets in securities
issued by the issuer of the security; and
(2) With respect to all of its total
assets, more than ten percent of its total
assets in securities issued by or subject
to demand features or guarantees from
the institution that issued the demand
feature or guarantee.
(C) Second tier securities.
Immediately after the acquisition of any
second tier security, a money market
fund must not have invested more than
one half of one percent of its total assets
in the second tier securities of any
single issuer, and must not have
invested more than 2.5 percent of its
total assets in second tier securities
issued by or subject to demand features
or guarantees from the institution that
issued the demand feature or guarantee.
(ii) Issuer diversification calculations.
For purposes of making calculations
under paragraph (d)(3)(i) of this section:
(A) Repurchase agreements. The
acquisition of a repurchase agreement
may be deemed to be an acquisition of
the underlying securities, provided the
obligation of the seller to repurchase the
securities from the money market fund
is collateralized fully and the fund’s
board of directors has evaluated the
seller’s creditworthiness.
(B) Refunded securities. The
acquisition of a refunded security shall
be deemed to be an acquisition of the
escrowed government securities.
(C) Conduit securities. A conduit
security shall be deemed to be issued by
the person (other than the municipal
issuer) ultimately responsible for
payments of interest and principal on
the security.
(D) Asset-backed securities.
(1) General. An asset-backed security
acquired by a fund (‘‘primary ABS’’)
shall be deemed to be issued by the
special purpose entity that issued the
asset-backed security, provided,
however:
(i) Holdings of primary ABS. Any
person whose obligations constitute ten
percent or more of the principal amount
of the qualifying assets of the primary
ABS (‘‘ten percent obligor’’) shall be
deemed to be an issuer of the portion of
the primary ABS such obligations
represent; and
(ii) Holdings of secondary ABS. If a
ten percent obligor of a primary ABS is
itself a special purpose entity issuing
asset-backed securities (‘‘secondary
ABS’’), any ten percent obligor of such
secondary ABS also shall be deemed to
be an issuer of the portion of the
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37009
primary ABS that such ten percent
obligor represents.
(2) Restricted special purpose entities.
A ten percent obligor with respect to a
primary or secondary ABS shall not be
deemed to have issued any portion of
the assets of a primary ABS as provided
in paragraph (d)(3)(ii)(D)(1) of this
section if that ten percent obligor is
itself a special purpose entity issuing
asset-backed securities (‘‘restricted
special purpose entity’’), and the
securities that it issues (other than
securities issued to a company that
controls, or is controlled by or under
common control with, the restricted
special purpose entity and which is not
itself a special purpose entity issuing
asset-backed securities) are held by only
one other special purpose entity.
(3) Demand features and guarantees.
In the case of a ten percent obligor
deemed to be an issuer, the fund must
satisfy the diversification requirements
of paragraphs (d)(3)(iii) of this section
with respect to any demand feature or
guarantee to which the ten percent
obligor’s obligations are subject.
(E) Shares of other money market
funds. A money market fund that
acquires shares issued by another
money market fund in an amount that
would otherwise be prohibited by
paragraph (d)(3)(i) of this section shall
nonetheless be deemed in compliance
with this section if the board of
directors of the acquiring money market
fund reasonably believes that the fund
in which it has invested is in
compliance with this section.
(F) Treatment of certain affiliated
entities. The money market fund, when
calculating the amount of its total assets
invested in securities issued by any
particular issuer for purposes of
paragraph (d)(3)(i) of this section, must
treat as a single issuer two or more
issuers of securities owned by the
money market fund if one issuer
controls the other, is controlled by the
other issuer, or is under common
control with the other issuer, provided
that ‘‘control’’ for this purpose means
ownership of more than 50 percent of
the issuer’s voting securities.
(iii) Diversification rules for demand
features and guarantees. The money
market fund must be diversified with
respect to demand features and
guarantees acquired by the fund as
provided in paragraphs (d)(3)(iii) and
(d)(3)(iv) of this section, other than with
respect to a demand feature issued by
the same institution that issued the
underlying security, or with respect to
a guarantee or demand feature that is
itself a government security.
(A) General. Immediately after the
acquisition of any demand feature or
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guarantee, any security subject to a
demand feature or guarantee, or a
security directly issued by the issuer of
a demand feature or guarantee, a money
market fund must not have invested
more than ten percent of its total assets
in securities issued by or subject to
demand features or guarantees from the
institution that issued the demand
feature or guarantee.
(B) Second tier demand features or
guarantees. Immediately after the
acquisition of any demand feature or
guarantee, any security subject to a
demand feature or guarantee, a security
directly issued by the issuer of a
demand feature or guarantee, or a
security after giving effect to the
demand feature or guarantee, in all
cases that is a second tier security, a
money market fund must not have
invested more than 2.5 percent of its
total assets in securities issued by or
subject to demand features or guarantees
from the institution that issued the
demand feature or guarantee.
(iv) Demand feature and guarantee
diversification calculations.
(A) Fractional demand features or
guarantees. In the case of a security
subject to a demand feature or guarantee
from an institution by which the
institution guarantees a specified
portion of the value of the security, the
institution shall be deemed to guarantee
the specified portion thereof.
(B) Layered demand features or
guarantees. In the case of a security
subject to demand features or guarantees
from multiple institutions that have not
limited the extent of their obligations as
described in paragraph (d)(3)(iv)(A) of
this section, each institution shall be
deemed to have provided the demand
feature or guarantee with respect to the
entire principal amount of the security.
(v) Diversification safe harbor. A
money market fund that satisfies the
applicable diversification requirements
of paragraphs (d)(3) and (e) of this
section shall be deemed to have
satisfied the diversification
requirements of section 5(b)(1) of the
Act (15 U.S.C. 80a–5(b)(1)) and the rules
adopted thereunder.
(4) Portfolio liquidity. The money
market fund must hold securities that
are sufficiently liquid to meet
reasonably foreseeable shareholder
redemptions in light of the fund’s
obligations under section 22(e) of the
Act (15 U.S.C. 80a–22(e)) and any
commitments the fund has made to
shareholders; provided, however, that:
(i) Illiquid securities. The money
market fund may not acquire any
illiquid security if, immediately after
the acquisition, the money market fund
would have invested more than five
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percent of its total assets in illiquid
securities.
(ii) Minimum daily liquidity
requirement. The money market fund
may not acquire any security other than
a daily liquid asset if, immediately after
the acquisition, the fund would have
invested less than ten percent of its total
assets in daily liquid assets. This
provision does not apply to tax exempt
funds.
(iii) Minimum weekly liquidity
requirement. The money market fund
may not acquire any security other than
a weekly liquid asset if, immediately
after the acquisition, the fund would
have invested less than thirty percent of
its total assets in weekly liquid assets.
(e) Demand features and guarantees
not relied upon. If the fund’s board of
directors has determined that the fund
is not relying on a demand feature or
guarantee to determine the quality
(pursuant to paragraph (d)(2) of this
section), or maturity (pursuant to
paragraph (i) of this section), or
liquidity of a portfolio security
(pursuant to paragraph (d)(4) of this
section), and maintains a record of this
determination (pursuant to paragraphs
(g)(3) and (h)(7) of this section), then the
fund may disregard such demand
feature or guarantee for all purposes of
this section.
(f) Downgrades, defaults and other
events.
(1) Downgrades.
(i) General. Upon the occurrence of
either of the events specified in
paragraphs (f)(1)(i)(A) and (B) of this
section with respect to a portfolio
security, the board of directors of the
money market fund shall reassess
promptly whether such security
continues to present minimal credit
risks and shall cause the fund to take
such action as the board of directors
determines is in the best interests of the
money market fund:
(A) A portfolio security of a money
market fund ceases to be a first tier
security (either because it no longer has
the highest rating from the requisite
NRSROs or, in the case of an unrated
security, the board of directors of the
money market fund determines that it is
no longer of comparable quality to a first
tier security); and
(B) The money market fund’s
investment adviser (or any person to
whom the fund’s board of directors has
delegated portfolio management
responsibilities) becomes aware that any
unrated security or second tier security
held by the money market fund has,
since the security was acquired by the
fund, been given a rating by a
designated NRSRO below the
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designated NRSRO’s second highest
short-term rating category.
(ii) Securities to be disposed of. The
reassessments required by paragraph
(f)(1)(i) of this section shall not be
required if the fund disposes of the
security (or it matures) within five
business days of the specified event
and, in the case of events specified in
paragraph (f)(1)(i)(B) of this section, the
board is subsequently notified of the
adviser’s actions.
(iii) Special rule for certain securities
subject to demand features. In the event
that after giving effect to a rating
downgrade, more than 2.5 percent of the
fund’s total assets are invested in
securities issued by or subject to
demand features from a single
institution that are second tier
securities, the fund shall reduce its
investment in securities issued by or
subject to demand features from that
institution to no more than 2.5 percent
of its total assets by exercising the
demand features at the next succeeding
exercise date(s), absent a finding by the
board of directors that disposal of the
portfolio security would not be in the
best interests of the money market fund.
(2) Defaults and other events. Upon
the occurrence of any of the events
specified in paragraphs (f)(2)(i) through
(iv) of this section with respect to a
portfolio security, the money market
fund shall dispose of such security as
soon as practicable consistent with
achieving an orderly disposition of the
security, by sale, exercise of any
demand feature or otherwise, absent a
finding by the board of directors that
disposal of the portfolio security would
not be in the best interests of the money
market fund (which determination may
take into account, among other factors,
market conditions that could affect the
orderly disposition of the portfolio
security):
(i) The default with respect to a
portfolio security (other than an
immaterial default unrelated to the
financial condition of the issuer);
(ii) A portfolio security ceases to be an
eligible security;
(iii) A portfolio security has been
determined to no longer present
minimal credit risks; or
(iv) An event of insolvency occurs
with respect to the issuer of a portfolio
security or the provider of any demand
feature or guarantee.
(3) Notice to the Commission. The
money market fund must notify the
Commission of the occurrence of certain
material events, as specified in Form N–
CR (§ 274.222 of this chapter).
(4) Defaults for purposes of
Paragraphs (f)(2) and (3) of this section.
For purposes of paragraphs (f)(2) and (3)
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of this section, an instrument subject to
a demand feature or guarantee shall not
be deemed to be in default (and an event
of insolvency with respect to the
security shall not be deemed to have
occurred) if:
(i) In the case of an instrument subject
to a demand feature, the demand feature
has been exercised and the fund has
recovered either the principal amount or
the amortized cost of the instrument,
plus accrued interest;
(ii) The provider of the guarantee is
continuing, without protest, to make
payments as due on the instrument; or
(iii) The provider of a guarantee with
respect to an asset-backed security
pursuant to paragraph (a)(16)(ii) of this
section is continuing, without protest, to
provide credit, liquidity or other
support as necessary to permit the assetbacked security to make payments as
due.
(g) Required procedures. The money
market fund’s board of directors must
adopt written procedures including the
following:
(1) General. In supervising the money
market fund’s operations and delegating
special responsibilities involving
portfolio management to the money
market fund’s investment adviser, the
money market fund’s board of directors,
as a particular responsibility within the
overall duty of care owed to its
shareholders, must establish written
procedures reasonably designed, taking
into account current market conditions
and the money market fund’s
investment objectives, to assure to the
extent reasonably practicable that the
money market fund’s price per share, as
computed for the purpose of
distribution, redemption and
repurchase, rounded to the nearest one
percent, will not deviate from the stable
price established by the board of
directors.
(2) Securities for which maturity is
determined by reference to demand
features. In the case of a security for
which maturity is determined by
reference to a demand feature, written
procedures shall require ongoing review
of the security’s continued minimal
credit risks, and that review must be
based on, among other things, financial
data for the most recent fiscal year of the
issuer of the demand feature and, in the
case of a security subject to a
conditional demand feature, the issuer
of the security whose financial
condition must be monitored under
paragraph (d)(2)(iv) of this section,
whether such data is publicly available
or provided under the terms of the
security’s governing documentation.
(3) Securities subject to demand
features or guarantees. In the case of a
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security subject to one or more demand
features or guarantees that the fund’s
board of directors has determined that
the fund is not relying on to determine
the quality (pursuant to paragraph (d)(2)
of this section), maturity (pursuant to
paragraph (i) of this section) or liquidity
(pursuant to paragraph (d)(4) of this
section) of the security subject to the
demand feature or guarantee, written
procedures must require periodic
evaluation of such determination.
(4) Adjustable rate securities without
demand features. In the case of a
variable rate or floating rate security that
is not subject to a demand feature and
for which maturity is determined
pursuant to paragraph (i)(1), (i)(2) or
(i)(4) of this section, written procedures
shall require periodic review of whether
the interest rate formula, upon
readjustment of its interest rate, can
reasonably be expected to cause the
security to have a market value that
approximates its amortized cost value.
(5) Ten percent obligors of assetbacked securities. In the case of an
asset-backed security, written
procedures must require the fund to
periodically determine the number of
ten percent obligors (as that term is used
in paragraph (d)(3)(ii)(D) of this section)
deemed to be the issuers of all or a
portion of the asset-backed security for
purposes of paragraph (d)(3)(ii)(D) of
this section; provided, however, written
procedures need not require periodic
determinations with respect to any
asset-backed security that a fund’s board
of directors has determined, at the time
of acquisition, will not have, or is
unlikely to have, ten percent obligors
that are deemed to be issuers of all or
a portion of that asset-backed security
for purposes of paragraph (d)(3)(ii)(D) of
this section, and maintains a record of
this determination.
(6) Asset-backed securities not subject
to guarantees. In the case of an asset
backed-security for which the fund’s
board of directors has determined that
the fund is not relying on the sponsor’s
financial strength or its ability or
willingness to provide liquidity, credit
or other support in connection with the
asset-backed security to determine the
quality (pursuant to paragraph (d)(2) of
this section) or liquidity (pursuant to
paragraph (d)(4) of this section) of the
asset-backed security, written
procedures must require periodic
evaluation of such determination.
(7) Stress testing. Written procedures
must provide for:
(i) The periodic testing, at such
intervals as the board of directors
determines appropriate and reasonable
in light of current market conditions, of
the money market fund’s ability to
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maintain the stable price per share
established by the board of directors for
the purpose of distribution, redemption,
and repurchase, and to have invested at
least fifteen percent of its assets in
weekly liquid assets, based upon
specified hypothetical events that
include, but are not limited to:
(A) Increases in the general level of
short-term interest rates;
(B) An increase in shareholder
redemptions, together with an
assessment of how the fund would meet
the redemptions, taking into
consideration assumptions regarding the
relative liquidity of the fund’s portfolio
securities, the prices for which portfolio
securities could be sold, the fund’s
historical experience meeting
redemption requests, and any other
relevant factors;
(C) A downgrade or default of
portfolio securities, and the effects these
events could have on other securities
held by the fund;
(D) The widening or narrowing of
spreads among the indexes to which
interest rates of portfolio securities are
tied;
(E) Other movements in interest rates
that may affect the fund’s portfolio
securities, such as parallel and nonparallel shifts in the yield curve; and
(F) Combinations of these and any
other events the adviser deems relevant,
assuming a positive correlation of risk
factors (e.g., assuming that a security
default likely will be followed by
increased redemptions) and taking into
consideration the extent to which the
fund’s portfolio securities are correlated
such that adverse events affecting a
given security are likely to also affect
one or more other securities (e.g., a
consideration of whether issuers in the
same or related industries or geographic
regions would be affected by adverse
events affecting issuers in the same
industry or geographic region).
(ii) A report on the results of such
testing to be provided to the board of
directors at its next regularly scheduled
meeting (or sooner, if appropriate in
light of the results), which report must
include:
(A) The date(s) on which the testing
was performed and the magnitude of
each hypothetical event that would
cause the fund’s price per share for
purposes of distribution, redemption
and repurchase to deviate from the
stable price per share established by the
board of directors, or cause the fund to
have invested less than fifteen percent
of its assets in weekly liquid assets; and
(B) An assessment by the fund’s
adviser of the fund’s ability to withstand
the events (and concurrent occurrences
of those events) that are reasonably
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likely to occur within the following
year, including such information as may
reasonably be necessary for the board of
directors to evaluate the stress testing
conducted by the adviser and the results
of the testing.
(h) Record keeping and reporting.
(1) Written procedures. For a period of
not less than six years following the
replacement of such procedures with
new procedures (the first two years in
an easily accessible place), a written
copy of the procedures (and any
modifications thereto) described in
paragraphs (g) and (j) of this section
must be maintained and preserved.
(2) Board considerations and actions.
For a period of not less than six years
(the first two years in an easily
accessible place) a written record must
be maintained and preserved of the
board of directors’ considerations and
actions taken in connection with the
discharge of its responsibilities, as set
forth in this section, to be included in
the minutes of the board of directors’
meetings.
(3) Credit risk analysis. For a period
of not less than three years from the date
that the credit risks of a portfolio
security were most recently reviewed, a
written record of the determination that
a portfolio security presents minimal
credit risks and the designated NRSRO
ratings (if any) used to determine the
status of the security as an eligible
security, first tier security or second tier
security shall be maintained and
preserved in an easily accessible place.
(4) Determinations with respect to
adjustable rate securities. For a period
of not less than three years from the date
when the assessment was most recently
made, a written record must be
preserved and maintained, in an easily
accessible place, of the determination
required by paragraph (g)(4) of this
section (that a variable rate or floating
rate security that is not subject to a
demand feature and for which maturity
is determined pursuant to paragraph
(i)(1), (i)(2) or (i)(4) of this section can
reasonably be expected, upon
readjustment of its interest rate at all
times during the life of the instrument,
to have a market value that
approximates its amortized cost).
(5) Determinations with respect to
asset-backed securities. For a period of
not less than three years from the date
when the determination was most
recently made, a written record must be
preserved and maintained, in an easily
accessible place, of the determinations
required by paragraph (g)(5) of this
section (the number of ten percent
obligors (as that term is used in
paragraph (d)(3)(ii)(D) of this section)
deemed to be the issuers of all or a
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portion of the asset-backed security for
purposes of paragraph (d)(3)(ii)(D) of
this section). The written record must
include:
(i) The identities of the ten percent
obligors (as that term is used in
paragraph (d)(3)(ii)(D) of this section),
the percentage of the qualifying assets
constituted by the securities of each ten
percent obligor and the percentage of
the fund’s total assets that are invested
in securities of each ten percent obligor;
and
(ii) Any determination that an assetbacked security will not have, or is
unlikely to have, ten percent obligors
deemed to be issuers of all or a portion
of that asset-backed security for
purposes of paragraph (d)(3)(ii)(D) of
this section.
(6) Evaluations with respect to assetbacked securities not subject to
guarantees. For a period of not less than
three years from the date when the
evaluation was most recently made, a
written record must be preserved and
maintained, in an easily accessible
place, of the evaluation required by
paragraph (g)(6) of this section
(regarding asset-backed securities not
subject to guarantees).
(7) Evaluations with respect to
securities subject to demand features or
guarantees. For a period of not less than
three years from the date when the
evaluation was most recently made, a
written record must be preserved and
maintained, in an easily accessible
place, of the evaluation required by
paragraph (g)(3) of this section
(regarding securities subject to one or
more demand features or guarantees).
(8) Reports with respect to stress
testing. For a period of not less than six
years (the first two years in an easily
accessible place), a written copy of the
report required under paragraph
(g)(7)(ii) of this section must be
maintained and preserved.
(9) Inspection of records. The
documents preserved pursuant to
paragraph (h) of this section are subject
to inspection by the Commission in
accordance with section 31(b) of the Act
(15 U.S.C. 80a–30(b)) as if such
documents were records required to be
maintained pursuant to rules adopted
under section 31(a) of the Act (15 U.S.C.
80a–30(a)).
(10) Web site disclosure of portfolio
holdings and other fund information.
The money market fund must post
prominently on its Web site the
following information:
(i) For a period of not less than six
months, beginning no later than the fifth
business day of the month, a schedule
of its investments, as of the last business
day or subsequent calendar day of the
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preceding month, that includes the
following information:
(A) With respect to the money market
fund and each class of redeemable
shares thereof:
(1) The WAM; and
(2) The WAL.
(B) With respect to each security held
by the money market fund:
(1) Name of the issuer;
(2) Category of investment (indicate
the category that most closely identifies
the instrument from among the
following: U.S. Treasury Debt; U.S.
Government Agency Debt; Non U.S.
Sovereign Debt; Non U.S. Sub-Sovereign
Debt; Variable Rate Demand Note; Other
Municipal Debt; Financial Company
Commercial Paper; Asset-Backed
Commercial Paper; Other Asset-Backed
Security; Non-Financial Company
Commercial Paper; Collateralized
Commercial Paper; Certificate of Deposit
(including Time Deposits and Euro
Time Deposits); Structured Investment
Vehicle Note; Other Note; U.S. Treasury
Repurchase Agreement; Government
Agency Repurchase Agreement; Other
Repurchase Agreement; Insurance
Company Funding Agreement;
Investment Company; Other
Instrument);
(3) CUSIP number (if any);
(4) Principal amount;
(5) The maturity date determined by
taking into account the maturity
shortening provisions in paragraph (i) of
this section (i.e., the maturity date used
to calculate WAM under paragraph
(d)(1)(ii) of this section);
(6) The maturity date determined
without reference to the exceptions in
paragraph (i) of this section regarding
interest rate readjustments (i.e., the
maturity used to calculate WAL under
paragraph (d)(1)(iii) of this section);
(7) Coupon or yield; and
(8) Value.
(ii) A schedule, chart, graph, or other
depiction, which must be updated each
business day as of the end of the
preceding business day, showing, as of
the end of each business day during the
preceding six months:
(A) The percentage of the money
market fund’s total assets invested in
daily liquid assets;
(B) The percentage of the money
market fund’s total assets invested in
weekly liquid assets; and
(C) The money market fund’s net
inflows or outflows.
(iii) A schedule, chart, graph, or other
depiction showing the money market
fund’s net asset value per share (which
the fund must calculate based on
current market factors before applying
the penny-rounding method), rounded
to the fourth decimal place in the case
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Federal Register / Vol. 78, No. 118 / Wednesday, June 19, 2013 / Proposed Rules
of funds with a $1.0000 share price or
an equivalent level of accuracy for funds
with a different share price (e.g.,
$10.000 or $100.00 per share), as of the
end of each business day during the
preceding six months, which must be
updated each business day as of the end
of the preceding business day.
(iv) A link to a Web site of the
Securities and Exchange Commission
where a user may obtain the most recent
12 months of publicly available
information filed by the money market
fund pursuant to § 270.30b1–7.
(v) For a period of not less than one
year, beginning no later than the first
business day following the occurrence
of any event specified in Parts C, E, F,
or G of Form N–CR (§ 274.222 of this
chapter), the same information that the
money market fund is required to report
to the Commission on Part C, Part E
(Items E.1 and E.2), Part F (Items F.1
and F.2), or Part G of Form N–CR
concerning such event.
(11) Processing of transactions. The
money market fund (or its transfer
agent) must have the capacity to redeem
and sell securities issued by the fund at
a price based on the current net asset
value per share pursuant to § 270.22c–
1. Such capacity must include the
ability to redeem and sell securities at
prices that do not correspond to a stable
price per share.
(i) Maturity of portfolio securities. For
purposes of this section, the maturity of
a portfolio security shall be deemed to
be the period remaining (calculated
from the trade date or such other date
on which the fund’s interest in the
security is subject to market action)
until the date on which, in accordance
with the terms of the security, the
principal amount must unconditionally
be paid, or in the case of a security
called for redemption, the date on
which the redemption payment must be
made, except as provided in paragraphs
(i)(1) through (i)(8) of this section:
(1) Adjustable rate government
securities. A government security that is
a variable rate security where the
variable rate of interest is readjusted no
less frequently than every 397 calendar
days shall be deemed to have a maturity
equal to the period remaining until the
next readjustment of the interest rate. A
government security that is a floating
rate security shall be deemed to have a
remaining maturity of one day.
(2) Short-term variable rate securities.
A variable rate security, the principal
amount of which, in accordance with
the terms of the security, must
unconditionally be paid in 397 calendar
days or less shall be deemed to have a
maturity equal to the earlier of the
period remaining until the next
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19:54 Jun 18, 2013
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readjustment of the interest rate or the
period remaining until the principal
amount can be recovered through
demand.
(3) Long-term variable rate securities.
A variable rate security, the principal
amount of which is scheduled to be
paid in more than 397 calendar days,
that is subject to a demand feature, shall
be deemed to have a maturity equal to
the longer of the period remaining until
the next readjustment of the interest rate
or the period remaining until the
principal amount can be recovered
through demand.
(4) Short-term floating rate securities.
A floating rate security, the principal
amount of which, in accordance with
the terms of the security, must
unconditionally be paid in 397 calendar
days or less shall be deemed to have a
maturity of one day, except for purposes
of determining WAL under paragraph
(d)(1)(iii) of this section, in which case
it shall be deemed to have a maturity
equal to the period remaining until the
principal amount can be recovered
through demand.
(5) Long-term floating rate securities.
A floating rate security, the principal
amount of which is scheduled to be
paid in more than 397 calendar days,
that is subject to a demand feature, shall
be deemed to have a maturity equal to
the period remaining until the principal
amount can be recovered through
demand.
(6) Repurchase agreements. A
repurchase agreement shall be deemed
to have a maturity equal to the period
remaining until the date on which the
repurchase of the underlying securities
is scheduled to occur, or, where the
agreement is subject to demand, the
notice period applicable to a demand for
the repurchase of the securities.
(7) Portfolio lending agreements. A
portfolio lending agreement shall be
treated as having a maturity equal to the
period remaining until the date on
which the loaned securities are
scheduled to be returned, or where the
agreement is subject to demand, the
notice period applicable to a demand for
the return of the loaned securities.
(8) Money market fund securities. An
investment in a money market fund
shall be treated as having a maturity
equal to the period of time within which
the acquired money market fund is
required to make payment upon
redemption, unless the acquired money
market fund has agreed in writing to
provide redemption proceeds to the
investing money market fund within a
shorter time period, in which case the
maturity of such investment shall be
deemed to be the shorter period.
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37013
(j) Delegation. The money market
fund’s board of directors may delegate
to the fund’s investment adviser or
officers the responsibility to make any
determination required to be made by
the board of directors under this section
other than the determinations required
by paragraphs (a)(10)(i) (designation of
NRSROs), (c)(1) (board findings),
(c)(2)(i) and (ii) (determinations related
to liquidity fees and temporary
suspensions), (f)(2) (defaults and other
events), (g)(1) (general required
procedures), and (g)(7) (stress testing
procedures) of this section.
(1) Written Guidelines. The board of
directors must establish and
periodically review written guidelines
(including guidelines for determining
whether securities present minimal
credit risks as required in paragraph
(d)(2) of this section) and procedures
under which the delegate makes such
determinations.
(2) Oversight. The board of directors
must take any measures reasonably
necessary (through periodic reviews of
fund investments and the delegate’s
procedures in connection with
investment decisions and prompt
review of the adviser’s actions in the
event of the default of a security or
event of insolvency with respect to the
issuer of the security or any guarantee
or demand feature to which it is subject
that requires notification of the
Commission under paragraph (f)(3) of
this section by reference to Form N–CR
(§ 274.222 of this chapter)) to assure that
the guidelines and procedures are being
followed.
■ 7. Section 270.12d3–1(d)(7)(v) is
amended by removing ‘‘§ 270.2a–7(a)(8)
and § 270.2a–7(a)(15)’’ and adding in its
place ‘‘§ 270.2a–7(a)(9) and § 270.2a–
7(a)(16)’’.
■ 8. Section 270.18f–3(c)(2)(i) is
amended by removing the phrase ‘‘that
determines net asset value using the
amortized cost method permitted by
§ 270.2a–7’’ and adding in its place
‘‘that operates in compliance with
§ 270.2a–7’’.
■ 9. Section § 270.22e–3 is amended by
revising paragraph (a)(1) and adding
paragraph (d).
The revisions and additions read as
follows.
Alternative 1
§ 270.22e–3 Exemption for liquidation of
money market funds.
(a) * * *
(1) The fund, at the end of a business
day, has invested less than fifteen
percent of its total assets in weekly
liquid assets or, in the case of a fund
relying on the exemptions provided by
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Federal Register / Vol. 78, No. 118 / Wednesday, June 19, 2013 / Proposed Rules
§ 270.2a–7(c)(2) or (3), the fund’s price
per share as computed for the purpose
of distribution, redemption and
repurchase, rounded to the nearest one
percent, has deviated from the stable
price established by the board of
directors or the fund’s board of
directors, including a majority of
directors who are not interested persons
of the fund, determines that such a
deviation is likely to occur;
*
*
*
*
*
(d) Definitions. Each of the terms
business day, total assets, and weekly
liquid assets has the same meaning as
defined in § 270.2a–7.
Alternative 2
Form N–CR within the period specified
in that form.
■ 12. Section 270.31a–1(b)(1) is
amended by removing ‘‘§ 270.2a–7(a)(8)
or § 270.2a–7(a)(15)’’ and adding in its
place ‘‘§ 270.2a–7(a)(9) or § 270.2a–
7(a)(16)’’.
PART 239—FORMS PRESCRIBED
UNDER THE SECURITIES ACT OF 1933
13. The authority citation for Part 239
continues to read in part as follows:
■
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,
77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n,
78o(d), 78o–7 note, 78u–5, 78w(a), 78ll,
78mm, 80a–2(a), 80a–3, 80a–8, 80a–9, 80a–
10, 80a–13, 80a–24, 80a–26, 80a–29, 80a–30,
and 80a–37, unless otherwise noted.
§ 270.22e–3 Exemption for liquidation of
money market funds.
*
(a) * * *
(1) The fund, at the end of a business
day, has invested less than fifteen
percent of its total assets in weekly
liquid assets, or the fund’s price per
share as computed for the purpose of
distribution, redemption and
repurchase, rounded to the nearest one
percent, has deviated from the stable
price established by the board of
directors or the fund’s board of
directors, including a majority of
directors who are not interested persons
of the fund, determines that such a
deviation is likely to occur;
*
*
*
*
*
(d) Definitions. Each of the terms
business day, total assets, and weekly
liquid assets has the same meaning as
defined in § 270.2a–7.
■ 10. Section 270.30b1–7 is revised to
read as follows:
PART 274—FORMS PRESCRIBED
UNDER THE INVESTMENT COMPANY
ACT OF 1940
§ 270.30b1–7 Monthly report for money
market funds.
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
Every registered open-end
management investment company, or
series thereof, that is regulated as a
money market fund under § 270.2a–7
must file with the Commission a
monthly report of portfolio holdings on
Form N–MFP (§ 274.201 of this chapter),
current as of the last business day or any
subsequent calendar day of the
preceding month, no later than the fifth
business day of each month.
■ 11. Section 270.30b1–8 is added to
read as follows:
§ 270.30b1–8. Current report for money
market funds.
Every registered open-end
management investment company, or
series thereof, that is regulated as a
money market fund under § 270.2a–7,
that experiences any of the events
specified on Form N–CR (17 CFR
274.222 of this chapter), must file with
the Commission a current report on
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19:54 Jun 18, 2013
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*
*
*
*
14. The authority citation for Part 274
continues to read in part as follows:
■
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,
78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24,
80a–26, and 80a–29, unless otherwise noted.
*
*
*
*
*
15. Form N–1A (referenced in
§§ 239.15A and 274.11A) is amended
by:
■ a. Revising paragraph (b)(1)(ii) of Item
4; and
■ b. Adding a paragraph (g) to Item 16;
or
■ c. Revising paragraph 2(b) of the
instructions to Item 3;
■ d. Revising paragraph (b)(1)(ii) of Item
4; and
■ e. Adding a paragraph (g) to Item 16.
The additions and revisions read as
follows:
■
Note: The text of Form N–1A does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Alternative 1
Form N–1A
*
*
*
*
*
Item 4. Risk/Return Summary:
Investments, Risks, and Performance
*
*
*
*
*
(b) * * *
(1) * * *
(ii)(A) If the Fund is a Money Market
Fund that is not subject to the
exemption provisions of § 270.2a–7(c)(2)
or § 270.2a–7(c)(3), include the
following bulleted statement:
• You could lose money by investing
in the Fund.
• You should not invest in the Fund
if you require your investment to
maintain a stable value.
• The value of shares of the Fund will
increase and decrease as a result of
PO 00000
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changes in the value of the securities in
which the Fund invests. The value of
the securities in which the Fund invests
may in turn be affected by many factors,
including interest rate changes and
defaults or changes in the credit quality
of a security’s issuer.
• An investment in the Fund is not
insured or guaranteed by the Federal
Deposit Insurance Corporation or any
other government agency.
• The Fund’s sponsor has no legal
obligation to provide financial support
to the Fund, and you should not expect
that the sponsor will provide financial
support to the Fund at any time.
(B) If the Fund is a Money Market
Fund that is subject to the exemption
provisions of § 270.2a–7(c)(2) or
§ 270.2a–7(c)(3), include the following
bulleted statement:
• You could lose money by investing
in the Fund.
• The Fund seeks to preserve the
value of your investment at $1.00 per
share, but cannot guarantee such
stability.
• An investment in the Fund is not
insured or guaranteed by the Federal
Deposit Insurance Corporation or any
other government agency.
• The Fund’s sponsor has no legal
obligation to provide financial support
to the Fund, and you should not expect
that the sponsor will provide financial
support to the Fund at any time.
Instruction. If an affiliated person,
promoter, or principal underwriter of
the Fund, or an affiliated person of such
a person, has entered into an agreement
to provide financial support to the
Fund, and the term of the agreement
will extend for at least one year
following the effective date of the
Fund’s registration statement, the
bulleted statement specified in Item
4(b)(1)(ii)(A) or Item 4(b)(1)(ii)(B) may
omit the last bulleted sentence (‘‘The
Fund’s sponsor has no legal obligation
to provide financial support to the
Fund, and you should not expect that
the sponsor will provide financial
support to the Fund at any time.’’). For
purposes of this Instruction, the term
‘‘financial support’’ includes, for
example, any capital contribution,
purchase of a security from the Fund in
reliance on § 270.17a–9, purchase of any
defaulted or devalued security at par,
purchase of Fund shares, execution of
letter of credit or letter of indemnity,
capital support agreement (whether or
not the Fund ultimately received
support), or performance guarantee, or
any other similar action to increase the
value of the fund’s portfolio or
otherwise support the fund during times
of stress.
*
*
*
*
*
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Item 16. Description of the Fund and Its
Investments and Risks
*
*
*
*
*
(g) Financial Support Provided to
Money Market Funds. If the Fund is a
Money Market Fund, disclose any
occasion during the last 10 years on
which an affiliated person, promoter, or
principal underwriter of the Fund, or an
affiliated person of such a person,
provided any form of financial support
to the Fund, including a description of
the nature of support, person providing
support, brief description of the
relationship between the person
providing support and the Fund, brief
description of the reason for support,
date support provided, amount of
support, security supported (if
applicable), value of security supported
on date support was initiated (if
applicable), term of support, and a brief
description of any contractual
restrictions relating to support.
Instructions
1. The term ‘‘financial support’’
includes, for example, any capital
contribution, purchase of a security
from the Fund in reliance on § 270.17a–
9, purchase of any defaulted or
devalued security at par, purchase of
Fund shares, execution of letter of credit
or letter of indemnity, capital support
agreement (whether or not the Fund
ultimately received support), or
performance guarantee, or any other
similar action to increase the value of
the Fund’s portfolio or otherwise
support the Fund during times of stress.
2. If during the last 10 years, the Fund
has participated in one or more mergers
with another investment company (a
‘‘merging investment company’’),
provide the information required by
Item 16(g) with respect to any merging
investment company as well as with
respect to the Fund; for purposes of this
instruction, the term ‘‘merger’’ means a
merger, consolidation, or purchase or
sale of substantially all of the assets
between the Fund and a merging
investment company.
Alternative 2
Form N–1A
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
*
*
*
*
*
Item 3. Risk/Return Summary: Fee
Table
*
*
*
*
*
*
*
Instructions
*
*
*
2. Shareholder Fees.
*
*
*
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*
*
19:54 Jun 18, 2013
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(b) ‘‘Redemption Fee’’ includes a fee
charged for any redemption of the
Fund’s shares, but does not include a
deferred sales charge (load) imposed
upon redemption, and, if the Fund is a
Money Market Fund, does not include
a liquidity fee imposed upon the sale of
Fund shares in accordance with rule 2a–
7(c)(2).
*
*
*
*
*
Item 4. Risk/Return Summary:
Investments, Risks, and Performance
*
*
*
*
*
(b) * * *
(1) * * *
*
*
*
*
*
(ii)(A) If the Fund is a Money Market
Fund (including any Money Market
Fund that is subject to the exemption
provisions of rule 2a–7(c)(2)(iii), but
that has chosen not to rely on the rule
2a–7(c)(2)(iii) exemption provisions),
include the following bulleted
statement:
• You could lose money by investing
in the Fund.
• The Fund seeks to preserve the
value of your investment at $1.00 per
share, but cannot guarantee such
stability.
• The Fund may impose a fee upon
sale of your shares when the Fund is
under considerable stress.
• The Fund may temporarily suspend
your ability to sell shares of the Fund
when the Fund is under considerable
stress.
• An investment in the Fund is not
insured or guaranteed by the Federal
Deposit Insurance Corporation or any
other government agency.
• The Fund’s sponsor has no legal
obligation to provide financial support
to the Fund, and you should not expect
that the sponsor will provide financial
support to the Fund at any time.
(B) If the Fund is a Money Market
Fund that is subject to the exemption
provisions of rule 2a–7(c)(2)(iii) and that
has chosen to rely on the rule 2a–
7(c)(2)(iii) exemption provisions,
include the following bulleted
statement:
• You could lose money by investing
in the Fund.
• The Fund seeks to preserve the
value of your investment at $1.00 per
share, but cannot guarantee such
stability.
• An investment in the Fund is not
insured or guaranteed by the Federal
Deposit Insurance Corporation or any
other government agency.
• The Fund’s sponsor has no legal
obligation to provide financial support
to the Fund, and you should not expect
that the sponsor will provide financial
support to the Fund at any time.
PO 00000
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37015
Instruction. If an affiliated person,
promoter, or principal underwriter of
the Fund, or an affiliated person of such
a person, has entered into an agreement
to provide financial support to the
Fund, and the term of the agreement
will extend for at least one year
following the effective date of the
Fund’s registration statement, the
bulleted statement specified in Item
4(b)(1)(ii)(A) or Item 4(b)(1)(ii)(B) may
omit the last bulleted sentence (‘‘The
Fund’s sponsor has no legal obligation
to provide financial support to the
Fund, and you should not expect that
the sponsor will provide financial
support to the Fund at any time.’’). For
purposes of this Instruction, the term
‘‘financial support’’ includes, for
example, any capital contribution,
purchase of a security from the Fund in
reliance on § 270.17a–9, purchase of any
defaulted or devalued security at par,
purchase of Fund shares, execution of
letter of credit or letter of indemnity,
capital support agreement (whether or
not the Fund ultimately received
support), or performance guarantee, or
any other similar action to increase the
value of the Fund’s portfolio or
otherwise support the Fund during
times of stress.
*
*
*
*
*
Item 16. Description of the Fund and Its
Investments and Risks
*
*
*
*
*
(g) Money Market Fund Material
Events. If the Fund is a Money Market
Fund (except any Money Market Fund
that is subject to the exemption
provisions of rule 2a–7(c)(2)(iii) and has
chosen to rely on the rule 2a–7(c)(2)(iii)
exemption provisions) disclose, if
applicable, the following events:
(1) During the last 10 years, any
occasion on which the Fund has
invested less than fifteen percent of its
total assets in weekly liquid assets (as
provided in rule 2a–7(c)(2)), and with
respect to each such occasion, whether
the Fund’s board of directors
determined to impose a liquidity fee
pursuant to rule 2a–7(c)(2)(i) and/or
temporarily suspend the Fund’s
redemptions pursuant to rule 2a–
7(c)(2)(ii).
Instructions. With respect to each
such occasion, disclose: the dates and
length of time for which the Fund
invested less than fifteen percent of its
total assets in weekly liquid assets; a
brief description of the facts and
circumstances leading to the Fund’s
investing less than fifteen percent of its
total assets in weekly liquid assets; the
dates and length of time for which the
Fund’s board of directors determined to
impose a liquidity fee pursuant to rule
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2a–7(c)(2)(i) and/or temporarily suspend
the Fund’s redemptions pursuant to rule
2a–7(c)(2)(ii); and a short discussion of
the board’s analysis supporting its
decision to impose a liquidity fee (or not
to impose a liquidity fee) and/or
temporarily suspend the Fund’s
redemptions.
(2) During the last 10 years, any
occasion on which an affiliated person,
promoter, or principal underwriter of
the Fund, or an affiliated person of such
a person, provided any form of financial
support to the Fund, including a
description of the nature of support,
person providing support, brief
description of the relationship between
the person providing support and the
Fund, brief description of the reason for
support, date support provided, amount
of support, security supported (if
applicable), value (calculated using
available market quotations or an
appropriate substitute that reflects
current market conditions) of security
supported on date support was initiated
(if applicable), term of support, and a
brief description of any contractual
restrictions relating to support.
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Instructions
1. The term ‘‘financial support’’
includes, for example, any capital
contribution, purchase of a security
from the Fund in reliance on § 270.17a–
9, purchase of any defaulted or
devalued security at par, purchase of
Fund shares, execution of letter of credit
or letter of indemnity, capital support
agreement (whether or not the Fund
ultimately received support), or
performance guarantee, or any other
similar action to increase the value of
the Fund’s portfolio or otherwise
support the Fund during times of stress.
2. If during the last 10 years, the Fund
has participated in one or more mergers
with another investment company (a
‘‘merging investment company’’),
provide the information required by
Item 16(g)(2) with respect to any
merging investment company as well as
with respect to the Fund; for purposes
of this instruction, the term ‘‘merger’’
means a merger, consolidation, or
purchase or sale of substantially all of
the assets between the Fund and a
merging investment company.
■ 16. Form N–MFP (referenced in
§ 274.201) is revised to read as follows:
Note: The text of Form N–MFP does not,
and this amendment will not, appear in the
Code of Federal Regulations.
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Form N–MFP
Monthly Schedule of Portfolio Holdings
of Money Market Funds
Form N–MFP is to be used by
registered open-end management
investment companies, or series thereof,
that are regulated as money market
funds pursuant to rule 2a–7 under the
Investment Company Act of 1940
(‘‘Act’’) (17 CFR 270.2a–7) (‘‘money
market funds’’), to file reports with the
Commission pursuant to rule 30b1–7
under the Act (17 CFR 270.30b1–7). The
Commission may use the information
provided on Form N–MFP in its
regulatory, disclosure review,
inspection, and policymaking roles.
General Instructions
A. Rule as to Use of Form N–MFP
Form N–MFP is the public reporting
form that is to be used for monthly
reports of money market funds required
by section 30(b) of the Act and rule
30b1–7 under the Act (17 CFR
270.30b1–7). A money market fund
must report information about the fund
and its portfolio holdings as of the last
business day or any subsequent
calendar day of the preceding month.
The Form N–MFP must be filed with the
Commission no later than the fifth
business day of each month, but may be
filed any time beginning on the first
business day of the month. Each money
market fund, or series of a money
market fund, is required to file a
separate form. If the money market fund
does not have any classes, the fund
must provide the information required
by Part B for the series.
A money market fund may file an
amendment to a previously filed Form
N–MFP at any time, including an
amendment to correct a mistake or error
in a previously filed form. A fund that
files an amendment to a previously filed
form must provide information in
response to all items of Form N–MFP,
regardless of why the amendment is
filed.
B. Application of General Rules and
Regulations
The General Rules and Regulations
under the Act contain certain general
requirements that are applicable to
reporting on any form under the Act.
These general requirements should be
carefully read and observed in the
preparation and filing of reports on this
form, except that any provision in the
form or in these instructions shall be
controlling.
C. Filing of Form N–MFP
A money market fund must file Form
N–MFP in accordance with rule 232.13
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of Regulation S–T. Form N–MFP must
be filed electronically using the
Commission’s EDGAR system.
D. Paperwork Reduction Act
Information
A registrant is not required to respond
to the collection of information
contained in Form N–MFP unless the
Form displays a currently valid Office of
Management and Budget (‘‘OMB’’)
control number. Please direct comments
concerning the accuracy of the
information collection burden estimate
and any suggestions for reducing the
burden to the Secretary, Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC 20549–1090. The OMB
has reviewed this collection of
information under the clearance
requirements of 44 U.S.C. 3507.
E. Definitions
References to sections and rules in
this Form N–MFP are to the Investment
Company Act of 1940 [15 U.S.C. 80a]
(the ‘‘Investment Company Act’’), unless
otherwise indicated. Terms used in this
Form N–MFP have the same meaning as
in the Investment Company Act or
related rules, unless otherwise
indicated.
As used in this Form N–MFP, the
terms set out below have the following
meanings:
‘‘Cash’’ means demand deposits in
depository institutions and cash
holdings in custodial accounts.
‘‘Class’’ means a class of shares issued
by a Multiple Class Fund that represents
interests in the same portfolio of
securities under rule 18f–3 [17 CFR
270.18f–3] or under an order exempting
the Multiple Class Fund from sections
18(f), 18(g), and 18(i) [15 U.S.C. 80a–
18(f), 18(g), and 18(i)].
‘‘Fund’’ means the Registrant or a
separate Series of the Registrant. When
an item of Form N–MFP specifically
applies to a Registrant or a Series, those
terms will be used.
‘‘LEI’’ means, with respect to any
company, the ‘‘legal entity identifier’’
assigned by or on behalf of an
internationally recognized standards
setting body and required for reporting
purposes by the U.S. Department of the
Treasury’s Office of Financial Research
or a financial regulator. In the case of a
financial institution, if a ‘‘legal entity
identifier’’ has not been assigned, then
LEI means the RSSD ID assigned by the
National Information Center of the
Board of Governors of the Federal
Reserve System, if any.
‘‘Master-Feeder Fund’’ means a twotiered arrangement in which one or
more Funds (or registered or
unregistered pooled investment
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vehicles) (each a ‘‘Feeder Fund’’), holds
shares of a single Fund (the ‘‘Master
Fund’’) in accordance with section
12(d)(1)(E) [15 U.S.C. 80a–12(d)(1)(E)].
‘‘Money Market Fund’’ means a Fund
that holds itself out as a money market
fund and meets the requirements of rule
2a–7 [17 CFR 270.2a–7].
‘‘Securities Act’’ means the Securities
Act of 1933 [15 U.S.C. 77a–aa].
‘‘Series’’ means shares offered by a
Registrant that represent undivided
interests in a portfolio of investments
and that are preferred over all other
series of shares for assets specifically
allocated to that series in accordance
with rule 18f–2(a) [17 CFR 270.18f–
2(a)].
‘‘Value’’ has the meaning defined in
section 2(a)(41) of the Act (15 U.S.C.
80a–2(a)(41)).
United States Securities And Exchange
Commission, Washington, DC 20549
Form N–MFP, Monthly Schedule Of
Portfolio Holdings Of Money Market
Funds
General Information
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Item 1. Report for [mm/dd/yyyy].
Item 2. CIK Number of Registrant.
Item 3. LEI of Registrant (if available)
(See General Instructions E.)
Item 4. EDGAR Series Identifier.
Item 5. Total number of share classes in
the series.
Item 6. Do you anticipate that this will
be the fund’s final filing on Form
N–MFP? [Y/N] If Yes, answer Items
6.a–6.c.
a. Is the fund liquidating? [Y/N]
b. Is the fund merging with, or being
acquired by, another fund? [Y/N]
c. If applicable, identify the successor
fund by CIK, Securities Act file
number, and EDGAR series
identifier.
Item 7. Has the fund acquired or merged
with another fund since the last
filing? [Y/N] If Yes, answer Item 7.a.
a. Identify the acquired or merged
fund by CIK, Securities Act file
number, and EDGAR series
identifier.
Item 8. Provide the name, email address,
and telephone number of the person
authorized to receive information
and respond to questions about this
Form N–MFP.
Part A: Series-Level Information About
the Fund
Item A.1 Securities Act File Number.
Item A.2 Investment Adviser.
a. SEC file number of investment
adviser.
Item A.3 Sub-Adviser. If a fund has
one or more sub-advisers, disclose
the name of each sub-adviser.
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a. SEC file number of each subadviser.
Item A.4 Independent Public
Accountant.
a. City and state of independent
public accountant.
Item A.5 Administrator. If a fund has
one or more administrators,
disclose the name of each
administrator.
Item A.6 Transfer Agent.
a. CIK Number.
b. SEC file number of transfer agent.
Item A.7 Master-Feeder Funds. Is this
a Feeder Fund? [Y/N] If Yes, answer
Items A.7.a–7.c.
a. Identify the Master Fund by CIK or,
if the fund does not have a CIK, by
name.
b. Securities Act file number of the
Master Fund.
c. EDGAR series identifier of the
Master Fund.
Item A.8 Master-Feeder Funds. Is this
a Master Fund? [Y/N] If Yes, answer
Items A.8.a–8.c.
a. Identify all Feeder Funds by CIK or,
if the fund does not have a CIK, by
name.
b. Securities Act file number of each
Feeder Fund.
c. EDGAR series identifier of each
Feeder Fund.
Item A.9 Is this series primarily used
to fund insurance company separate
accounts? [Y/N]
Item A.10 Category. Indicate the
category that most closely identifies
the money market fund from among
the following: Treasury,
Government/Agency, Exempt
Government, Prime, Single State, or
Other Tax Exempt.
Item A.11 Dollar-weighted average
portfolio maturity (‘‘WAM’’ as
defined in rule 2a–7(d)(1)(ii)).
Item A.12 Dollar-weighted average life
maturity (‘‘WAL’’ as defined in rule
2a–7(d)(1)(iii)). Calculate WAL
without reference to the exceptions
in rule 2a–7(d) regarding interest
rate readjustments.
Item A.13 Liquidity. Provide the
following, to the nearest cent, as of
the close of business on each Friday
during the month reported (if the
reporting date falls on a holiday or
other day on which the fund does
not calculate the daily or weekly
liquidity, provide the value as of
the close of business on the date in
that week last calculated):
a. Total Value of Daily Liquid Assets:
i. Friday, week 1:
ii. Friday, week 2:
iii. Friday, week 3:
iv. Friday, week 4:
v. Friday, week 5 (if applicable):
b. Total Value of Weekly Liquid
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Assets (including Daily Liquid
Assets):
i. Friday, week 1:
ii. Friday, week 2:
iii. Friday, week 3:
iv. Friday, week 4:
v. Friday, week 5 (if applicable):
Item A.14 Provide the following, to the
nearest cent:
a. Cash. (See General Instructions E.)
b. Total Value of portfolio securities.
(See General Instructions E.)
c. Total Value of other assets
(excluding amounts provided in
A.14.a– b.)
Item A.15 Total value of liabilities, to
the nearest cent.
Item A.16 Net assets of the series, to
the nearest cent.
Item A.17 Number of shares
outstanding, to the nearest
hundredth.
Item A.18 If the fund seeks to maintain
a stable price per share, state the
price the funds seeks to maintain.
Item A.19 Total percentage of shares
outstanding, to the nearest tenth of
one percent, held by the twenty
largest shareholders of record.
Item A.20 7-day gross yield. Based on
the 7 days ended on the last day of
the prior month, calculate the
fund’s yield by determining the net
change, exclusive of capital changes
and income other than investment
income, in the value of a
hypothetical pre-existing account
having a balance of one share at the
beginning of the period and
dividing the difference by the value
of the account at the beginning of
the base period to obtain the base
period return, and then multiplying
the base period return by (365/7)
with the resulting yield figure
carried to the nearest hundredth of
one percent. The 7-day gross yield
should not reflect a deduction of
shareholders fees and fund
operating expenses. For master
funds and feeder funds, report the
7-day gross yield at the master-fund
level.
Item A.21 Net asset value per share.
Provide the net asset value per
share, rounded to the fourth
decimal place in the case of a fund
with a $1.00 share price (or an
equivalent level of accuracy for
funds with a different share price),
as of the close of business on each
Friday during the month reported
(if the reporting date falls on a
holiday or other day on which the
fund does not calculate the net asset
value per share, provide the value
as of the close of business on the
date in that week last calculated):
a. Friday, week 1:
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b. Friday, week 2:
c. Friday, week 3:
d. Friday, week 4:
e. Friday, week 5 (if applicable):
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Part B: Class-Level Information About
the Fund
For each Class of the Series
(regardless of the number of shares
outstanding in the Class), disclose the
following:
Item B.1 EDGAR Class identifier.
Item B.2 Minimum initial investment.
Item B.3 Net assets of the Class, to the
nearest cent.
Item B.4 Number of shares
outstanding, to the nearest
hundredth.
Item B.5 Net asset value per share.
Provide the net asset value per
share, rounded to the fourth
decimal place in the case of a fund
with a $1.00 share price (or an
equivalent level of accuracy for
funds with a different share price),
as of the close of business on each
Friday during the month reported
(if the reporting date falls on a
holiday or other day on which the
fund does not calculate the net asset
value per share, provide the value
as of the close of business on the
date in that week last calculated):
a. Friday, week 1:
b. Friday, week 2:
c. Friday, week 3:
d. Friday, week 4:
e. Friday, week 5 (if applicable):
Item B.6 Net shareholder flow. Provide
the aggregate weekly gross
subscriptions (including dividend
reinvestments) and gross
redemptions, rounded to the nearest
cent, as of the close of business on
each Friday during the month
reported (if the reporting date falls
on a holiday or other day on which
the fund does not calculate the
gross subscriptions or gross
redemptions, provide the value as
of the close of business on the date
in that week last calculated):
a. Friday, week 1:
i. Weekly gross subscriptions
(including dividend reinvestments):
ii. Weekly gross redemptions:
b. Friday, week 2:
i. Weekly gross subscriptions
(including dividend reinvestments):
ii. Weekly gross redemptions:
c. Friday, week 3:
i. Weekly gross subscriptions
(including dividend reinvestments):
ii. Weekly gross redemptions:
d. Friday, week 4:
i. Weekly gross subscriptions
(including dividend reinvestments):
ii. Weekly gross redemptions:
e. Friday, week 5 (if applicable):
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i. Weekly gross subscriptions
(including dividend reinvestments):
ii. Weekly gross redemptions:
f. Total for the month reported:
i. Monthly gross subscriptions
(including dividend reinvestments):
ii. Monthly gross redemptions:
Item B.7 7-day net yield, as calculated
under Item 26(a)(1) of Form N–1A
(§ 274.11A of this chapter).
Item B.8 During the reporting period,
did any Person pay for, or waive all
or part of the fund’s operating
expenses or management fees? [Y/
N] If Yes, answer Item B.8.a.
a. Provide the name of the Person and
describe the nature and amount of
the expense payment or fee waiver,
or both (reported in dollars).
Part C: Schedule of Portfolio Securities
and Other Information on Securities
Sold
For each security held by the money
market fund, disclose the following:
Item C.1 The name of the issuer.
Item C.2 The title of the issue.
Item C.3 The CUSIP.
Item C.4 The LEI (if available). (See
General Instruction E.)
Item C.5 Other identifier. In addition
to CUSIP and LEI, provide at least
one of the following other
identifiers, if available:
a. The ISIN;
b. The CIK; or
c. Other unique identifier.
Item C.6 The category of investment.
Indicate the category that most
closely identifies the instrument
from among the following: U.S.
Treasury Debt; U.S. Government
Agency Debt; Non U.S. Sovereign
Debt; Non U.S. Sub-Sovereign Debt;
Variable Rate Demand Note; Other
Municipal Debt; Financial
Company Commercial Paper; AssetBacked Commercial Paper; Other
Asset-Backed Security; NonFinancial Company Commercial
Paper; Collateralized Commercial
Paper; Certificate of Deposit
(including Time Deposits and Euro
Time Deposits); Structured
Investment Vehicle Note; Other
Note; U.S. Treasury Repurchase
Agreement; Government Agency
Repurchase Agreement; Other
Repurchase Agreement; Insurance
Company Funding Agreement;
Investment Company; Other
Instrument. If Other Instrument,
include a brief description.
Item C.7 If the security is a repurchase
agreement, is the fund treating the
acquisition of the repurchase
agreement as the acquisition of the
underlying securities (i.e.,
collateral) for purposes of portfolio
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diversification under rule 2a–7?
[Y/N]
Item C.8 or all repurchase agreements,
specify whether the repurchase
agreement is ‘‘open’’ (i.e., the
repurchase agreement has no
specified end date and, by its terms,
will be extended or ‘‘rolled’’ each
business day (or at another
specified period) unless the
investor chooses to terminate it),
and describe the securities subject
to the repurchase agreement (i.e.,
collateral).
a. Is the repurchase agreement
‘‘open’’? [Y/N]
b. The name of the collateral issuer.
c. CUSIP.
d. LEI (if available).
e. Maturity date.
f. Coupon or yield.
g. The principal amount, to the
nearest cent.
h. Value of collateral, to the nearest
cent.
i. The category of investments that
most closely represents the
collateral, selected from among the
following:
U.S. Treasury Debt; U.S. Government
Agency Debt; Non U.S. Sovereign Debt;
Non U.S. Sub-Sovereign Debt; Variable
Rate Demand Note; Other Municipal
Debt; Financial Company Commercial
Paper; Asset-Backed Commercial Paper;
Other Asset-Backed Security; NonFinancial Company Commercial Paper;
Collateralized Commercial Paper;
Certificate of Deposit (including Time
Deposits and Euro Time Deposits);
Structured Investment Vehicle Note;
Equity; Corporate Bond; Exchange
Traded Fund; Trust Receipt (other than
for U.S. Treasuries); Derivative; Other
Instrument. If Other Instrument, include
a brief description.
If multiple securities of an issuer are
subject to the repurchase agreement, the
securities may be aggregated, in which
case disclose: (a) the total principal
amount and value and (b) the range of
maturity dates and interest rates.
Item C.9 Rating. Indicate whether the
security is a rated First Tier
Security, rated Second Tier
Security, an Unrated Security, or no
longer an Eligible Security.
Item C.10 Name of each Designated
NRSRO.
a. For each Designated NRSRO,
disclose the credit rating given by
the Designated NRSRO. If the
instrument and its issuer are not
rated by the Designated NRSRO,
indicate ‘‘NR.’’
Item C.11 The maturity date
determined by taking into account
the maturity shortening provisions
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of rule 2a–7(i) (i.e., the maturity
date used to calculate WAM under
rule 2a–7(d)(1)(ii)).
Item C.12 The maturity date
determined without reference to the
exceptions in rule 2a–7(i) regarding
interest rate readjustments (i.e., the
maturity date used to calculate
WAL under rule 2a–7(d)(1)(iii)).
Item C.13 The maturity date
determined without reference to the
maturity shortening provisions of
rule 2a–7(i) (i.e., the final legal
maturity date on which, in
accordance with the terms of the
security without regard to any
interest rate readjustment or
demand feature, the principal
amount must unconditionally be
paid).
Item C.14 Does the security have a
Demand Feature on which the fund
is relying to determine the quality,
maturity or liquidity of the
security? [Y/N] If Yes, answer Items
C.14.a–14.f. Where applicable,
provide the information required in
Items C.14b–14.f in the order that
each Demand Feature issuer was
reported in Item C.14.a.
a. The identity of the Demand Feature
issuer(s).
b. Designated NRSRO(s) for the
Demand Feature(s) or provider(s) of
the Demand Feature(s).
c. For each Designated NRSRO,
disclose the credit rating given by
the Designated NRSRO. If there is
no rating given by the Designated
NRSRO, indicate ‘‘NR.’’
d. The amount (i.e., percentage) of
fractional support provided by each
Demand Feature issuer.
e. The period remaining until the
principal amount of the security
may be recovered through the
Demand Feature.
f. Is the demand feature conditional?
[Y/N]
Item C.15 Does the security have a
Guarantee (other than an
unconditional letter of credit
disclosed in item C.14 above) on
which the fund is relying to
determine the quality, maturity or
liquidity of the security? [Y/N] If
Yes, answer Items C.15.a–15.d.
Where applicable, provide the
information required in Item
C.15.b–15.d in the order that each
Guarantor was reported in Item
C.15.a.
a. The identity of the Guarantor(s).
b. Designated NRSRO(s) for the
Guarantee(s) or Guarantor(s).
c. For each Designated NRSRO,
disclose the credit rating given by
the Designated NRSRO. If there is
no rating given by the Designated
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NRSRO, indicate ‘‘NR.’’
d. The amount (i.e., percentage) of
fractional support provided by each
Guarantor.
Item C.16 Does the security have any
enhancements, other than those
identified in Items C.14 and C.15
above, on which the fund is relying
to determine the quality, maturity
or liquidity of the security? [Y/N] If
Yes, answer Items C.16.a–16.e.
Where applicable, provide the
information required in Items
C.16.b–16.e in the order that each
enhancement provider was reported
in Item C.16.a.
a. The identity of the enhancement
provider(s).
b. The type of enhancement(s).
c. Designated NRSRO(s) for the
enhancement(s) or enhancement
provider(s).
d. For each Designated NRSRO,
disclose the credit rating given by
the Designated NRSRO. If there is
no rating given by the Designated
NRSRO, indicate ‘‘NR.’’
e. The amount (i.e., percentage) of
fractional support provided by each
enhancement provider.
Item C.17 The following information
for each security held by the series
(report items C.17.a–17.e separately
for each lot purchased):
a. The total principal amount, to the
nearest cent.
b. The purchase date(s).
c. The yield at purchase.
d. The yield as of the Form N–MFP
reporting date (for floating or
variable rate securities, if
applicable).
e. The purchase price (as a percentage
of par, rounded to the nearest one
thousandth of one percent).
Item C.18 The total Value of the fund’s
position in the security, to the
nearest cent: (See General
Instruction E.)
a. Including the value of any sponsor
support:
b. Excluding the value of any sponsor
support:
Item C.19 The percentage of the money
market fund’s net assets invested in
the security, to the nearest
hundredth of a percent.
Item C.20 The security’s level
measurement (level 1, level 2, level
3) in the fair value hierarchy under
U.S. Generally Accepted
Accounting Principles (ASC 820,
Fair Value Measurement)?
Item C.21 Is the security a Daily Liquid
Asset? [Y/N]
Item C.22 Is the security a Weekly
Liquid Asset? [Y/N]
Item C.23 Is the security an Illiquid
Security? [Y/N]
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Item C.24 Explanatory notes. Disclose
any other information that may be
material to other disclosures related
to the portfolio security. If none,
leave blank.
For any security sold during the
reporting period, disclose the following:
Item C.25 The following information
for each security sold by the series
(report items C.25.a–25.e separately
for each lot sold):
a. The total principal amount, to the
nearest cent.
b. The purchase price (as a percentage
of par, rounded to the nearest one
thousandth of one percent).
c. The sale date(s).
d. The yield at sale.
e. The sale price (as a percentage of
par, rounded to the nearest one
thousandth of one percent).
Signatures
Pursuant to the requirements of the
Investment Company Act of 1940, the
registrant has duly caused this report to
be signed on its behalf by the
undersigned hereunto duly authorized.
llllllllllllllllll
(Registrant)
Date llllllllllllllll
llllllllllllllllll
(Signature)*
* Print name and title of the signing
officer under his/her signature.
■ 17. Section 274.222 and Form N–CR
are added to read as follows:
Alternative 1
§ 274.222 Form N–CR, Current report of
money market fund material events
This form shall be used by registered
investment companies that are regulated
as money market funds under § 270.2a–
7 of this chapter to file current reports
pursuant to § 270.30b1–8 of this chapter
within the time periods specified in the
form.
Note: The text of Form N–CR will not
appear in the Code of Federal Regulations.
Form N–CR
Current Report Money Market Fund
Material Events
Form N–CR is to be used by registered
open-end management investment
companies, or series thereof, that are
regulated as money market funds
pursuant to rule 2a–7 under the
Investment Company Act of 1940
(‘‘Investment Company Act’’) (17 CFR
270.2a–7) (‘‘money market funds’’), to
file current reports with the
Commission pursuant to rule 30b1–8
under the Investment Company Act (17
CFR 270.30b1–8). The Commission may
use the information provided on Form
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N–CR in its regulatory, disclosure
review, inspection, and policymaking
roles.
has reviewed this collection of
information under the clearance
requirements of 44 U.S.C. 3507.
General Instructions
F. Definitions
References to sections and rules in
this Form N–CR are to the Investment
Company Act (15 U.S.C. 80a), unless
otherwise indicated. Terms used in this
Form N–CR have the same meaning as
in the Investment Company Act or rule
2a–7 under the Investment Company
Act, unless otherwise indicated. In
addition, as used in this Form N–CR,
the term ‘‘Fund’’ means the registrant or
a separate series of the registrant.
A. Rule as to Use of Form N–CR
Form N–CR is the public reporting
form that is to be used for current
reports of money market funds required
by section 30(b) of the Act and rule
30b1–8 under the Act. A money market
fund must file a report on Form N–CR
upon the occurrence of any one or more
of the events specified in Parts B–D of
this form. Unless otherwise specified, a
report is to be filed within one business
day after occurrence of the event, and
will be made public immediately upon
filing. If the event occurs on a Saturday,
Sunday, or holiday on which the
Commission is not open for business,
then the report is to be filed on the first
business day thereafter.
B. Application of General Rules and
Regulations
The General Rules and Regulations
under the Act contain certain general
requirements that are applicable to
reporting on any form under the Act.
These general requirements should be
carefully read and observed in the
preparation and filing of reports on this
form, except that any provision in the
form or in these instructions shall be
controlling.
C. Information To Be Included in Report
Filed on Form N–CR
Upon the occurrence of any one or
more of the events specified in Parts B–
D of Form N–CR, a money market fund
must file a report on Form N–CR that
includes information in response to
each of the items in Part A of the form,
as well as each of the items in the
applicable Parts B–D of the form.
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
D. Filing of Form N–CR
A money market fund must file Form
N–CR in accordance with rule 232.13 of
Regulation S–T. Form N–CR must be
filed electronically using the
Commission’s EDGAR system.
E. Paperwork Reduction Act
Information
A registrant is not required to respond
to the collection of information
contained in Form N–CR unless the
form displays a currently valid Office of
Management and Budget (‘‘OMB’’)
control number. Please direct comments
concerning the accuracy of the
information collection burden estimate
and any suggestions for reducing the
burden to the Secretary, Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC 20549–1090. The OMB
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19:54 Jun 18, 2013
Jkt 229001
United States Securities and Exchange
Commission Washington, DC 20549
Form N–CR Current Report Money
Market Fund Material Events
Part A: General Information
Item A.1 Report for [mm/dd/yyyy].
Item A.2 CIK Number of registrant.
Item A.3 EDGAR Series Identifier.
Item A.4 Securities Act File Number.
Item A.5 Provide the name, email
address, and telephone number of
the person authorized to receive
information and respond to
questions about this Form N–CR.
Part B: Default or Event of Insolvency
of Portfolio Security Issuer
If the issuer of one or more of the
Fund’s portfolio securities, or the issuer
of a Demand Feature or Guarantee to
which one of the Fund’s portfolio
securities is subject, and on which the
Fund is relying to determine the quality,
maturity, or liquidity of a portfolio
security, experiences a default or Event
of Insolvency (other than an immaterial
default unrelated to the financial
condition of the issuer), and the
portfolio security or securities (or the
securities subject to the Demand Feature
or Guarantee) accounted for at least 1⁄2
of 1 percent of the Fund’s Total Assets
immediately before the default or Event
of Insolvency, disclose the following
information:
Item B.1 Security or securities
affected.
Item B.2 Date(s) on which the
default(s) or Event(s) of Insolvency
occurred.
Item B.3 Value of affected security or
securities on the date(s) on which
the default(s) or Event(s) of
Insolvency occurred.
Item B.4 Percentage of the Fund’s
Total Assets represented by the
affected security or securities.
Item B.5 Brief description of actions
Fund plans to take in response to
the default(s) or Event(s) of
Insolvency.
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Sfmt 4702
Instruction. For purposes of Part B, an
instrument subject to a Demand Feature
or Guarantee will not be deemed to be
in default (and an Event of Insolvency
with respect to the security will not be
deemed to have occurred) if: (i) in the
case of an instrument subject to a
Demand Feature, the Demand Feature
has been exercised and the Fund has
recovered either the principal amount or
the amortized cost of the instrument,
plus accrued interest; (ii) the provider of
the Guarantee is continuing, without
protest, to make payments as due on the
instrument; or (iii) the provider of a
Guarantee with respect to an AssetBacked Security pursuant to rule 2a–
7(a)(16)(ii) is continuing, without
protest, to provide credit, liquidity or
other support as necessary to permit the
Asset-Backed Security to make
payments as due.
Part C: Provision of Financial Support
to Fund
If an affiliated person, promoter, or
principal underwriter of the Fund, or an
affiliated person of such a person,
provides any form of financial support
to the Fund (including, for example, any
capital contribution, purchase of a
security from the Fund in reliance on
§ 270.17a–9, purchase of any defaulted
or devalued security at par, purchase of
Fund shares, execution of letter of credit
or letter of indemnity, capital support
agreement (whether or not the Fund
ultimately received support), or
performance guarantee, or any other
similar action to increase the value of
the Fund’s portfolio or otherwise
support the Fund during times of
stress), disclose the following
information:
Item C.1 Description of nature of
support.
Item C.2 Person providing support.
Item C.3 Brief description of
relationship between the person
providing support and the Fund.
Item C.4 Brief description of reason for
support.
Item C.5 Date support provided.
Item C.6 Amount of support.
Item C.7 Security supported (if
applicable).
Item C.8 Value of security supported
on date support was initiated (if
applicable).
Item C.9 Term of support.
Item C.10 Brief description of any
contractual restrictions relating to
support.
Instruction. If an affiliated person,
promoter, or principal underwriter of
the Fund, or an affiliated person of such
a person, purchases a security from the
Fund in reliance on § 270.17a–9, the
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Fund must provide the purchase price
of the security in responding to Item
C.6.
Part D: Deviation Between Current Net
Asset Value per Share and Intended
Stable Price per Share
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
If a Fund is subject to the exemption
provisions of rule 2a–7(c)(2) or rule 2a–
7(c)(3), and its current net asset value
per share (rounded to the fourth decimal
place in the case of a fund with a $1.00
share price, or an equivalent level of
accuracy for funds with a different share
price) deviates downward from its
intended stable price per share by more
than 1⁄4 of 1 percent, disclose:
Item D.1 Date(s) on which such
deviation exceeded 1⁄4 of 1 percent.
Item D.2 Extent of deviation between
the Fund’s current net asset value
per share and its intended stable
price per share.
Item D.3 Principal reason for the
deviation, including the name of
any security whose value calculated
using available market quotations
(or an appropriate substitute that
reflects current market conditions)
or sale price, or whose issuer’s
downgrade, default, or event of
insolvency (or similar event), has
contributed to the deviation.
Investment Company Act of 1940
(‘‘Investment Company Act’’) (17 CFR
270.2a–7) (‘‘money market funds’’), to
file current reports with the
Commission pursuant to rule 30b1–8
under the Investment Company Act (17
CFR 270.30b1–8). The Commission may
use the information provided on Form
N–CR in its regulatory, disclosure
review, inspection, and policymaking
roles.
Management and Budget (‘‘OMB’’)
control number. Please direct comments
concerning the accuracy of the
information collection burden estimate
and any suggestions for reducing the
burden to the Secretary, Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC 20549–1090. The OMB
has reviewed this collection of
information under the clearance
requirements of 44 U.S.C. 3507.
General Instructions
F. Definitions
A. Rule as to Use of Form N–CR
Form N–CR is the public reporting
form that is to be used for current
reports of money market funds required
by section 30(b) of the Act and rule
30b1–8 under the Act. A money market
fund must file a report on Form N–CR
upon the occurrence of any one or more
of the events specified in Parts B–G of
this form. Unless otherwise specified, a
report is to be filed within one business
day after occurrence of the event, and
will be made public immediately upon
filing. If the event occurs on a Saturday,
Sunday, or holiday on which the
Commission is not open for business,
then the report is to be filed on the first
business day thereafter.
References to sections and rules in
this Form N–CR are to the Investment
Company Act (15 U.S.C 80a), unless
otherwise indicated. Terms used in this
Form N–CR have the same meaning as
in the Investment Company Act or rule
2a–7 under the Investment Company
Act, unless otherwise indicated. In
addition, as used in this Form N–CR,
the term ‘‘Fund’’ means the registrant or
a separate series of the registrant.
B. Application of General Rules and
Regulations
Signatures
The General Rules and Regulations
under the Act contain certain general
Pursuant to the requirements of the
requirements that are applicable to
Investment Company Act of 1940, the
registrant has duly caused this report to reporting on any form under the Act.
These general requirements should be
be signed on its behalf by the
carefully read and observed in the
undersigned hereunto duly authorized.
llllllllllllllllll
l preparation and filing of reports on this
form, except that any provision in the
(Registrant)
form or in these instructions shall be
Date llllllllllllllll
controlling.
llllllllllllllllll
l
C. Information To Be Included in Report
(Signature) *
Filed on Form N–CR
* Print name and title of the signing
Upon the occurrence of any one or
officer under his/her signature.
more of the events specified in Parts B–
Alternative 2
G of Form N–CR, a money market fund
must file a report on Form N–CR that
§ 274.222 Form N–CR, Current report of
includes information in response to
money market fund material events
each of the items in Part A of the form,
This form shall be used by registered
investment companies that are regulated as well as each of the items in the
as money market funds under § 270.2a– applicable Parts B–G of the form.
7 of this chapter to file current reports
D. Filing of Form N–CR
pursuant to § 270.30b1–8 of this chapter
A money market fund must file Form
within the time periods specified in the
N–CR in accordance with rule 232.13 of
form.
Regulation S–T. Form N–CR must be
filed electronically using the
FORM N–CR
Commission’s EDGAR system.
Current Report Money Market Fund
Material Events
Form N–CR is to be used by registered
open-end management investment
companies, or series thereof, that are
regulated as money market funds
pursuant to rule 2a–7 under the
VerDate Mar<15>2010
19:54 Jun 18, 2013
Jkt 229001
37021
E. Paperwork Reduction Act
Information
A registrant is not required to respond
to the collection of information
contained in Form N–CR unless the
form displays a currently valid Office of
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Fmt 4701
Sfmt 4702
United States Securities and Exchange
Commission Washington, DC 20549
Form N–CR Current Report Money
Market Fund Material Events
Part A: General Information
Item A.1 Report for [mm/dd/yyyy].
Item A.2 CIK Number of registrant.
Item A.3 EDGAR Series Identifier.
Item A.4 Securities Act File Number.
Item A.5 Provide the name, email
address, and telephone number of
the person authorized to receive
information and respond to
questions about this Form N–CR.
Part B: Default or Event of Insolvency
of Portfolio Security Issuer
If the issuer of one or more of the
Fund’s portfolio securities, or the issuer
of a Demand Feature or Guarantee to
which one of the Fund’s portfolio
securities is subject, and on which the
Fund is relying to determine the quality,
maturity, or liquidity of a portfolio
security, experiences a default or Event
of Insolvency (other than an immaterial
default unrelated to the financial
condition of the issuer), and the
portfolio security or securities (or the
securities subject to the Demand Feature
or Guarantee) accounted for at least 1⁄2
of 1 percent of the Fund’s Total Assets
immediately before the default or Event
of Insolvency, disclose the following
information:
Item B.1 Security or securities
affected.
Item B.2 Date(s) on which the
default(s) or Event(s) of Insolvency
occurred.
Item B.3 Value of affected security or
securities on the date(s) on which
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Federal Register / Vol. 78, No. 118 / Wednesday, June 19, 2013 / Proposed Rules
the default(s) or Event(s) of
Insolvency occurred.
Item B.4 Percentage of the Fund’s
Total Assets represented by the
affected security or securities.
Item B.5 Brief description of actions
Fund plans to take in response to
the default(s) or Event(s) of
Insolvency.
Instruction. For purposes of Part B, an
instrument subject to a Demand Feature
or Guarantee will not be deemed to be
in default (and an Event of Insolvency
with respect to the security will not be
deemed to have occurred) if: (i) in the
case of an instrument subject to a
Demand Feature, the Demand Feature
has been exercised and the Fund has
recovered either the principal amount or
the amortized cost of the instrument,
plus accrued interest; (ii) the provider of
the Guarantee is continuing, without
protest, to make payments as due on the
instrument; or (iii) the provider of a
Guarantee with respect to an AssetBacked Security pursuant to rule 2a–
7(a)(16)(ii) is continuing, without
protest, to provide credit, liquidity or
other support as necessary to permit the
Asset-Backed Security to make
payments as due.
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
Part C: Provision of Financial Support
to Fund
If an affiliated person, promoter, or
principal underwriter of the Fund, or an
affiliated person of such a person,
provides any form of financial support
to the Fund (including, for example, any
capital contribution, purchase of a
security from the Fund in reliance on
§ 270.17a–9, purchase of any defaulted
or devalued security at par, purchase of
Fund shares, execution of letter of credit
or letter of indemnity, capital support
agreement (whether or not the Fund
ultimately received support), or
performance guarantee, or any other
similar action to increase the value of
the Fund’s portfolio or otherwise
support the Fund during times of
stress), disclose the following
information:
Item C.1 Description of nature of
support.
Item C.2 Person providing support.
Item C.3 Brief description of
relationship between the person
providing support and the Fund.
Item C.4 Brief description of reason for
support.
Item C.5 Date support provided.
Item C.6 Amount of support.
Item C.7 Security supported (if
applicable).
Item C.8 Value of security supported
on date support was initiated (if
applicable).
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19:54 Jun 18, 2013
Jkt 229001
Item C.9 Term of support.
Item C.10 Brief description of any
contractual restrictions relating to
support.
Instruction. If an affiliated person,
promoter, or principal underwriter of
the Fund, or an affiliated person of such
a person, purchases a security from the
Fund in reliance on § 270.17a–9, the
Fund must provide the purchase price
of the security in responding to Item
C.6.
Part D: Deviation Between Current Net
Asset Value per Share and Intended
Stable Price per Share
If a Fund’s current net asset value per
share (rounded to the fourth decimal
place in the case of a fund with a $1.00
share price, or an equivalent level of
accuracy for funds with a different share
price) deviates downward from its
intended stable price per share by more
than 1⁄4 of 1 percent, disclose:
Item D.1 Date(s) on which such
deviation exceeded 1⁄4 of 1 percent.
Item D.2 Extent of deviation between
the Fund’s current net asset value
per share and its intended stable
price per share.
Item D.3 Principal reason for the
deviation, including the name of
any security whose value calculated
using available market quotations
(or an appropriate substitute that
reflects current market conditions)
or sale price, or whose issuer’s
downgrade, default, or event of
insolvency (or similar event), has
contributed to the deviation.
Part E: Imposition of Liquidity Fee
If, at the end of a business day, a Fund
(except any Fund that is subject to the
exemption provisions of rule 2a–
7(c)(2)(iii) and that has chosen to rely on
the rule 2a–7(c)(2)(iii) exemption
provisions) has invested less than
fifteen percent of its Total Assets in
weekly liquid assets (as provided in rule
2a–7(c)(2)), disclose the following
information:
Item E.1 Initial date on which the
Fund invested less than fifteen
percent of its Total Assets in weekly
liquid assets.
Item E.2 If the Fund imposes a
liquidity fee pursuant to rule 2a–
7(c)(2)(i), date on which the Fund
instituted the liquidity fee.
Item E.3 Brief description of the facts
and circumstances leading to the
Fund’s investing less than fifteen
percent of its Total Assets in weekly
liquid assets.
Item E.4 Short discussion of the board
of directors’ analysis supporting its
decision that imposing a liquidity
PO 00000
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Fmt 4701
Sfmt 4702
fee pursuant to rule 2a–7(c)(2)(i) (or
not imposing such a liquidity fee)
would be in the best interest of the
Fund.
Instruction. A Fund must file a report
on Form N–CR responding to Items E.1
and E.2 on the first business day after
the initial date on which the Fund has
invested less than fifteen percent of its
Total Assets in weekly liquid assets. A
Fund must amend its initial report on
Form N–CR to respond to Items E.3 and
E.4 by the fourth business day after the
initial date on which the Fund has
invested less than fifteen percent of its
Total Assets in weekly liquid assets.
Part F: Suspension of Fund
Redemptions
If a Fund (except any Fund that is
subject to the exemption provisions of
rule 2a–7(c)(2)(iii) and that has chosen
to rely on the rule 2a–7(c)(2)(iii)
exemption provisions) that has invested
less than fifteen percent of its Total
Assets in weekly liquid assets (as
provided in rule 2a–7(c)(2)) suspends
the Fund’s redemptions pursuant to rule
2a–7(c)(2)(ii), disclose the following
information:
Item F.1 Initial date on which the
Fund invested less than fifteen
percent of its Total Assets in weekly
liquid assets.
Item F.2 Date on which the Fund
initially suspended redemptions.
Item F.3 Brief description of the facts
and circumstances leading to the
Fund’s investing less than fifteen
percent of its Total Assets in weekly
liquid assets.
Item F.4 Short discussion of the board
of directors’ analysis supporting its
decision to suspend the Fund’s
redemptions.
Instruction. A Fund must file a report
on Form N–CR responding to Items F.1
and F.2 on the first business day after
the initial date on which the Fund
suspends redemptions. A Fund must
amend its initial report on Form N–CR
to respond to Items F.3 and F.4 by the
fourth business day after the initial date
on which the Fund suspends
redemptions.
Part G: Removal of Liquidity Fees and/
or Resumption of Fund Redemptions
If a Fund (except any Fund that is
subject to the exemption provisions of
rule 2a–7(c)(2)(iii) and that has chosen
to rely on the rule 2a–7(c)(2)(iii)
exemption provisions) that has imposed
a liquidity fee and/or suspended the
Fund’s redemptions pursuant to rule
2a–7(c)(2) determines to remove such
fee and/or resume fund redemptions,
disclose the following, as applicable:
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PART 279—FORMS PRESCRIBED
UNDER THE INVESTMENT ADVISERS
ACT OF 1940
Signatures
■
Pursuant to the requirements of the
Investment Company Act of 1940, the
registrant has duly caused this report to
be signed on its behalf by the
undersigned hereunto duly authorized.
llllllllllllllllll
l
(Registrant)
Date llllllllllllllll
llllllllllllllllll
l
(Signature) *
mstockstill on DSK4VPTVN1PROD with PROPOSALS2
* Print name and title of the signing
officer under his/her signature.
VerDate Mar<15>2010
19:54 Jun 18, 2013
Jkt 229001
8. The authority citation for part 279
continues to read as follows:
Authority: The Investment Advisers Act of
1940, 15 U.S.C. 80b–1, et seq.
19. Form PF (referenced in § 279.9) is
amended by:
■ a. In General Instruction 15, removing
the reference to Question 57 from the
last bulleted sentence;
■ b. Revising section 3 to read as
follows;
■ c. Redesignating Questions 65–79 in
section 4 to 66–80;
■ d. In newly designated question 67(b)
in section 4, revising the reference to
‘‘Question 66(a)’’ to read ‘‘Question
67(a)’’;
■
PO 00000
Frm 00191
Fmt 4701
Sfmt 4725
e. In newly designated question 76(b)
in section 4, revising the reference to
‘‘Question 75(a)’’ to read ‘‘Question
76(a)’’;
■ f. In newly designated question 77(b)
in section 4, revising the reference to
‘‘Question 76(a)’’ to read ‘‘Question
77(a)’’; and
■ g. In the Glossary of Terms, adding
and revising certain terms.
The additions and revisions read as
follows:
■
Note: The text of Form PF does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form PF
*
*
*
*
*
Section 3
BILLING CODE 8011–01–P
E:\FR\FM\19JNP2.SGM
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ep19jn13.005</GPH>
Item G.1 Date on which the Fund
removed the liquidity fee and/or
resumed Fund redemptions.
37023
]]>Agencies
[Federal Register Volume 78, Number 118 (Wednesday, June 19, 2013)]
[Proposed Rules]
[Pages 36834-37023]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: X13-10619]
[[Page 36833]]
Vol. 78
Wednesday,
No. 118
June 19, 2013
Part II
Securities and Exchange Commission
-----------------------------------------------------------------------
17 CFR Parts 210, 230, 239, et al.
Money Market Fund Reform; Amendments to Form PF; Proposed Rule
Federal Register / Vol. 78, No. 118 / Wednesday, June 19, 2013 /
Proposed Rules
[[Page 36834]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 230, 239, 270, 274 and 279
[Release No. 33-9408, IA-3616; IC-30551; File No. S7-03-13]
RIN 3235-AK61
Money Market Fund Reform; Amendments to Form PF
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is proposing two alternatives for amending rules that govern
money market mutual funds (or ``money market funds'') under the
Investment Company Act of 1940. The two alternatives are designed to
address money market funds' susceptibility to heavy redemptions,
improve their ability to manage and mitigate potential contagion from
such redemptions, and increase the transparency of their risks, while
preserving, as much as possible, the benefits of money market funds.
The first alternative proposal would require money market funds to sell
and redeem shares based on the current market-based value of the
securities in their underlying portfolios, rounded to the fourth
decimal place (e.g., $1.0000), i.e., transact at a ``floating'' net
asset value per share (``NAV''). The second alternative proposal would
require money market funds to impose a liquidity fee (unless the fund's
board determines that it is not in the best interest of the fund) if a
fund's liquidity levels fell below a specified threshold and would
permit the funds to suspend redemptions temporarily, i.e., to ``gate''
the fund under the same circumstances. Under this proposal, we could
adopt either alternative by itself or a combination of the two
alternatives. The SEC also is proposing additional amendments that are
designed to make money market funds more resilient by increasing the
diversification of their portfolios, enhancing their stress testing,
and increasing transparency by requiring money market funds to provide
additional information to the SEC and to investors. The proposal also
includes amendments requiring investment advisers to certain
unregistered liquidity funds, which can resemble money market funds, to
provide additional information about those funds to the SEC.
DATES: Comments should be received on or before September 17, 2013.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/proposed.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number S7-03-13 on the subject line; or
Use the Federal eRulemaking Portal (https://
www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-03-13. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (https://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; we do
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Adam Bolter, Senior Counsel; Brian
McLaughlin Johnson, Senior Counsel; Kay-Mario Vobis, Senior Counsel;
Amanda Hollander Wagner, Senior Counsel; Thoreau A. Bartmann, Branch
Chief; or Sarah G. ten Siethoff, Senior Special Counsel, Investment
Company Rulemaking Office, at (202) 551-6792, Division of Investment
Management, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment amendments to rules 419 [17 CFR 230.419] and 482 [17 CFR
230.482] under the Securities Act of 1933 [15 U.S.C. 77a--z-3]
(``Securities Act''), rules 2a-7 [17 CFR 270.2a-7], 12d3-1 [17 CFR
270.12d3-1], 18f-3 [17 CFR 270.18f-3], 22e-3 [17 CFR 270.22e-3], 30b1-7
[17 CFR 270.30b1-7], 31a-1 [17 CFR 270.31a-1], and new rule 30b1-8 [17
CFR 270.30b1-8] under the Investment Company Act of 1940 [15 U.S.C.
80a] (``Investment Company Act'' or ``Act''), Form N-1A under the
Investment Company Act and the Securities Act, Form N-MFP under the
Investment Company Act, and section 3 of Form PF under the Investment
Advisers Act [15 U.S.C. 80b], and new Form N-CR under the Investment
Company Act.\1\
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\1\ Unless otherwise noted, all references to statutory sections
are to the Investment Company Act, and all references to rules under
the Investment Company Act, including rule 2a-7, will be to Title
17, Part 270 of the Code of Federal Regulations [17 CFR 270].
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Table of Contents
I. Introduction
II. Background
A. Role of Money Market Funds
B. Economics of Money Market Funds
1. Incentives Created by Money Market Funds' Valuation and
Pricing Methods
2. Incentives Created by Money Market Funds' Liquidity Needs
3. Incentives Created by Imperfect Transparency, Including
Sponsor Support
4. Incentives Created by Money Market Funds Investors' Desire To
Avoid Loss
5. Effects on Other Money Market Funds, Investors, and the
Short-Term Financing Markets
C. The 2007-2008 Financial Crisis
D. Examination of Money Market Fund Regulation Since the
Financial Crisis
1. The 2010 Amendments
2. The Eurozone Debt Crisis and U.S. Debt Ceiling Impasse of
2011
3. Our Continuing Consideration of the Need for Additional
Reforms
III. Discussion
A. Floating Net Asset Value
1. Certain Considerations Relating to the Floating NAV Proposal
2. Money Market Fund Pricing
3. Exemption to the Floating NAV Requirement for Government
Money Market Funds
4. Exemption to the Floating NAV Requirement for Retail Money
Market Funds
5. Effect on Other Money Market Fund Exemptions
6. Tax and Accounting Implications of Floating NAV Money Market
Funds
7. Operational Implications of Floating NAV Money Market Funds
8. Disclosure Regarding Floating NAV
9. Transition
B. Standby Liquidity Fees and Gates
1. Analysis of Certain Effects of Liquidity Fees and Gates
2. Terms of the Liquidity Fees and Gates
3. Exemptions To Permit Liquidity Fees and Gates
4. Amendments to Rule 22e-3
5. Exemptions From the Liquidity Fees and Gates Requirement
6. Operational Considerations Relating to Liquidity Fees and
Gates
7. Tax Implications of Liquidity Fees
8. Disclosure Regarding Liquidity Fees and Gates
[[Page 36835]]
9. Alternative Redemption Restrictions
C. Potential Combination of Standby Liquidity Fees and Gates and
Floating Net Asset Value
1. Potential Benefits of a Combination
2. Potential Drawbacks of a Combination
3. Effect of Combination
4. Operational Issues
D. Certain Alternatives Considered
1. Alternatives in the FSOC Proposed Recommendations
2. Alternatives in the PWG Report
E. Macroeconomic Effects of the Proposals
1. Effect on Current Investment in Money Market Funds
2. Effect on Current Issuers and the Short-Term Financing
Markets
F. Amendments to Disclosure Requirements
1. Financial Support Provided to Money Market Funds
2. Daily Disclosure of Daily Liquid Assets and Weekly Liquid
Assets
3. Daily Web Site Disclosure of Current NAV per Share
4. Disclosure of Portfolio Holdings
5. Daily Calculation of Current NAV per Share Under the
Liquidity Fees and Gates Proposal
6. Money Market Fund Confirmation Statements
G. New Form N-CR
1. Proposed Disclosure Requirements Under Both Reform
Alternatives
2. Additional Proposed Disclosure Requirements Under Liquidity
Fees and Gates Alternative
3. Economic Analysis
H. Amendments to Form N-MFP Reporting Requirements
1. Amendments Related to Rule 2a-7 Reforms
2. New Reporting Requirements
3. Clarifying Amendments
4. Public Availability of Information
5. Request for Comment on Frequency of Filing
6. Operational Implications
I. Amendments to Form PF Reporting Requirements
1. Overview of Proposed Amendments to Form PF
2. Utility of New Information, Including Benefits, Costs, and
Economic Implications
J. Diversification
1. Treatment of Certain Affiliates for Purposes of Rule 2a-7's
Five Percent Issuer Diversification Requirement
2. Asset-Backed Securities
3. The Twenty-Five Percent Basket
4. Additional Diversification Alternatives Considered
K. Issuer Transparency
L. Stress Testing
1. Stress Testing Under the Floating NAV Alternative
2. Stress Testing Under the Liquidity Fees and Gates Alternative
3. Economic Analysis
4. Combined Approach
M. Clarifying Amendments
1. Definitions of Daily Liquid Assets and Weekly Liquid Assets
2. Definition of Demand Feature
3. Short-Term Floating Rate Securities
4. Second Tier Securities
N. Proposed Compliance Date
1. Compliance Period for Amendments Related to Floating NAV
2. Compliance Period for Amendments Related to Liquidity Fees
and Gates
3. Compliance Period for Other Amendments to Money Market Fund
Regulation
4. Request for Comment
O. Request for Comment and Data
IV. Paperwork Reduction Act Analysis
A. Alternative 1: Floating Net Asset Value
1. Rule 2a-7
2. Rule 22e-3
3. Rule 30b1-7 and Form N-MFP
4. Rule 30b1-8 and Form N-CR
5. Rule 34b-1(a)
6. Rule 482
7. Form N-1A
8. Advisers Act Rule 204(b)-1 and Form PF
B. Alternative 2: Standby Liquidity Fees and Gates
1. Rule 2a-7
2. Rule 22e-3
3. Rule 30b1-7 and Form N-MFP
4. Rule 30b1-8 and Form N-CR
5. Rule 34b-1(a)
6. Rule 482
7. Form N-1A
8. Advisers Act Rule 204(b)-1 and Form PF
C. Request for Comments
V. Regulatory Flexibility Act Certification
VI. Statutory Authority
Text of Proposed Rules and Forms
I. Introduction
Money market funds are a type of mutual fund registered under the
Investment Company Act and regulated under rule 2a-7 under the Act.\2\
Money market funds pay dividends that reflect prevailing short-term
interest rates, generally are redeemable on demand, and, unlike other
investment companies, seek to maintain a stable net asset value per
share (``NAV''), typically $1.00.\3\ 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. As of February 28, 2013, there were
approximately 586 money market funds registered with the Commission,
and these funds collectively held over $2.9 trillion of assets.\4\
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\2\ Money market funds are also sometimes called ``money market
mutual funds'' or ``money funds.''
\3\ See generally Valuation of Debt Instruments and Computation
of Current Price Per Share by Certain Open-End Investment Companies
(Money Market Funds), Investment Company Act Release No. 13380 (July
11, 1983) [48 FR 32555 (July 18, 1983)] (``1983 Adopting Release'').
Most money market funds seek to maintain a stable net asset value
per share of $1.00, but a few seek to maintain a stable net asset
value per share of a different amount, e.g., $10.00. For
convenience, throughout this Release, the discussion will simply
refer to the stable net asset value of $1.00 per share.
\4\ Based on Form N-MFP data. SEC regulations require that money
market funds report certain portfolio information on a monthly basis
to the SEC on Form N-MFP. See rule 30b1-7.
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Money market funds seek to maintain a stable share price by
limiting their investments to short-term, high-quality debt securities
that fluctuate very little in value under normal market conditions.\5\
They also rely on exemptions provided in rule 2a-7 that permit them to
value their portfolio securities using the ``amortized cost'' method of
valuation and to use the ``penny-rounding'' method of pricing.\6\ Under
the amortized cost method, a money market fund's portfolio securities
generally are valued at cost plus any amortization of premium or
accumulation of discount, rather than at their value based on current
market factors.\7\ The penny rounding method of pricing permits a money
market fund when pricing its shares to round the fund's net asset value
to the nearest one percent (i.e., the nearest penny).\8\ Together,
these valuation and pricing techniques create a ``rounding convention''
that permits a money market fund to sell and redeem shares at a stable
share price without regard to small variations in the value of the
securities that comprise its portfolio.\9\
[[Page 36836]]
Other types of mutual funds not regulated by rule 2a-7, must calculate
their daily NAVs using market-based factors (with some exceptions) and
do not use penny rounding.\10\ We note, however, that banks and other
companies also make wide use of amortized cost accounting to value
certain of their assets.\11\
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\5\ Throughout this Release, we generally use the term ``stable
share price'' to refer to the stable share price that money market
funds seek to maintain and compute for purposes of distribution,
redemption and repurchases of fund shares.
\6\ Money market funds use a combination of the two methods so
that, under normal circumstances, they can use the penny rounding
method to maintain a price of $1.00 per share without pricing to the
third decimal point like other mutual funds, and the amortized cost
method so that they need not strike a daily market-based NAV. See
infra text accompanying nn.163, 177.
\7\ See rule 2a-7(a)(2). See also infra note 10.
\8\ See rule 2a-7(a)(20).
\9\ When the Commission initially established its regulatory
framework allowing money market funds to maintain a stable share
price through use of the amortized cost method of valuation and/or
the penny rounding method of pricing (so long as they abided by
certain risk limiting conditions), it did so understanding the
benefits that stable value money market funds provided as a cash
management vehicle, particularly for smaller investors, and focusing
on minimizing inappropriate dilution of assets and returns for
shareholders. See Proceedings before the Securities and Exchange
Commission in the Matter of InterCapital Liquid Asset Fund, Inc. et
al., 3-5431, Dec. 28, 1978, at 1533 (Statement of Martin Lybecker,
Division of Investment Management at the Securities and Exchange
Commission) (stating that Commission staff had learned over the
course of the hearings the strong preference of money market fund
investors to have a stable share price and that with the right risk
limiting conditions the Commission could limit the likelihood of a
deviation from that stable value, addressing Commission concerns
about dilution); 1983 Adopting Release, supra note 3, at nn.42-43
and accompanying text (``[T]he provisions of the rule impose
obligations on the board of directors to assess the fairness of the
valuation or pricing method and take appropriate steps to ensure
that shareholders always receive their proportionate interest in the
money market fund.''). At that time, the Commission was persuaded
that deviations to an extent that would cause material dilution
generally would not occur given the risk limiting conditions of the
rule. See id., at nn.41-42 and accompanying text (noting that
testimony from the original money market fund exemptive order
hearings alleged that the risk limiting conditions, short of
extraordinarily adverse conditions in the market, should ensure that
a properly managed money market fund should be able to maintain a
stable price per share and that rule 2a-7 is based on that
representation).
\10\ For a mutual fund not regulated under rule 2a-7, the
Investment Company Act and applicable rules generally require that
it price its securities at the current net asset value per share by
valuing portfolio instruments at market value or, if market
quotations are not readily available, at fair value as determined in
good faith by the fund's board of directors. See section 2(a)(41)(B)
of the Act and rules 2a-4 and 22c-1. The Commission, however, has
stated that it would not object if a mutual fund board of directors
determines, in good faith, that the value of debt securities with
remaining maturities of 60 days or less is their amortized cost,
unless the particular circumstances warrant otherwise. See Valuation
of Debt Instruments by Money Market Funds and Certain Other Open-End
Investment Companies, Investment Company Act Release No. 9786 (May
31, 1977) [42 FR 28999 (June 7, 1977)] (``1977 Valuation Release'').
In this regard, the Commission has stated that the ``fair value of
securities with remaining maturities of 60 days or less may not
always be accurately reflected through the use of amortized cost
valuation, due to an impairment of the credit worthiness of an
issuer, or other factors. In such situations, it would appear to be
incumbent upon the directors of a fund to recognize such factors and
take them into account in determining `fair value.' '' Id.
\11\ See FASB ASC paragraph 320-10-35-1c indicating investments
in debt securities classified as held-to-maturity shall be measured
subsequently at amortized cost in the statement of financial
position. See also Vincent Ryan, FASB Exposure Draft Alarms Bank
CFOs (June 2, 2010) available at https://www.cfo.com/article.cfm/
14502294.
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In exchange for the ability to rely on the exemptions provided by
rule 2a-7, the rule imposes important conditions designed to limit
deviations between the fund's $1.00 share price and the market value of
the fund's portfolio. It requires money market funds to maintain a
significant amount of liquid assets and to invest in securities that
meet the rule's credit quality, maturity, and diversification
requirements.\12\ For example, a money market fund's portfolio
securities must meet certain credit quality requirements, such as
posing minimal credit risks.\13\ The rule also places limits on the
remaining maturity of securities in the fund's portfolio to limit the
interest rate and credit spread risk to which a money market fund may
be exposed. A money market fund generally may not acquire any security
with a remaining maturity greater than 397 days, and the dollar-
weighted average maturity of the securities owned by the fund may not
exceed 60 days and the fund's dollar-weighted average life to maturity
may not exceed 120 days.\14\ Money market funds also must maintain
sufficient liquidity to meet reasonably foreseeable redemptions, and
generally must invest at least 10% of their portfolios in assets that
can provide daily liquidity and invest at least 30% of their portfolios
in assets that can provide weekly liquidity.\15\ Finally, rule 2a-7
also requires money market funds to diversify their portfolios by
generally limiting the funds to investing no more than 5% of their
portfolios in any one issuer and no more than 10% of their portfolios
in securities issued by, or subject to guarantees or demand features
(i.e., puts) from, any one institution.\16\
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\12\ See rule 2a-7(c)(2), (3), (4), and (5).
\13\ See rule 2a-7(a)(12), (c)(3)(ii).
\14\ Rule 2a-7(c)(2).
\15\ See rule 2a-7(c)(5). The 10% daily liquid asset requirement
does not apply to tax exempt funds.
\16\ See rule 2a-7(c)(4).
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Rule 2a-7 also includes certain procedural requirements overseen by
the fund's board of directors. These include the requirement that the
fund periodically calculate the market-based value of the portfolio
(``shadow price'') \17\ and compare it to the fund's stable share
price; if the deviation between these two values exceeds \1/2\ of 1
percent (50 basis points), the fund's board of directors must consider
what action, if any, should be initiated by the board, including
whether to re-price the fund's securities above or below the fund's
$1.00 share price (an event colloquially known as ``breaking the
buck'').\18\
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\17\ See rule 2a-7(c)(8)(ii)(A).
\18\ See rule 2a-7(c)(8)(ii)(A) and (B). Regardless of the
extent of the deviation, rule 2a-7 imposes on the board of a money
market fund a duty to take appropriate action whenever the board
believes the extent of any deviation may result in material dilution
or other unfair results to investors or current shareholders. Rule
2a-7(c)(8)(ii)(C). In addition, the money market fund can use the
amortized cost or penny-rounding methods only as long as the board
of directors believes that they fairly reflect the market-based net
asset value per share. See rule 2a-7(c)(1).
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Different types of money market funds have been introduced to meet
the differing needs of money market fund investors. Historically, most
investors have invested in ``prime money market funds,'' which hold a
variety of taxable short-term obligations issued by corporations and
banks, as well as repurchase agreements and asset-backed commercial
paper.\19\ ``Government money market funds'' principally hold
obligations of the U.S. government, including obligations of the U.S.
Treasury and federal agencies and instrumentalities, as well as
repurchase agreements collateralized by government securities. Some
government money market funds limit themselves to holding only U.S.
Treasury obligations or repurchase agreements collateralized by U.S.
Treasury securities and are called ``Treasury money market funds.''
Compared to prime funds, government and Treasury money market funds
generally offer greater safety of principal but historically have paid
lower yields. ``Tax-exempt money market funds'' primarily hold
obligations of state and local governments and their instrumentalities,
and pay interest that is generally exempt from federal income tax for
individual taxpayers.
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\19\ See Investment Company Institute, 2013 Investment Company
Fact Book, at 178, Table 37 (2013), available at https://www.ici.org/
pdf/2013_factbook.pdf.
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In the analysis that follows, we begin by reviewing the role of
money market funds and the benefits they provide investors. We then
review the economics of money market funds. This includes a discussion
of several features of money market funds that, when combined, can
create incentives for fund shareholders to redeem shares during periods
of stress, as well as the potential impact that such redemptions can
have on the fund and the markets that provide short-term financing.\20\
We then discuss money market funds' experience during the 2007-2008
financial crisis against this backdrop. We next analyze our 2010
reforms and their impact on the heightened redemption activity during
the 2011 Eurozone sovereign debt crisis and U.S. debt ceiling impasse.
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\20\ Throughout this Release, we generally refer to ``short-term
financing markets'' to describe the markets for short-term financing
of corporations, banks, and governments.
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Based on these analyses as well as other publicly available
analytical works, some of which are contained in the report responding
to certain questions posed by Commissioners Aguilar, Paredes and
Gallagher (``RSFI Study'') \21\ prepared by staff from the Division of
Risk, Strategy, and Financial Innovation (``RSFI''), we propose two
alternative frameworks for additional regulation of money market funds.
Each alternative seeks to preserve the ability of money market funds to
function as an effective and efficient cash management tool for
investors, but also address
[[Page 36837]]
certain features in money market funds that can make them susceptible
to heavy redemptions, provide them with better tools to manage and
mitigate potential contagion from high levels of redemptions, and
increase the transparency of their risks. We are also proposing
amendments that would apply under each alternative that would result in
additional changes to money market fund disclosure, diversification
limits, and stress testing, among other reforms.\22\
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\21\ See Response to Questions Posed by Commissioners Aguilar,
Paredes, and Gallagher, a report by staff of the Division of Risk,
Strategy, and Financial Innovation (Nov. 30, 2012), available at
https://www.sec.gov/news/studies/2012/money-market-funds-memo-
2012.pdf.
\22\ We note that we have consulted and coordinated with the
Consumer Financial Protection Bureau regarding this proposed
rulemaking in accordance with section 1027(i)(2) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act.
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II. Background
A. Role of Money Market Funds
The combination of principal stability, liquidity, and short-term
yields offered by money market funds, which is unlike that offered by
other types of mutual funds, has made money market funds popular cash
management vehicles for both retail and institutional investors, as
discussed above. Retail investors use money market funds for a variety
of reasons, including, for example, to hold cash for short or long
periods of time or to take a temporary ``defensive position'' in
anticipation of declining equity markets. Institutional investors
commonly use money market funds for cash management in part because, as
discussed later in this Release, money market funds provide efficient
diversified cash management due both to the scale of their operations
and their expertise.\23\
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\23\ See infra notes 72-73 and accompanying text.
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Money market funds, due to their popularity with investors, have
become an important source of financing in certain segments of the
short-term financing markets, as discussed in more detail in section
III.E.2 below. Money market funds' ability to maintain a stable share
price contributes to their popularity. Indeed, the $1.00 stable share
price has been one of the fundamental features of money market funds.
As discussed in more detail in section III.A.7 below, the funds' stable
share price facilitates the funds' role as a cash management vehicle,
provides tax and administrative convenience to both money market funds
and their shareholders, and enhances money market funds' attractiveness
as an investment option.
Rule 2a-7, in addition to facilitating money market funds'
maintenance of stable share prices, also benefits investors by making
available an investment option that provides an efficient and
diversified means for investors to participate in the short-term
financing markets through a portfolio of short-term, high quality debt
securities.\24\ Many investors likely would find it impractical or
inefficient to invest directly in the short-term financing markets, and
some investors likely would not want the relatively undiversified
exposure that can result from investing in those markets on a smaller
scale or that could be associated with certain alternatives to money
market funds, like bank deposits.\25\ Although other types of mutual
funds can and do invest in the short-term financing markets, investors
may prefer money market funds because the risk the funds may undertake
is limited under rule 2a-7 (and because of the funds' corresponding
ability to maintain a stable share price).\26\
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\24\ See, e.g., Comment Letter of Harvard Business School
Professors Samuel Hanson, David Scharfstein, & Adi Sunderam (Jan. 8,
2013) (available in File No. FSOC-2012-0003) (``Harvard Business
School FSOC Comment Letter'') (explaining that prime money market
funds, by providing a way for investors to invest in the short-term
financing markets indirectly, ``provides MMF investors with a
diversified pool of deposit-like instruments with the convenience of
a single deposit-like account,'' and that, ``[g]iven the fixed costs
of managing a portfolio of such instruments, MMFs provide scale
efficiencies for small-balance savers (e.g., households and small
and mid-sized nonfinancial corporations) along with a valuable set
of transactional services (e.g., check-writing and other cash-
management functions).'').
\25\ Id. See also, e.g., Comment Letter of Investment Company
Institute (Jan. 24, 2013) (available in File No. FSOC-2012-0003)
(``ICI Jan. 24 FSOC Comment Letter'') (explaining that although bank
deposits are an alternative to money market funds, ``corporate cash
managers and other institutional investors do not view an
undiversified holding in an uninsured (or underinsured) bank account
as having the same risk profile as an investment in a diversified
short-term money market fund subject to the risk-limiting conditions
of Rule 2a-7'').
\26\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25
(``The regulatory regime established by Rule 2a-7 has proven to be
effective in protecting investors' interests and maintaining their
confidence in money market funds.'').
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Therefore, although rule 2a-7 permits money market funds to use
techniques to value and price their shares not permitted to other
mutual funds (or not permitted to the same extent), the rule also
imposes additional protective conditions on money market funds. These
additional conditions are designed to make money market funds' use of
the pricing techniques permitted by rule 2a-7 consistent with the
protection of investors, and more generally, to make available an
investment option for investors that seek an efficient way to obtain
short-term yields. These conditions thus reflect the differences in the
way money market funds operate and the ways in which investors use
money market funds compared to other types of mutual funds.
We recognize, and considered when developing the reform proposals
we are putting forward today, that money market funds are a popular
investment product and that they provide many benefits to investors and
to the short-term financing markets. Indeed, it is for these reasons
that we are proposing reforms designed to make the funds more
resilient, as discussed throughout this Release, while preserving, to
the extent possible, the benefits of money market funds. These reform
proposals may, however, make money market funds less attractive to
certain investors as discussed more fully below.
B. Economics of Money Market Funds
The combination of several features of money market funds can
create an incentive for their shareholders to redeem shares heavily in
periods of financial stress, as discussed in greater detail in the RSFI
Study. We discuss these factors below, as well as the harm that can
result from heavy redemptions in money market funds.
1. Incentives Created by Money Market Funds' Valuation and Pricing
Methods
Money market funds are unique among mutual funds in that rule 2a-7
permits them to use the amortized cost method of valuation and the
penny-rounding method of pricing. As discussed above, these valuation
and pricing techniques allow a money market fund to sell and redeem
shares at a stable share price without regard to small variations in
the value of the securities that comprise its portfolio, and thus to
maintain a stable $1.00 share price under most conditions.
Although the stable $1.00 share price calculated using these
methods provides a close approximation to market value under normal
market conditions, differences may exist because market prices adjust
to changes in interest rates, credit risk, and liquidity. We note that
the vast majority of money market fund portfolio securities are not
valued based on market prices obtained through secondary market trading
because the secondary markets for most portfolio securities such as
commercial paper, repos, and certificates of deposit are not actively
traded. Accordingly, most money market fund portfolio securities are
valued largely through ``mark-to-model'' or ``matrix pricing''
estimates.\27\
[[Page 36838]]
The market value of a money market fund's portfolio securities also may
experience relatively large changes if a portfolio asset defaults or
its credit profile deteriorates.\28\ Today differences within the
tolerance defined by rule 2a-7 are reflected only in a fund's shadow
price, and not the share price at which the fund satisfies purchase and
redemption transactions.
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\27\ See, e.g., Harvard Business School FSOC Comment Letter,
supra note 24 (``secondary markets for commercial paper and other
private money market assets such as CDs are highly illiquid.
Therefore, the asset prices used to calculate the floating NAV would
largely be accounting or model-based estimates, rather than prices
based on secondary market transactions with sizable volumes.'');
Institutional Money Market Funds Association, The Use of Amortised
Cost Accounting by Money Market Funds, available at https://
www.immfa.org/assets/files/
IMMFA%20The%20use%20of%20amortised%20cost%20accounting%20by%20MMF.pdf
(noting that ``investors typically hold money market instruments to
maturity, and so there are relatively few prices from the secondary
market or broker quotes,'' that as a result most money market funds
value their assets using yield curve pricing, discounted cash flow
pricing, and amortized cost valuation, and surveying several money
market funds and finding that only U.S. Treasury bills are
considered ``level one'' assets under the relevant accounting
standards for which traded or quoted prices are generally
available).
\28\ The credit quality standards in rule 2a-7 are designed to
minimize the likelihood of such a default or credit deterioration.
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Deviations that arise from changes in interest rates and credit
risk are temporary as long as securities are held to maturity, because
amortized cost values and market-based values converge at maturity. If,
however, a portfolio asset defaults or an asset sale results in a
realized capital gain or loss, deviations between the stable $1.00
share price and the shadow price become permanent. For example, if a
portfolio experiences a 25 basis point loss because an issuer defaults,
the fund's shadow price falls from $1.0000 to $0.9975. Even though the
fund has not broken the buck, this reduction is permanent and can only
be rebuilt internally in the event that the fund realizes a capital
gain elsewhere in the portfolio, which generally is unlikely given the
types of securities in which money market funds typically invest.\29\
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\29\ It is important to understand that, in practice, a money
market fund cannot use future portfolio earnings to rebuild its
shadow price because Subchapter M of the Internal Revenue Code
effectively forces money market funds to distribute virtually all of
their earnings to investors. These restrictions can cause permanent
reductions in shadow prices to persist over time, even if a fund's
other portfolio securities are otherwise unimpaired.
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If a fund's shadow price deviates far enough from its stable $1.00
share price, investors may have an economic incentive to redeem money
market fund shares.\30\ For example, investors may have an incentive to
redeem shares when a fund's shadow price is less than $1.00.\31\ If
investors redeem shares when the shadow price is less than $1.00, the
fund's shadow price will decline even further because portfolio losses
are spread across a smaller asset base. If enough shares are redeemed,
a fund can ``break the buck'' due, in part, to heavy investor
redemptions and the concentration of losses across a shrinking asset
base. In times of stress, this reason alone provides an incentive for
investors to redeem shares ahead of other investors: early redeemers
get $1.00 per share, whereas later redeemers may get less than $1.00
per share even if the fund experiences no further losses.
---------------------------------------------------------------------------
\30\ The value of this economic incentive is determined in part
by the volatility of the fund's underlying assets, which is, in
turn, affected by the volatility of interest rates, the likelihood
of default, and the maturities of the underlying assets. Since the
risk limiting conditions imposed by rule 2a-7 require funds to hold
high quality assets with short maturities, the volatility of the
underlying assets is very low (which implies that the corresponding
value of this economic incentive is low), except when the fund is
under stress.
\31\ We recognize that, absent the fund breaking the buck,
arbitraging fluctuations in a money market fund's shadow price would
require some effort and may not be compelling in many cases given
the small dollar value that could be captured. See, e.g., Money
Market Fund Reform, Investment Company Act Release No. 28807 (June
30, 2009) [74 FR 32688 (July 8, 2009)] (``2009 Proposing Release''),
at nn.304-305 and accompanying text (discussing how to arbitrage
around price changes from rising interest rates, investors would
need to sell money market fund shares for $1.00 and reinvest the
proceeds in equivalent short-term debt securities at then-current
interest rates).
---------------------------------------------------------------------------
To illustrate the incentive for investors to redeem shares early,
consider a money market fund that has one million shares outstanding
and holds a portfolio worth exactly $1 million. Assume the fund's
stable share price and shadow price are both $1.00. If the fund
recognizes a $4,000 loss, the fund's shadow price will fall below $1.00
as follows:
[GRAPHIC] [TIFF OMITTED] TP19JN13.001
If investors redeem one quarter of the fund's shares (250,000
shares), the redeeming shareholders are paid $1.00. Because redeeming
shareholders are paid more than the shadow price of the fund, the
redemptions further concentrate the loss among the remaining
shareholders. In this case, the amount of redemptions is sufficient to
cause the fund to ``break the buck.''
[GRAPHIC] [TIFF OMITTED] TP19JN13.002
This example shows that if a fund's shadow price falls below $1.00
and the fund experiences redemptions, the remaining investors have an
incentive to redeem shares to potentially avoid holding shares worth
even less, particularly if the fund re-prices its shares below $1.00.
This incentive exists even if investors do not expect the fund to incur
further portfolio losses.
As discussed in greater detail in the RSFI Study and as we saw
during the 2007-2008 financial crisis as further discussed below, money
market funds, although generally able to maintain stable share prices,
remain subject to credit, interest rate, and liquidity risks, all of
which can cause a fund's shadow price to decline below $1.00 and create
an incentive for investors to redeem shares ahead of other
investors.\32\ Although defaults are very low probability events, the
resulting losses will be most acute if the default occurs in a position
that is greater than 0.5% of the fund's assets, as was the case in the
Reserve Primary Fund's investment in Lehman Brothers commercial paper
in September 2008.\33\ As discussed further in section III.J of this
Release, we note that money market funds hold significant numbers of
such larger positions.\34\
---------------------------------------------------------------------------
\32\ See generally RSFI Study, supra note 21, at section 4.A.
\33\ See generally infra section II.C.
\34\ FSOC, in formulating possible money market reform
recommendations, solicited and received comments from the public
(FSOC Comment File, File No. FSOC-2012-0003, available at https://
www.regulations.gov/#!docketDetail;D=FSOC-2012-0003), some of which
have made similar observations about the concentration and size of
money market fund holdings. See, e.g., Harvard Business School FSOC
Comment Letter, supra note 24 (noting that ``prime MMFs mainly
invest in money-market instruments issued by large, global banks''
and providing information about the size of the holdings of ``the 50
largest non-government issuers of money market instruments held by
prime MMFs as of May 2012'').
---------------------------------------------------------------------------
2. Incentives Created by Money Market Funds' Liquidity Needs
The incentive for money market fund investors to redeem shares
ahead of other investors also can be heightened
[[Page 36839]]
by liquidity concerns. Money market funds, by definition and like all
other mutual funds, offer investors the ability to redeem shares upon
demand.
A money market fund has three sources of internal liquidity to meet
redemption requests: cash on hand, cash from investors purchasing
shares, and cash from maturing securities. If these internal sources of
liquidity are insufficient to satisfy redemption requests on any
particular day, money market funds may be forced to sell portfolio
securities to raise additional cash.\35\ Since the secondary market for
many portfolio securities is not deeply liquid (in part because most
money market fund securities are held to maturity), funds may have to
sell securities at a discount from their amortized cost value, or even
at fire-sale prices,\36\ thereby incurring additional losses that may
have been avoided if the funds had sufficient liquidity.\37\ This,
itself, can cause a fund's portfolio to lose value. In addition,
redemptions that deplete a fund's most liquid assets can have
incremental adverse effects because they leave the fund with fewer
liquid assets, making it more difficult to avoid selling less liquid
assets, potentially at a discount, to meet further redemption requests.
---------------------------------------------------------------------------
\35\ Although the Act permits a money market fund to borrow
money from a bank, such loans, assuming the proceeds of which are
paid out to meet redemptions, create liabilities that must be
reflected in the fund's shadow price, and thus will contribute to
the stresses that may force the fund to ``break the buck.'' See
section 18(f) of the Investment Company Act.
\36\ Money market funds normally meet redemptions by disposing
of their more liquid assets, rather than selling a pro rata slice of
all their holdings, which typically include less liquid securities
such as certificates of deposit, commercial paper, or term
repurchase agreements (``repo''). See Harvard Business School FSOC
Comment Letter, supra note 24 (``MMFs forced to liquidate commercial
paper and bank certificates of deposits are likely to sell them at
heavily discounted, `fire sale' prices. This creates run risk
because early investor redemptions can be met with the sale of
liquid Treasury bills, which generate enough cash to fully pay early
redeemers. In contrast, late redemptions force the sale of illiquid
assets at discounted prices, which may not generate enough revenue
to fully repay late redeemers. Thus, each investor benefits from
redeeming earlier than others, setting the stage for runs.'');
Jonathan Witmer, Does the Buck Stop Here? A Comparison of
Withdrawals from Money Market Mutual Funds with Floating and
Constant Share Prices, Bank of Canada Working Paper 2012-25 (Aug.
2012) (``Witmer''), available at https://www.bankofcanada.ca/wp-
content/uploads/2012/08/wp2012-25.pdf. ``Fire sales'' refer to
situations when securities deviate from their information-efficient
values typically as a result of sale price pressure. For an overview
of the theoretical and empirical research on asset ``fire sales,''
see Andrei Shleifer & Robert Vishny, Fire Sales in Finance and
Macroeconomics, 25 Journal of Economic Perspectives, Winter 2011, at
29-48 (``Fire Sales'').
\37\ The RSFI Study examined whether money market funds are more
resilient to redemptions following the 2010 reforms and notes that,
``As expected, the results show that funds with a 30 percent [weekly
liquid asset requirement] are more resilient to both portfolio
losses and investor redemptions'' than those funds without a 30
percent weekly liquid asset requirement. RSFI Study, supra note 21,
at 37.
---------------------------------------------------------------------------
3. Incentives Created by Imperfect Transparency, Including Sponsor
Support
Lack of investor understanding and complete transparency concerning
the risks posed by particular money market funds can exacerbate the
concerns discussed above. If investors do not know a fund's shadow
price and/or its underlying portfolio holdings (or if previous
disclosures of this information are no longer accurate), investors may
not be able to fully understand the degree of risk in the underlying
portfolio.\38\ In such an environment, a default of a large-scale
commercial paper issuer, such as a bank holding company, could
accelerate redemption activity across many funds because investors may
not know which funds (if any) hold defaulted securities and initiate
redemptions to avoid potential rather than actual losses in a ``flight
to transparency.'' \39\ Since many money market funds hold securities
from the same issuer, investors may respond to a lack of transparency
about specific fund holdings by redeeming assets from funds that are
believed to be holding highly correlated positions.\40\
---------------------------------------------------------------------------
\38\ See, e.g., RSFI Study, supra note 21, at 31 (stating that
although disclosures on Form N-MFP have improved fund transparency,
``it must be remembered that funds file the form on a monthly basis
with no interim updates,'' and that ``[t]he Commission also makes
the information public with a 60-day lag, which may cause it to be
stale''); Comment Letter of the Presidents of the 12 Federal Reserve
Banks (Feb. 12, 2013) (available in File No. FSOC-2012-0003)
(``Federal Reserve Bank Presidents FSOC Comment Letter'') (stating
that ``[e]ven more frequent and timely disclosure may be warranted
to increase the transparency of MMFs'' and noting that ``[d]uring
times of stress, [. . .] uncertainty regarding portfolio composition
could heighten investors' incentives to redeem in between reporting
periods [of money market funds' portfolio information], as they will
not be able to determine if their fund is exposed to certain
stressed assets''); see also infra section III.H where we request
comment on whether we should require money market funds to file Form
N-MFP more frequently.
\39\ See Nicola Gennaioli, Andrei Shleifer & Robert Vishny,
Neglected Risks, Financial Innovation, and Financial Fragility, 104
J. Fin. Econ. 453 (2012) (``A small piece of news that brings to
investors' minds the previously unattended risks catches them by
surprise and causes them to drastically revise their valuations of
new securities and to sell them. . . . When investors realize that
the new securities are false substitutes for the traditional ones,
they fly to safety, dumping these securities on the market and
buying the truly safe ones.'').
\40\ See infra notes 65-67 and accompanying text. Based on Form
N-MFP data as of February 28, 2013, there were 27 different issuers
whose securities were held by more than 100 prime money market
funds.
---------------------------------------------------------------------------
Money market funds' sponsors on a number of occasions have
voluntarily chosen to provide financial support for their money market
funds \41\ for various reasons, including to keep a fund from re-
pricing below its stable value, but also, for example, to protect the
sponsors' reputations or brands. Considering that instances of sponsor
support are not required to be disclosed outside of financial
statements, and thus were not particularly transparent to investors,
voluntary sponsor support has played a role in helping some money
market funds maintain a stable value and, in turn, may have lessened
investors' perception of the risk in money market funds.\42\ Even those
investors who were aware of sponsor support could not be assured it
would be available in the future.\43\ Instances of discretionary
sponsor support were relatively common during the financial crisis. For
example, during the period from September 16, 2008 to October 1, 2008,
a number of money market fund sponsors purchased large amounts of
portfolio securities from their money market funds or provided capital
support to the funds (or received staff no-action assurances in order
to provide
[[Page 36840]]
support).\44\ Commission staff provided no-action assurances to 100
money market funds in 18 different fund groups so that the fund groups
could enter into such arrangements.\45\ Although a number of advisers
to money market funds obtained staff no-action assurances in order to
provide sponsor support, several did not subsequently provide the
support because it was no longer necessary.\46\
---------------------------------------------------------------------------
\41\ Rule 17a-9 currently allows for discretionary support of
money market funds by their sponsors and other affiliates.
\42\ See, e.g., Comment Letter of Occupy the SEC (Feb. 15, 2013)
(available in File No. FSOC-2012-0003) (``Occupy the SEC FSOC
Comment Letter'') (``The current strategies for maintaining a stable
NAV--rounding and discretionary fund sponsor support--both serve to
conceal important market signals of mounting problems within the
fund's portfolio.''). See also Federal Reserve Bank Presidents FSOC
Comment Letter, supra note 38 (warning that ``[g]iven the perception
of stability that discretionary support creates, this practice may
attract investors that are not willing to accept the underlying
risks in MMFs and who therefore are more prone to run in times of
potential stress.'')
\43\ See, e.g., U.S. Securities and Exchange Commission,
Roundtable on Money Market Funds and Systemic Risk, unofficial
transcript (May 10, 2011), available at https://www.sec.gov/
spotlight/mmf-risk/mmf-risk-transcript-051011.htm (``Roundtable
Transcript'') (Bill Stouten, Thrivent Financial) (``I think the
primary factor that makes money funds vulnerable to runs is the
marketing of the stable NAV. And I think the record of money market
funds and maintaining the stable NAV has largely been the result of
periodic voluntary sponsor support. I think sophisticated investors
that understand this and doubt the willingness or ability of the
sponsor to make that support know that they need to pull their money
out before a declining asset is sold.''); (Lance Pan, Capital
Advisors Group) (``over the last 30 or 40 years, [investors] have
relied on the perception that even though there is risk in money
market funds, that risk is owned somehow implicitly by the fund
sponsors. So once they perceive that they are not able to get that
additional assurance, I believe that was one probable cause of the
run''); see also Federal Reserve Bank Presidents FSOC Comment
Letter, supra note 38 (stating that ``[t]hough [sponsor support]
creates a perception of stability, it may not truly provide
stability in times of stress. Indeed, events of 2008 showed that
sponsor support cannot always be relied upon.''); infra section
III.F.1.
\44\ See Steffanie A. Brady et al., The Stability of Prime Money
Market Mutual Funds: Sponsor Support from 2007 to 2011, Federal
Reserve Bank of Boston Risk and Policy Analysis Unit Working Paper
No. 12-3 (Aug. 13, 2012), available at https://www.bos.frb.org/
bankinfo/qau/wp/2012/qau1203.pdf. Staff in the Federal Reserve Bank
of Boston's Risk and Policy Analysis Unit examine 341 money market
funds and find that 78 of the funds disclosed sponsor support on
Form N-CSR between 2007 and 2011 (some multiple times). This
analysis excludes Capital Support Agreements and/or Letters of
Credit that were not drawn upon. Large sponsor support (in
aggregate) representing over 0.5% of assets under management
occurred in 31 money market funds, and the primary reasons disclosed
for such support include losses on Lehman Brothers, AIG, and Morgan
Stanley securities. Moody's Investors Service Special Comment,
Sponsor Support Key to Money Market Funds (Aug. 9, 2010) (``Moody's
Sponsor Support Report''), reported that 62 money market funds
required sponsor support during 2007-2008.
\45\ Our staff estimated that during the period from August 2007
to December 31, 2008, almost 20% of all money market funds received
some support (or staff no-action assurances concerning support) from
their money managers or their affiliates. We note that not all of
such support required no-action assurances from Commission staff
(for example, fund affiliates were able to purchase defaulted Lehman
Brothers securities from fund portfolios under rule 17a-9 under the
Investment Company Act without the need for any no-action
assurances). See, e.g., https://www.sec.gov/divisions/investment/im-
noaction.shtml#money.
\46\ See, e.g., Comment Letter of The Dreyfus Corporation (Aug.
7, 2012) (available in File No. 4-619) (stating that no-action
relief to provide sponsor support ``was sought by many money funds
as a precautionary measure'').
---------------------------------------------------------------------------
The 2007-2008 financial crisis is not the only instance in which
some money market funds have come under strain, although it is unique
in the amount of money market funds that requested or received sponsor
support.\47\ Interest rate changes, issuer defaults, and credit rating
downgrades can lead to significant valuation losses for individual
funds. Table 1 documents that since 1989, in addition to the 2007-2008
financial crisis, 11 events were deemed to have been sufficiently
negative that some fund sponsors chose to provide support or to seek
staff no-action assurances in order to provide support.\48\ The table
indicates that these events potentially affected 158 different money
market funds. This finding is consistent with estimates provided by
Moody's that at least 145 U.S. money market funds received sponsor
support to maintain either price stability or share liquidity before
2007.\49\ Note that although these events affected money market funds
and their sponsors, there is no evidence that these events caused
systemic problems, most likely because the events were isolated either
to a single entity or class of security. Table 1 is consistent with the
interpretation that outside a crisis period, these events did not
propagate risk more broadly to the rest of the money market fund
industry. However, a caveat that prevents making a strong inference
about the impact of sponsor support on investor behavior from Table 1
is that sponsor support generally was not immediately disclosed, and
was not required to be disclosed by the Commission, and so investors
may have been unaware that their money market fund had come under
stress.\50\
---------------------------------------------------------------------------
\47\ See Moody's Sponsor Support Report, supra note 44.
\48\ The table does not comprehensively describe every instance
of sponsor support of a money market fund or request for no-action
assurances to provide support, but rather summarizes some of the
more notable instances of sponsor support.
\49\ See Moody's Sponsor Support Report, supra note 44, noting
in particular 13 funds requiring support in 1990 due to credit
defaults or deterioration at MNC Financial, Mortgage & Realty Trust,
and Drexel Burnham; 79 funds requiring support in 1994 due to the
Orange County bankruptcy and holdings of certain floating rate
securities when interest rates increased; and 25 funds requiring
support in 1999 after the credit of certain General American Life
Insurance securities deteriorated.
\50\ Note that we are proposing changes to our rules and forms
to require more comprehensive and timely disclosure of such sponsor
support. See infra sections III.F.1 and III.G.
\51\ The estimated total numbers of money market funds are from
Table 38 of the Investment Company Institute's 2013 Fact Book,
available at https://www.ici.org/pdf/2013_factbook.pdf. The numbers
of money market funds are as of the end of the relevant year, and
not necessarily as of the date that any particular money market fund
received support (or whose sponsor received no-action assurances in
order to provide support).
\52\ See Jack Lowenstein, Should the Rating Agencies be
Downgraded?, Euromoney (Feb. 1, 1990) (noting that Integrated
Resources had been rated A-2 by Standard & Poor's until two days
before default); Jonathan R. Laing, Never Say Never--Or, How Safe Is
Your Money-Market Fund?, Barron's (Mar. 26, 1990) (``Laing''), at 6;
Randall W. Forsyth, Portfolio Analysis of Selected Fixed-Income
Funds--Muni Money-Fund Risks, Barron's (July 2, 1990) (``Forsyth''),
at 33; Georgette Jasen, SEC Is Accelerating Its Inspections of Money
Funds, Wall St. J. (Dec. 4, 1990) (``Jasen''), at C1. One $630
million money market fund held a 3.5% position in Integrated
Resources when it defaulted. See Linda Sandler, Cloud Cast on `Junk'
IOUs By Integrated Resources, Wall St. J. (June 28, 1989).
\53\ See Laing, supra note 52; Forsyth, supra note 52; Jasen,
supra note 52.
\54\ See Revisions to Rules Regulating Money Market Funds,
Investment Company Act Release No. 19959 (Dec. 17, 1993) [58 FR
68585 (Dec. 28, 1993)] at n.12 (``1993 Proposing Release''). See
also Leslie Eaton, Another Close Call--An Adviser Bails Out Its
Money Fund, Barron's (Mar. 11, 1991), at 42 (noting that Mercantile
Bancorp bought out $28 million of MNC Financial notes from its
affiliated money market fund, which had accounted for 3% of the
money market fund's assets).
Table 1
------------------------------------------------------------------------
Estimated number
Number of money of money market
market funds from funds supported
Year 2013 ICI mutual by affiliate or Event
fund fact book for which no-
\51\ action assurances
obtained
------------------------------------------------------------------------
1989........... 673 4 Default of
Integrated
Resources
commercial paper
(rated A-2 by
Standard &
Poor's until
shortly prior to
default).\52\
1990........... 741 11 Default of
Mortgage &
Realty Trust
commercial paper
(rated A-2 by
Standard &
Poor's until
shortly prior to
default).\53\
1990........... 741 10 MNC Financial
Corp. commercial
paper downgraded
from being a
second tier
security.\54\
1991........... 820 10 Mutual Benefit
Life Insurance
(``MBLI'')
seized by state
insurance
regulators,
causing it to
fail to honor
put obligations
after those
holding
securities with
these features
put the
obligations en
masse to
MBLI.\55\
1994........... 963 40 Rising interest
rates damaged
the value of
certain
adjustable rate
securities held
by money market
funds.\56\
1994........... 963 43 Orange County,
California
bankruptcy.\57\
1997........... 1,103 3 Mercury Finance
Corp. defaults
on its
commercial
paper.
[[Page 36841]]
1999........... 1,045 25 Credit rating
downgrade of
General American
Life Insurance
Co. triggered a
wave of demands
for repayment on
its funding
contracts,
leading to
liquidity
problems and
causing it to be
placed under
administrative
supervision by
state insurance
regulators.\58\
2001........... 1,015 6 Pacific Gas &
Electric Co. and
Southern
California
Edison Co.
commercial paper
went from being
first tier
securities to
defaulting in a
2-week
period.\59\
2007........... 805 51 Investments in
SIVs.
2008........... 783 109 Investments in
Lehman Brothers,
America
International
Group, Inc.
(``AIG'') and
other financial
sector debt
securities.
2010........... 652 3 British Petroleum
Gulf oil spill
affects price of
BP debt
securities held
by some money
market funds.
2011........... 632 3 Investments in
Eksportfinans,
which was
downgraded from
being a first
tier security to
junk-bond
status.
------------------------------------------------------------------------
It also is important to note that, as discussed above, fund
sponsors may provide financial support for a number of different
reasons. Sponsors may support funds to protect their reputations and
their brands or the credit rating of the fund.\60\ Support also may be
used to keep a fund from breaking a buck or to increase a fund's shadow
price if its sponsor believes investors avoid funds that may have low
shadow prices. We note that the fact that no-action assurances were
obtained or sponsor support was provided does not necessarily mean that
a money market fund would have broken the buck without such support or
assurances.
---------------------------------------------------------------------------
\55\ At the time of its seizure, MBLI debt was rated in the
highest short-term rating category by Standard & Poor's. See 1993
Proposing Release, supra note 54, at n.28 and accompanying text. The
money market fund sponsors either repurchased the MBLI-backed
instruments from the funds at their amortized cost or obtained a
replacement guarantor in order to prevent shareholder losses. Id.
\56\ See Money Market Fund Prospectuses, Investment Company Act
Release No. 21216 (July 19, 1995) [60 FR 38454, (July 26, 1995)], at
n.17; Investment Company Institute, Report of the Money Market
Working Group (Mar. 17, 2009), available at https://www.ici.org/pdf/
ppr_09_mmwg.pdf (``ICI 2009 Report''), at 177; Leslie Wayne,
Investors Lose Money in `Safe' Fund, N.Y. Times, Sept. 28, 1994;
Leslie Eaton, New Caution About Money Market Funds, N.Y. Times,
Sept. 29, 1994.
\57\ See ICI 2009 Report, supra note 56, at 178; Tom Petruno,
Orange County in Bankruptcy: Investors Weigh Their Options: Muni
Bond Values Slump but Few Trade at Fire-Sale Prices, L.A. Times,
Dec. 8, 1994.
\58\ See Sandra Ward, Money Good? How some fund managers
sacrificed safety for yield, Barron's (Aug. 23, 1999), at F3.
\59\ See Aaron Lucchetti & Theo Francis, Parents Take on Funds'
Risks Tied to Utilities, Wall St. J. (Feb. 28, 2001), at C1; Lewis
Braham, Commentary: Money Market Funds Enter the Danger Zone,
Businessweek (Apr. 8, 2001).
\60\ See, e.g., Marcin Kacperczyk & Philipp Schnabl, How Safe
are Money Market Funds?, 128 Q. J. Econ. (forthcoming Aug. 2013)
(``Kacperczyk & Schnabl'') (``. . . fund sponsors with more non-
money market fund business expect to incur large costs if their
money market funds fail. Such costs are typically reputational in
nature, in that an individual fund's default generates negative
spillovers to the fund's sponsor['s] other business. In practice,
these costs could be outflows from other mutual funds managed by the
same sponsor or a loss of business in the sponsor's commercial
banking, investment banking, or insurance operations.''); Patrick E.
McCabe, The Cross Section of Money Market Fund Risks and Financial
Crises, Federal Reserve Board Finance and Economic Discussion Series
Paper No. 2010-51 (2010) (``Cross Section'') (``Nothing required
these sponsors to provide support, but because allowing a fund to
break the buck would have been destructive to a sponsor's reputation
and franchise, sponsors backstopped their funds voluntarily.'');
Value Line Posts Loss for 1st Period, Cites Charge of $7.5 Million,
Wall St. J. (Sept. 18, 1989) (``In discussing the charge in its
fiscal 1989 annual report [for buying out defaulted commercial paper
from its money market fund], Value Line said it purchased the fund's
holdings in order to protect its reputation and the continuing
income from its investment advisory and money management
business.''); Comment Letter of James J. Angel (Feb. 6, 2013)
(available in File No. FSOC-2012-0003) (``Angel FSOC Comment
Letter'') (``Sponsors have a strong commercial incentive to stand
behind their funds. Breaking the buck means the immediate and
catastrophic end of the sponsor's entire asset management
business.'').
---------------------------------------------------------------------------
Finally, the government assistance provided to money market funds
during 2007-2008 financial crisis, discussed in more detail below, may
have contributed to investors' perceptions that the risk of loss in
money market funds is low.\61\ If investors perceive money market funds
as having an implicit government guarantee in times of crisis, any
potential instability of a money market fund's NAV could be mis-
estimated. Investors will form expectations about the likelihood of a
potential intervention to support money market funds, either by the
U.S. government or fund sponsors. To the extent these forecasts are
based on inaccurate information, investor estimates of potential losses
will be biased.
---------------------------------------------------------------------------
\61\ See, e.g, Marcin Kacperczyk & Philipp Schnabl, Money Market
Funds: How to Avoid Breaking the Buck, in Regulating Wall St: The
Dodd-Frank Act and the New Architecture of Global Finance (Viral V.
Acharya, et al., eds., 2011), at 313 (``Given that money market
funds provide both payment services to investors and refinancing to
financial intermediaries, there is a strong case for the government
to support money market funds during a financial crisis by
guaranteeing the value of money market fund investments. As a result
of such support, money market funds have an ex ante incentive to
take on excessive risk, similarly to other financial institutions
with explicit or implicit government guarantees . . . after the
[government] guarantees were provided in September 2008 [to money
market funds], most investors will expect similar guarantees during
future financial crises. . . .''). But see Comment Letter of
Fidelity (Apr. 26, 2012) (available in File No. 4-619) (``Fidelity
April 2012 PWG Comment Letter'') (citing a survey of Fidelity's
retail customers in which 75% of responding customers did not
believe that money market funds are guaranteed by the government and
25% either believed that they were guaranteed or were not sure
whether they were guaranteed). We note that investor belief that
money market funds are not guaranteed by the government does not
necessarily mean that investors do not believe that the government
will support money market funds if there is another run on money
market funds.
---------------------------------------------------------------------------
4. Incentives Created by Money Market Funds Investors' Desire To Avoid
Loss
In addition to the incentives described above, other
characteristics of money market funds create incentives to redeem in
times of stress. Investors in money market funds have varying
investment goals and tolerances for risk. Many investors use money
market funds for principal preservation and as a cash management tool,
and, consequently, these funds can attract investors who are unable or
unwilling to tolerate even small losses. These investors may seek to
minimize possible losses, even at the cost of forgoing higher
returns.\62\ Such
[[Page 36842]]
investors may be very loss averse for many reasons, including general
risk tolerance, legal or investment restrictions, or short-term cash
needs.\63\ These overarching considerations may create incentives for
money market investors to redeem and would be expected to persist, even
if valuation and pricing incentives were addressed.
---------------------------------------------------------------------------
\62\ See, e.g., Comment Letter of Investment Company Institute
(Apr. 19, 2012) (available in File No. 4-619) (``ICI Apr 2012 PWG
Comment Letter'') (enclosing a survey commissioned by the Investment
Company Institute and conducted by Treasury Strategies, Inc.
finding, among other things. that 94% of respondents rated safety of
principal as an ``extremely important'' factor in their money market
fund investment decision and 64% ranked safety of principal as the
``primary driver'' of their money market fund investment).
\63\ See, e.g., Comment Letter of County Commissioners Assoc. of
Ohio (Dec. 21, 2012) (available in File No. FSOC-2012-0003)
(``County governments in Ohio operate under legal constraints or
other policies that limit them from investing in instruments without
a stable value.'').
---------------------------------------------------------------------------
The desire to avoid loss may cause investors to redeem from money
market funds in times of stress in a ``flight to quality.'' For
example, as discussed in the RSFI Study, one explanation for the heavy
redemptions from prime money market funds and purchases in government
money market fund shares during the financial crisis may be a flight to
quality, given that most of the assets held by government money market
funds have a lower default risk than the assets of prime money market
funds.\64\
---------------------------------------------------------------------------
\64\ One study documented that investors redirected assets from
prime money market funds into government money market funds during
September 2008. See Russ Wermers et al., Runs on Money Market Funds
(Jan. 2, 2013), available at https://www.rhsmith.umd.edu/cfp/pdfs_
docs/papers/WermersMoneyFundRuns.pdf (``Wermers Study''). Another
study found that redemption activity in money market funds during
the financial crisis was higher for riskier money market funds. See
Cross Section, supra note 60.
---------------------------------------------------------------------------
5. Effects on Other Money Market Funds, Investors, and the Short-Term
Financing Markets
The analysis above generally describes how potential losses may
create shareholder incentives to redeem at a specific money market
fund. We now discuss how stress at one money market fund can be
positively correlated across funds in at least two ways. Some market
observers have noted that if a money market fund suffers a loss on one
of its portfolio securities--whether because of a deterioration in
credit quality, for example, or because the fund sold the security at a
discount to its amortized-cost value--other money market funds holding
the same security may have to reflect the resultant discounts in their
shadow prices.\65\ Any resulting decline in the shadow prices of other
funds could, in turn, lead to a contagion effect that could spread even
further.\66\ For example, a number of commenters have observed that
many money market fund holdings tend to be highly correlated, making it
more likely that multiple money market funds will experience
contemporaneous decreases in share prices.\67\
---------------------------------------------------------------------------
\65\ See generally Douglas W. Diamond & Raghuram G. Rajan, Fear
of Fire Sales, Illiquidity Seeking, and Credit Freezes, 126 Q. J.
Econ. 557 (May 2011); Fire Sales, supra note 36; Markus Brunnermeier
et al., The Fundamental Principles of Financial Regulation, in
Geneva Reports on the World Economy 11 (2009).
\66\ For example, supra Table 1, which identifies certain
instances in which money market fund sponsors supported their funds
or sought staff no-action assurances to do so, tends to show that
correlated holdings across funds resulted in multiple funds
experiencing losses that appeared to motivate sponsors to provide
support or seek staff no-action assurances in order to provide
support.
\67\ See, e.g., Comment Letter of Better Markets, Inc. (Feb. 15,
2013) (available in File No. FSOC-2012-0003) (``Better Markets FSOC
Comment Letter'') (agreeing with FSOC's analysis and stating that
``MMFs tend to have similar exposures due to limits on the nature of
permitted investments. As a result, losses creating instability and
a crisis of confidence in one MMF are likely to affect other MMFs at
the same time.''); Comment Letter of Robert Comment (Dec. 31. 2012)
(available in File No. FSOC-2012-0003) (``Robert Comment FSOC
Comment Letter'') (discussing correlation in money market funds'
portfolios and stating, among other things, that ``now that
bank[hyphen]issued money market instruments have come to comprise
half the holdings of the typical prime fund, the SEC should
acknowledge correlated credit risk by requiring that prime funds
practice sector diversification (in addition to issuer
diversification)''); Occupy the SEC FSOC Comment Letter, supra note
42 (discussing concentration of risk across money market funds).
---------------------------------------------------------------------------
As discussed above, in times of stress if investors do not wish to
be exposed to a distressed issuer (or correlated issuers) but do not
know which money market funds own these distressed securities at any
given time, investors may redeem from any money market funds that could
own the security (e.g., redeeming from all prime funds).\68\ A fund
that did not own the security and was not otherwise under stress could
nonetheless experience heavy redemptions which, as discussed above,
could themselves ultimately cause the fund to experience losses if it
does not have adequate liquidity.
---------------------------------------------------------------------------
\68\ See, e.g., Wermers Study, supra note 64 (based on an
empirical analysis of data from the 2008 run on money market funds,
finding that, during 2008, ``[f]unds that cater to institutional
investors, which are the most sophisticated and informed investors,
were hardest hit,'' and that ``investor flows from money market
funds seem to have been driven both by strategic externalities . . .
and information.'').
---------------------------------------------------------------------------
As was experienced during the financial crisis, the potential for
liquidity-induced contagion may have negative effects on investors and
the markets for short-term financing of corporations, banks, and
governments. This is in large part because of the significance of money
market funds' role in such short-term financing markets.\69\ Indeed,
money market funds had experienced steady growth before the financial
crisis, driven in part by growth in the size of institutional cash
pools,\70\ which grew from under $100 billion in 1990 to almost $4
trillion just before the 2008 financial crisis.\71\ Money market funds'
suitability for cash management operations also has made them popular
among corporate treasurers, municipalities, and other institutional
investors, some of whom rely on money market funds for their cash
management operations because the funds provide diversified cash
management more efficiently due both to the scale of their operations
and their expertise.\72\ For example, according to
[[Page 36843]]
one survey, approximately 19% of organizations' short-term investments
were allocated to money market funds (and, according to this observer,
this figure is down from almost 40% in 2008 due in part to the
reallocation of cash investments to bank deposits following temporary
unlimited Federal Deposit Insurance Corporation deposit insurance for
non-interest bearing bank transaction accounts, which recently
expired).\73\
---------------------------------------------------------------------------
\69\ See infra Panels A, B, and C in section III.E for
statistics on the types and percentages of outstanding short-term
debt obligations held by money market funds.
\70\ See Zoltan Pozsar, Institutional Cash Pools and the Triffin
Dilemma of the U.S. Banking System, IMF Working Paper 11/190 (Aug.
2011) (``Pozsar''); Gary Gorton & Andrew Metrick, Securitized
Banking and the Run on Repo, 104 J. Fin. Econ. 425 (2012) (``Gorton
& Metrick''); Jeremy C. Stein, Monetary Policy as Financial
Stability Regulation, 127 Q. J. Econ. 57 (2012); Nicola Gennaioli,
Andrei Shleifer & Robert W. Vishny, A Model of Shadow Banking, J.
Fin. (forthcoming 2013). The Pozsar paper defines institutional cash
pools as ``large, centrally managed, short-term cash balances of
global non-financial corporations and institutional investors such
as asset managers, securities lenders and pension funds.'' Pozsar,
at 4.
\71\ See Pozsar, supra note 70, at 5-6. These institutional cash
pools can come from corporations, bank trust departments, securities
lending operations of brokerage firms, state and local governments,
hedge funds, and other private funds. The rise in institutional cash
pools increased demand for investments that were considered to have
a relatively low risk of loss, including, in addition to money
market funds, Treasury bonds, insured deposit accounts, repurchase
agreements, and asset-backed commercial paper. See Ben S. Bernanke,
Carol Bertaut, Laurie Pounder DeMarco & Steven Kamin, International
Capital Flows and the Returns to Safe Assets in the United States,
2003-2007, Board of Governors of the Federal Reserve System
International Finance Discussion Paper No. 1014 (Feb. 2011); Pozsar,
supra note 70; Gorton & Metrick, supra note 70; Daniel M. Covitz,
Nellie Liang & Gustavo A. Suarez, The Evolution of a Financial
Crisis: Collapse of the Asset-Backed Commercial Paper Market, J.
Fin. (forthcoming 2013) (``Covitz''). The incentive among these cash
pools to search for alternate ``safe'' investments was only
heightened by factors such as limits on deposit insurance coverage
and historical bans on banks paying interest on institutional demand
deposit accounts, which limited the utility of deposit accounts for
large pools of cash. See Pozsar, supra note 70; Gary Gorton & Andrew
Metrick, Regulating the Shadow Banking System, Brookings Papers on
Economic Activity (Fall 2010), at 262-263 (``Gorton Shadow
Banking'').
\72\ See, e.g., Roundtable Transcript, supra note 43 (Travis
Barker, Institutional Money Market Funds Association) (``[money
market funds are] there to provide institutional investors with
greater diversification than they could otherwise achieve''); (Lance
Pan, Capital Advisors Group) (noting diversification benefits of
money market funds and investors' need for a substitute to bank
products to mitigate counterparty risk); (Kathryn L. Hewitt,
Government Finance Officers Association) (``Most of us don't have
the time, the energy, or the resources at our fingertips to analyze
the credit quality of every security ourselves. So we're in essence,
by going into a pooled fund, hiring that expertise for us . . . it
gives us diversification, it gives us immediate cash management
needs where we can move money into and out of it, and it satisfies
much of our operating cash investment opportunities.''); (Brian
Reid, Investment Company Institute) (``there's a very clear stated
demand out there on the part of investors for a non-bank product
that creates a pooled investment in short-term assets . . . banks
can't satisfy this because an undiversified exposure to a single
bank is considered to be far riskier. . . .''); (Carol A. DeNale,
CVS Caremark) (``I think that it would be very small investment [in]
deposits in banks. I don't think there's--you know, the ratings of
some of the banks would make me nervous, also; [sic] they're not
guaranteed. I'm not going to put a $20 million investment in some
banks.'').
\73\ See 2012 Association for Financial Professionals Liquidity
Survey, at 15, available at https://www.afponline.org/liquidity
(subscription required) (``2012 AFP Liquidity Survey''). The size of
this allocation to money market funds is down substantially from
prior years. For example, prior AFP Liquidity Surveys show higher
allocations of organizations' short-term investments to money market
funds: Almost 40% in the 2008 survey, approximately 25% in the 2009
and 2010 surveys, and almost 30% in the 2011 survey. This shift has
largely reflected a re-allocation of cash investments to bank
deposits, which rose from representing 25% of organizations' short-
term investment allocations in the 2008 Association for Financial
Professionals Liquidity Survey, available at https://
www.afponline.org/pub/pdf/2008_Liquidity_Survey.pdf (``2008 AFP
Liquidity Survey''), to 51% of organizations' short-term investment
allocations in the 2012 survey. The 2012 survey notes that some of
this shift has been driven by the temporary unlimited FDIC deposit
insurance coverage for non-interest bearing bank transaction
accounts (which expired at the end of 2012) and the above-market
rate that these bank accounts are able to offer in the low interest
rate environment through earnings credits. See 2012 AFP Liquidity
Survey, this note. As of August 14, 2012, approximately 66% of money
market fund assets were held in money market funds or share classes
intended to be sold to institutional investors according to
iMoneyNet data. All of the AFP Liquidity Surveys are available at
https://www.afponline.org.
---------------------------------------------------------------------------
Money market funds' size and significance in the short-term
markets, together with their features that can create an incentive to
redeem as discussed above, have led to concerns that money market funds
may contribute to systemic risk. Heavy redemptions from money market
funds during periods of financial stress can remove liquidity from the
financial system, potentially disrupting the secondary market. Issuers
may have difficulty obtaining capital in the short-term markets during
these periods because money market funds are focused on meeting
redemption requests through internal liquidity generated either from
maturing securities or cash from subscriptions, and thus may be
purchasing fewer short-term debt obligations.\74\ To the extent that
multiple money market funds experience heavy redemptions, the negative
effects on the short-term markets can be magnified. Money market funds'
experience during the 2007-2008 financial crisis illustrates the impact
of heavy redemptions, as we discuss in more detail below.
---------------------------------------------------------------------------
\74\ See supra text preceding and accompanying n.35. Although
money market funds also can build liquidity internally by retaining
(rather than investing) cash from investors purchasing shares, this
is not likely to be a material source of liquidity for a distressed
money market fund experiencing heavy redemptions.
---------------------------------------------------------------------------
Heavy redemptions in money market funds may disproportionately
affect slow-moving shareholders because, as discussed further below,
redemption data from the 2007-2008 financial crisis show that some
institutional investors are likely to redeem from distressed money
market funds more quickly than other investors and to redeem a greater
percentage of their prime fund holdings.\75\ Slower-to-redeem
shareholders may be harmed because, as discussed above, redemptions at
a money market fund can concentrate existing losses in the fund or
create new losses if the fund must sell assets at a discount. In both
cases, redemptions leave the fund's portfolio more likely to lose
value, to the detriment of slower-to-redeem investors.\76\ Retail
investors--who tend to be slower moving--also could be harmed if market
stress begins at an institutional money market fund and spreads to
other funds, including funds composed solely or primarily of retail
investors.\77\
---------------------------------------------------------------------------
\75\ This likely is because some institutional investors
generally have more capital at stake, sophisticated tools, and
professional staffs to monitor risk. See 2009 Proposing Release,
supra note 31, at nn.46-48 and 178 and accompanying text.
\76\ See, e.g., RSFI Study, supra note 21, at 10 (``Investor
redemptions during the 2008 financial crisis, particularly after
Lehman's failure, were heaviest in institutional share classes of
prime money market funds, which typically hold securities that are
illiquid relative to government funds. It is possible that
sophisticated investors took advantage of the opportunity to redeem
shares to avoid losses, leaving less sophisticated investors (if co-
mingled) to bear the losses.'').
\77\ As discussed further below, retail money market funds
experienced a lower level of redemptions in 2008 than institutional
money market funds, although the full predictive power of this
empirical evidence is tempered by the introduction of the Treasury
Department's temporary guarantee program for money market funds,
which may have prevented heavier shareholder redemptions among
generally slower moving retail investors. See infra n.91.
---------------------------------------------------------------------------
C. The 2007-2008 Financial Crisis
There are many possible explanations for the redemptions from money
market funds during the 2007-2008 financial crisis.\78\ Regardless of
the cause (or causes), money market funds' experience in the 2007-2008
financial crisis demonstrates the harm that can result from such rapid
heavy redemptions in money market funds.\79\ As explained in the RSFI
study, on September 16, 2008, the day after Lehman Brothers Holdings
Inc. announced its bankruptcy, The Reserve Fund announced that as of
that afternoon, its Primary Fund--which held a $785 million (or 1.2% of
the fund's assets) position in Lehman Brothers commercial paper--would
``break the buck'' and price its securities at $0.97 per share.\80\ At
the same time, there was turbulence in the market for financial sector
securities as a result of the bankruptcy of Lehman Brothers and the
near failure of American International Group (``AIG''), whose
commercial paper was held by many prime money market funds. In addition
to Lehman Brothers and AIG, there were other stresses in the market as
well, as discussed in greater detail in the RSFI Study.\81\
---------------------------------------------------------------------------
\78\ See generally RSFI Study, supra note 21, at section 3.
\79\ See generally RSFI Study, supra note 21, at section 3. See
also 2009 Proposing Release supra note 31, at section I.D; infra
section II.D.2 (discussing the financial distress in 2011 caused by
the Eurozone sovereign debt crisis and U.S. debt ceiling impasse and
money market funds' experience during that time).
\80\ See also 2009 Proposing Release, supra note 31, at n.44 and
accompanying text. We note that the Reserve Primary Fund's assets
have been returned to shareholders in several distributions made
over a number of years. We understand that assets returned
constitute approximately 99% of the fund's assets as of the close of
business on September 15, 2008, including the income earned during
the liquidation period. Any final distribution to former Reserve
Primary Fund shareholders will not occur until the litigation
surrounding the fund is complete. See Consolidated Class Action
Complaint, In Re The Reserve Primary Fund Sec. & Derivative Class
Action Litig., No. 08-CV-8060-PGG (S.D.N.Y. Jan. 5, 2010).
\81\ See generally RSFI Study, supra note 21, at section 3.
---------------------------------------------------------------------------
Redemptions in the Primary Fund were followed by redemptions from
other Reserve money market funds.\82\ Prime institutional money market
funds more generally began experiencing heavy redemptions.\83\ During
the week of September 15, 2008, investors withdrew approximately $300
billion
[[Page 36844]]
from prime money market funds or 14% of the assets in those funds.\84\
During that time, fearing further redemptions, money market fund
managers began to retain cash rather than invest in commercial paper,
certificates of deposit, or other short-term instruments.\85\
Commenters have stated that money market funds were not the only
investors in the short-term financing markets that reduced or halted
investment in commercial paper and other riskier short-term debt
securities during the 2008 financial crisis.\86\ Short-term financing
markets froze, impairing access to credit, and those who were still
able to access short-term credit often did so only at overnight
maturities.\87\
---------------------------------------------------------------------------
\82\ See 2009 Proposing Release, supra note 31, at Section I.D.
\83\ See RSFI Study, supra note 21, at section 3.
\84\ See INVESTMENT COMPANY INSTITUTE, REPORT OF THE MONEY
MARKET WORKING GROUP, at 62 (Mar. 17, 2009), available at https://
www.ici.org/pdf/ppr_09_mmwg.pdf (``ICI REPORT'') (analyzing data
from iMoneyNet). The latter figure describes aggregate redemptions
from all prime money market funds. Some money market funds had
redemptions well in excess of 14% of their assets. Based on
iMoneyNet data (and excluding the Reserve Primary Fund), the maximum
weekly redemptions from a money market fund during the 2008
financial crisis was over 64% of the fund's assets.
\85\ See Philip Swagel, ``The Financial Crisis: An Inside
View,'' Brookings Papers on Economic Activity, at 31 (Spring 2009)
(conference draft), available at https://www.brookings.edu/economics/
bpea/~/media/Files/Programs/ES/BPEA/2009--spring--bpea--papers/
2009--spring--bpea--swagel.pdf; Christopher Condon & Bryan Keogh,
Funds' Flight from Commercial Paper Forced Fed Move, BLOOMBERG, Oct.
7, 2008, available at https://www.bloomberg.com/apps/
news?pid=newsarchive&sid=a5hvnKFCC--pQ.
\86\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25.
\87\ See 2009 Proposing Release, supra note 31, at nn.51-53 &
65-68 and accompanying text (citing to minutes of the Federal Open
Market Committee, news articles, Federal Reserve Board data on
commercial paper spreads over Treasury bills, and books and academic
articles on the financial crisis).
---------------------------------------------------------------------------
Figure 1, below, provides context for the redemptions that occurred
during the financial crisis. Specifically, it shows daily total net
assets over time, where the vertical line indicates the date that
Lehman Brothers filed for bankruptcy, September 15, 2008. Investor
redemptions during the 2008 financial crisis, particularly after
Lehman's failure, were heaviest in institutional share classes of prime
money market funds, which typically hold securities that are less
liquid and of lower credit quality than those typically held by
government money market funds. The figure shows that institutional
share classes of government money market funds, which include Treasury
and government funds, experienced heavy inflows.\88\ The aggregate
level of retail investor redemption activity, in contrast, was not
particularly high during September and October 2008, as shown in Figure
1.\89\
---------------------------------------------------------------------------
\88\ As discussed in section III.A.3, government money market
funds historically have faced different redemption pressures in
times of stress and have different risk characteristics than other
money market funds because of their unique portfolio composition,
which typically has lower credit default risk and greater liquidity
than non-government portfolio securities typically held by money
market funds.
\89\ We understand that iMoneyNet differentiates retail and
institutional money market funds based on factors such as minimum
initial investment amount and how the fund provider self-categorizes
the fund.
[GRAPHIC] [TIFF OMITTED] TP19JN13.003
On September 19, 2008, the U.S. Department of the Treasury
(``Treasury'') announced a temporary guarantee program (``Temporary
Guarantee Program''), which would use the $50 billion Exchange
Stabilization Fund to support more than $3 trillion in shares of money
market funds, and the Board of Governors of the Federal Reserve System
authorized the temporary extension of credit to banks to finance their
purchase of high-quality asset-backed commercial paper from money
market funds.\90\ These programs successfully slowed redemptions in
prime money market funds and provided additional liquidity to money
market funds. The disruptions to the short-term markets detailed above
could have continued for a longer period of time but for these
programs.\91\
---------------------------------------------------------------------------
\90\ See 2009 Proposing Release, supra note 31, at nn.55-59 and
accompanying text for a fuller description of the various forms of
governmental assistance provided to money market funds during this
time.
\91\ Treasury used the $50 billion Exchange Stabilization Fund
to fund the Temporary Guarantee Program, but legislation has since
been enacted prohibiting Treasury from using this fund again for
guarantee programs for money market funds. See Emergency Economic
Stabilization Act of 2008 Sec. 131(b), 12 U.S.C. Sec. 5236 (2008).
The $50 billion Exchange Stabilization Fund was never drawn upon by
money market funds under this program and the Temporary Guarantee
Program expired on September 18, 2009. The Federal Reserve Board
also established the Asset-Backed Commercial Paper Money Market
Mutual Fund Liquidity Facility (``AMLF''), through which credit was
extended to U.S. banks and bank holding companies to finance
purchases of high-quality asset-backed commercial paper (``ABCP'')
from money market funds, and it may have mitigated fire sales to
meet redemptions requests. See Burcu Duygan-Bump et al., How
Effective Were the Federal Reserve Emergency Liquidity Facilities?
Evidence from the Asset-Backed Commercial Paper Money Market Mutual
Fund Liquidity Facility, 68 J. Fin. 715 (Apr. 2013) (``Our results
suggest that the AMLF provided an important source of liquidity to
MMMFs and the ABCP market, as it helped to stabilize MMMF asset
flows and to reduce ABCP yields.''). The AMLF expired on February 1,
2010. Given the significant decline in money market investments in
ABCP since 2008, reopening the AMLF would provide little benefit to
money market funds today. For example, ABCP investments accounted
for over 20% of Moody's-rated U.S. prime money market fund assets at
the end of August 2008, but accounted for less than 10% of those
assets by the end of August 2011. See Moody's Investors Service,
Money Market Funds: ABCP Investments Decrease, Dec. 7, 2011, at 2.
Form N-MFP data shows that as of February 28, 2013, prime money
market funds held 6.9% of their assets in ABCP.
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[[Page 36845]]
D. Examination of Money Market Fund Regulation Since the Financial
Crisis
1. The 2010 Amendments
In March 2010, we adopted a number of amendments to rule 2a-7.\92\
These amendments were designed to make money market funds more
resilient by reducing the interest rate, credit, and liquidity risks of
fund asset portfolios. More specifically, the amendments decreased
money market funds' credit risk exposure by further restricting the
amount of lower quality securities that funds can hold.\93\ The
amendments, for the first time, also require that money market funds
maintain liquidity buffers in the form of specified levels of daily and
weekly liquid assets.\94\ These liquidity buffers provide a source of
internal liquidity and are intended to help funds withstand high
redemptions during times of market illiquidity. Finally, the amendments
reduce money market funds' exposure to interest rate risk by decreasing
the maximum weighted average maturities of fund portfolios from 90 to
60 days.\95\
---------------------------------------------------------------------------
\92\ Money Market Fund Reform, Investment Company Act Release
No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (``2010
Adopting Release'').
\93\ Specifically, the amendments placed tighter limits on a
money market fund's ability to acquire ``second tier'' securities by
(1) restricting a money market fund from investing more than 3% of
its assets in second tier securities (rather than the previous limit
of 5%), (2) restricting a money market fund from investing more than
\1/2 \of 1% of its assets in second tier securities issued by any
single issuer (rather than the previous limit of the greater of 1%
or $1 million), and (3) restricting a money market fund from buying
second tier securities that mature in more than 45 days (rather than
the previous limit of 397 days). See rule 2a-7(c)(3)(ii) and
(c)(4)(i)(C). Second tier securities are eligible securities that,
if rated, have received other than the highest short-term term debt
rating from the requisite NRSROs or, if unrated, have been
determined by the fund's board of directors to be of comparable
quality. See rule 2a-7(a)(24) (defining ``second tier security'');
rule 2a-7(a)(12) (defining ``eligible security''); rule 2a-7(a)(23)
(defining ``requisite NRSROs'').
\94\ The requirements are that, for all taxable money market
funds, at least 10% of assets must be in cash, U.S. Treasury
securities, or securities that convert into cash (e.g., mature)
within one day and, for all money market funds, at least 30% of
assets must be in cash, U.S. Treasury securities, certain other
Government securities with remaining maturities of 60 days or less,
or securities that convert into cash within one week. See rule 2a-
7(c)(5)(ii) and (iii).
\95\ The 2010 amendments also introduced a weighted average life
requirement of 120 days, which limits the money market fund's
ability to invest in longer-term floating rate securities. See rule
2a-7(c)(2)(ii) and (iii).
---------------------------------------------------------------------------
In addition to reducing the risk profile of the underlying money
market fund portfolios, the reforms increased the amount of information
that money market funds are required to report to the Commission and
the public. Money market funds are now required to submit to the SEC
monthly information on their portfolio holdings using Form N-MFP.\96\
This information allows the Commission, investors, and third parties to
monitor compliance with rule 2a-7 and to better understand and monitor
the underlying risks of money market fund portfolios. Money market
funds are now required to post portfolio information on their Web sites
each month, providing investors with important information to help them
make better-informed investment decisions and helping them impose
market discipline on fund managers.\97\
---------------------------------------------------------------------------
\96\ See rule 30b1-7.
\97\ See rule 2a-7(c)(12).
---------------------------------------------------------------------------
Finally, money market funds must undergo stress tests under the
direction of the board of directors on a periodic basis.\98\ Under this
stress testing requirement, each fund must periodically test its
ability to maintain a stable NAV per share based upon certain
hypothetical events, including an increase in short-term interest
rates, an increase in shareholder redemptions, a downgrade of or
default on portfolio securities, and widening or narrowing of spreads
between yields on an appropriate benchmark selected by the fund for
overnight interest rates and commercial paper and other types of
securities held by the fund. This reform was intended to provide money
market fund boards and the Commission a better understanding of the
risks to which the fund is exposed and give fund managers a tool to
better manage those risks.\99\
---------------------------------------------------------------------------
\98\ See rule 2a-7(c)(10)(v).
\99\ See 2009 Proposing Release, supra note 31, at section
II.C.3.
---------------------------------------------------------------------------
2. The Eurozone Debt Crisis and U.S. Debt Ceiling Impasse of 2011
One way to evaluate the efficacy of the 2010 reforms is to examine
redemption activity during the summer of 2011. Money market funds
experienced substantial redemptions during this time as the Eurozone
sovereign debt crisis and impasse over the U.S. debt ceiling unfolded.
As a result of concerns about exposure to European financial
institutions, prime money market funds began experiencing substantial
redemptions.\100\ Assets held by prime money market funds declined by
approximately $100 billion (or 6%) during a three-week period beginning
June 14, 2011.\101\ Some prime money market funds had redemptions of
almost 20% of their assets in each of June, July, and August 2011, and
one fund lost 23% of its assets during that period after articles began
to appear in the financial press that warned of indirect exposure of
money market funds to Greece.\102\ Figures 2 and 3 below show the
redemptions from prime money market funds during this time, and also
show that investors purchased shares of government money market funds
in late June and early July in response to these concerns, but then
began redeeming government money market fund shares in late July and
early August, likely as a result of concerns about the U.S. debt
ceiling impasse and possible ratings downgrades of government
securities.\103\
---------------------------------------------------------------------------
\100\ See RSFI Study, supra note 21, at 32.
\101\ Id.
\102\ Id.
\103\ See also id. at 33.
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[[Page 36846]]
[GRAPHIC] [TIFF OMITTED] TP19JN13.004
While it is difficult to isolate the effects of the 2010
amendments, these events highlight the potential increased resilience
of money market funds after the reforms were adopted. Most
significantly, no money market fund had to re-price below its stable
$1.00 share price. As discussed in greater detail in the RSFI Study,
unlike September 2008, money market funds did not experience
significant capital losses that summer, and the funds' shadow prices
did not deviate significantly from the funds' stable share prices; also
unlike in 2008, money market funds in the summer of 2011 had sufficient
liquidity to satisfy investors' redemption requests, which were made
over a longer period than in 2008, suggesting that the 2010 amendments
acted as intended to enhance the resiliency of money market funds.\104\
The redemptions in the summer of 2011 also did not take place against
the backdrop of a broader financial crisis, and therefore may have
reflected more targeted concerns by investors (concern about exposure
to the Eurozone and U.S. government securities as the debt ceiling
impasse unfolded). Money market funds' experience in 2008, in contrast,
may have reflected a broader range of concerns as reflected in the RSFI
Study, which discusses a number of possible explanations for
redemptions during the financial crisis.\105\
---------------------------------------------------------------------------
\104\ Id. at 33-34.
\105\ Id. at 7-13.
---------------------------------------------------------------------------
Although money market funds' experiences differed in 2008 and the
summer of 2011, the heavy redemptions money market funds experienced in
the
[[Page 36847]]
summer of 2011 appear to have negatively affected the markets for
short-term financing. Academics researching these issues have found, as
detailed in the RSFI Study, that ``creditworthy issuers may encounter
financing difficulties because of risk taking by the funds from which
they raise financing''; ``local branches of foreign banks reduced
lending to U.S. entities in 2011''; and that ``European banks that were
more reliant on money funds experienced bigger declines in dollar
lending.'' \106\ Thus, while such redemptions often exemplify rational
risk management by money market fund investors, they can also have
certain contagion effects on the short-term financing markets.
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\106\ See id. at 34-35 (``It is important to note, however,
investor redemptions has a direct effect on short-term funding
liquidity in the U.S. commercial paper market. Chernenko and
Sunderam (2012) report that `creditworthy issuers may encounter
financing difficulties because of risk taking by the funds from
which they raise financing.' Similarly, Correa, Sapriza, and Zlate
(2012) finds U.S. branches of foreign banks reduced lending to U.S.
entities in 2011, while Ivashina, Scharfstein, and Stein (2012)
document European banks that were more reliant on money funds
experienced bigger declines in dollar lending.'') (internal
citations omitted); Sergey Chernenko & Adi Sunderam, Frictions in
Shadow Banking: Evidence from the Lending Behavior of Money Market
Funds, Fisher College of Business Working Paper No. 2012-4 (Sept.
2012); Ricardo Correa et al., Liquidity Shocks, Dollar Funding
Costs, and the Bank Lending Channel During the European Sovereign
Crisis, Federal Reserve Board International Finance Discussion Paper
No. 2012-1059 (Nov. 2012); Victoria Ivashina et al., Dollar Funding
and the Lending Behavior of Global Banks, National Bureau of
Economic Research Working Paper No. 18528 (Nov. 2012).
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3. Our Continuing Consideration of the Need for Additional Reforms
When we proposed and adopted the 2010 amendments, we acknowledged
that money market funds' experience during the 2007-2008 financial
crisis raised questions of whether more fundamental changes to money
market funds might be warranted.\107\ We solicited and received input
from a number of different sources analyzing whether or not additional
reforms may be necessary, and we began to solicit and evaluate
potential options for additional regulation of money market funds to
address these vulnerabilities. In the 2009 Proposing Release we
requested comment on certain options, including whether money market
funds should be required to move to the ``floating net asset value''
used by all other mutual funds or satisfy certain redemptions in-
kind.\108\ We received over 100 comments on this aspect of the 2009
Proposing Release.\109\ In adopting the 2010 amendments, we noted that
we would continue to explore more significant regulatory changes in
light of the comments we received.\110\ At the time, we stated that we
had not had the opportunity to fully explore possible alternatives and
analyze the potential costs, benefits, and consequences of those
alternatives.
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\107\ See 2009 Proposing Release, supra note 31, at section III;
2010 Adopting Release, supra note 92, at section I.
\108\ See 2009 Proposing Release, supra note 31, at section
III.A.
\109\ Comments on the 2009 Proposing Release can be found at
https://www.sec.gov/comments/s7-11-09/s71109.shtml.
\110\ See 2010 Adopting Release, supra note 92, at section I.
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Our subsequent consideration of money market funds has been
informed by the work of the President's Working Group on Financial
Markets, which published a report on money market fund reform options
in 2010 (the ``PWG Report'').\111\ We solicited comment on the features
of money market funds that make them susceptible to heavy redemptions
and potential options for reform both through our request for comment
on the PWG Report and by hosting a May 2011 roundtable on Money Market
Funds and Systemic Risk (the ``2011 Roundtable'').\112\
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\111\ Report of the President's Working Group on Financial
Markets, Money Market Fund Reform Options (Oct. 2010) (``PWG
Report''), available at https://www.treasury.gov/press-center/press-
releases/Documents/10.21%20PWG%20Report%20Final.pdf. The members of
the PWG included the Secretary of the Treasury Department (as
chairman of the PWG), the Chairman of the Board of Governors of the
Federal Reserve System, the Chairman of the SEC, and the Chairman of
the Commodity Futures Trading Commission.
\112\ See President's Working Group Report on Money Market Fund
Reform, Investment Company Act Release No. 29497 (Nov. 3, 2010) [75
FR 68636 (Nov. 8, 2010)]. See also Roundtable Transcript, supra note
43.
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The potential financial stability risks associated with money
market funds also have attracted the attention of the Financial
Stability Oversight Council (``FSOC''), which has been tasked with
monitoring and responding to threats to the U.S. financial system and
which superseded the PWG.\113\ On November 13, 2012, FSOC proposed to
recommend that we implement one or a combination of three reforms
designed to address risks to financial companies and markets that money
market funds may pose.\114\ The first option would require money market
funds to use floating NAVs.\115\ The second option would require money
market funds to have a NAV buffer with a tailored amount of assets of
up to 1% (raised through various means) to absorb day-to-day
fluctuations in the value of the funds' portfolio securities and allow
the funds to maintain a stable NAV.\116\ The NAV buffer would be paired
with a requirement that 3% of a shareholder's highest account value in
excess of $100,000 during the previous 30 days--a ``minimum balance at
risk'' (``MBR'')--be made available for redemption on a delayed basis.
These requirements would not apply to certain money market funds that
invest primarily in U.S. Treasury obligations and repurchase agreements
collateralized with U.S. Treasury securities. The third option would
require money market funds to have a risk-based NAV buffer of 3%. This
3% NAV buffer potentially could be combined with other measures aimed
at enhancing the effectiveness of the buffer and potentially increasing
the resiliency of money market funds, and
[[Page 36848]]
thereby justifying a reduction in the level of the required NAV
buffer.\117\ Finally, in addition to proposing to recommend these three
reform options, FSOC requested comment on other potential reforms,
including standby liquidity fees and temporary restrictions on
redemptions (``gates''), which would be implemented during times of
market stress to reduce money market funds' vulnerability to runs.\118\
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\113\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 (the ``Dodd-Frank Act'') established the FSOC: (A) To
identify risks to the financial stability of the United States that
could arise from the material financial distress or failure, or
ongoing activities, of large, interconnected bank holding companies
or nonbank financial companies, or that could arise outside the
financial services marketplace; (B) to promote market discipline, by
eliminating expectations on the part of shareholders, creditors, and
counterparties of such companies that the Government will shield
them from losses in the event of failure; and (C) to respond to
emerging threats to the stability of the United States financial
system. The ten voting members of the FSOC include the Treasury
Secretary (who serves as Chairman of the FSOC), the Chairmen of the
Commission, the Board of Governors of the Federal Reserve System,
the Commodity Futures Trading Commission, the Federal Deposit
Insurance Corporation, and the National Credit Union Administration
Board, the Directors of the Bureau of Consumer Financial Protection
and the Federal Housing Finance Agency, the Comptroller of the
Currency, and an independent insurance expert appointed by the
President of the United States. See Dodd-Frank Act, Public Law 111-
203, 124 Stat. 1376 Sec. Sec. 111-112 (2010).
\114\ See Proposed Recommendations Regarding Money Market Mutual
Fund Reform, Financial Stability Oversight Council [77 FR 69455
(Nov. 19, 2012)] (the ``FSOC Proposed Recommendations''). Under
section 120 of the Dodd-Frank Act, if the FSOC determines that the
conduct, scope, nature, size, scale, concentration, or
interconnectedness of a financial activity or practice conducted by
bank holding companies or nonbank financial companies could create
or increase the risk of significant liquidity, credit, or other
problems spreading among bank holding companies and nonbank
financial companies, the financial markets of the United States, or
low-income, minority or under-served communities, the FSOC may
provide for more stringent regulation of such financial activity or
practice by issuing recommendations to primary financial regulators,
like the Commission, to apply new or heightened standards or
safeguards. FSOC has proposed to issue a recommendation to the
Commission under this authority concerning money market funds. If
FSOC issues a final recommendation to the Commission, the
Commission, under section 120, would be required to impose the
recommended standards, or similar standards that FSOC deems
acceptable, or explain in writing to FSOC why the Commission has
determined not to follow FSOC's recommendation.
\115\ See FSOC Proposed Recommendations, supra note 114, at
section V.A.
\116\ See id. at section V.B.
\117\ See id. at section V.C.
\118\ See id. at section V.D.
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In its proposed recommendation FSOC stated that the Commission,
``by virtue of its institutional expertise and statutory authority, is
best positioned to implement reforms to address the risk that [money
market funds] present to the economy,'' and that if the Commission
``moves forward with meaningful structural reforms of [money market
funds] before [FSOC] completes its Section 120 process, [FSOC] expects
that it would not issue a final Section 120 recommendation.'' \119\ We
strongly agree that the Commission is best positioned to consider and
implement any further reforms to money market funds, and we have
considered FSOC's analysis of its proposed recommended reform options
and the public comments that FSOC has received in formulating the money
market reforms we are proposing today.
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\119\ See id. at section III.B.
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The RSFI Study, discussed throughout this Release, also has
informed our consideration of the risks that may be posed by money
market funds and our formulation of today's proposals. The RSFI Study
contains, among other things, a detailed analysis of our 2010
amendments to rule 2a-7 and some of the amendments' effects to date,
including changes in some of the characteristics of money market funds,
the likelihood that a fund with the maximum permitted weighted average
maturity (``WAM'') would ``break the buck'' before and after the 2010
reforms, money market funds' experience during the 2011 Eurozone
sovereign debt crisis and the U.S. debt-ceiling impasse, and how money
market funds would have performed during September 2008 had the 2010
reforms been in place at that time.\120\
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\120\ See generally RSFI Study, supra note 21, at section 4.
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In particular, the RSFI Study found that under certain assumptions
the expected probability of a money market fund breaking the buck was
lower with the additional liquidity required by the 2010 reforms.\121\
In addition, funds in 2011 had sufficient liquidity to withstand
investors' redemptions during the summer of 2011.\122\ The fact that no
fund experienced a credit event during that time also contributed to
the evidence that funds' were able to withstand relatively heavy
redemptions while maintaining a stable $1.00 share price. Finally,
using actual portfolio holdings from September 2008, the RSFI Study
analyzed how funds would have performed during the financial crisis had
the 2010 reforms been in place at that time. While funds holding 30%
weekly liquid assets are more resilient to portfolio losses, funds will
``break the buck'' with near certainty if capital losses of the fund's
non-weekly liquid assets exceed 1%.\123\ The RSFI Study concludes that
the 2010 reforms would have been unlikely to prevent a fund from
breaking the buck when faced with large credit losses like the ones
experienced in 2008.\124\ The inferences that can be drawn from the
RSFI Study lead us to conclude that while the 2010 reforms were an
important step in making money market funds better able to withstand
heavy redemptions when there are no portfolio losses (as was the case
in the summer of 2011), they are not sufficient to address the
incentive to redeem when credit losses are expected to cause fund's
portfolios to lose value or when the short-term financing markets more
generally are expected to, or do, come under stress. Accordingly, we
preliminarily believe that the alternative reforms proposed in this
Release could lessen money market funds' susceptibility to heavy
redemptions, improve their ability to manage and mitigate potential
contagion from high levels of redemptions, and increase the
transparency of their risks, while preserving, as much as possible, the
benefits of money market funds.
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\121\ Id. at 30.
\122\ Id. at 34.
\123\ Id. at 38, Table 5. In fact, even at capital losses of
only 0.75% of the fund's non-weekly liquid assets and no investor
redemptions, funds are already more likely than not (64.6%) to
``break the buck.'' Id.
\124\ To further illustrate the point, the RSFI Study noted that
the Reserve Primary Fund ``would have broken the buck even in the
presence of the 2010 liquidity requirements.'' Id. at 37.
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III. Discussion
We are proposing alternative amendments to rule 2a-7, and related
rules and forms, that would either (i) require money market funds
(other than government and retail money market funds) \125\ to
``float'' their NAV per share or (ii) require that a money market fund
(other than a government fund) whose weekly liquid assets fall below
15% of its total assets be required to impose a liquidity fee of 2% on
all redemptions (unless the fund's board determines that the liquidity
fee is not in the best interest of the fund). Under the second
alternative, once the money market fund crosses this threshold, the
fund's board also would have the ability to temporarily suspend
redemptions (or ``gate'') the fund for a limited period of time if the
board determines that doing so is in the fund's best interest.\126\ We
discuss each of these alternative proposals in this section, along with
potential tax, accounting, operational, and economic implications. We
also discuss a potential combination of our floating NAV proposal and
liquidity fees and gates proposal, as well as the potential benefits,
drawbacks, and operational issues associated with such a potential
combination. We also discuss various alternative approaches that we
have considered for money market fund reform.
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\125\ Our proposed exemptions for government and retail money
market funds (including our proposed definition for a retail money
market fund) are discussed in sections III.A.3 and III.A.4,
respectively. The exemptive amendments we are proposing are within
the Commission's broad authority under section 6(c) of the Act.
Section 6(c) authorizes the Commission to exempt by rule,
conditionally or unconditionally, any person, security, or
transaction (or classes of persons, securities, or transactions)
from any provision of the Act ``if and to the extent that such
exemption is necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions'' of the Act. 15 U.S.C. 80a-
6(c). For the reasons discussed throughout this Release, the
Commission preliminarily believes that the proposed amendments to
rules 2a-7, 12d3-1, 18f-3, and 22e-3 meet these standards.
\126\ In the text of the proposed rules and forms below we refer
to our floating NAV alternative as ``Alternative 1,'' and our
liquidity fees and gates alternative as ``Alternative 2.''
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In addition, we are proposing a number of other amendments that
would apply under either alternative proposal to enhance the disclosure
of money market fund operations and risks. Certain of our proposed
disclosure requirements would vary depending on the alternative
proposal adopted (if any) as they specifically relate to the floating
NAV proposal or the liquidity fees and gates proposal. In addition, we
are proposing additional disclosure reforms to improve the transparency
of risks present in money market funds, including daily Web site
disclosure of funds' daily and weekly liquid assets and market-based
NAV per share and historic instances of sponsor support. We also are
proposing to establish a new current event disclosure form that would
require funds to make prompt public disclosure of certain events,
including portfolio security defaults, sponsor support, a fall in the
funds' weekly liquid assets below 15% of total
[[Page 36849]]
assets, and a fall in the market-based price of the fund below $0.9975.
We are proposing to amend Form N-MFP to provide additional
information relevant to assessing the risk of funds and make this
information public immediately upon filing. In addition, we are
proposing to require that a large liquidity fund adviser that manages a
private liquidity fund provide security-level reporting on Form PF that
are substantially the same as those currently required to be reported
by money market funds on Form N-MFP.\127\
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\127\ See infra section III.I.
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Our proposed amendments also would tighten the diversification
requirements of rule 2a-7 by requiring consolidation of certain
affiliates for purposes of the 5% issuer diversification requirement,
requiring funds to presumptively treat the sponsors of asset-backed
securities (``ABSs'') as guarantors subject to rule 2a-7's
diversification requirements, and removing the so-called ``twenty-five
percent basket.'' \128\ Finally, we are proposing to amend the stress
testing provision of rule 2a-7 to enhance how funds stress test their
portfolios and require that money market funds stress test against the
fund's level of weekly liquid assets falling below 15% of total assets.
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\128\ The ``twenty-five percent basket'' currently allows money
market funds to only comply with the 10% guarantee concentration
limit with respect to 75% of the fund's total assets. See infra
section III.J.
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We note finally that we are not rescinding our outstanding 2011
proposal to remove references to credit ratings from two rules and four
forms under the Investment Company Act, including rule 2a-7 and Form N-
MFP, under section 939A of the Dodd-Frank Act, and on which we welcome
additional comments.\129\ The Commission intends to address this matter
at another time and, therefore, this Release is based on rule 2a-7 and
Form N-MFP as amended and adopted in 2010.\130\
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\129\ See References to Credit Ratings in Certain Investment
Company Act Rules and Forms, Investment Company Act Release No.
29592 (Mar. 3, 2011) [76 FR 12896 (Mar. 9, 2011)] (proposing to also
eliminate references to credit ratings from rule 5b-3 and Forms N-
1A, N-2, and N-3, and establish new rule 6a-5 to replace a reference
to credit ratings in section 6(a)(5) that the Dodd-Frank Act
eliminated).
\130\ See 2010 Adopting Release, supra note 92. We note that
after enactment of the Dodd-Frank Act, our staff issued a no-action
letter assuring money market funds and their managers that, in light
of section 939A of the Dodd-Frank Act, the staff would not recommend
enforcement action to the Commission under section 2(a)(41) of the
Act and rules 2a-4 and 22c-1 thereunder if a money market fund board
did not designate NRSROs and did not make related disclosures in its
SAI before the Commission had completed its review of rule 2a-7
required by the Dodd-Frank Act and made any modifications to the
rule. See SEC Staff No-Action Letter to the Investment Company
Institute (Aug. 19, 2010). This staff guidance remains in effect
until such time as the Commission or its staff indicate otherwise.
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A. Floating Net Asset Value
Our first alternative proposal--a floating NAV--is designed
primarily to address the incentive of money market fund shareholders to
redeem shares in times of fund and market stress based on the fund's
valuation and pricing methods, as discussed in section II.B.1 above. It
should also improve the transparency of pricing associated with money
market funds. Under this alternative, money market funds (other than
government and retail money market funds \131\) would be required to
``float'' their net asset value. This proposal would amend \132\ rule
2a-7 to rescind certain exemptions that have permitted money market
funds to maintain a stable price by use of amortized cost valuation and
penny-rounding pricing of their portfolios.\133\ As a result, the money
market funds subject to this reform would sell and redeem shares at
prices that reflect the value using market-based factors of their
portfolio securities and would not penny round their prices.\134\ In
other words, the daily share prices of these money market funds would
``float,'' which means that each fund's NAV would fluctuate along with
changes, if any, in the value using market-based factors of the fund's
underlying portfolio of securities.\135\ Money market funds would only
be able to use amortized cost valuation to the extent other mutual
funds are able to do so--where the fund's board of directors
determines, in good faith, that the fair value of debt securities with
remaining maturities of 60 days or less is their amortized cost, unless
the particular circumstances warrant otherwise.\136\
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\131\ The definitions of government and retail money market
funds, as considered exempt under our proposals from certain
proposed reforms, are discussed in sections III.A.3 and III.A.4.
These funds would also price their portfolio securities using
market-based factors, but would continue to be able to maintain a
stable price per share through the use of the penny rounding method
of pricing.
\132\ References to rule 2a-7 as amended under our floating NAV
proposal will be ``proposed (FNAV) rule''; similarly, references to
rule 2a-7 as amended under our liquidity fees and gates proposal
discussed in section III.B will be ``proposed (Fees & Gates) rule.''
\133\ We also propose to amend rule 18f-3(c)(2)(i) to replace
the phrase ``that determines net asset value using the amortized
cost method permitted by Sec. 270.2a-7'' with ``that operates in
compliance with Sec. 270.2a-7'' because money market funds would
not use the amortized cost method to a greater extent than mutual
funds generally under either of our core reform proposals.
\134\ We have not previously proposed, but have sought comment
on requiring money market funds to use a floating NAV. See 2009
Proposing Release, supra note 31, at section II.A. The floating NAV
alternative on which we seek comment today is informed by the
comments we received in response to the 2009 comment request, as
well as relevant comments submitted in response to: (i) the PWG
Report and (ii) the FSOC Proposed Recommendations.
\135\ See infra note 27 for a discussion of how money market
funds generally value their portfolio securities using market-based
factors based on estimates from models rather than trading inputs.
\136\ See 1977 Valuation Release, supra note 10. In this regard,
the Commission has stated that the ``fair value of securities with
remaining maturities of 60 days or less may not always be accurately
reflected through the use of amortized cost valuation, due to an
impairment of the creditworthiness of an issuer, or other factors.
In such situations, it would appear to be incumbent on the directors
of a fund to recognize such factors and take them into account in
determining `fair value.' '' Id. Accordingly, this guidance
effectively limits the use of amortized cost valuation to
circumstances where it is the same as valuation based on market
factors. Some commenters voiced concern about allowing an exemption
for money market funds with remaining maturities of 60 days or less.
See, e.g., Federal Reserve Bank Presidents FSOC Comment Letter,
supra note 38. However, we believe that these commenters
misunderstood Commission guidance in this area, which limits the use
of amortized cost valuation for these securities to circumstances
under which the amortized cost value accurately reflects the fair
value, as determined using market factors. See 1977 Valuation
Release, supra note 10.
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Under this approach, the ``risk limiting'' provisions of rule 2a-7
would continue to apply to money market funds.\137\ Accordingly, mutual
funds that hold themselves out as money market funds would continue to
be limited to investing in short-term, high-quality, dollar-denominated
instruments. We would, however, rescind rule 2a-7's provisions that
relate to the maintenance of a stable value for these funds, including
shadow pricing, and would adopt the other reforms discussed in this
Release that are not related to the discretionary standby liquidity
fees and gates alternative, as discussed in section III.B below.
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\137\ See proposed (FNAV) rule 2a-7(d) (risk-limiting
conditions).
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We also propose to require that all money market funds, other than
government and retail money market funds, price their shares using a
more precise method of rounding.\138\ The proposal would require that
each money market fund round prices and transact in its shares at the
fourth decimal place in the case of a fund with a $1.00 target share
price (i.e., $1.0000) or an equivalent level of precision if a fund
prices its shares at a different target level (e.g., a fund with a $10
target share price would price its shares at $10.000). Depending on the
degree of fluctuation, this precision would increase the
[[Page 36850]]
observed sensitivity of a fund's share price to changes in the market
values of the fund's portfolio securities, and should better inform
shareholders of the floating nature of the fund's value. Finally, we
propose a relatively long compliance date of 2 years to provide time
for money market funds converting to a floating NAV on a permanent
basis to make system modifications and time for funds to respond to
redemption requests. The extended compliance date would also allow
shareholders time to understand the implications of any reforms,
determine if a floating NAV money market fund is an appropriate
investment, and if not, redeem their shares in an orderly fashion.
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\138\ See proposed (FNAV) rule 2a-7(c) (share price). We discuss
our proposed amendment to share pricing in infra section III.A.2.
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The financial crisis of 2007-2008 had significant impacts on
investors, money market funds, and the short-term financing markets.
The floating NAV alternative is designed to respond, at least in part,
to the contagion effects from heavy redemptions from money market funds
that were revealed during that crisis. As discussed in greater detail
below, although it is not possible to state with certainty what would
have happened if money market funds had operated with a floating NAV at
that time, we expect that if a floating NAV had been in place, it could
have mitigated some of the heavy redemptions that occurred due to the
stable share price. Many factors, however, contributed to these heavy
redemptions, and we recognize that a floating NAV requirement is a
targeted reform that may not ameliorate all of those factors.
Under a floating NAV, investors would not have had the incentive to
redeem money market fund shares to benefit from receiving the stable
share price of a fund that may have experienced losses, because they
would have received the actual market-based value of their shares. The
transparency provided by the floating NAV alternative might also have
reduced redemptions during the crisis that were a result of investor
uncertainty about the value of the securities owned by money market
funds because investors would have seen fluctuations in money market
fund share prices that reflect market-based factors.
Of course, a floating NAV would not have prevented redemptions from
money market funds that were driven by certain other investing
decisions, such as a desire to own higher quality assets than those
that were in the portfolios of prime money market funds, or not to be
invested in securities at all, but rather to hold assets in another
form such as in insured bank deposits. The floating NAV alternative is
not intended to deter redemptions that constitute rational risk
management by shareholders or that reflect a general incentive to avoid
loss. Instead, it is designed to increase transparency, and thus
investor awareness, of money market fund risks and dis-incentivize
redemption activity that can result from informed investors attempting
to exploit the possibility of redeeming shares at their stable share
price even if the portfolio has suffered a loss.
1. Certain Considerations Relating to the Floating NAV Proposal
a. A Reduction in the Incentive To Redeem Shares
As discussed above, when a fund's shadow price is less than the
fund's $1.00 share price, money market fund shareholders have an
incentive to redeem shares ahead of other investors in times of fund
and market stress. Given the size of institutional investors' holdings
and their resources for monitoring funds, institutions have both the
motivation and ability to act on this incentive. Indeed, as discussed
above and in the RSFI Study, institutional investors redeemed shares
more heavily than retail investors from prime money market funds in
both September 2008 and June 2011.
Some market observers have suggested that the valuation and pricing
techniques permitted by rule 2a-7 may exacerbate the incentive to
redeem in money market funds if investors expect that the value of the
fund's shares will fall below $1.00.\139\ Our floating NAV proposal is
designed to lower this risk by reducing investors' incentive to redeem
shares in times of fund and market stress. Under our floating NAV
proposal, money market funds would transact at share prices that
reflect current market-based factors (not amortized cost or penny
rounding) and thus investor incentives to redeem early to take
advantage of transacting at a stable value are ameliorated.\140\
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\139\ See, e.g., Roundtable Transcript, supra note 43. (Bill
Stouten, Thrivent Financial) (``I think the primary factor that
makes money funds vulnerable to runs is the marketing of the stable
value.''); (Gary Gensler, U.S. Commodity Futures Trading Commission
(``CFTC'')) (``But one thing comes along with the money market
funds, which is the stable value, or if I can say as an old market
guy, it's a `free put.' You can put back an instrument and get 100
cents on the dollar. And it's that free put that I think causes some
structural challenges.''); Comment Letter of Federal Reserve Bank of
Richmond (Jan. 10, 2011) (available in File No. 4-619) (``Richmond
Fed PWG Comment Letter''). See also supra section II.B (discussing
the structural features of money market funds that can make them
vulnerable to runs); Statement 309 of the Shadow Financial
Regulatory Committee, Systemic Risk and Money Market Mutual Funds
(Feb. 14, 2011) (available in File No. 4-619), (``[I]f fund
valuations were marked to market immediately using the full NAV
approach--as required for other types of mutual funds--this type of
run [the September 2008 run on money market funds] would not have
occurred, and there would not have been a strong economic incentive
for money market mutual funds to liquidate positions.''); Gorton
Shadow Banking, supra note 71, at 269-270 (explaining that money
market funds' ability to transact at a stable $1.00 per share
distinguishes them from other mutual funds, allows them to compete
with bank demand deposits, and ``may have instilled a false sense of
security in investors who took the implicit promise as equivalent to
the explicit insurance offered by deposit accounts'').
\140\ As discussed supra in Section II, we recognize that
incentives other than those created by money market fund's stable
share price exist for money market fund shareholders to redeem in
times of stress, including avoidance of loss and the tendency of
investors to engage in flights to quality, liquidity, and
transparency.
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b. Improved Transparency
Our floating NAV proposal also is designed to increase the
transparency of money market fund risk. Money market funds are
investment products that have the potential for the portfolio to
deviate from a stable value. Although many investors understand that
money market funds are not guaranteed, survey data shows that some
investors are unsure about the amount of risk in money market funds and
the likelihood of government assistance if losses occur.\141\
Similarly, many institutional investors use money market funds for
liquidity purposes and are extremely loss averse; that is, they are
unwilling to suffer any losses on money market fund investments.\142\
Money market funds' stable share price, combined with the practice of
fund management companies providing financial support to money market
funds when necessary, may have
[[Page 36851]]
implicitly encouraged investors to view these funds as ``risk-free''
cash.\143\ However, the stability of money market fund share prices has
been due, in part, to the willingness of fund sponsors to support the
stable value of the fund. As discussed in section II.B.3 above, sponsor
support has not always been transparent to investors, potentially
causing investors to underestimate the investment risk posed by money
market funds. As a result, money market fund investors, who were not
accustomed to seeing their funds lose value, may have increased their
redemptions of shares when values fell in recent times.\144\
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\141\ See Fidelity April 2012 PWG Comment Letter, supra note 61.
For example, 41% of the retail customers surveyed said they either
would expect the government to protect money market funds' stable
values in times of crisis (10%) or were unsure about whether the
government would do so (31%). 47% of the retail customers thought
money market funds present comparable risks to ``bank products,''
which in context appears to refer to insured deposits, 12% thought
money market funds posed less risk than bank products, while 36% of
the retail customers thought money market funds posed more risk than
bank products.
\142\ See, e.g., Roundtable Transcript, supra note 43 (Lance
Pan, Capital Advisors Group) (``I would like to add that money fund
investors do view money funds as liquidity vehicles, not as
investment vehicles. What I mean by that is they will take zero
loss, and they're loss averse as opposed to risk averse. So to the
extent that they own that risk [i.e., investors, rather than fund
sponsors, may be exposed to a loss], at a certain point they started
to own that risk, then the run would start to develop.''); Comment
Letter of Treasury Strategies, Inc. (Jan. 10, 2011) (available in
File No. 4-619) (``The added risk [in The Reserve Primary Fund
resulting from its taking on more risk] produced higher yields, and
as a result attracted substantial `hot money' from highly
sophisticated, institutional investors. These investors were fully
knowledgeable of the risks they were taking, and assumed they would
be the first to be able to sell their investments if the Reserve
Fund's bet on a government bailout of Lehman Brothers failed.'').
\143\ See also, e.g., Better Markets FSOC Comment Letter, supra
note 67, at 11-12 (``a fluctuating NAV would correct the basic
misconception among many investors that their investment is
guaranteed'').
\144\ See, e.g., PWG Report, supra note 111, at 10 (``Investors
have come to view MMF shares as extremely safe, in part because of
the funds' stable NAVs and sponsors' record of supporting funds that
might otherwise lose value. MMFs' history of maintaining stable
value has attracted highly risk-averse investors who are prone to
withdraw assets rapidly when losses appear possible.''); Comment
Letter of Capital Advisers (Apr. 2, 2012) (available in File No. 4-
619) (stating that institutional money market fund investors
``derive their risk-free assumptions from the fact that very few (a
total of two) funds have experienced losses and in all other `near
miss' instances fund sponsors have provided voluntary capital or
liquidity support to cover potential losses'' and that the
``Treasury Department further reinforced these assumptions when it
announced the Temporary Guarantee Program for Money Market Funds on
September 29, 2008'') (emphasis in original).
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Our floating NAV proposal is designed to increase the transparency
of risks present in money market funds. By making gains and losses a
more regular and observable occurrence in money market funds, a
floating NAV could alter investor expectations by making clear that
money market funds are not risk free and that the funds' share price
will fluctuate based on the value of the funds' assets.\145\ Investors
in money market funds with floating NAVs should become more accustomed
to, and tolerant of, fluctuations in money market funds' NAVs and thus
may be less likely to redeem shares in times of stress. The proposal
would also treat money market fund shareholders more equitably than the
current system by requiring redeeming shareholders to receive the fair
value of their shares.\146\
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\145\ For a more detailed discussion of a floating NAV and
investors' expectations, see PWG Report, supra note 111, at 19-22;
2009 Proposing Release, supra note 31, at section III.A.
\146\ See, e.g., Comment Letter of Deutsche Investment
Management Americas Inc. (Jan. 10, 2011) (available in File No. 4-
619) (``Deutsche PWG Comment Letter'') (noting that a ``variable NAV
fund . . . will treat all investors fairly during times of stress'';
that ``large and sudden redemptions runs [are] a phenomenon
exacerbated by the fact that amortized cost accounting rules can
embed realized losses in the fund that are not reflected in the
NAV''; and that ``[t]o avoid having to absorb these embedded losses,
investors have the incentive to redeem early''); Comment Letter of
TDAM USA Inc. (Sept. 8, 2009) (available in File No. S7-11-09)
(agreeing that ``requiring money market funds to issue and redeem
their shares at market value, or to float their NAVs, would in
certain respects advance shareholder fairness'').
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To further enhance transparency, we also are proposing to require a
number of new disclosures related to fund sponsor support (see section
III.F below). As discussed further in section III.E below, investors
unwilling to bear the risk of a floating NAV would likely move to other
products, such as government or retail money market funds (which we
propose would be exempt from our floating NAV proposal and permitted to
maintain a stable price).
We seek comment on this aspect of our proposal.
Do commenters agree that floating a money market fund's
NAV would lessen the incentive to redeem shares in times of fund and
market stress that can result from use of amortized cost valuation and
penny rounding pricing by money market funds today?
What would be the effect of the other incentives to redeem
that would remain under a floating NAV with basis point pricing
requirement?
Would floating a money market fund's NAV provide
sufficient transparency to cause investors to estimate more accurately
the investment risks of money market funds? Do commenters believe that
daily disclosure of shadow prices on fund Web sites would accomplish
the same goal without eliminating the stable share price at which fund
investors purchase and redeem shares? Why or why not? Is daily
disclosure of a fund's shadow price without transacting at that price
likely to lead to higher or lower risks of large redemptions in times
of stress? If the enhanced disclosure requirements proposed elsewhere
in this Release were in place, what would be the incremental benefit of
the enhanced transparency of a floating NAV?
Are there other places to disclose the shadow price that
would make the disclosure more effective in enhancing transparency?
If the fluctuations in money market funds' NAVs remained
relatively small even with a $1.0000 share price, would investors
become accustomed only to experiencing small gains and losses, and
therefore be inclined to redeem heavily if a fund experienced a loss in
excess of investors' expectations?
Would investors in a floating NAV money market fund that
appears likely to suffer a loss be less inclined to redeem because the
loss would be shared pro rata by all shareholders? Would a floating NAV
make investors in a fund more likely to redeem at the first sign of
potential stress because any loss would be immediately reflected in the
floating NAV?
Would floating NAV money market funds treat non-redeeming
shareholders, and particularly slower-to-redeem shareholders, more
equitably in times of stress?
To the extent that some investors choose not to invest in
money market funds due to the prospect of even a modest loss through a
floating NAV, would the funds' resiliency to heightened redemptions be
improved?
Would money market fund sponsors voluntarily make cash
contributions or use other available means to support their money
market funds and thereby prevent their NAVs from actually floating?
\147\ Would larger fund sponsors or those sponsors with more access to
capital have a competitive advantage over other fund sponsors?
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\147\ In section III.A.5.a we discuss the economic implications
of sponsor support under our floating NAV proposal. We are not
proposing any changes that would prohibit fund sponsors from
supporting money market funds under our floating NAV proposal. Our
proposal also includes new disclosure requirements related to
sponsor support. See infra section III.F.
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c. Redemptions During Periods of Illiquidity
We recognize that a floating NAV may not eliminate investors'
incentives to redeem fund shares, particularly when financial markets
are under stress and investors are engaging in flights to quality,
liquidity, or transparency.\148\ As discussed above, the RSFI Study
noted that the incentive for investors to redeem ahead of other
investors is heightened by liquidity concerns-when liquidity levels are
insufficient to meet redemption requests, funds may be forced to sell
portfolio securities into illiquid secondary markets at
[[Page 36852]]
discounted or even fire-sale prices.\149\ Because the potential cost of
liquidity transformation is not reflected in market-based pricing until
after the redemption has occurred, this liquidity pressure may create
an additional incentive for investors to redeem shares in times of fund
and market stress.\150\ In addition, market-based pricing does not
capture the likely increasing illiquidity of a fund's portfolio as it
sells its more liquid assets first during a period of market stress to
defer liquidity pressures as long as possible. As discussed in section
II.D.1 above, our 2010 amendments, including new daily and weekly
liquid asset requirements, strengthened the resiliency of money market
funds to both portfolio losses and investor redemptions as compared
with 2008. We note, however, that other financial intermediaries that
engage in maturity transformation, including banks, also have liquidity
mismatches to some degree.
---------------------------------------------------------------------------
\148\ See, e.g., PWG Report, supra note 111, at 20 (``To be
sure, a floating NAV itself would not eliminate entirely MMFs'
susceptibility to runs. Rational investors still would have an
incentive to redeem as fast as possible the shares of any MMF that
is at risk of depleting its liquidity buffer before that buffer is
exhausted, because subsequent redemptions may force the fund to
dispose of less-liquid assets and incur losses.''); 2009 Proposing
Release, supra note 31, at 106 (``We recognize that a floating net
asset value would not necessarily eliminate the incentive to redeem
shares during a liquidity crisis--shareholders still would have an
incentive to redeem before the portfolio quality deteriorated
further from the fund selling securities into an illiquid market to
meet redemption demands.''). See also supra notes 36-37 and
accompanying text.
\149\ See RSFI Study, supra note 21, at 4 (noting that most
money market fund portfolio securities are held to maturity, and
secondary markets in these securities are not deeply liquid).
\150\ Although we recognize that managers of certain other
mutual funds, and not just money market funds, generally sell the
most liquid portfolio securities first to satisfy redemptions that
exceed available cash, non-money market mutual funds generally are
not as susceptible to heightened redemptions as are money market
funds for a variety of reasons, including that non-money market
mutual funds generally are not used for cash management.
---------------------------------------------------------------------------
We request comment on the incentive to redeem that exists in a
liquidity crisis.
Do commenters believe that a floating NAV is sufficient to
address the incentive to redeem caused by liquidity concerns in times
of market stress? Would other tools, such as redemption gates or
liquidity fees, also be necessary?
Do commenters believe that money market funds as currently
structured present unique risks as compared with other mutual funds,
all of which may face some degree of liquidity pressure during times of
market stress? Would the floating NAV proposal suffice to address those
risks?
Did the 2010 amendments, including new daily and weekly
liquid asset requirements, address sufficiently the incentive to redeem
in periods of illiquidity?
d. Empirical Evidence in Other Floating NAV Cash Management Vehicles
Commenters have cited to the fact that some floating value money
market funds in other jurisdictions and U.S. ultra-short bond mutual
funds also suffered heavy redemptions during the 2007-2008 financial
crisis.\151\ These commenters suggest, therefore, that money market
fund floating NAVs would likely not stop investors from redeeming
shares. One qualification in considering these experiences is that many
of the European floating NAV products that experienced heavy
shareholder redemptions were priced and managed differently than our
proposal and that U.S. ultra-short bond mutual funds are not subject to
rule 2a-7's risk-limiting conditions.\152\
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\151\ See, e.g., Statement of the Investment Company Institute,
SEC Open Meeting of the Investor Advisory Committee, May 10, 2010,
at 4, available at www.ici.org/pdf/24289.pdf (stating that
``[u]ltra-short bond funds lost more than 60% of their assets from
mid-2007 to the end of 2008, and French floating NAV dynamic money
funds lost about 40% of their assets in a three-month time span from
July 2007 to September 2007'' and that ``[s]hareholders in fixed-
income funds [including those with floating NAVs] also tend to be
more risk adverse and more likely to redeem shares quickly when
fixed-income markets show any signs of distress''); Comment Letter
of the European Fund and Asset Management Association (Jan. 10,
2011) (available in File No. 4-619) (``EFAMA PWG Comment Letter'')
(noting that ``[i]n a matter of weeks, EUR 70 billion were redeemed
from these [enhanced money market] funds, predominantly by
institutional investors; around 15-20 suspended redemptions for a
short period, and 4 of them were [definitively] closed.'').
\152\ Many European floating NAV money market funds, not all of
which suffered heavy redemptions, price their shares differently
than floating NAV money market funds would under our proposal by
accumulating rather than distributing dividends. The shares of
accumulating dividend funds therefore generally will exceed one
euro, and a loss in these funds would be a small reduction in the
excess value above one euro as opposed to a drop in value below a
single euro. This kind of floating NAV money market fund may not
have affected shareholders' expectations of and tolerance for losses
to the same extent as would our proposal. See, e.g., Deutsche PWG
Comment Letter, supra note 146 (stating that ``drawing parallels to
the return or redemption experiences within [European money market
funds and ultra-short bond funds] and those in the proposed variable
NAV rule 2a-7 money market funds is not entirely accurate due to the
differences in the duration of time and the magnitude of the
redemption experiences'' and noting that (i) ``the variable NAV
structure prevalent in many European money market funds is based on
a system of accumulating dividends, not the use of a mark to market
accounting system'' and (ii) ``one of the weaknesses addressed
through the European Fund and Asset Management Association
(``EFAMA'') and the Committee of European Securities Regulators
(``CESR'') in the European style of money market funds was the lack
of standardization in the definition of money market funds and the
broad investment policies across EU member states''). See also
Witmer, supra note 36.
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Europe, for example, has several different types of money market
funds, all of which can take on more risk than U.S. money market funds
as they are not currently subject to regulatory restrictions on their
credit quality, liquidity, maturity, and diversification as stringent
as those imposed under rule 2a-7, among other differences in
regulation.\153\ One commenter observed that the financial crisis was
first felt in Europe when ``so-called `enhanced money market funds,'
which used the `money market' fund label in their marketing strategies
while taking on more risk than traditional money market funds, [ran]
into problems.'' \154\ The difficulties experienced by these funds, the
commenter asserted, ``created confusion for investors about the
definition, classification and risk characteristics of money market
funds.'' \155\ In contrast, French mon[eacute]taire funds, which are
managed more conservatively than ``enhanced money market funds'' and
thus resemble more closely the floating NAV money market funds
contemplated by our proposal, generally did not experience heavy
redemptions.\156\ The experience of French mon[eacute]taire funds would
be consistent with another commenter's observation that ``one could
reach the opposite conclusion that a variable NAV structure can, and in
fact has, operated as intended during times of market stress in a
manner consistent with minimizing systemic risk.'' \157\
---------------------------------------------------------------------------
\153\ For a discussion of the regulation of European money
market funds, see infra Table 2, notes E and H; Common Definition of
European Money Market Funds (Ref. CESR/10-049).
\154\ See EFAMA PWG Comment Letter, supra note 151 (emphasis in
original).
\155\ Id. (noting that ``[i]n a matter of weeks, EUR 70 billion
were redeemed from these [enhanced money market] funds,
predominantly by institutional investors; around 15-20 suspended
redemptions for a short period, and 4 of them were [definitively]
closed'').
\156\ See Comment Letter of HSBC Global Asset Management on the
European Commission's Green Paper on Shadow Banking (May 28, 2012)
(``HSBC EC Letter''), available at https://ec.europa.eu/internal--
market/consultations/2012/shadow/individual-others/hsbc--en.pdf
(comparing inflows and outflows of European money market funds);
EFAMA PWG Comment Letter, supra note 151 (describing the outflows
from European enhanced money market funds).
\157\ Deutsche PWG Comment Letter, supra note 146 (emphasis in
original).
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U.S ultra-short bond funds also experienced redemptions in this
period. U.S. ultra-short bond funds are not subject to rule 2a-7's
risk-limiting conditions and although their NAVs float, pose more risk
of loss to investors than most U.S. money market funds, including
floating NAV money market funds under our proposal.\158\ One reason
that investors redeemed shares in ultra-short bond funds during the
2007-2008 financial crisis may have been because they did not fully
understand the riskiness or liquidity of ultra-short
[[Page 36853]]
bond funds. That some ultra-short bond funds experienced heavy
redemptions during the financial crisis, therefore, does not
necessarily suggest that investors in the floating NAV money market
funds contemplated by our proposal also would experience redemptions in
a financial crisis. Empirical analysis in this area also yields
different opinions.\159\
---------------------------------------------------------------------------
\158\ See, e.g., Witmer, supra note 36, at 23 (noting that
ultra-short bond funds in the U.S. and enhanced money market funds
in Europe both maintain a floating NAV structure, but are not
subject to the same liquidity, credit, and maturity restrictions as
money market funds).
\159\ See, e.g., Witmer, supra note 36 (empirically testing
whether floating NAVs (as compared with constant NAVs) provide a
benefit in reducing run-like behavior by examining flow and
withdrawal behavior (from 2006 through 2011) of money market mutual
funds in the United States and Europe and concluding that the
variable NAV fund structure is less susceptible to run-like behavior
relative to constant NAV money market funds). But see Comment Letter
of Jeffrey Gordon (Feb. 28, 2013) (available in File No. FSOC-2012-
0003) (``Gordon FSOC Comment Letter'').
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Having pointed out these differences, we recognize that the data is
consistent with certain commenters' view that other incentives may lead
to heavy redemptions of floating NAV funds in times of stress.\160\ We
seek comment on the performance of other floating NAV investment
products during the 2007-2008 financial crisis.
---------------------------------------------------------------------------
\160\ See, e.g., Comment Letter of Treasury Strategies, Inc.
(Alternative One: Floating Net Asset Value) (Jan. 15, 2013)
(available in File No. FSOC-2012-0003).
---------------------------------------------------------------------------
Do commenters agree with the preceding discussion of what
may have caused investors to heavily redeem shares in some floating
value money market funds in other jurisdictions and in U.S. ultra-short
bond funds during the 2007-2008 financial crisis? Are there other
possible factors that we should consider?
Do commenters agree with the distinctions we identified
between money market funds under our proposed floating NAV and money
market funds in other jurisdictions and U.S. ultra-short bond funds?
Are there similarities or differences we have not identified?
Do commenters believe that the risk limiting requirements
of rule 2a-7 would deter heavy redemptions in money market funds with a
floating NAV because of the restrictions on the underlying assets?
Do commenters believe that money market funds attract very
risk averse investors? If so, are these investors more or less likely
to rapidly redeem in times of stress to avoid even small losses?
2. Money Market Fund Pricing
We are proposing that money market funds, other than government and
retail money market funds, price their shares using a more precise
method of valuation that would require funds to price and transact in
their shares at an NAV that is calculated to the fourth decimal place
for shares with a target NAV of one dollar (e.g., $1.0000). Funds with
a current share price other than $1.00 would be required to price their
shares at an equivalent level of precision (e.g., a fund with a $10
target share price would price its shares at $10.000).\161\ The
proposed change to money market fund pricing under our floating NAV
proposal would change the rounding convention for money market funds--
from penny rounding (i.e., to the nearest one percent) to ``basis
point'' rounding (to the nearest 1/100th of one percent).\162\ ``Basis
point'' rounding is a significantly more precise standard than the 1/
10th of one percent currently required for most mutual funds.\163\ For
the reasons discussed below, we believe that our proposal provides the
level of precision necessary to convey the risks of money market funds
to investors.
---------------------------------------------------------------------------
\161\ See proposed (FNAV) rule 2a-7(c). In its proposed
recommendations the FSOC proposed that money market funds re-price
their shares to $100.00, which is the mathematical equivalent of our
$1.0000 proposed share price. See FSOC Proposed Recommendations,
supra note 114, at 31. FSOC commenters generally opposed the $100.00
per share re-pricing, stating that the Investment Company Act does
not require that a registered investment company offer its shares at
a particular price. See, e.g., Comment Letter of Federated
Investors, Inc. (Re: Alternative One) (Jan. 25. 2013) (available in
File No. FSOC-2012-0003) (``Federated Investors Alternative 1 FSOC
Comment Letter''); ICI Jan. 24 FSOC Comment Letter, supra note 25.
While our proposed pricing is mathematically the same as that
proposed by the FSOC, pricing fund shares using $1.00 extended to
four decimal places reduces other potential costs, including, for
example, the possibility that funds would require corporate actions
(e.g., reverse stock splits) to re-price their shares at $100.00.
Our proposed pricing does not mandate that funds establish a
particular share price, but rather amends the precision by which a
fund prices its shares.
\162\ Money market funds are permitted to use penny rounding
under rule 2a-7(c) and therefore, a money market fund priced at
$1.00 per share may round its NAV to the nearest penny.
\163\ Currently, money market funds priced at $1.00 may round
their NAV to the nearest penny ($1.00). See rule 2a-7(c). Mutual
funds other than money market funds must calculate the fund's NAV to
the nearest 1/10th of 1% (i.e., for funds with shares priced at
$1.00, the funds should price their shares to the third decimal
place, or $1.000). See 1977 Valuation Release, supra note 10. Many
mutual funds typically price their shares at an initial NAV of $10
and round their NAV to the nearest penny. See rule 2a-4. Because
floating NAV money market funds, under our proposal, would continue
to adhere to rule 2a-7s's risk-limiting conditions and generally
seek principal stability, we are proposing that money market funds
with a floating NAV value their shares to the nearest 1/100th of 1%,
a more precise standard than that required of most mutual funds
today.
---------------------------------------------------------------------------
Market-based valuation with penny rather than ``basis point''
rounding effectively provides the same rounding convention as exists in
money market funds today--the underlying valuation based on market-
based factors may deviate by as much as 50 basis points before the fund
breaks the buck. Accordingly, it is unlikely to change investor
behavior.
A $1.0000 share price, however, would reflect small fluctuations in
value more than a $1.00 price, which may more effectively inform
investor expectations. For example, the value of a $1.00 per share
fund's portfolio securities would have to change by 50 basis points for
investors to currently see a one-penny change in the NAV; under our
proposal, the share price at which investors purchase and redeem shares
would reflect single basis point variations.\164\ We do not anticipate
significant operational difficulties or overly burdensome costs arising
from funds pricing shares using ``basis point'' rounding: A number of
money market funds recently elected to voluntarily report daily shadow
NAVs at this level of precision.\165\
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\164\ We expect that floating $100.00 NAVs (which is the
mathematical equivalent of our proposed $1.0000 NAV) would change by
a penny or more during all but the shortest investment horizons.
Commission staff compared reported shadow prices on Form N-MFP
between November 2010 and March 2012 over consecutive one-, three-,
and six-month periods. Staff estimated that there would have been no
penny change over a one-month period in 98% of the months using a
$10.00 NAV but only 69% of the months using a $100 NAV. Staff
estimated that there would have been no penny change over a three-
month period in 98% of the time using a $10 NAV but only 59% of the
time using a $100.00 NAV. Staff estimates that there would have been
no penny change over a six-month period in 96% of the time using a
$10 NAV but only 43% of the time using a $100.00 NAV. No money
market fund had a support agreement in place during this time
period.
\165\ Many large fund complexes have begun (or plan) to disclose
daily money market fund market valuations (i.e., shadow prices) of
at least some of their money market funds, rounded to four decimal
places (``basis point'' rounding), for example, BlackRock, Fidelity
Investments, and J.P. Morgan. See, e.g., Money Funds' New Openness
Unlikely to Stop Regulation, Wall St. J. (Jan. 30, 2013).
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``Basis point'' rounding should enhance many of the potential
advantages of having a floating NAV. It should allow funds to reflect
gains and losses more precisely. In addition, it should help reduce
incentives for investors to redeem shares ahead of other investors when
the shadow price is less than $1.0000 as investors would sell shares at
a more precise and equitable price than under the current rules. At the
same time, it should help reduce penalties for investors buying shares
when shadow prices are less than $1.0000. ``Basis point'' rounding
should therefore help stabilize funds in times of market stress by
deterring redemptions from investors that would otherwise seek to take
advantage of less precise pricing to redeem at a higher value than a
more precise valuation would provide
[[Page 36854]]
and thus dilute the value of the fund for remaining shareholders.
Our proposed amendment to require that money market funds use
``basis point'' rounding should provide shareholders with sufficient
price transparency to better understand the tradeoffs between risk and
return across competing funds, and become more accustomed to
fluctuations in market value of a fund's portfolio securities.\166\ It
should allow them to appreciate that some money market funds may
experience greater price volatility than others, and thus that there
are variations in the risk profiles of different money market funds.
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\166\ Similar to other mutual funds, our proposed pricing of
money market fund shares would continue to allow shareholders to
purchase and redeem fractional shares, and therefore would not
affect the ability of shareholders to purchase and redeem shares
with round or precise dollar amounts as they do today.
---------------------------------------------------------------------------
We also considered whether to require that money market funds price
to three decimal places (for a fund with a target share price of
$1.000), as other mutual funds do. We are concerned, however, that such
``10 basis point'' rounding may not be sufficient to ensure that
investors do not underestimate the investment risks of money market
funds, particularly if funds manage themselves in such a way that their
NAVs remain constant or nearly constant. Fund investment managers may
respond to a floating NAV with ``10 basis point'' rounding by managing
their portfolios more conservatively to avoid volatility that would
require them to price fund shares at something other than $1.000. It is
possible that managers would be able to avoid this volatility for quite
some time, even with a floating NAV.\167\ Although a floating NAV with
``basis point'' rounding may discourage risk taking in funds, a
floating NAV with ``10 basis point'' rounding may mask small deviations
in the market-based value of the fund's portfolio securities.
---------------------------------------------------------------------------
\167\ See, e.g., PWG Report, supra note 111, at 22 (``Investors'
perceptions that MMFs are virtually riskless may change slowly and
unpredictably if NAV fluctuations remain small and rare. MMFs with
floating NAVs, at least temporarily, might even be more prone to
runs if investors who continue to see shares as essentially risk-
free react to small or temporary changes in the value of their
shares.''); Comment Letter of Federated Investors, Inc. (May 19,
2011) (available in File No. 4-619) (stating that ``managers would
employ all manners of techniques to minimize the fluctuations in
their funds' NAVs'' and, therefore, ``[i]nvestors would then expect
the funds to exhibit very low volatility, and would redeem their
shares if the volatility exceeded their expectations'').
---------------------------------------------------------------------------
We seek comment on this aspect of our proposal.
What level of precision in calculating a fund's share
price would best convey to investors that floating NAV funds are
different from stable price funds? Is ``basis point'' rounding too
precise? Would ``10 basis point rounding'' ($1.000 for a fund with a
$1.00 target share price) provide sufficient price transparency? Or
another measure?
Would requiring funds to price their shares at $1.0000 per
share effectively alter investor expectations regarding a fund's NAV
gains and losses? Would this in turn make investors less likely to
redeem heavily when faced with potential or actual losses?
Would ``basis point'' rounding better reflect gains and
losses? Would it help eliminate incentives for investors to redeem
shares ahead of other investors when prices are less than $1.0000?
Should we require that all money market funds price their
shares at $1.0000, including those funds that currently price their
shares at an initial value other than $1.00? Do commenters agree that,
regardless of a fund's initial share price, under our proposal all
money market funds would be required to price fund shares to an
equivalent level of precision (e.g., ``basis point'' rounding)?
What would be the cost of implementing ``basis point''
rounding? Would funds require corporate actions or shareholder approval
to price fund shares at $1.0000? What operational changes and related
costs would be involved?
3. Exemption to the Floating NAV Requirement for Government Money
Market Funds
We are proposing an exemption to the floating NAV requirement for
government money market funds-money market funds that maintain at least
80% of their total assets in cash, government securities, or repurchase
agreements that are collateralized fully.\168\ We believe that a
government money market fund that maintains 80% of its total assets in
cash and government securities fits within the typical risk profile of
government money market funds as understood by investors, and is the
portfolio holdings test used today for determining the accuracy of a
fund's name.\169\ Under the proposal, government money market funds
would not be subject to the basis point rounding aspect of the floating
NAV requirement and instead would be permitted to use the penny
rounding method of pricing fund shares to maintain a stable price.\170\
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\168\ Proposed (FNAV) rule 2a-7(c)(2).
\169\ For example, some government money market funds limit
themselves to holding mostly Treasury securities and Treasury repos
and are referred to as ``Treasury money market funds.'' To comply
with the investment company names rule, funds that hold themselves
out as Treasury money market funds must hold at least 80% of their
portfolio assets in U.S. Treasury securities and for Treasury repos.
See rule 35d-1 (a materially deceptive and misleading name of a fund
(for purposes of section 35(d) of the Investment Company Act
(Unlawful representations and names)) includes a name suggesting
that the fund focuses its investments in a particular type of
investment or in investments in a particular industry or group of
industries, unless, among other requirements, the fund has adopted a
policy to invest, under normal circumstances, at least 80% of the
value of its assets in the particular type of investments or
industry suggested by the fund's name).
\170\ As discussed in greater detail below, money market funds
that take advantage of an exemption to the floating NAV requirement
would not be able to use the amortized cost method of valuation, but
would instead be required to only use the penny rounding method of
pricing to facilitate a stable price per share.
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As discussed above, government money market funds face different
redemption pressures and have different risk characteristics than other
money market funds because of their unique portfolio composition.\171\
The securities primarily held by government money market funds
typically have even a lower credit default risk than commercial paper
and are highly liquid in even the most stressful market scenario.\172\
The primary risk that these funds bear is interest rate risk; that is,
the risk that changes in interest rates result in a change in the
market value of portfolio securities. Even the interest rate risk of
government money market funds, however, is generally mitigated because
they typically hold assets that have short maturities and hold those
assets to maturity.\173\
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\171\ See, e.g., Comment Letter of Charles Schwab (Jan. 17,
2013) (available in File No. FSOC-2012-0003) (``Schwab FSOC Comment
Letter''); FSOC Proposed Recommendations, supra note 114, at 9.
\172\ See, e.g., RSFI Study, supra note 21, at 8-9; Comment
Letter of Vanguard (Jan. 15, 2013) (available in File No. FSOC-2012-
0003) (``Vanguard FSOC Comment Letter'').
\173\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25
(``Given the short duration of [government] money market fund
portfolios, any interest rate movements have a modest and temporary
effect on the value of the fund's securities'').
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Nonetheless, it is possible that a government money market fund
could undergo such stress that it results in a significant decline in a
fund's shadow price. Government money market funds may invest up to 20%
of their portfolio in non-government securities, and a credit event in
that 20% portion of the portfolio or a shift in interest rates could
trigger a drop in the shadow price, thereby creating incentives for
shareholders to redeem shares ahead of other investors.
[[Page 36855]]
Despite these risks, we believe that requiring government money
market funds to float their NAV may be unnecessary to achieve policy
goals.\174\ As discussed below, shifting to a floating NAV could impose
potentially significant costs on both a fund and its investors. In
light of the evidence of investor behavior during previous crises, it
does not appear that government money market funds are as susceptible
to the risks of mass investor redemptions as other money market
funds.\175\ Investors have frequently noted the benefits of having a
stable money market fund option, and exempting government money market
funds from a floating NAV would allow us to preserve this option at a
minimal risk.\176\ On balance, we believe the benefits of retaining a
stable share price money market fund option and the relative safety in
a government money market fund's 80% bucket appropriately
counterbalances the risks associated with the 20% portion of a
government money market fund's portfolio that may be invested in
securities other than cash, government securities, or repurchase
agreements.
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\174\ Many commenters have agreed with this position, suggesting
that a floating NAV proposal should exempt government money market
funds. See, e.g., Comment Letter of The Dreyfus Corporation (Feb.
11, 2013) (available in File No. FSOC-2012-0003) (``Dreyfus FSOC
Comment Letter''); Comment Letter of Northern Trust (Feb. 14, 2013)
(available in File No. FSOC-2012-0003) (``Northern Trust FSOC
Comment Letter''); ICI Jan. 24 FSOC Comment Letter, supra note 25.
\175\ See RSFI Study, supra note 21, at 12-13 (examining the
change in daily assets of different types of money market funds and
highlighting abnormally large inflows into institutional and retail
government funds during September 2008).
\176\ See, e.g., Comment Letter of Allegheny Conference on
Community Development (Jan. 4, 2013) (available in File No. FSOC-
2012-0003) (``Many nonprofit institutions are required, by law or by
investment policy, to invest cash only in products offering a stable
value''); Comment Letter of New Jersey Association of Counties (Dec.
21, 2012) (available in File No. FSOC-2012-0003) (``We thus strongly
support maintaining the ability of money market funds to offer a
stable $1.00 per-share value'').
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Under the proposal, funds taking advantage of the government fund
exemption (as well as funds using the retail exemption discussed in the
next section) would no longer be permitted to use the amortized cost
method of valuation to facilitate a stable NAV, but would continue to
be able to use the penny rounding method of pricing. While today
virtually all money market funds use both amortized cost valuation and
penny rounding pricing together to maintain a stable value, either
method alone effectively provides the same 50 basis points of deviation
from a fund's shadow price before the fund must ``break the buck'' and
re-price its shares. Accordingly, today the principal benefit from
money market funds being able to use amortized cost valuation in
addition to basis point rounding is that it alleviates the burden of
the money market fund having to value each portfolio security each day
using market factors.\177\ However, as described in section III.F.3
below, we are proposing that all money market funds be required to
disclose on a daily basis their share price with portfolios valued
using market factors and applying basis point rounding. As a result,
money market funds--including those exempt from the floating NAV
requirement--would have to value their portfolio assets using market
factors instead of amortized cost each day. Accordingly, in line with
this increased transparency on the valuation of money market funds'
portfolios, and in light of the fact that this increased transparency
renders penny rounding alone an equal method of achieving price
stability in money market funds, we are proposing that the government
exemption permit penny rounding pricing alone and not also amortized
cost valuation for all portfolio securities.
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\177\ Rule 2a-7 currently requires a money market fund's board
of directors to review the amount of deviation between the fund's
market-based NAV per share and the fund's amortized cost per share
``periodically.'' Rule 2a-7(c)(8)(ii)(A)(2).
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The government money market fund exemption to the floating NAV
requirement would not be limited solely to Treasury money market funds,
but also would extend to money market funds that invest at least 80% of
their portfolio in cash, ``government securities'' as defined in
section 2(a)(16) of the Act, and repurchase agreements collateralized
with government securities. Allowable securities would include
securities issued by government-sponsored entities such as the Federal
Home Loan Banks, government repurchase agreements, and those issued by
other ``instrumentalities'' of the U.S. government.\178\ It would
exclude, however, securities issued by state and municipal governments,
which do not generally share the same credit and liquidity traits as
U.S. government securities.\179\
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\178\ Section 2(a)(16) of the Investment Company Act.
\179\ See, e.g., RSFI Study, supra note 21; Schwab FSOC Comment
Letter, supra note 171 (``There may be slightly higher risk in
municipal money market funds, but these funds tend to be more liquid
than most prime funds.'').
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Today, government money market funds hold approximately $910
billion in assets, or around 40% of all money market fund assets.\180\
Fund groups that wish to focus on offering stable price products could
offer government and retail money market funds. We also note that our
proposed retail money market fund exemption discussed in the next
section would likely cover most municipal (or tax-exempt) funds,
because the tax advantages that these funds offer are only enjoyed by
individuals and thus most of these funds could continue to offer a
stable share price.\181\ Similarly, investors who prefer a stable price
fund or are unable to invest in a floating NAV fund could choose to
invest in government money market funds. These investors could continue
to use these money market funds as a cash management tool without
incurring any costs or other effects associated with floating NAV
investment vehicles.
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\180\ Based on iMoneyNet data.
\181\ We note that there are some tax-exempt money market funds
that self-classify as institutional funds to private reporting
services such as iMoneyNet. We understand that these funds'
shareholder base typically is comprised of omnibus accounts, with
underlying individual investors.
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We request comment on this aspect of our proposal.
Do commenters agree with our assumption that money market
funds with at least 80% of their total assets in cash, government
securities, and government repos are unlikely to suffer losses due to
credit quality problems correct? Is our assumption that they are
unlikely to be subject to significant shareholder redemptions during a
financial crisis correct?
Should government money market funds be exempt from the
floating NAV requirement? Why or why not? Are there other risks, such
as interest rate or liquidity risks, about which we should be concerned
if we adopt this proposed exemption to the floating NAV requirement? If
so, what are they and how should they be addressed?
Would the costs imposed on government money market funds
if we required them to price at a floating NAV be different from the
costs discussed below?
Are the proposed criteria for qualifying for the
government money market funds exemption to the floating NAV requirement
appropriate? Should government money market funds be required to hold
more or fewer than 80% of total assets in cash, government securities,
and government repos? If so, what should it be and why?
What kinds of risks are created by exempting government
money market funds from a floating NAV requirement where the funds are
permitted to maintain 20% of their portfolio in securities other than
cash, government securities, and government repos? Should there be
additional limits or
[[Page 36856]]
requirements on the 20%? Would investors have incentives to redeem
shares ahead of other investors if they see a material downgrade in
securities held in the 20% basket? Would such an incentive create a
significant risk of runs?
Is penny rounding sufficient to allow government money
market funds to maintain a stable price? Should we also permit these
funds to use amortized cost valuation? If so, why? Should we permit
money market funds to continue using amortized cost valuation for
certain types of securities, such as government securities? Why?
If the Commission does not adopt this exemption, how many
investors in government money market funds might reallocate assets to
non-government money market fund alternatives? How many assets in
government money market funds might be reallocated to alternatives? To
what non-government money market fund alternatives are these investors
likely to reallocate their investments?
Should we provide other exemptions to the floating NAV
requirement based on the characteristics of a fund's portfolio assets,
such as funds that hold heightened daily or weekly liquid assets? If
so, why and what threshold should we use?
Should money market funds that invest primarily in
municipal securities be exempted from the floating NAV requirement? Why
or why not? To what extent would such funds expect to qualify for the
retail exemption?
4. Exemption to the Floating NAV Requirement for Retail Money Market
Funds
a. Overview
We are also proposing to exempt money market funds that are limited
to retail investors from our floating NAV proposal by allowing them to
use the penny rounding method of pricing instead of basis point
rounding.\182\ Under this proposal, retail funds would still generally
be required to value portfolio securities using market-based factors
rather than amortized cost. As discussed in detail below, retail
investors historically have behaved differently from institutional
investors in a crisis, being much less likely to make large redemptions
quickly in response to the first sign of market stress. Thus, prime
money market funds that are limited to retail investors in general have
not been subject to the same pressures as institutional or mixed
funds.\183\ Under the proposed exemption, we would define a retail fund
as a money market fund that does not permit a shareholder to redeem
more than $1 million in a single business day. We would permit retail
funds to continue to maintain a stable price. As of February 28, 2013,
funds that self-report as retail money market funds currently hold
nearly $695 billion in assets, which is approximately 26% of all assets
held in money market funds.\184\
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\182\ Much like under the government fund proposal, funds that
take advantage of the retail exemption would not be able to use the
amortized cost method of valuation to facilitate a stable NAV for
the same reasons as discussed in section III.A.3 above.
\183\ See, e.g., Comment Letter of United Services Automobile
Association (Feb. 15. 2013) (available in File No. FSOC-2012-0003)
(``USAA FSOC Comment Letter'') (``Retail MMFs do not need additional
or more stringent regulation to prevent runs because retail
investors are inherently (and historically) less likely to cause
runs.'').
\184\ Based on iMoneyNet data. Of these assets, approximately
$497 billion are held by prime money market funds and another $198
billion are in government funds. Because we are proposing to exempt
government funds from the floating NAV requirement, the proposed
retail exemption would only be relevant to the investors holding the
$497 billion in retail prime funds.
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As noted above in section II, during the 2007-2008 financial
crisis, institutional prime money market funds had substantially
greater redemptions than retail prime money market funds.\185\ For
example, approximately 4-5% of prime retail money market funds had
outflows of greater than 5% on each of September 17, 18, and 19, 2008,
compared to 22-30% of prime institutional money market funds.\186\
Similarly, in late June 2011, institutional prime money market funds
experienced heightened redemptions in response to concerns about their
potential exposure to the Eurozone debt crisis, whereas retail prime
money market funds generally did not experience a similar
increase.\187\ Studies of money market fund redemption patterns in
times of market stress also have noted this difference.\188\ As
discussed above, institutional shareholders tend to respond more
quickly than retail shareholders to potential market stresses because
generally they have greater capital at risk and may be better informed
about the fund through sophisticated tools to monitor and analyze the
portfolio holdings of the funds in which they invest.
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\185\ See RSFI Study, supra note 21, at 8. We note that the RSFI
Study used a definition of retail fund based on fund self-
classification, which does not entirely correspond with the
definition of retail fund that we are proposing today.
\186\ Based on iMoneyNet data. iMoneyNet classifies retail and
institutional money market funds according to who is eligible to
purchase fund shares, minimum initial investment amount in the fund,
and to whom the fund is marketed. However, as discussed infra, there
is currently no regulatory distinction that reliably distinguishes
these types of investors, and the iMoneyNet method uses a different
method of classification than the method we are proposing.
\187\ Based on iMoneyNet data. Retail money market funds
suffered net redemptions of less than 1% between June 14, 2011 and
July 5, 2011, and only 27 retail money market funds had redemptions
in excess of 5% during that period (and of these funds only 7 had
redemptions in excess of 10% during this period), far fewer
redemptions than those incurred by institutional funds.
\188\ See, e.g., RSFI Study, supra note 21, at 8; Cross Section,
supra note 60, at 9 (noting that institutional prime money market
funds suffered net redemptions of $410 billion (or 30% of assets
under management) in the four weeks beginning September 10, 2008,
based on iMoneyNet data, while retail prime money market funds
suffered net redemptions of $40 billion (or 5% of assets under
management) during this same time period); Kacperczyk & Schnabl,
supra note 60, at 31; Wermers Study, supra note 64.
---------------------------------------------------------------------------
Given the tendency of retail investors to continue to hold money
market fund shares in times of market stress, it appears to be
unnecessary to impose a floating NAV requirement on retail funds to
address the risk that a fund would be unable to manage heavy
redemptions in times of crisis.\189\ We understand that funds designed
for retail investors generally do not have a concentrated shareholder
base and are therefore less likely to experience large and unexpected
redemptions that would put a strain on the fund's liquidity.\190\ Some
commenters have therefore suggested providing an exemption for retail
funds to preserve the current benefits of money market funds for these
investors, and as a consequence, reduce the macroeconomic effects that
may be associated with a floating NAV requirement.\191\ A retail
exemption may also reduce the operational burdens of implementing a
floating NAV, because retail funds and their intermediaries may not
need to undertake the operational costs of transitioning
[[Page 36857]]
systems or managing potential tax and accounting issues associated with
a floating NAV. However, other commenters have opposed a retail
exemption, citing the difficulty of distinguishing retail and
institutional investors, operational issues, and other concerns.\192\
---------------------------------------------------------------------------
\189\ See Comment Letter of Reich & Tang (Feb. 14, 2013)
(available in File No. FSOC-2012-0003) (``Reich & Tang FSOC Comment
Letter'') (``As a general rule, retail investors' use of money
market funds tends to be stable and countercyclical. . . . This is
in direct contrast to the general behavior of institutional
investors.'').
\190\ See Comment Letter of John M. Winters (Dec. 18, 2012)
(available in File No. FSOC-2012-0003) (``Winters FSOC Comment
Letter'') (``Retail MMFs and institutional government MMFs do not
have a liquidity problem due to the nature of the investor type or
portfolio securities. . . .'').
\191\ See, e.g., USAA FSOC Comment Letter, supra note 183
(``Bifurcation would allow retail MMFs to continue to play the same
vital role they do today, provide retail investors with professional
investment management services, portfolio diversification and
liquidity, while also acting as a key provider of financing in the
broader capital markets''); Reich & Tang FSOC Comment Letter, supra
note 189 (``A departure of this nature would diminish and endanger
the benefits [of MMFs] to retail investors and cause these same
individuals to seek potentially less appropriate or riskier
alternatives.''). See also infra section III.E.
\192\ See, e.g., Comment Letter of Invesco Ltd. (Feb. 15, 2013)
(available in File No. FSOC-2012-0003) (``Invesco FSOC Comment
Letter'') (``While we acknowledge that the disruptions experienced
by MMFs during the 2008 financial crisis were largely attributable
to prime MMF redemptions by large investors, we believe that efforts
to characterize MMFs or their investors as either ``institutional''
or ``retail'' are misplaced and impractical due to the difficulty of
establishing a litmus test that can be used consistently to identify
those investors most likely to trigger a MMF run.''); Comment Letter
of Federated Investors, Inc. (Feb. 15. 2013) (available in File No.
FSOC-2012-0003) (``Federated Investors Feb. 15 FSOC Comment
Letter'').
---------------------------------------------------------------------------
In 2009, similar considerations led us to propose lower
requirements for the amount of daily and weekly liquid assets that
retail money market funds would need to hold compared with
institutional funds.\193\ We noted that retail prime money market funds
experienced significantly fewer outflows when compared with
institutional prime money market funds in the fall of 2008.\194\
Although we have not adopted that proposal, in part because we
recognize significant difficulties in distinguishing retail from
institutional funds for purposes of that reform, we continue to
consider whether retail and institutional money market funds should be
subject to different requirements.
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\193\ In 2009, we proposed to define a retail money market fund
as a money market fund that was not an institutional fund, and to
define an institutional fund as a money market fund whose board of
directors, considering a number of factors, determines that is
``intended to be offered to institutional investors.'' See 2009
Proposing Release, supra note 31, at section II.C.2.
\194\ Id. at n.185 and accompanying text.
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It is important to note that some commenters on our 2009 money
market fund reforms proposal suggested that not all retail and
institutional shareholders behave the same way as their peers.\195\
Also, although retail shareholders during recent financial crises have
not redeemed from money market funds in large numbers in response to
market stress, this does not necessarily mean that in the future they
will not eventually exhibit increased redemption activity if stress on
one or more money market funds persists.\196\ Empirical analyses of
retail money market fund redemptions during the 2007-2008 financial
crisis show that at least some retail investors eventually began
redeeming shares.\197\ The introduction of the Treasury Temporary
Guarantee Program on September 19, 2008 (a few days after institutional
prime money market funds experienced heavy redemptions) may have
prevented shareholder redemptions from accelerating in retail money
market funds. Commenters on the FSOC Proposed Recommendations also have
questioned whether the behavior of retail investors during the 2008
crisis should be regarded as definitive.\198\
---------------------------------------------------------------------------
\195\ See, e.g., Comment Letter of Invesco Aim Advisors, Inc.
(Sept. 4, 2009) (available in File No. S7-11-09) (``Invesco 2009
Comment Letter''); Comment Letter of Federated Investors, Inc.
(Sept. 8, 2009) (available in File No. S7-11-09).
\196\ See, e.g., Comment Letter of HSBC Global Asset Management
Ltd (Feb. 15, 2013) (available in File No. FSOC-2012-0003) (``HSBC
FSOC Comment Letter'') (``Whilst the credit crisis of 2008 is an
important data point to compare investor behavior, there are other
data points in history that show that retail investors do ``run''
from investments (banks, other types of mutual fund) during times of
market crisis.'').
\197\ See, e.g., Cross Section, supra note 60, at 25-26 (finding
that net redemptions from retail prime money market funds in
September 2008 indicates that higher risk money market funds did
have greater net outflows but only late in the run and that outflows
from retail money market funds peaked later than those from
institutional funds); Wermers Study, supra note 64, at 3 (analysis
of money market fund redemption data from the 2007-2008 financial
crisis showed that ``prime institutional funds exhibited much larger
persistence in outflows than retail funds, although retail investors
also exhibited some run-like behavior.'').
\198\ See, e.g., Federated Investors Feb 15 FSOC Comment Letter,
supra note 192 (``The oft-repeated point that some funds labeled
``institutional'' experienced higher redemptions than some funds
labeled ``retail'' during the financial crisis is not sufficient.
Many so-called institutional funds experienced the same or even
lower levels of redemptions as so-called [retail money market] funds
during the period of high redemptions during the financial crisis,
and many funds included both retail and institutional investors.'').
---------------------------------------------------------------------------
The evidence, however, suggests that retail investors tend to
redeem shares slowly in times of fund and market stress or do not
redeem shares at all. As indicated in the RSFI study, such lower
redemptions may be more readily managed without adverse effects on the
fund, in part because of the Commission's enhanced liquidity
requirements adopted in 2010.\199\ However, we recognize that by
providing a retail exemption to the floating NAV, we would be leaving
in place for those investors the existing incentive to redeem that can
result from the use of a stable price, and some retail investors could
potentially benefit from redeeming shares ahead of other retail
investors in times of fund and market stress.\200\
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\199\ See supra section II.D.2 for a discussion of how these
enhanced liquidity requirements were more effective in providing
stability in the face of the slower pace of redemptions in
institutional prime money market funds in June and July of 2011 in
response to the Eurozone debt crisis compared with the very rapid
heavy redemptions that occurred in September 2008. But see RSFI
study, supra at note 21, at 37 (noting that The Reserve Primary Fund
would have broken the buck even in the presence of the 2010
liquidity requirements).
\200\ See Dreyfus FSOC Comment Letter, supra note 174 (``Thus
while it can be expected that different kinds of prime money market
funds may experience different levels of redemption activity, it may
not be the case that different kinds of prime money market funds
have different credit risk profiles.'').
---------------------------------------------------------------------------
The retail exemption would take the same form as the government
exemption in allowing these money market funds to price using penny
rounding instead of basis point rounding. For the reasons described in
section III.A.3 above, we do not believe that allowing continued use of
amortized cost valuation for all securities in these funds' portfolios
is appropriate given that these funds will be required to value their
securities using market factors on a daily basis due to new Web site
disclosure requirements described in section III.F.3 and given that
penny rounding otherwise achieves the same level of price stability.
We request comment on whether we should provide a retail money
market fund exemption to the floating NAV.
Are we correct in our understanding that retail investors
are less likely to redeem money market fund shares in times of market
stress than institutional investors? Or are they just slower to
participate in heavy redemptions?
Does the evidence showing that retail investors behave
differently than institutional investors justify a retail exemption? Is
this difference in behavior likely to continue in the future?
Would a retail exemption reduce the operational effects of
implementing the floating NAV requirement, such as systems changes and
tax and accounting issues? If so, to what extent and how?
If the Commission does not adopt an exemption to the
floating NAV requirement for retail funds, how many investors in retail
prime money market funds might reallocate assets to non-prime money
market fund alternatives? How many assets in retail prime money market
funds might be reallocated to alternatives? To what non-prime money
market alternatives are retail investors likely to reallocate their
investments? \201\
---------------------------------------------------------------------------
\201\ See infra section III.E.
---------------------------------------------------------------------------
Are we correct that retail investors would prefer an
exemption from the floating NAV requirement? Would they instead prefer
to invest in floating NAV funds? If so, why?
Is penny rounding sufficient to allow retail money market
funds to maintain a stable price? Should we also permit these funds to
use amortized cost valuation? If so, why?
Should we consider requiring retail funds that rely on an
exemption from
[[Page 36858]]
the floating NAV requirement to be subject to the liquidity fees and
gates requirement described in section III.B?
b. Operation of the Retail Fund Exemption
The operational challenges of implementing an exemption for retail
investor funds are numerous and complex. Currently, many money market
funds are owned by both retail and institutional investors, although
many are separated into retail and institutional share classes.\202\
With the retail exemption to the floating NAV requirement, funds with
separate share classes for different types of investors (as well as
funds that mix different types of investors together) that wish to
offer a stable price would need to reorganize, offering separate money
market funds to retail and institutional investors.\203\ We recognize
that any distinction could result in ``gaming behavior'' whereby
investors having the general attributes of an institution might attempt
to fit within the confines of whatever retail exemption we craft.\204\
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\202\ Several of the largest prime money market funds have both
institutional and retail share classes. For example, see Vanguard
Money Market Reserves, Vanguard Prime Money Market Fund Investor
Shares (VMMXX), Registration Statement (Form N-1A) (Dec. 28, 2012);
Vanguard Money Market Reserves, Vanguard Prime Money Market Fund
Institutional Shares (VMRXX), Registration Statement (Form N-1A)
(Dec. 28, 2012); J.P. Morgan Money Market Funds, JPMorgan Prime
Money Market Fund Institutional Class Shares (JINXX), Registration
Statement (Form N-1A) (July 1, 2012); J.P. Morgan Money Market
Funds, JPMorgan Prime Money Market Fund Morgan Class Shares (VMVXX),
Registration Statement (Form N-1A) (July 1, 2012).
\203\ Alternatively, funds might choose to be treated as
institutional (and not eligible for the proposed retail exemption to
the floating NAV requirement).
\204\ See Comment Letter of BlackRock, Inc. (Dec. 13, 2012)
(available in File No. FSOC-2012-0003) (``BlackRock FSOC Comment
Letter'') (``A two-tiered approach to MMFs based on a distinction
between ``retail'' and ``institutional'' funds would be difficult to
implement and may lead to gaming behavior by investors.''); HSBC
FSOC Comment Letter, supra note 196 (``There are also practical
challenges such as defining and identifying different types of
investors and preventing the ``gaming'' of any regulation.'').
---------------------------------------------------------------------------
It can be difficult to distinguish objectively between retail and
institutional money market funds, given that funds generally self-
report this designation, there are no clear or consistent criteria for
classifying funds and there is no common regulatory or industry
definition of a retail investor or a retail money market fund.\205\
Many of the issues that we discuss below regarding distinguishing
between types of investors were raised by our 2009 proposed money
market fund reforms in which we proposed to establish different
liquidity requirements for institutional and retail money market
funds.\206\ Many commenters then asserted that distinguishing between
retail and institutional money market funds would be difficult given
the extent to which shares of money market funds are held by investors
through omnibus accounts and other financial intermediaries.\207\
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\205\ Commenters have suggested a number of ways to distinguish
retail funds from institutional funds. See, e.g., Comment Letter of
Fidelity Investments, Comments on Response to Questions Posed by
Commissioners Aguilar, Paredes, and Gallagher, (Jan. 24, 2013),
available at https://www.sec.gov/comments/mms-response/mms-
response.shtml (``Fidelity RSFI Comment Letter''); Schwab FSOC
Comment Letter, supra note 171. All of these methods involve some
degree of subjectivity and risk of over or under inclusion.
\206\ We proposed but did not adopt a requirement that a money
market fund's board determine at least once each calendar year
whether the fund is an institutional fund based on the nature of the
record owner of the fund's shares, minimum initial investment
requirements, and cash flows from purchases and redemptions. See
2009 Proposing Release, supra note 31, at nn.195-197 and
accompanying text.
\207\ See 2010 Adopting Release, supra note 92, at nn.220-228
and accompanying text. Many commenters also expressed concern with
requiring fund boards to make such a determination. See 2010
Adopting Release, supra note 92, at n.222 and accompanying text. See
also section III.A.4.b of this Release.
---------------------------------------------------------------------------
Some commenters at the time, however, suggested possible approaches
we might take.\208\ We have since received more comments suggesting
other methods for distinguishing between investor types.\209\ The daily
redemption limit method we are proposing today is an objective
criterion intended to encourage self-identification of retail
investors, because we understand that institutional investors generally
would not be able to tolerate such redemption limits and they would
accordingly self-select into institutional money market funds designed
for them, while we anticipate that the limit would not constrain how
most retail investors typically use money market funds. We also discuss
several alternate methods we could use to make such a distinction
below.
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\208\ For example, one commenter suggested that we treat as
institutional a fund that has any class that offers same-day
liquidity to shareholders. Comment Letter of Fidelity Investments
(Aug. 24, 2009) (available in File No. S7-11-09) (``Fidelity 2009
Comment Letter''). We expressed concern regarding this proposal and
whether institutional investors would be willing to migrate to funds
that offer next-day liquidity to avoid the more restrictive
requirements. See 2010 Adopting Release, supra note 92. We expressed
similar concerns about others' suggestion that retail funds be
distinguished based on minimum initial account sizes or maximum
expense ratios. See, e.g., Comment Letter of HighMark Capital
Management, Inc. (Sept. 8, 2009) (available in File No. S7-11-09);
Comment Letter of T. Rowe Price Associates, Inc. (Sept. 8, 2009)
(available in File No. S7-11-09) (``T. Rowe Price 2009 Comment
Letter'').
\209\ See, e.g., Fidelity RSFI Comment Letter, supra note 205;
Schwab FSOC Comment Letter, supra note 171.
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i. Daily Redemption Limit
We are proposing to define a retail money market fund as a money
market fund that restricts a shareholder of record from redeeming more
than $1,000,000 in any one business day.\210\ We believe that this
approach would be relatively simple to implement, since it would only
require a retail money market fund to establish a one-time, across-the-
board redemption policy,\211\ and unlike other approaches discussed
below, it would not depend on a fund's ability to monitor the dollar
amounts invested in shareholders' accounts, shareholder concentrations,
or other shareholder characteristics. A daily redemption limitation
approach also should reduce the risk that a retail fund will experience
heavier redemption requests than it can effectively manage in a crisis,
because it will limit the total amount of redemptions a fund can
experience in a single day, allowing the fund time to better predict
and manage its liquidity.\212\
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\210\ See proposed (FNAV) rule 2a-7(c)(3).
\211\ The proposed retail exemption would provide exemptive
relief from the Investment Company Act and its rules to permit a
retail money market fund to restrict daily redemptions as provided
for in the proposed rule. See proposed (FNAV) rule 2a-7(c)(3)(iii).
\212\ See USAA FSOC Comment Letter, supra note 183 (``This
approach would reduce large money movement from retail MMFs in any
given day, and therefore retail MMFs would be less likely to
experience large scale runs resulting from a lack of liquidity.'').
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A redemption limitation approach to defining retail funds should
also lead institutions to self-select into institutional floating money
market funds, since retail money market funds with redemption
limitations would typically not meet their operational needs.\213\ This
incentive to self-select may help mitigate (but cannot eliminate)
``gaming'' by investors with institutional characteristics who
otherwise might be tempted to try and invest in stable price retail
funds, compared to the other methods of distinguishing investors
discussed below. Even if an institutional investor purchased shares in
a stable price fund, the institutional investor would be subject to the
$1 million daily redemption limit. Retail investors rarely need the
ability to redeem such a significant amount on a daily basis, and if
they do anticipate needing to make
[[Page 36859]]
large redemptions quickly, they would be able to choose to invest in a
government money market fund, a floating NAV fund, or plan to make
several redemptions over time.
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\213\ See id. (noting that if the Commission were to define a
fund as retail through a daily redemption limitation approach
``[l]arge individual investors and institutions will self-select
into institutional MMFs because retail MMFs will not meet their
operational needs.'').
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Applying the daily redemption limitation method to omnibus accounts
may pose difficulties. In order for the fund to impose its redemption
limit policies on the underlying shareholders, intermediaries with
omnibus accounts would need to provide some form of transparency
regarding underlying shareholders, such as account sizes of underlying
shareholders (showing that each was below the $1 million redemption
limit). Alternatively, the fund could arrange with the intermediary to
carry out the fund's policies and impose the redemption limitation, or
else impose redemption limits on the omnibus account as a whole. We
discuss omnibus account issues further below.
We have selected $1,000,000 as the appropriate daily redemption
threshold because we expect that such a daily limit is high enough that
it should continue to make money market funds a viable and desirable
cash management tool for retail investors,\214\ but is low enough that
it should not suit the operational needs of institutions. We recognize
that typical retail investors rarely make redemptions that approach
$1,000,000 in a single day. Nonetheless, retail investors' net worth
and investment choices can differ significantly, and they may on
occasion engage in large transactions. For example, a retail investor
may make large redemption requests when closing out their account,
rebalancing their investment portfolio, paying their tax bills, or
making a large purchase such as the down payment on a house. In
selecting the appropriate redemption limit, we sought to find a
threshold that is low enough that institutions would self-select out of
retail funds, but high enough that it would not impose unnecessary
burdens on retail investors, even when they engage in atypical
redemptions. One commenter suggested a lower redemption threshold of
$250,000,\215\ but we are concerned that such a threshold may be too
low to meet the cash management needs of retail investors that engage
in occasional large transactions. We also considered a higher
threshold, such as a $5,000,000 daily redemption limit instead, but are
concerned that such a higher limit might not provide sufficient
limitation on heightened redemptions in times of stress.
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\214\ The staff understands that for at least one large fund
group, significantly less than 1% of the number of redemption
transactions in money market funds intended for retail investors
exceed $1,000,000, and that more than 97% of retail transactions
were under $25,000. Nonetheless, the fund group received redemption
request exceeding $250,000 from some retail investors on a daily
basis.
\215\ See USAA FSOC Comment Letter, supra note 183 (suggesting
that a $250,000 cap on daily redemptions is a natural dollar limit
because it is consistent with rule 18f-1 (exemption for mutual funds
that allows funds to commit to pay certain redemptions in cash,
rather than in-kind) and the current FDIC account guarantee limit).
---------------------------------------------------------------------------
As mentioned previously, setting an appropriate redemption
threshold for retail money market funds is complicated by the fact that
retail investors may, however, on occasion need to redeem relatively
large amounts from a money market fund, for example, in connection with
the purchase of a home, and that some institutions may have small
enough cash balances that they may find that a $1,000,000 daily
redemption threshold still suits their operational needs. A retail
fund's prospectus and advertising materials would need to provide
information to shareholders about daily redemption limitations to
shareholders.\216\ This should provide sufficient information to
potential investors, both retail and institutional, to allow them to
make informed decisions about whether investing in the fund would be
appropriate. Any money market fund that takes advantage of the retail
exemption would also need to effectively describe that it is intended
for retail investors. Retail investors who may need to make large
(i.e., in excess of $1,000,000) immediate redemptions would thus know
that they should not invest in a retail money market fund with daily
redemption limitations, and that they should instead use an alternate
cash management tool. Alternatively, since it is likely that retail
investors would have advance notice of the need to redeem in excess of
the fund's limits, they could manage the redemption request over a
period of several days.
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\216\ Prospectus disclosure regarding any restrictions on
redemptions is currently required by Form N-1A, and we do not
believe that any amendments to the current disclosure requirements
would be necessary to require additional fund disclosure regarding
the daily redemption restrictions of the proposed retail exemption.
See Item 6 and Item 11(c)(1) of Form N-1A.
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We request comment on our proposed method of distinguishing between
retail and institutional money market funds based on a daily redemption
limitation of $1,000,000.
Would a daily redemption limit effectively distinguish
retail from institutional money market funds? Are we correct in
assuming that institutional investors would self-select out of retail
funds with such redemption limits? Would a daily redemption limit help
reduce the risk that a fund might not be able to manage heavy
shareholder redemptions in times of stress? Would this method of
distinguishing between retail and institutional money market funds
appropriately reflect the relative risks faced by these two types of
funds?
If we classify funds as retail or institutional based on
an investor's permitted daily redemptions, should we limit a retail
fund investor's daily redemptions to $1,000,000, or some other dollar
amount such as $250,000 or $5,000,000? Should we provide a means to
increase the dollar amount limit to keep pace with inflation? If so,
what method should we use?
How large are institutional investors' typical account
balances and daily redemptions? Would institutional investors be
willing to break large investments into smaller pieces so they can
spread them across multiple retail funds?
Are current disclosure requirements sufficient to inform
current and potential shareholders of the operations and risks of
redemption limitations? Should we consider additional disclosure
requirements? If so, what kinds of disclosures should be required?
We ask commenters to provide empirical justification for
any comments on a redemption limitation approach to distinguishing
retail and institutional money market funds. We also request that
commenters with access to shareholder redemption data provide us with
detailed information about the size of individual redemptions in normal
market periods but especially in September 2008 and summer 2011.
In particular, we request that commenters submit data on
the size and frequency of retail and institutional redemptions in money
market funds today, including breakdowns of the typical number and
dollar volume of transactions in funds intended for retail and
institutional shareholders. We also request empirical data on the size
and frequency of retail investors outlier redemption activity, such as
when closing out their accounts or making other atypical transactions.
Should the exemption have a weekly redemption limit as an
alternative to, or in addition to, the daily redemption limit? If so,
what should that limit be?
We have discussed above why we believe a daily redemption limit may
effectively distinguish between retail and institutional investors and
may also serve to help a retail fund manage the redemption requests it
receives. In some cases, retail investors may still want to
[[Page 36860]]
redeem more than $1 million in a single day. To help accommodate such
requests, but at the same time allow a retail fund to effectively
manage its redemptions, a retail exemption also could include a
provision permitting an investor to redeem in excess of the fund's
daily redemption limit, provided the investor gives advance notice of
their intent to redeem in excess of the limit. Permitting higher
redemptions with advance notice may serve the interests of retail
investors, while also giving a fund manager sufficient time to prepare
to meet the redemption request without adverse consequences to the
fund. We request comment on whether we should include a provision
allowing retail funds to permit redemption requests in excess of their
daily limit if the investor provides advance notice.
Should we include a provision permitting retail investors
to redeem more than the daily redemption limit if they gave advance
notice? How frequently are retail investors likely to need to redeem
more than the daily redemption limit, and also know that they would
need to make such a redemption in advance? Would such an advance notice
provision encourage ``gaming behavior,'' for example if an institution
invested in a retail fund and gave notice that every Friday it would
redeem a large position to make payroll? Should we be concerned with
such ``gaming behavior'' provided that the fund was given sufficient
notice that it could effectively manage the redemptions?
If we were to include an advance notice provision, what
should the terms be? Should a retail investor be permitted to redeem
any amount provided that they gave sufficient notice? A limited amount,
such as $5 or $10 million? How much advance notice would be required, 2
days, 5 days, more or less? Should the amount that an investor be
permitted to redeem be tied to the amount of advance notice given? For
example, should an investor be permitted to redeem $3 million in a
single day if they give 3 days' notice, but $10 million in a single day
if they gave 10 days' notice?
Should an advance notice provision include requirements
regarding the method of how the notice is submitted to the fund, or for
fund recordkeeping of the notices it receives? Should such a provision
include requirements on intermediary communications, (for example, if
the notice is provided to the intermediary rather than the fund, should
we require that the advance notice clock begin counting once the fund
receives the notice, not when it is given to the intermediary) or
should it leave such details to be worked out between the parties?
What operational costs would be associated with providing
such an advance notice provision? Would funds be able to effectively
communicate to investors the terms of such an advance notice provision?
We note that most money market funds that invest in municipal
securities (tax-exempt funds) are intended for retail investors,
because the tax advantages of those securities are only applicable to
individual investors, and accordingly, a retail exemption would likely
result in most such funds seeking to qualify for the proposed
exemption. Our 2010 reforms exempted tax-exempt funds from the
requirement to maintain 10% daily liquid assets because, at the time,
we understood that the supply of tax-exempt securities with daily
demand features was extremely limited.\217\ Because tax-exempt money
market funds are not required to maintain 10% daily liquid assets,
these funds may be less liquid than other retail money market funds,
which could raise concerns that tax-exempt retail funds might not be
able to manage even the lower level of redemptions expected in a retail
fund. Based on information received through Form N-MFP, we now
understand that many tax-exempt funds can and do maintain more than 10%
of their portfolio in daily liquid assets, and thus complying with a
10% daily liquid asset requirement may be feasible for these
funds.\218\ We request comment on whether we should require tax-exempt
funds that wish to take advantage of the proposed retail exemption to
also meet the 10% daily liquid asset requirements.
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\217\ See 2010 Adopting Release, supra note 92, at nn.240-243
and accompanying text; rule 2a-7(c)(5)(ii).
\218\ Based on a review of Form N-MFP filings, we understand
that as of the end of February 2013, 51% of tax-exempt funds
maintain daily liquid assets in excess of 10%, and that another 29%
maintain daily liquid assets of between 5% and 10% of their
portfolios. The average daily liquid assets held across all tax-
exempt funds was approximately 9.9% of their total portfolios.
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Would tax-exempt funds that rely on the proposed retail
exemption be able to manage redemptions in time of stress without such
a daily liquid asset requirement? What level of daily liquid assets do
tax-exempt money market funds typically maintain today? Should we
require tax-exempt money market funds to meet the daily liquid asset
requirement if they are to rely on the proposed retail exemption to the
floating NAV?
There are different ways a money market fund could comply with the
exemption's daily redemption limitation if a shareholder seeks to
redeem more than $1 million on any given day notwithstanding the fund's
policy not to honor such requests. The fund could treat the entire
order as not in ``good order'' and reject the order in its entirety.
Alternatively, the fund could treat the order as a request to redeem $1
million and reject the remainder of the order (or treat it as if it
were received on the next business day). Any of those approaches would
allow the money market fund to meet the daily redemption limitation and
neither would provide an incentive for a shareholder to submit a
redemption request in excess of $1 million on any one day. A fund would
also need to disclose how it handles such excessive redemption requests
in its prospectus.\219\ We request comment on these approaches.
---------------------------------------------------------------------------
\219\ See Item 6 and Item 11(c)(1) of Form N-1A.
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Should we specify in rule 2a-7 the way that a money market
fund must comply with the exemption's daily redemption limitation? Is
either of the ways we discuss above easier or less costly to implement
than the other?
Are there any other approaches, other than the ones
discussed above, that funds may use to meet the daily redemption
limitation? If so, what are the benefits and costs of those
alternatives?
ii. Omnibus Account Issues
Today, most money market funds do not have the ability to look
through omnibus accounts to determine the characteristics and
redemption patterns of their underlying investors. An omnibus account
may consist of holdings of thousands of small investors in retirement
plans or brokerage accounts, just one or a few institutional accounts,
or a mix of the two. Omnibus accounts typically aggregate all the
customer orders they receive each day, net purchases and redemptions,
and they often present a single buy and single sell order to the fund.
Because the omnibus account holder is the shareholder of record, to
qualify as a retail fund under a direct application of our daily
redemptions limitation proposal, a fund would be required to restrict
daily redemptions by omnibus accounts to no more than $1,000,000.
Because omnibus accounts can represent hundreds or thousands of
beneficial owners and their transactions, they would often have daily
activity that exceeds this limit. This combined activity would result
in omnibus accounts often having daily redemptions that exceed the
limit even though no one beneficial owner's
[[Page 36861]]
transaction exceeds the limit.\220\ Accordingly, to implement a retail
exemption, our proposal needs to also address retail investors that
purchase money market shares through omnibus accounts.
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\220\ See, e.g., Invesco FSOC Comment Letter, supra note 192
(``These [omnibus] accounts, due to their size, might well be
regarded as `institutional' despite the fact that the aggregate of
assets belong largely to investors who would be considered `retail'
if they invested in the MMF directly.'').
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To address this issue, the proposed retail exemption would also
permit a fund to allow a shareholder of record to redeem more than
$1,000,000 in a single day, provided that the shareholder of record is
an ``omnibus account holder'' \221\ that similarly restricts each
beneficial owner in the omnibus account to no more than $1,000,000 in
daily redemptions.\222\ Under the proposed exemption, a fund would not
be required to impose its redemption limits on an omnibus account
holder, provided that the fund has policies and procedures reasonably
designed to allow the conclusion that the omnibus account holder does
not permit any beneficial owner from ``directly or indirectly''
redeeming more than $1,000,000 in a single day.\223\
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\221\ Omnibus account holder would be defined in the proposed
rule as ``a broker, dealer, bank, or other person that holds
securities issued by the fund in nominee name.'' See proposed (FNAV)
rule 2a-7(c)(3) (ii).
\222\ See proposed (FNAV) rule 2a-7(c)(3) (ii).
\223\ See id.
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The restriction on ``direct or indirect'' redemptions is designed
to manage issues related to ``chains of intermediaries,'' such as when
an investor purchases fund shares through one intermediary, for
example, an introducing broker or retirement plan, which then purchases
the fund shares through a second intermediary, such as a clearing
broker.\224\ The proposed exemption would require that a retail fund's
policies and procedures be reasonably designed to allow the conclusion
that the fund's redemption limit is applied to beneficial owners all
the way down any chain of intermediaries. If a fund cannot reasonably
conclude that such policies are enforced by intermediaries at each step
of the chain, then the fund must apply its redemption limit at the
aggregate omnibus account holder level (or rely on a cooperating
intermediary to apply the fund's redemption limits to any uncooperative
intermediaries further down the chain). Accordingly, to redeem more
than $1,000,000 daily, a fund's policies and procedures must be
designed to conclude that an omnibus account holder that is the
shareholder of record with the fund reasonably concludes that all
beneficial owners in the omnibus account, even if invested through
another intermediary, comply with the redemption limit. If the fund
cannot reasonably conclude that intermediaries that have omnibus
accounts with it also do not permit beneficial owners to redeem more
than $1,000,000 in a single day, the fund's policies must be reasonably
designed to allow the conclusion that the omnibus account holder
applies the fund's redemption limit to the other intermediaries'
transactions on an aggregate level.\225\
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\224\ For purposes of imposing redemption limitations on
beneficial owners, we would expect that funds seek to ensure as part
of their policies and procedures that an intermediary would make
reasonable efforts consistent with applicable regulatory
requirements to aggregate multiple accounts held with it that are
owned by a single beneficial owner. We would not expect that a fund
would seek to ensure that an intermediary reasonably be able to
identify that a single beneficial owner owns fund shares through
multiple accounts if the shareholder has an account with the
intermediary, and also owns shares through another intermediary that
does not already share account information with the first
intermediary.
\225\ See proposed (FNAV) rule 2a-7(c)(3)(ii).
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We note that the challenges of managing implementation of fund
policies through omnibus accounts are not unique to a retail exemption.
For example, funds frequently rely on intermediaries to assess,
collect, and remit redemption fees charged pursuant to rule 22c-2 on
beneficial owners that invest through omnibus accounts. Funds and
intermediaries face similar issues when managing compliance with other
fund policies, such as account size limits, breakpoints, rights of
accumulation, and contingent deferred sales charges.\226\ Service
providers also offer services designed to facilitate compliance and
evaluation of intermediary activities.
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\226\ Under rule 38a-1, funds are required to have policies and
procedures reasonably designed to prevent violation of the federal
securities laws by the fund and certain service providers.
---------------------------------------------------------------------------
The proposed rule would not require retail money market funds to
enter into explicit agreements or contracts with omnibus account
holders at any stage in the chain, but would instead allow funds to
manage these relations in whatever way that best suits their
circumstances. We would expect that in some cases, funds may enter into
agreements with omnibus account holders to reasonably conclude that
their policies are complied with. In other cases, funds may have
sufficient transparency into the activity of omnibus account holders,
or use other verification methods (such as certifications), that funds
could reasonably conclude that their policies are being followed
without an explicit agreement. If a fund could not verify or reasonably
conclude that an omnibus account holder is applying the redemption
limit to underlying beneficial owner transactions, we would expect that
a fund would treat that omnibus account holder like any other
shareholder of record, and impose the $1,000,000 daily redemption limit
on that omnibus account. Retail money market funds will need to monitor
compliance and implement policies and procedures to address the
implications of potential exceptions, for example, if an intermediary
improperly permitted a redemption in excess of the fund's limits.
Finally, the rule would also prohibit a fund from allowing an omnibus
account holder to redeem more than $1,000,000 for its own account in a
single day.\227\ This restriction is intended to prevent an omnibus
account holder from exceeding the fund's redemption limits under the
exemption when trading for its own account.
---------------------------------------------------------------------------
\227\ See proposed (FNAV) rule 2a-7(c)(3)(ii).
---------------------------------------------------------------------------
As proposed, the omnibus account holder provision does not provide
for any different treatment of intermediaries based on their
characteristics and instead applies the redemption limits equally to
all beneficial owners. However, in some circumstances such treatment
may not be consistent with the intent of the exemption. For example, an
intermediary with investment discretion, such as a defined-contribution
pension plan that allows the plan sponsor to remove a money market fund
from its offerings, could unilaterally liquidate in one day a quantity
of fund shares that greatly exceeds the fund's redemption limit, even
if no one beneficial owner had an account balance that exceeds the
limit. Intermediaries might also pose different risks, for example, the
risks associated with a sweep account might be different than the risks
posed by a retirement plan. Also, certain intermediaries may not be
able to offer funds with redemption restrictions to investors, even if
the underlying beneficial owners are retail investors. We understand
that identical treatment of intermediaries under the proposal may not
precisely reflect the risks of intermediaries with different
characteristics, but recognize that this is a cost of our attempt to
keep the retail exemption simple to implement.
A shareholder may own fund shares through multiple accounts, either
directly with a fund, or through an intermediary. In some cases, such
as when one account is held directly with
[[Page 36862]]
a fund and another account is held through an intermediary, the fund
would not be able to identify that the same shareholder has multiple
accounts with the fund, and may not be able to effectively restrict
that shareholder from redeeming fund shares from those accounts, that
in aggregate, may exceed the proposed daily redemption limit. The
proposed retail exemption would not restrict such redemptions, because
the shareholder with multiple accounts would not be a ``shareholder of
record'' for all of the accounts.\228\ In other cases, a fund may be
able to identify that a shareholder holds multiple accounts with the
fund, such as if a shareholder owns fund shares in an account held
directly with the fund, and also owns shares through an individual
retirement account (``IRA'') held with the fund. In those cases, the
shareholder with multiple accounts would be the shareholder of record
for both accounts, and the fund should be able to identify the
shareholder as such.\229\ If a fund receives redemption orders
exceeding the $1,000,000 limit from a shareholder of record through
multiple accounts in a single day, the fund would need to aggregate the
redemption requests from all accounts held by that shareholder of
record, and impose the daily redemption limit on the shareholder of
record's total redemptions, not just on an account-by-account
basis.\230\
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\228\ See id.. An intermediary would be the shareholder of
record for the omnibus accounts they hold.
\229\ We note that we do not expect funds to collapse such
accounts, but rather match such accounts where there is reasonably
available identifying information on hand at the fund or its
transfer agent that the accounts have the same record owner.
\230\ Similar issues may arise if a shareholder holds an account
jointly with another person, such as a spouse. A fund's policies and
procedures should establish methods of managing redemptions from
joint accounts.
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We request comment on the proposed treatment of omnibus account
holders under the retail exemption to the floating NAV alternative.
Does our proposed treatment of omnibus accounts under the
retail exemption appropriately address the operation of such accounts?
What types of policies and procedures would funds develop to confirm
that omnibus account holders are able to reasonably prevent beneficial
owners that invest through the account from violating a retail money
market fund's redemption limit policies and procedures?
The proposed rule does not require funds to enter into
agreements with omnibus account holders, nor does it prescribe any
other mechanism for requiring a fund to verify that its redemption
limits are effectively enforced. Should we require such agreements?
What difficulties would arise in implementing such agreements? Instead
of agreements, should we consider prescribing some other type of
verification or compliance procedure to prevent a fund's limit from
being breached, such as certifications from omnibus account holders?
Should the rule require a fund to obtain periodic
certifications regarding the redemptions of beneficial owners in an
omnibus account? If so, should we require a specific periodicity of
certifications, such as every month, or every quarter?
Should we differentiate between intermediaries that invest
through omnibus accounts? For example, should we require that an
intermediary that has investment discretion over a number of beneficial
owners' accounts be treated as a single beneficial owner for purposes
of the daily redemption limit? Should we treat certain intermediaries
differently than others, perhaps allowing higher or unlimited
redemptions for investors who invest through certain types of
intermediaries such as retirement plans? What operational difficulties
would arise if we were to provide for such differential treatment of
intermediaries?
Can funds accurately identify multiple accounts in a fund
that are owned by a single shareholder of record? If not, what costs
would be incurred in building such systems? How should the redemption
limit apply to accounts that are owned by multiple investors? Should we
be concerned about investors opening accounts through multiple
intermediaries and multiple accounts in an attempt to circumvent the
daily redemption limits?
As discussed above, we understand that today many money market
funds are unable to determine the characteristics or redemption
patterns of their shareholders that invest through omnibus accounts.
This lack of transparency can not only hinder a fund from effectively
applying a retail exemption but can also lead to difficulties in
managing the liquidity levels of a fund's portfolio, if a fund cannot
effectively anticipate when it is likely to receive significant
shareholder redemptions through examination of its shareholder base. We
request comment on whether we should consider requiring additional
transparency into money market fund omnibus accounts to enable funds to
understand better their respective shareholder base and relevant
redemption patterns.
Should we consider any other methods of generally
providing more transparency into omnibus accounts for money market
funds so that funds could better manage their portfolios in light of
their respective shareholder base? If so, what methods should we
consider?
c. Consideration of Other Distinguishing Methods
As discussed above, as part of the retail exemption that we are
proposing today, we are proposing a method of distinguishing between
retail and institutional money market funds based on daily redemption
limits. This is not the only method by which we could attempt to
distinguish types of funds. Below we discuss several alternate methods
of making such a distinction, and request comment on whether we should
adopt one of these methods instead.
i. Maximum Account Balance
A different method of distinguishing retail funds would be to
define a retail fund as a fund that does not permit account balances of
more than a certain size. For example, we could define a fund as retail
if the fund does not permit investors to maintain accounts with a
balance that exceeds $250,000, $1,000,000, $5,000,000, or some other
amount.\231\ If an investor's account balance were to exceed the
threshold dollar amount, the fund could automatically direct additional
investments to shares of a government money market fund or a fund
subject to the floating NAV requirement.\232\ Such an approach would
require a retail fund to update the disclosure in its prospectus and
advertising materials to inform investors how their investments would
be handled in such circumstances. Much like the redemption limitation
method, omnibus accounts may pose difficulties that would need to be
addressed through certifications, transparency, or some other
manner.\233\ A maximum account balance approach may also create
operational issues in other ways, such
[[Page 36863]]
as managing what happens if a buy and hold investor's account exceeded
the limits due to appreciation in value. Determining the proper maximum
account balance that would effectively distinguish between retail and
institutional investors may also prove difficult.
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\231\ A variation on this approach might prohibit further
investment in a retail fund at the end of a calendar quarter if the
average account size exceeds a threshold dollar amount during the
quarter.
\232\ If a fund were part of a fund group that does not include
an affiliated institutional fund, the fund would not allow further
investments from an investor whose account balance reaches (or, if
the account receives dividends or otherwise increases in value,
exceeds) the threshold amount.
\233\ We also expect that there may be significant differences
in costs depending on how such an exemption was structured, and that
it could be significantly less costly to test whether an investor
investing through an omnibus account has exceeded a maximum account
balance periodically rather than on a trade-by-trade basis. See also
infra section III.A.4.d for a discussion of operational costs of the
retail exemption.
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Defining a retail fund based on the maximum permitted account
balance would be relatively simple to explain to investors through
disclosure in the fund's prospectus and advertising materials. This
approach could, however, disadvantage funds that do not have an
affiliated government or institutional money market fund into which
investors' ``spillover'' investments in excess of the maximum amount
could be directed and could encourage ``gaming behavior,'' if
institutional investors were to open multiple accounts through
different intermediaries with balances under the maximum amount in
order to evade any maximum investment limit we might set.\234\
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\234\ See BlackRock FSOC Comment Letter, supra note 204;
Federated Investors Feb. 15 FSOC Comment Letter, supra note 192.
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We request comment on the approach of distinguishing between retail
and institutional money market funds based on investors' account
balances:
If we were to classify funds as retail or institutional
based on an investor's account balance, what maximum account size would
appropriately distinguish a retail account from an institutional
account: $250,000, $1,000,000, $5,000,000, or some other dollar amount?
Would this method of distinguishing between retail and institutional
money market funds appropriately reflect the relative risks faced by
these two types of funds? How would funds or other parties, such as
intermediaries and omnibus accountholders, be able to enforce account
balance limitations?
Would shareholders with institutional characteristics be
likely to open multiple retail money market fund accounts under the
maximum amount, for example by going through intermediaries, to
circumvent the account size requirement, and if so, would retail funds
be subject to greater risk during periods of stress? What disclosure
would be necessary to inform current and potential shareholders of the
operations and risks of account balance limitations?
We ask commenters to provide empirical justification for
any comments on an account balance approach to distinguishing retail
and institutional money market funds. We also request information on
composition and distribution of individual account sizes to assist the
Commission in considering this approach.
ii. Shareholder Concentration
Another approach to distinguishing retail and institutional money
market funds might be to base the distinction on the fund's shareholder
concentration characteristics. Under this approach, a fund would be
able to qualify for a retail exemption if the fund's largest
shareholders owned less than a certain percentage of the fund. This
type of ``concentration'' method of distinguishing funds would be a
test for identifying funds whose shareholders are more concentrated,
and thus have a limited number of shareholders whose redemption choices
could affect the fund more significantly during periods of stress. A
heavily concentrated fund may indicate that the fund has a smaller
number of large shareholders, who are likely institutions. In addition,
funds whose shareholders are less concentrated, and thereby that are
less subject to heavy redemption pressure from a limited number of
investors, may be able to withstand stress more effectively and thus
could maintain a stable price.
Commenters have suggested several methods for defining the
appropriate concentration level for a fund. One test for determining if
a fund is institutional might be whether the top 20 shareholders own
more than 15% of the fund's assets,\235\ or the top 100 shareholders
own more than 25% of fund assets, or some other similar measure.
Another method to test concentration might be to define a fund as
institutional if any shareholder owns more than 0.1% of the fund,\236\
or 1% of the fund, or some other percentage.
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\235\ See Fidelity RSFI Comment Letter, supra note 205. This
commenter suggested that the test would apply regardless of whether
underlying shareholders are individuals or institutions.
\236\ See Schwab FSOC Comment Letter, supra note 171.
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Distinguishing between retail and institutional money market funds
based on shareholder concentration could more accurately reflect the
relative risks that funds face than distinguishing retail and
institutional money market funds based on the maximum balance of
shareholders' accounts, since an individual shareholder's account value
does not necessarily reflect the risks of concentrated heavy
redemptions. However it may be less accurate at distinguishing types of
investors (and at reducing the risks of heavy redemptions associated
with certain types of investors) than the redemption limitation
discussed above, because the redemption limitation would likely cause
investors to self-select into the appropriate fund.
One benefit of the concentration method of distinguishing retail
funds is that it may lessen operational issues related to omnibus
accounts. If funds were required to count an intermediary with omnibus
accounts as one shareholder for concentration purposes (e.g., like any
other shareholder), there may be no need for transparency into omnibus
accounts.\237\ However, if we did not require such treatment of omnibus
accounts, this concentration method would raise the same issues
associated with managing omnibus accounts as the other methods
discussed above.
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\237\ See supra note 235.
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This concentration method of distinguishing retail funds would also
pose a number of difficulties in implementation and operation. For
example, it may be over-inclusive and a fund may be wrongly classified
as an institutional money market fund if many of its large shareholders
of record are intermediaries or sweep accounts,\238\ even though the
underlying beneficial owners may be retail investors. The method may
also create difficulties for funds that have limited assets or
investors (for example, new funds with only a few investors), because
those small and start-up funds may have a concentrated investor base
even though their investors may be primarily retail.\239\ Similarly,
this method may not effectively distinguish retail and institutional
money market funds if the fund is so large that even institutional
accounts do not trigger the concentration limits. An institutional fund
that is not heavily concentrated may be subject to the same risks as a
more concentrated fund, because institutional investors tend to be more
sensitive to changing market conditions.
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\238\ See, e.g., Dreyfus FSOC Comment Letter, supra note 174
(noting that sweep accounts behaved more like retail accounts rather
than institutional ones during the 2008 financial crisis).
\239\ See Invesco FSOC Comment Letter, supra note 192
(``Proposals to designate as ``institutional'' any account holding
more than a given percentage of a MMF would provide an unfair
competitive advantage to larger funds, which could continue to
classify larger investors as ``retail.'').
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Finally, this method could create significant operational issues
for funds if shareholder concentration levels were to change
temporarily, or to fluctuate periodically.\240\ For example, if we were
to provide a retail exemption that
[[Page 36864]]
depended on a fund's top 20 investors not owning more than 15% of the
fund, this would require a fund to constantly monitor the size of its
investor base and reject investments that would push the fund over the
concentration limit in real time. Constant monitoring and order
rejection may be costly and difficult to implement, not only for the
fund but also for the affected shareholders who may have their purchase
orders rejected unexpectedly by the fund. Shareholders may also have
issues understanding whether a fund is institutional or retail, and
because concentration may frequently change, it may be difficult to
provide clear guidelines regarding whether a shareholder could or could
not invest in a fund.
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\240\ See Schwab FSOC Comment Letter, supra note 171 (discussing
issues related to temporary changes in ownership percentages that
may cause violations of such a concentration test).
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We request comment on the approach of distinguishing between retail
and institutional money market funds based on shareholder
concentration:
If we classify funds as retail or institutional based on
shareholder concentration, what thresholds should we use? Would
criteria such as whether the top 20 investors make up more than 15% of
the fund, or some other threshold, effectively distinguish between
types of funds? Would such a concentration test pose operational
difficulties? How would funds enforce such limits? How should funds
treat omnibus accounts if they were to use such a test?
Would investors who are likely to redeem shares when
market-based valuations fall below the stable price per share be
willing and able to spread their investment across enough funds to
avoid being too large in any one of them?
Would shareholder concentration limits result in further
consolidation in the industry, as funds seek to grow in order to
accommodate large investors?
We ask commenters to provide empirical justification for
any comments on a shareholder concentration approach to distinguishing
retail and institutional money market funds.
iii. Shareholder Characteristics
Money market funds could also look at certain characteristics of
the investors, such as whether they use a social security number or a
taxpayer identification number to register their accounts or whether
they demand same-day settlement, to distinguish between retail and
institutional money market funds. Such a characteristics test could be
used either alone, or in combination with one of the other methods
discussed above to distinguish retail funds. However, this approach
also has significant drawbacks. While institutional money market funds
primarily offer same-day settlement and retail money market funds
primarily do not, this is not always the case.\241\ Likewise, social
security numbers do not necessarily correlate to an individual, and
taxpayer identification numbers do not necessarily correlate to a
business. For instance, many businesses are operated as pass-through
entities for tax purposes. In addition, funds may not be aware of
whether their investors have a SSN or a TIN if the investments are held
through an omnibus account.
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\241\ Some institutional money market funds do not offer same-
day settlement. See, e.g., Money Market Obligations Trust, Federated
New York Municipal Cash Trust (FNTXX), Registration Statement (Form
N-1A) (Feb. 28, 2013) (stating that redemption proceeds normally are
wired or mailed within one business day after receiving a request in
proper form). Some retail money market funds do offer same-day
settlement. See, e.g., Dreyfus 100% U.S. Treasury Money Market Fund
(DUSXX), Registration Statement (Form N-1A) (May 1, 2012) (stating
that if a redemption request is received in proper form by 3:00
p.m., Eastern time, the proceeds of the redemption, if transfer by
wire is requested, ordinarily will be transmitted on the same day).
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The Commission requests comment on shareholder characteristics that
could effectively distinguish between types of investors, as well as
other methods of distinguishing between retail and institutional money
market funds.
What types of shareholder characteristics would
effectively distinguish between types of investors? Social security
numbers and/or taxpayer identification numbers? Whether the fund
provides same-day settlement? Some other characteristic(s)?
Besides the approaches discussed above, are there other
ways we could effectively distinguish retail from institutional money
market funds? Should we combine any of these approaches? Should we
adopt more than one of these methods of distinguishing retail funds, so
that a fund could use the method that is lowest cost and best fits
their investor base?
We ask commenters to provide empirical justification for
any comments on a shareholder characteristics approach to
distinguishing retail and institutional money market funds.
d. Economic Effects of the Proposed Retail Exemption
In addition to the costs and benefits of a retail exemption
discussed above, implementing any retail exemption to the floating NAV
requirement may have effects on efficiency, competition, and capital
formation. A retail exemption to the floating NAV requirement could
make retail money market funds more attractive to investors than
floating NAV funds without a retail exemption, assuming that retail
investors prefer such funds. If so, we anticipate a retail exemption
could reduce the impact we expect on the number of funds and assets
under management, discussed in section III.E below. However, these
positive effects on capital formation could be reversed to the extent
that the costs funds incur in implementing a retail exemption are
passed on to shareholders, or shareholders give up potentially higher
yields. As discussed above, a retail exemption to the floating NAV
requirement could involve operational costs, with the extent of those
costs likely being higher for funds sold primarily through
intermediaries than for funds sold directly to investors. These
operational costs, depending on their magnitude, might affect capital
formation and also competition (depending on the different ability of
funds to absorb these costs).
A retail exemption to the floating NAV requirement could have
negative effects on competition by benefitting fund groups with large
percentages of retail investors, especially where those retail
investors invest directly in the funds rather than through
intermediaries, relative to other funds.\242\ A retail exemption could
have a negative effect on competition to the extent that it favors fund
groups that already offer separate retail and institutional money
market funds and thus might not need to reorganize an existing money
market fund into two separate funds to implement the exemption. On the
other hand, as discussed above, we believe that the majority of money
market funds currently are owned by both retail and institutional
investors (although many funds are separated into retail and
institutional classes), and therefore relatively few funds would
benefit from this competitive advantage. Fund groups that can offer
multiple retail funds will have a competitive advantage over those that
cannot if investors with large liquidity needs are willing to spread
their investments across multiple retail funds to avoid the redemption
threshold.
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\242\ Fund groups with large percentages of retail investors,
and in particular, direct investors, may be better positioned to
satisfy growing demand if we were to adopt the proposed retail
exemption to our floating NAV proposal. See Invesco FSOC Comment
Letter, supra note 192 (``Imposing a distinction between `retail'
versus `institutional' funds would therefore unduly favor those MMF
complexes with a preponderance of direct individual investors or
affiliated omnibus account platforms over those with a more diverse
investor basis and those with using unaffiliated intermediaries.'').
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[[Page 36865]]
A retail exemption may promote efficiency by tying the floating NAV
requirement to the shareholders that are most likely to redeem from a
fund in response to deviations between its stable share price and
market-based NAV per share. However, to the extent that a retail
exemption fails to distinguish effectively institutional from retail
shareholders, it may have negative effects on efficiency by permitting
``gaming behavior'' by shareholders with institutional characteristics
who nonetheless invest in retail funds. It may also negatively affect
fund efficiency to the extent that, to take advantage of a retail
exemption, a fund that currently separates institutional and retail
investors through different classes instead would need to create
separate and distinct funds, which may be less efficient. The costs of
such a re-organization are discussed in this Release below.
We request comment on the effects of a retail exemption to the
floating NAV proposed on efficiency, competition, and capital
formation.
Would implementing a retail exemption have an effect on
efficiency, competition, or capital formation? Which methods of
distinguishing retail and institutional investors discussed above, if
any, would result in the most positive effects on efficiency,
competition, and capital formation?
Would the floating NAV proposal have less of a negative
impact on capital formation with a retail exemption than without? Would
it provide competitive advantages to fund groups that have large
percentages of retail investors, especially where those retail
investors invest directly in the funds rather than through
intermediaries, relative to other funds that have lower percentages of
retail investors?
Would a retail exemption better promote efficiency by
tying the floating NAV requirement to institutional shareholders
instead of retail shareholders? Why or why not?
The qualitative costs and benefits of any retail exemption to the
floating NAV proposal are discussed above. Because we do not know how
attractive such funds would be to retail investors, we cannot quantify
these qualitative benefits or costs. However, we can quantify the
operational costs that money market funds, intermediaries, and money
market fund service providers might incur in implementing and
administering the retail exemption to the floating NAV requirement that
we are proposing today.\243\
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\243\ The costs estimated in this section would be spread
amongst money market funds, intermediaries, and money market fund
service providers (e.g., transfer agents). For ease of reference, we
refer only to money market funds and intermediaries in our
discussion of these costs. As with other costs we estimate in this
Release, our staff has estimated the costs that a single affected
entity would incur. We anticipate, however, that many money market
funds and intermediaries may not bear the estimated costs on an
individual basis. The costs of systems modifications, for example,
likely would be allocated among the multiple users of the systems,
such as money market fund members of a fund group, money market
funds that use the same transfer agent, and intermediaries that use
systems purchased from the same third party. Accordingly, we expect
that the cost for many individual entities may be less than the
estimated costs.
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Although we do not have the information necessary to provide a
point estimate \244\ of the potential costs associated with a retail
exemption, our staff has estimated the ranges of hours and costs that
may be required to perform activities typically involved in making
systems modifications, implementing fund policies and procedures, and
performing related activities. These estimates include one-time and
ongoing costs to establish separate funds if necessary, modify systems
and related procedures and controls, update disclosure in a fund's
prospectus and advertising materials to reflect any investment or
redemption restrictions associated with the retail exemption, as well
as ongoing operational costs. All estimates are based on the staff's
experience and discussions with industry representatives. We first
discuss the different categories of operational costs that might be
incurred in implementing a retail exemption, and then we provide a
total cost estimate that captures all of the categories of costs
discussed below. We expect that only funds that determine that the
benefits of taking advantage of the proposed retail exemption would be
justified by the costs would take advantage of it and bear these costs.
Otherwise, they would incur the costs of implementing a floating NAV
generally.
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\244\ We are using the term ``point estimate'' to indicate a
specific single estimate as opposed to a range of estimates.
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Many money market funds are currently owned by both retail and
institutional investors, although they are often separated into retail
and institutional share classes. A fund relying on the proposed retail
exemption would need to be structured to accept only retail investors
as determined by the daily redemption limit, and thus any money market
fund that currently has both retail and institutional shareholders
would need to be reorganized into separate retail and institutional
money market funds. One-time costs associated with this reorganization
would include costs incurred by the fund's counsel to draft appropriate
organizational documents and costs incurred by the fund's board of
directors to approve such documents. One-time costs also would include
the costs to update the fund's registration statement and any relevant
contracts or agreements to reflect the reorganization, as well as costs
to update prospectuses and to inform shareholders of the
reorganization. Funds and intermediaries may also incur one-time costs
in training staff to understand the operation of the fund and
effectively implement the redemption restrictions.
The daily redemption limitation method of distinguishing retail and
institutional investors that we are proposing today would also require
funds to have policies and procedures reasonably designed to allow the
conclusion that omnibus account holders apply the fund's redemption
limits to beneficial owners invested through the omnibus accounts.
Adopting such policies and procedures and building systems to implement
them would also involve one-time costs for funds and intermediaries.
Funds could either conclude that their policies are enforced by
obtaining information regarding underlying investors in omnibus
accounts (transparency), or use some other sort of method to reasonably
verify that omnibus account holders are implementing the fund's
redemption policies, such as entering into an agreement or getting
certifications from the omnibus account holder. In preparing the
following cost estimates, the staff assumed that funds would generally
rely on financial intermediaries to implement redemption policies
without undergoing the costs of entering into an agreement, because
funds and intermediaries would typically take the approach that is the
least expensive. However, some funds may undertake the costs of
obtaining an explicit agreement despite the expense. Our staff
estimates that the one-time costs necessary to implement the retail
exemption to the floating NAV proposal, including the various
organizational, operational, training, and other costs discussed above,
would range from $1,000,000 to $1,500,000 for each fund that chooses to
take advantage of the retail exemption.\245\
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\245\ Staff estimates that these costs would be attributable to
the following activities: (i) Planning, coding, testing, and
installing system modifications; (ii) drafting, integrating, and
implementing related procedures and controls; and (iii) preparing
training materials and administering training sessions for staff in
affected areas. Our staff's estimates of these operational and
related costs, and those discussed throughout this Release, are
based on, among other things, staff experience implementing, or
overseeing the implementation of, systems modifications and related
work at mutual fund complexes, and included analyses of wage
information from SIFMA's Management & Professional Earnings in the
Securities Industry 2012, see infra note 996, for the various types
of professionals staff estimates would be involved in performing the
activities associated with our proposals. The actual costs
associated with each of these activities would depend on a number of
factors, including variations in the functionality, sophistication,
and level of automation of existing systems and related procedures
and controls, and the complexity of the operating environment in
which these systems operate. Our staff's estimates generally are
based on the use of internal resources because we believe that a
money market fund (or other affected entity) would engage third-
party service providers only if the external costs were comparable,
or less than, the estimated internal costs. The total operational
costs discussed here include the costs that are ``collections of
information'' that are discussed in section IV of this Release.
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[[Page 36866]]
Funds that choose to take advantage of the retail exemption would
also incur ongoing costs. These ongoing costs would include the costs
of operating two separate funds (retail and institutional) instead of
separate classes of a single fund, such as additional transfer agent,
accounting, and other similar costs. Funds and intermediaries would
also incur ongoing costs related to enforcing the daily redemption
limitation on an ongoing basis and monitoring to conclude that the
limits are being effectively enforced. Other ongoing costs may include
systems maintenance, periodic review and updates of policies and
procedures, and additional staff training. Accordingly, our staff
estimates that money market funds and intermediaries administering a
retail exemption likely would incur ongoing costs of 20%-30% of the
one-time costs, or between $200,000 and $450,000 per year.\246\
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\246\ We recognize that adding new capabilities or capacity to a
system (including modifications to related procedures and controls
and related training) will entail ongoing annual maintenance costs
and understand that those costs generally are estimated as a
percentage of the initial costs of building or modifying a system.
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Are the staff's cost estimates too high or too low, and,
if so, by what amount and why? Are there operational or other costs
associated with segregating retail investors other than those discussed
above?
Do commenters believe that the proposed retail exemption
would involve expenses beyond those estimated? To what extent would the
costs vary depending on how a retail exemption is structured? Which of
the staff's assumptions would most significantly affect the costs? Has
our staff identified the assumptions that most significantly influence
the cost of a retail exemption?
What kinds of ongoing activities would be required to
administer the proposed retail exemption to the floating NAV
requirement, and to what extent? Would it be less costly for some funds
(e.g., those that are directly sold to investors) to make use of a
retail investor exemption? If so, how much would those funds save?
5. Effect on Other Money Market Fund Exemptions
a. Affiliate Purchases
Rule 17a-9 provides an exemption from section 17(a) of the Act to
permit affiliated persons of a money market fund to purchase portfolio
securities from the fund under certain circumstances, and it is
designed to provide a means for an affiliated person to provide
liquidity to the fund and prevent it from breaking the buck.\247\ Under
our floating NAV proposal, however, money market funds' share prices
would ``float,'' and funds thus could not ``break the buck.''
Notwithstanding the inability of funds to ``break the buck'' under our
floating NAV proposal, for the reasons discussed below, we propose to
retain rule 17a-9 with the amendments, discussed below, for all money
market funds (including government and retail money market funds that
would be exempt from our floating NAV proposal).
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\247\ Absent a Commission exemption, section 17(a)(2) of the Act
prohibits any affiliated person or promoter of or principal
underwriter for a fund (or any affiliated person of such a person),
acting as principal, from knowingly purchasing securities from the
fund. For convenience, in this Release, we refer to all of the
persons who would otherwise be prohibited by section 17(a)(2) from
purchasing securities of a money market fund as ``affiliated
persons.'' ``Affiliated person'' is defined in section 2(a)(3) of
the Act.
Rule 17a-9, as adopted in 1996, provides an exemption from
section 17(a) of the Act to permit affiliated persons of a money
market fund to purchase a security from a money market fund that is
no longer an eligible security (as defined in rule 2a-7), provided
that the purchase price is (i) paid in cash; and (ii) equals the
greater of amortized cost of the security or its market price (in
each case including accrued interest). See Revisions to Rules
Regulating Money Market Funds, Investment Company Act Release No.
21837 (Mar. 21, 1996) [61 FR 13956 (Mar.28, 1996)] (the ``1996
Adopting Release''). As part of the 2010 money market fund reforms
(discussed in supra section II.D.1), we expanded the exemptive
relief in rule 17a-9 to permit affiliates to purchase from a money
market fund (i) a portfolio security that has defaulted, but that
continues to be an eligible security (subject to the purchase
conditions described); and (ii) any other portfolio security
(subject to the purchase conditions described above), for any
reason, provided the affiliated person remits to the fund any profit
it realizes from the later sale of the security (``clawback
provision''). See rule 17a-9(a), (b).
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Funds with a floating NAV would still be required to adhere to rule
2a-7's risk-limiting conditions to reduce the likelihood that portfolio
securities experience losses from credit events and interest rate
changes. Even with a floating NAV and limited risk, as specified by the
provisions of rule 2a-7, money market funds face potential liquidity,
credit and reputational issues in times of fund and market stress and
the resultant incentives for shareholders to redeem shares.
In normal market conditions, that shareholders may request
immediate redemptions from a fund with a portfolio that does not hold
securities that mature in the same time frame generally is no cause for
concern because funds typically can sell portfolio securities to
satisfy shareholder redemptions without negatively affecting prices. In
times of crisis when the secondary markets for portfolio assets become
illiquid, funds might be unable to sell sufficient assets without
causing large price movements that affect not only the non-redeeming
shareholders but also investors in other funds that hold similar
assets. Therefore, to provide fund sponsors with flexibility to protect
shareholder interests, we are proposing to allow fund sponsors to
continue to support money market fund operations through, for example,
affiliate purchases (in reliance on rule 17a-9), provided such support
is thoroughly and consistently disclosed.\248\
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\248\ Commenters have noted the importance of sponsor support
under rule 17a-9 as a tool that funds can use as a support
mechanism. See, e.g., Comment Letter of U.S. Chamber of Commerce
(Jan. 23, 2013) (available in File No. FSOC-2012-0003) (``U.S.
Chamber Jan. 23, 2013 FSOC Comment Letter''), Federated Investors
Alternative 1 FSOC Comment Letter, supra note 161. We are proposing
amendments to require that money market funds disclose the
circumstances under which a fund sponsor may offer any form of
support to the fund (e.g., capital contributions, capital support
agreements, letters of indemnity), any limits on such support, past
instances of support provided to the fund, and public notification
to the Commission regarding current instances of support provided.
See infra section III.F for a more detailed discussion.
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As exists today, money market fund sponsors that have a greater
capacity to support their funds may have a competitive advantage over
other fund sponsors that do not. The value of this competitive
advantage depends on the extent to which fund sponsors choose to
support their funds and may be reduced by the proposed enhanced
disclosure requirements discussed in this Release which may
disincentivize fund sponsors from supporting their funds. The value of
potential sponsor support also will depend on whether investors view
support as good news (because, for example, the sponsor stands behind
the fund) or bad news (because, for
[[Page 36867]]
example, the sponsor does not adequately monitor the portfolio
manager). The decision to leave rule 17a-9 in place should not, in our
opinion, impose any additional costs on money market funds, their
shareholders, or others, or change the effects on efficiency or capital
formation. We recognize, however, that permitting sponsor support
(through rule 17a-9 transactions) may allow money market fund sponsors
to prevent their fund from deviating from its stable share price,
potentially undercutting our goal to increase the transparency of money
market fund risks.
We request comment on retaining the rule 17a-9 exemption.
Do commenters believe affiliated person support is
important to funds, investors, or the securities markets even under our
floating NAV proposal? Do commenters agree with our assumptions that
liquidity concerns are likely to remain significant even with a
floating NAV and that fund sponsors should continue to have this
flexibility to protect shareholder interests? We note that rule 17a-9
was established and then expanded in 2010, in the context of stable
values. If money market funds are required to float their NAVs, should
we limit further the circumstances under which fund sponsors or
advisers can use rule 17a-9? If so, how?
Does permitting affiliated purchases for floating NAV
money market funds reduce the transparency of fund risks that our
floating NAV proposal is designed, in part, to achieve? If so, does the
additional disclosure we are proposing mitigate such an effect? Are
there additional ways we can mitigate such an effect?
Should we allow only certain types of support or should we
prohibit certain types of support? For example, should we allow
sponsors to purchase under rule 17a-9 only liquidity-impaired assets,
or should we prohibit sponsors from purchasing defaulted securities?
Why or why not? If yes, what types of support should be permitted and
what types should be prohibited? Why?
Would the ability of fund sponsors to support the NAV of
floating funds affect the way in which money market funds are
structured and marketed? If so, how? Would it affect the competitive
position of fund sponsors that are more or less likely to have
available capital to support their funds?
Do commenters agree that our proposed amendment would not
impose additional costs on funds or shareholders or impact efficiency
or capital formation?
Instead of retaining 17a-9, should we instead repeal the
rule and thereby prohibit certain types of sponsor support of money
market funds? If so, why?
b. Suspension of Redemptions
Rule 22e-3 exempts money market funds from section 22(e) of the Act
to permit them to suspend redemptions and postpone payment of
redemption proceeds to facilitate an orderly liquidation of the
fund.\249\ Rule 22e-3 replaced temporary rule 22e-3T.\250\ Rule 22e-3
is designed to allow funds to suspend redemptions before actually
breaking the buck, reduce the vulnerability of investors to the harmful
effects of heavy redemptions on funds, and minimize the potential for
disruption to the securities markets.\251\ Rule 22e-3 currently
requires that a fund's board of directors, including a majority of
disinterested directors, determine that the deviation between the
fund's amortized cost price per share and the market-based net asset
value per share may result in material dilution or other unfair results
before it suspends redemptions.\252\ We recognize that, under our
floating NAV proposal, money market funds (including those exempt from
the floating NAV requirement) generally would no longer be able to use
amortized cost valuation for their portfolio holdings.\253\ Instead,
government and retail money market funds would use the penny rounding
method of pricing to maintain a stable share price and other money
market funds would have a floating NAV per share. Accordingly, for all
money market funds, the current threshold under rule 22e-3 for
suspending redemptions would need modification to conform to the new
regulatory regime.
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\249\ Rule 22e-3(a)(1).
\250\ Rule 22e-3 was first adopted as an interim final temporary
final shortly after the Temporary Guarantee Program was established.
See Temporary Exemption for Liquidation of Certain Money Market
Funds, Investment Company Act Release No. 28487 (Nov. 20, 2008) [73
FR 71919 (Nov. 26, 2008)] (establishing rule 22e-3T to facilitate
compliance for those money market funds that elected to participate
in the Temporary Guarantee Program and were therefore required to
promptly suspend redemptions if the fund broke the buck). The
temporary rule expired on expired October 18, 2009. Id. See also
infra section II.C (discussing the Temporary Guarantee Program).
\251\ See 2010 Adopting Release, supra note 92, at section II.H
(noting that the rule is designed only to facilitate the permanent
termination of the fund in an orderly manner). See also rule 22e-
3(a)(2) (requiring the fund's board to irrevocably approve the
fund's liquidation).
\252\ Rule 22e-3(a)(1).
\253\ As discussed above, money market funds would continue to
be permitted to use amortized cost to value portfolio securities
with a remaining maturity of 60 days or less.
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As discussed above, we recognize that our floating NAV proposal, in
conjunction with our other proposals, may not be sufficient to
eliminate the incentive for shareholders to redeem shares in times of
fund and market stress. As such, floating NAV money market funds may
still face liquidity issues that could force them to want to suspend
redemptions and liquidate. Commenters have noted the benefits of rule
22e-3, including that the rule prevents a lengthy and disorderly
liquidation process, like that experienced by the Reserve Primary
Fund.\254\ Therefore, despite a floating NAV fund's inability to break
a buck, we believe the benefits of rule 22e-3 should be preserved.
Accordingly, under our proposed amendment, all floating NAV money
market funds would be permitted to suspend redemptions, when, among
other requirements, the fund, at the end of a business day, has less
than 15% of its total assets in weekly liquid assets.\255\ As discussed
below in our discussion of the liquidity fees and gates alternative
proposal, we believe that when a fund's weekly liquid assets are at
least 50% below the minimum required weekly liquidity (i.e., weekly
liquid assets have fallen from 30% to 15%), the fund is under
sufficient stress to warrant that the fund's board be permitted to
suspend redemptions in light of a decision to liquidate the fund (and
therefore facilitate an orderly liquidation).
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\254\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25;
Comment Letter of Federated Investors, Inc. (Re: Alternative 2)
(Jan. 25. 2013) (available in File No. FSOC-2012-0003) (``Federated
Alternative 2 FSOC Comment Letter'').
\255\ See proposed (FNAV) rule 22e-3(a) (requiring that the
fund's board, including a majority of directors who are not
interested persons of the fund, irrevocably has approved the
liquidation of the fund).
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Government money market funds and retail money market funds, which
would be exempt from the floating NAV requirement, would be able to
suspend redemptions and liquidate if either (1) the fund, at the end of
a business day, has less than 15% of its total assets in weekly liquid
assets or (2) the fund's price per share as computed for purposes of
distribution, redemption, and repurchase is no longer equal to its
stable share price or the fund's board (including a majority of
disinterested directors) determines that such a change is likely to
occur.\256\ This would allow those funds to suspend redemptions and
liquidate if the fund came under liquidity stress or if the fund was
about to ``break the buck.''
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\256\ See id.
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Because money market funds already comply with rule 22e-3, we do
not believe that retaining the rule in the
[[Page 36868]]
context of our floating NAV proposal would impose any additional costs
on money market funds, their shareholders, or others, nor have any
effects on competition, efficiency, or capital formation.\257\
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\257\ The Commission considered rule 22e-3's costs, benefits,
and effects on competition, efficiency, and capital formation, which
this amendment would preserve, when it adopted the rule. See 2010
Adopting Release, supra note 92, at sections II.H, V, and VI.
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We request comment on this proposed amendment.
Do commenters believe that the ability to suspend
redemptions (under the circumstances we propose) would be important to
floating NAV funds, their investors, and the securities markets?
Would this ability be important to a retail or government
money market fund even though we are proposing to exempt these funds
from the floating NAV requirement, in part, because they are less
likely to face heavy redemptions in times of stress?
Is it appropriate to allow a money market fund to suspend
redemptions and liquidate if its level of weekly liquid assets falls
below 15% of its total assets? Is there a different threshold based on
daily or weekly assets that would better protect money market fund
shareholders? What is that threshold, and why is it better? Is there a
threshold based on different factors that would better protect money
market fund shareholders? What are those factors, and why are they
better? If so, is such suspension then appropriate only in connection
with liquidation, or should it be broader?
Is our conclusion correct that it will impose no costs nor
have any effects on competition, efficiency, or capital formation?
6. Tax and Accounting Implications of Floating NAV Money Market Funds
a. Tax Implications
Money market funds' ability to maintain a stable value per share
simplifies tax compliance for their shareholders. Today, purchases and
sales of money market fund shares at a stable $1.00 share price
generate no gains or losses, and money market fund shareholders
therefore generally need not track the timing and price of purchase and
sale transactions for capital gains or losses.
i. Realized Gains and Losses
If we were to require some money market funds to use floating NAVs,
taxable investors in those money market funds, like taxable investors
in other types of mutual funds, would experience gains and losses.
Shareholders in floating NAV money market funds, therefore, could owe
tax on any gains on sales of their money market fund shares, could have
tax benefits from any losses, and would have to determine those
amounts.\258\ Because it is not possible to predict the timing of
shareholders' future transactions and the amount of NAV fluctuations,
we are not able to estimate the amount of any increase or decrease in
shareholders' tax burdens. But, given the relatively small fluctuations
in value that we anticipate would occur in floating NAV money market
funds and our proposed exemption of certain funds from the floating NAV
requirement, any changes in tax burdens likely would be minimal.
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\258\ In its proposed recommendation, the FSOC recognized the
potential increased tax-compliance burdens associated with a
floating NAV for both money market funds and shareholders. FSOC
Proposed Recommendations, supra note 114, at 33-34.
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Commenters also have asserted that taxable investors in floating
NAV money market funds, like taxable investors in other types of mutual
funds, would be required to track the timing and price of purchase and
sale transactions to determine the amounts of gains and losses
realized.\259\ For mutual funds other than stable-value money market
funds, tax rules now generally require the funds or intermediaries to
report to the IRS and the shareholders certain information about sales
of shares, including sale dates and gross proceeds.\260\ If the shares
sold were acquired after January 1, 2012, the fund or intermediary must
also report cost basis and whether any gain or loss is long or short
term.\261\ These new basis reporting requirements and the pre-2012
reporting requirements are collectively referred to as ``information
reporting.'' Mutual funds and intermediaries, however, are not
currently required to make reports to certain shareholders (including
most institutional investors). The regulations call these shareholders
``exempt recipients.'' \262\
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\259\ See, e.g., Comment Letter of Investment Company Institute
(Feb. 16, 2012) (available in File No. 4-619) (``ICI Feb. 2012 PWG
Comment Letter'') (enclosing a submission by the Investment Company
Institute Working Group on Money Market Fund Reform Standing
Committee on Investment Management International Organization of
Securities Commissions) (``To be sure, investors already face these
burdens [tracking purchases and sales for tax purposes] in
connection with investments in long-term mutual funds. But most
investors make fewer purchases and sales from long-term mutual funds
because they are used for long-term saving, not cash management.'').
\260\ Regulations exclude sales of stable-value money market
funds from this reporting obligation. See 26 CFR 1.6045-1(c)(3)(vi).
\261\ The new reporting requirements (often referred to as
``basis reporting'') were instituted by section 403 of the Energy
Improvement and Extension Act of 2008 (Division B of Pub. L. 110-
343) (codified at 26 U.S.C. 6045(g), 6045A, and 6045B); see also 26
CFR 1.6045-1; Internal Revenue Service Form 1099-B.
\262\ See 26 CFR 1.6045-1(c)(3).
---------------------------------------------------------------------------
We understand, based on discussions by our staff with staff at the
Treasury Department and the IRS, that, by operation of the current tax
regulations, if our floating NAV proposal is adopted, money market
funds that float their NAV per share would no longer be excluded from
the information reporting requirements currently applicable to mutual
funds and intermediaries.\263\ Because retail money market funds would
not be required to use floating NAVs, the vast majority of floating NAV
money market fund shareholders are expected to be exempt recipients
(with respect to which information reporting is not required). Such
exempt recipients would thus be required to track gains and losses,
similar to the current treatment of exempt recipient holders of other
mutual fund shares. If there are any money market fund shareholders for
which information reporting is made, those shareholders would be able
to make use of such reports in determining and reporting their tax
liability. We also understand that the Treasury Department and the IRS
are considering alternatives for modifying forms and guidance (1) to
include net information reporting by the funds of realized gains and
losses for sales of all mutual fund shares; and (2) to allow summary
income tax reporting by shareholders.\264\
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\263\ See supra note 260.
\264\ For 2012, the IRS allowed certain taxpayers to include
summary totals in their Federal income tax returns, adding
``Available upon request'' where transaction details might otherwise
have been required. See 2012 Instructions for Form 8949--Sales and
Other Dispositions of Capital Assets, p. 3, col. 1, ``Exception 2,''
available at https://www.irs.gov/pub/irs-pdf/i8949.pdf.
---------------------------------------------------------------------------
We anticipate that these modifications, if effected, could reduce
burdens and costs to shareholders when reporting annual realized gains
or losses from transactions in a floating NAV money market fund. We
recognize that if these modifications are not made, the tax reporting
effects of a floating NAV could be quite burdensome for money market
fund investors that typically engage in frequent transactions.
Regardless of the applicability of net information reporting or of
summary income tax reporting, however, all shareholders of floating NAV
money market funds would be required to recognize and report taxable
gains and losses with respect to redemptions of fund shares, which does
not occur today
[[Page 36869]]
with respect to shares of stable-value money market funds.\265\
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\265\ Money market funds also would incur costs in gathering and
transmitting this information to money market fund shareholders that
they would not incur absent our proposal, but these costs are
discussed in the operational costs discussed below.
---------------------------------------------------------------------------
We request comment on the burdens of tax compliance for money
market fund shareholders (the impact on funds is discussed in the
operational costs section below).
If any shareholders of a floating NAV money market fund
are not exempt recipients (and thus receive the information reporting
that other non-exempt-recipient shareholders of other mutual funds
currently receive), how difficult would it be for those shareholders to
use that information to determine and report taxable gains and losses?
Would it be any more difficult for floating NAV money market fund
shareholders than other mutual fund shareholders? What kinds of costs,
by type and amount, would be involved?
In the case of floating NAV fund shareholders that are
exempt recipients (which are not required recipients of information
reporting), what types and amounts of costs would those shareholders
incur to track their share purchases and sales and report any taxable
gains or losses?
As discussed above, mutual funds and intermediaries are
not required to provide information reporting for exempt recipients,
including virtually all institutional investors. Do mutual funds and
intermediaries provide this information to shareholders even if tax law
does not require them to do so? If not, would money market funds and
intermediaries be able to use their existing systems and processes to
access this information if investors request it as a result of our
floating NAV proposal? Would doing so involve systems modifications or
other costs in addition to those we estimate in section III.A.7, below?
Would institutions or other exempt recipients find it useful or more
efficient to receive this information from funds rather than to develop
it themselves?
Would exempt-recipient investors continue to invest in
floating NAV funds if there continues to be no information reporting
with respect to them?
Would exempt-recipient investors invest in floating NAV
money market funds if there is no administrative relief related to
summary reporting of capital gains and losses, as discussed above? What
would be the effect on the utility of floating NAV money market funds
if the anticipated administrative relief is not provided? Would
investors be able to use floating NAV money market funds in the same
way or for the same purposes absent the anticipated administrative
relief?
ii. Wash Sales
In addition to the tax obligations that may arise through daily
fluctuations in purchase and redemption prices of floating NAV money
market funds (discussed above), special ``wash sale'' rules apply when
shareholders sell securities at a loss and, within 30 days before or
after the sale, buy substantially identical securities.\266\ Generally,
if a shareholder incurs a loss from a wash sale, the loss cannot be
deducted, and instead must be added to the basis of the new,
substantially identical securities, which effectively postpones the
loss deduction until the shareholder recognizes gain or loss on the new
securities.\267\ Because many money market fund investors automatically
reinvest their dividends (which are often paid monthly), virtually all
redemptions by these investors would be within 30 days of a dividend
reinvestment (i.e., purchase). Under the wash sale rules, the losses
realized in those redemptions would be disallowed in whole or in part
until an investor disposed of the replacement shares (or longer, if
that disposition is also a wash sale). We understand that the Treasury
Department and IRS are actively considering administrative relief under
which redemptions of floating NAV money market fund shares that
generate losses below a de minimis threshold would not be subject to
the wash sale rules. We recognize, however, that money market funds
would still incur operational costs to establish systems with the
capability of identifying wash sale transactions, assessing whether
they meet the de minimis criterion, and adjusting shareholder basis as
needed when they do not.\268\
---------------------------------------------------------------------------
\266\ See 26 U.S.C. 1091.
\267\ Id.
\268\ These operational costs are discussed in infra section
III.A.7.
---------------------------------------------------------------------------
We request comment on the tax implications related to our floating
NAV proposal.
Would investors continue to invest in floating NAV money
market funds absent administrative relief from the Treasury Department
and IRS relating to wash sales? What would be the effect on the utility
of floating NAV money market funds if the anticipated administrative
relief is not provided? Would investors be able to use floating NAV
money market funds in the same way or for the same purposes absent the
anticipated administrative relief?
b. Accounting Implications
If we were to adopt our floating NAV proposal, some money market
fund shareholders may question whether they would be able to treat
their fund shares as ``cash equivalents'' on their balance sheets. We
understand that classifying money market fund investments as cash
equivalents is important because, among other things, investors may
have debt covenants that mandate certain levels of cash and cash
equivalents.\269\
---------------------------------------------------------------------------
\269\ In addition, some corporate investors may perceive cash
and cash equivalents on a company's balance sheet as a measure of
financial strength.
---------------------------------------------------------------------------
Current U.S. GAAP defines cash equivalents as ``short-term, highly
liquid investments that are readily convertible to known amounts of
cash and that are so near their maturity that they present
insignificant risk of changes in value because of changes in interest
rates.'' \270\ In addition, U.S. GAAP includes an investment in a money
market fund as an example of a cash equivalent.\271\ Notwithstanding,
some shareholders may be concerned given this guidance came before
money market funds using floating NAVs.\272\
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\270\ See Financial Accounting Standards Board Accounting
Standards Codification (``FASB ASC'') paragraph 305-10-20.
\271\ Id.
\272\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25.
---------------------------------------------------------------------------
Except as noted below, the Commission believes that an investment
in a money market fund with a floating NAV would meet the definition of
a ``cash equivalent.'' We believe the adoption of floating NAV alone
would not preclude shareholders from classifying their investments in
money market funds as cash equivalents because fluctuations in the
amount of cash received upon redemption would likely be insignificant
and would be consistent with the concept of a `known' amount of cash.
The RSFI Study supports our belief by noting that floating NAV money
market funds are not likely to experience significant fluctuations in
value.\273\ The floating NAV requirement is also not expected to change
the risk profile of money market fund portfolio investments. Rule 2a-
7's risk-limiting conditions should result in fluctuations in value
from changes in interest rates and credit risk being insignificant.
---------------------------------------------------------------------------
\273\ See RSFI Study, supra note 21.
---------------------------------------------------------------------------
As is the case today with stable share price money market funds,
events may occur that give rise to credit and liquidity issues for
money market funds and shareholders would need to reassess if their
investments continue to meet the definition of a cash equivalent. For
example, during the financial crisis,
[[Page 36870]]
certain money market funds experienced unexpected declines in the fair
value of their investments due to deterioration in the creditworthiness
of their assets and as a result, portfolios of money market funds
became less liquid. Investors in these money market funds would have
needed to determine whether their investments continued to meet the
definition of a cash equivalent. If events occur that cause
shareholders in floating NAV money market funds to determine their
shares are not cash equivalents, the shares would need to be classified
as investments, and shareholders would have to treat them either as
trading securities or available-for-sale securities.\274\
---------------------------------------------------------------------------
\274\ See FASB ASC paragraph 320-10-25-1.
---------------------------------------------------------------------------
Do commenters believe using a floating NAV would preclude money
market funds from being classified as cash equivalents under GAAP?
Would shareholders be less likely to invest in floating
NAV money market funds if the shares held were classified for financial
statement purposes as an ``investment'' rather than ``cash and cash
equivalent?''
Are there any other accounting-related costs or burdens
that money market fund shareholders would incur if we require money
market funds to use floating NAVs?
c. Implications for Local Government Investment Pools
We also recognize that many states have established local
government investment pools (``LGIPs''), money market fund-like
investment pools that invest in short-term securities,\275\ that are
required by law or investment policies to maintain a stable NAV per
share.\276\ The Government Accounting Standards Board (``GASB'') states
that LGIPs that are operated in a manner consistent with rule 2a-7
(i.e., a ``2a7-like pool'') may use amortized cost to value securities
(and presumably, facilitate maintaining a stable NAV per share).\277\
Our floating NAV proposal, if adopted, may have implications for LGIPs.
In order to continue to manage LGIPs, state statutes and policies may
need to be amended to permit the operation of investment pools that
adhere to rule 2a-7 as we propose to amend it.\278\ Because we are
unable to predict how various state legislatures and other market
participants will react to our floating NAV proposal, we do not have
the information necessary to provide a reasonable estimate of the
impact on LGIPs or the potential effects on efficiency, competition,
and capital formation. We note, however, that it is possible that
states could amend their statutes or policies to permit the operation
of LGIPs that comply with rule 2a-7 as we propose to amend it. We
request comment on this aspect of our proposal.
---------------------------------------------------------------------------
\275\ LGIPs tend to emulate typical money market funds by
maintaining a stable NAV per share through investments in short-term
securities. See infra III.E.1, Table 2, note N.
\276\ See, e.g., U.S. Chamber of Commerce Letter to the Hon.
Elisse Walter (Feb. 13, 2013), available at https://
www.centerforcapitalmarkets.com/wp-content/uploads/2010/04/2013-
2.13-Floating-NAV-Qs-Letter.pdf. See also, e.g., Virginia's Local
Government Investment Pool Act, which sets certain prudential
investment standards but leaves it to the state treasury board to
formulate specific investment policies for Virginia's LGIP. See Va.
Code Ann. Sec. 2.2-4605(A)(3). Accordingly, the treasury board
instituted a policy of managing Virginia's LGIP in accordance with
``certain risk limiting provisions to maintain a stable net asset
value at $1.00 per share'' and ``GASB `2a-7 like' requirements.''
Virginia LGIP's Investment Circular, June 30, 2012, available at
https://www.trs.virginia.gov/cash/lgip.aspx. Not all LGIPs are
currently managed to maintain a stable NAV, however, see infra
section III.E.1, Table 2, note N.
\277\ See GASB, Statement No. 31, Accounting and Financial
Reporting for Certain Investments and for External Investment Pools
(Mar. 1997).
\278\ See, e.g., Comment Letter of American Public Power Assoc.,
et al., File No. FSOC-2012-0003 (Feb. 13, 2013) (``If the SEC rules
are changed to adopt a daily floating NAV, states would have to
alter their own statutes in order to comply, as many state statues
cite rule 2a-7 as the model for their management of the LGIPs'').
---------------------------------------------------------------------------
Would our floating NAV proposal affect LGIPs as described
above? Are there other ways in which LGIPs would be affected? If so,
please describe.
Are there other costs that we have not considered?
How do commenters think states and other market
participants would react to our floating NAV proposal? Do commenters
believe that states would amend their statutes or policies to permit
LGIPs to have a floating NAV per share provided the fund complies with
rule 2a-7, as we propose to amend it? If so, what types and amounts of
costs would states incur? If not, would there be any effect on
efficiency, competition, or capital formation?
7. Operational Implications of Floating NAV Money Market Funds
Money market funds (or their transfer agents) are required under
rule 2a-7 to have the capacity to redeem and sell fund shares at prices
based on the funds' current net asset value per share pursuant to rule
22c-1 rather than $1.00, i.e., to transact at the fund's floating
NAV.\279\ Intermediaries, although not subject to rule 2a-7, typically
have separate obligations to investors with regard to the distribution
of proceeds received in connection with investments made or assets held
on behalf of investors.\280\ Prior to adopting these amendments to rule
2a-7, the ICI submitted a comment letter detailing the modifications
that would be required to permit funds to transact at the fund's
floating NAV.\281\ Accordingly, we expect that money market funds and
transfer agents already have laid the foundation required to use
floating NAVs.
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\279\ See rule 2a-7(c)(13). See also 2010 Adopting Release,
supra note 92, at nn.362-363.
\280\ See, e.g., 2010 Adopting Release, supra note 92, at
nn.362-363. Examples of intermediaries that offer money market funds
to their customers include broker-dealers, portals, bank trust
departments, insurance companies, and retirement plan
administrators. See Investment Company Institute, Operational
Impacts of Proposed Redemption Restrictions on Money Market Funds,
at 13 (2012), available at https://www.ici.org/pdf/ppr_12_
operational_mmf.pdf (``ICI Operational Impacts Study'').
\281\ See, e.g., Comment Letter of the Investment Company
Institute (Sept. 8, 2009) (available in File No. S7-11-09) (``ICI
2009 Comment Letter'') (describing the modifications that would be
necessary if the Commission adopted the requirement, currently
reflected in rule 2a-7(c)(13), that money market funds (or their
transfer agents) have the capacity to transact at a floating NAV,
to: (i) Fund transfer agent recordkeeping systems (e.g., special
same-day settlement processes and systems, customized transmissions,
and reporting mechanisms associated with same-day settlement systems
and proprietary systems used for next-day settlement); (ii) a number
of essential ancillary systems and related processes (e.g., systems
changes for reconciliation and control functions, transactions
accepted via the Internet and by phone, modifying related
shareholder disclosures and phone scripts, education and training
for transfer agent employees and changes to the systems used by fund
accountants that transmit net asset value data to fund transfer
agents); and (iii) sub-transfer agent/recordkeeping arrangements
(explaining that similar modifications likely would be needed at
various intermediaries).
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We recognize, however, that funds, transfer agents, intermediaries,
and others in the distribution chain may not currently have the
capacity to process transactions at floating NAVs constantly, as would
be required under our proposal.\282\ Accordingly, we expect that sub-
transfer agents, fund accounting departments, custodians,
intermediaries, and others in the distribution chain would need to
develop and overlay additional controls and procedures on top of
existing systems in order to implement a floating NAV on a continual
basis. In each case, the controls and procedures for the accounting
systems at these entities would have to be modified to permit those
systems to calculate a money
[[Page 36871]]
market fund's floating NAV each business day and to communicate that
value to others in the distribution chain on a permanent basis. In
addition, we understand that, under our floating NAV proposal, money
market funds and other recordkeepers would incur additional costs to
track portfolio security gains and losses, provide ``basis reporting,''
and monitor for potential wash-sale transactions, as discussed above in
section III.A.6. We believe, however, that funds, in many cases, should
be able to leverage existing systems that track this information for
other mutual funds.
---------------------------------------------------------------------------
\282\ Even though a fund complex's transfer agent system is the
primary recordkeeping system, there are a number of additional
subsystems and ancillary systems that overlay, integrate with, or
feed to or from a fund's primary transfer agent system, incorporate
custom development, and may be proprietary or vendor dependent
(e.g., print vendors to produce trade confirmations). See ICI
Operational Impacts Study at 20, supra note 280. The systems of sub-
transfer agents and other parties may also require modifications
related to our floating NAV proposal.
---------------------------------------------------------------------------
We understand that the costs to modify a particular entity's
existing controls and procedures would vary depending on the capacity,
function and level of automation of the accounting systems to which the
controls and procedures relate and the complexity of those systems'
operating environments.\283\ Procedures and controls that support
systems that operate in highly automated operating environments would
likely be less costly to modify while those that support complex
operations with multiple fund types or limited automation or both would
be more costly to change.\284\ Because each system's capabilities and
functions are different, an entity would likely have to perform an in-
depth analysis of our proposed rules to calculate the costs of
modifications required for its own system. While we do not have the
information necessary to provide a point estimate of the potential
costs of modifying procedures and controls, we expect that each entity
would bear one-time costs to modify existing procedures and controls in
the functional areas that are likely to be impacted by our proposal.
Our staff has estimated that the one-time costs of implementation for
an affected entity would range from $1.2 million (for entities
requiring less extensive modifications) to $2.3 million (for entities
requiring more extensive modifications).\285\ Staff also estimates that
the annual costs to keep procedures and controls current and to provide
continuing training would range from 5% to 15% of the one-time
costs.\286\
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\283\ See, e.g., ICI Operational Impacts Study at 37, supra note
280 (noting that the modifications necessary to transact at a
floating NAV would ``require in some cases minor and other instances
major modifications--depending on the complexity of the systems and
the types of intermediaries and investors'' involved).
\284\ See, e.g., id. at 41 (reporting that half of the
respondents in its survey reported that their transfer agent systems
``already had the capability to process money market trades'' at a
floating value, while the other respondents would need to modify
their transfer agent systems to comply with the requirement to have
the capacity to transact at a floating NAV).
\285\ Staff estimates that these costs would be attributable to
the following activities: (i) Drafting, integrating, and
implementing procedures and controls; (ii) preparation of training
materials; and (iii) training. See also supra note 245 (discussing
the bases of our staff's estimates of operational and related
costs).
\286\ As noted throughout this Release, we recognize that adding
new capabilities or capacity to a system (including modifications to
related procedures and controls) will entail ongoing annual
maintenance costs and understand that those costs generally are
estimated as a percentage of initial costs of building or expanding
a system.
---------------------------------------------------------------------------
We anticipate, however, that many money market funds, transfer
agents, custodians, and intermediaries in the distribution chain may
not bear the estimated costs on an individual basis and therefore
experience economies of scale. For example, the costs would likely be
allocated among the multiple users of affected systems, such as money
market funds that are members of a fund group, money market funds that
use the same transfer agent or custodian, and intermediaries that use
systems purchased from the same third party. Accordingly, we expect
that the cost for many individual entities that would have to process
transactions at floating NAVs may be less than the estimated costs.
We request comment on this analysis and our range of estimated
costs to money market funds, transfer agents, custodians, and
intermediaries.
To what extent would transfer agents, fund accounting
departments, custodians, and intermediaries need to develop and
implement additional controls and procedures or modify existing ones
under our floating NAV proposal?
To what extent do intermediaries, as a result of their
separate obligations to investors regarding distribution of proceeds,
have the capacity to process (on a continual basis) transactions at a
fund's floating NAV?
Do money market funds and others expect they would incur
costs in addition to those we estimate above or that they would incur
different costs? If so, what are these costs?
Would the costs incurred by money market funds and others
in the distribution chain discussed above be passed on to retail (and
other) investors in the form of higher fees?
If a number of money market funds already report daily
shadow prices using ``basis point'' rounding, are there additional
operational costs that funds would incur to price their shares to four
decimal places? If so, please describe. Are there means by which these
operational costs can be reduced while still providing sufficient price
transparency?
Do all funds have the ready capability to price their
shares to four decimal places? For those funds that do so already, we
seek comment on the costs involved in developing this capability. For
funds that do not have the capability, what types and amounts of costs
would be incurred?
What type of ongoing maintenance and training would be
necessary, and to what extent? Do commenters agree that such costs
would likely range between 5% and 15% of one-time costs? If not, is
there a more accurate way to estimate these costs?
To what extent would money market funds or others
experience economies of scale?
We request that intermediaries and others provide data to
support the costs they expect they would incur and an explanation of
the work they have already undertaken as a result of rule 2a-7's
current requirement that money market funds (or their transfer agents)
have the capacity to transact at a floating NAV.
In addition, funds would incur costs to communicate with
shareholders the change to a floating NAV per share. Although funds
(and their intermediaries that provide information to beneficial
owners) already have the means to provide shareholders the values of
their money market fund holdings, our staff anticipates that they would
incur additional costs associated with programs and systems
modifications necessary to provide shareholders with access to that
information online, through automated phone systems, and on shareholder
statements under our floating NAV proposal and to explain to
shareholders that the value of their money market funds shares will
fluctuate.\287\
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\287\ Staff expects these costs would include software
programming modifications, as well as personnel costs that would
include training and scripts for telephone representatives to enable
them to respond to investor inquiries.
---------------------------------------------------------------------------
Our staff anticipates that these communication costs would vary
among funds (or their transfer agents) and fund intermediaries
depending on the current capabilities of the entity's Web site,
automated or manned phone systems, systems for processing shareholder
statements, and the number of investors. We believe that money market
funds themselves would need to perform an in-depth analysis of our
proposed rules in order to estimate the necessary systems
modifications. While we do not have the information necessary to
provide a point estimate of the potential costs of systems
modifications, our staff
[[Page 36872]]
has estimated that the costs for a fund (or its transfer agent) or
intermediary that may be required to perform these activities would
range from $230,000 to $490,000.\288\ Staff also estimates that funds
(or their transfer agents) and their intermediaries would have ongoing
costs to maintain automated phone systems and systems for processing
shareholder statements, and to explain to shareholders that the value
of their money market fund shares will fluctuate, and that these costs
would range from 5% to 15% of the one-time costs.\289\ We request
comment on this aspect of our proposal.
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\288\ Staff estimates that these costs would be attributable to
the following activities: (i) Project assessment and development;
(ii) project implementation and testing; and (iii) written and
telephone communication. See also supra note 245 (discussing the
bases of our staff's estimates of operational and related costs).
\289\ As noted throughout this Release, we recognize that adding
new capabilities or capacity to a system will entail ongoing annual
maintenance costs and understand that those costs generally are
estimated as a percentage of initial costs of building or expanding
a system.
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Do commenters agree with our estimated range of costs to
funds (or their transfer agents) and fund intermediaries to communicate
with shareholders the change to a floating NAV per share? If not, we
request detailed estimates of the types and amounts of costs.
Money market funds' ability to maintain a stable value also
facilitates the funds' role as a cash management vehicle and provides
other operational efficiencies for their shareholders.\290\ Money
market fund shareholders generally are able to transact in fund shares
at a stable value known in advance. This permits money market fund
transactions to settle on the same day that an investor places a
purchase or sell order, and allows a shareholder to determine the exact
value of his or her money market fund shares (absent a liquidation
event) at any time.\291\ These features have made money market funds an
important component of systems for processing and settling various
types of transactions.\292\
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\290\ See, e.g., Federated Investors Alternative 1 FSOC Comment
Letter, supra note 161; Comment Letter of Steve Fancher, et al.
(Jan. 22, 2013) (available in File No. FSOC-2012-0003); Comment
Letter of Steve Morgan, et al. (Jan. 22, 2013) (available in File
No. FSOC-2012-0003) (``Steve Morgan FSOC Comment Letter''); Comment
Letter of Edward Jones (Feb. 15, 2013) (available in File No. FSOC-
2012-0003) (``Edward Jones FSOC Comment Letter'') (citing cash
management benefits for individual investors in particular); Comment
Letter of T. Rowe Price (Jan. 30, 2013) (available in File No. FSOC-
2012-0003) (``T. Rowe Price FSOC Comment Letter'').
\291\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25
(noting how same-day settlement is vitally important to many
investors and describing how such same-day settlement is facilitated
by a stable NAV). We note, however, that not all money market fund
transactions settle on the same day. See, e.g., ICI 2009 Comment
Letter, supra note 281 (describing the systems and processes
involved to permit same-day settlement and those involved for next-
day settlement).
\292\ See, e.g., Comment Letter of John D. Hawke (Dec. 15, 2011)
(available in File No. 4-619) (``Hawke Dec 2011 PWG Comment
Letter'') (identifying various types of systems, including among
others trust accounting systems at bank trust departments; corporate
payroll processing systems and processing systems used to manage
corporations' cash balances; processing systems used by federal,
state, and local governments to manage their cash balances; and
municipal bond trustee cash management systems).
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Commenters have asserted that money market funds with floating NAVs
would be incompatible with these systems because, among other things,
transactions in shares of these money market funds, like other types of
mutual fund transactions, would generally not settle on the same day
that an order is placed, and the value of the shares of these money
market funds could not be determined precisely before that day's NAV
had been calculated.\293\ Requiring money market funds to use floating
NAVs, the commenters assert, would require money market fund
shareholders and service providers to reprogram their systems or
manually reconcile transactions, increasing staffing costs.\294\ Others
have asserted that similar considerations could affect features that
are particularly appealing to retail investors, such as ATM access,
check writing, electronic check payment processing services and
products, and U.S. Fedwire transfers.\295\ We note that we are
proposing an exemption for retail funds which we expect would
significantly alleviate any such concerns about the costs of altering
those features, because funds that take advantage of the retail
exemption would be able to maintain a stable price, and accordingly,
such features would be unaffected. Nonetheless, not all funds with
these features may choose to take advantage of the proposed retail
exemption, and therefore, some funds may need to make additional
modifications to continue offering these features. We have included
estimates of the costs to make such modifications below. We seek
comment on the extent to which these features may be affected by our
proposal and the proposed retail exemption.
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\293\ Hawke Dec 2011 PWG Comment Letter, supra note 292 (``The
net result of a floating NAV would be to make Money Funds not useful
to hold the large, short-term cash balances used in these automated
transaction processing systems across a wide variety of businesses
and applications.''); Comment Letter of Cachematrix Holdings LLC
(Dec. 12, 2011) (available in File No. 4-619) (``Cachematrix PWG
Comment Letter'') (``A stable share price is critical to same-day
and next-day processing, shortened settlement times, float
management, and mitigation of counterparty risk among firms.'');
Comment Letter of State Street Global Advisors (Sept. 8, 2009)
(available in File No. S7-11-09) (``[T]he stable NAV simplifies
transaction settlement, which permits money market funds to offer
shareholders same day settlement options, as well as ATM access,
check writing, and ACH/FedWire transfers.'').
\294\ See, e.g., Hawke Dec 2011 PWG Comment Letter, supra note
292 (stating that ``[m]anual processing [required to reconcile the
day-to-day fluctuations in the value of money market funds with a
floating NAV] would mean more staffing requirement, more costs
associated with staffing the function, and errors and delays in
completing the process'' and that reprogramming systems would ``take
many years and hundreds of millions of dollars to complete across a
wide range of businesses and applications for which stable value
money funds currently are used to hold short-term liquidity'');
Cachematrix PWG Comment Letter, supra note 293 (``[A]n entire
industry has programmed accounting, trading and settlement systems
based on a stable share price. The cost for each bank to retool
their sub-accounting systems to accommodate a fluctuating NAV could
be in the millions of dollars. This does not take into account the
costs that each bank would then pass on to the thousands of
corporations that use money market trading systems.'').
\295\ See, e.g., Comment Letter of Fidelity Investments (Feb.
14, 2013) (available in File No. FSOC-2012-0003) (``Fidelity FSOC
Comment Letter''). ([B]roker-dealers offer clients a variety of
features that are available generally only to accounts with a stable
NAV, including ATM access, check writing, and ACH and Fedwire
transfers. A floating NAV would force MMFs that offer same day
settlement on shares redeemed through wire transfers to shift to
next day settlement or require fund advisers to modify their systems
to accommodate floating NAV MMFs.''); Edward Jones FSOC Comment
Letter, supra note 290; ICI Feb 2012 PWG Comment Letter, supra note
259 (``[E]limination of the stable NAV for money market funds would
likely force brokers and fund sponsors to consider how or whether
they could continue to provide such services to money market fund
investors.'').
---------------------------------------------------------------------------
Would money market funds and financial intermediaries
continue to provide the retail-focused services discussed above if we
were to require money market funds to use floating NAVs? If not, why
not?
Would investors reduce or eliminate their money market
fund investments if these services were no longer available or if the
cost of these services increases?
Commenters also assert that requiring money market funds to use
floating NAVs would extend the settlement cycle from same-day
settlement to next-day settlement, which would expose parties to
transactions to increased risk (e.g., during a day in which a
transaction to be paid by proceeds from a sale of money market fund
shares is still open, one party to the transaction could default).\296\
But a money market
[[Page 36873]]
fund with a floating NAV could still offer same-day settlement. The
fund could price its shares each day and provide redemption proceeds
that evening. Indeed, we are aware of two floating NAV money market
funds that normally operate this way.\297\ Alternatively, funds could
price their shares periodically (e.g., at noon and 4 p.m. each day) to
provide same-day settlement.\298\ We recognize that pricing services
may incur operational costs to modify their systems (and pass these
costs along to funds) to provide pricing multiple times each day and
seek comment on the nature and amounts of these costs.
---------------------------------------------------------------------------
\296\ See, e.g., Hawke Dec 2011 PWG Comment Letter, supra note
292 (``Both parties would carry the unsettled transaction as an open
position for one extra day and each party would be exposed for that
time to the risk that its counterparty would default during the
extra day, or that the bank holding the cash overnight (or over the
weekend) would fail. For a bank involved in making a payment in
anticipation of an incoming funds transfer as part of these
processing systems, this change from same-day to next-day processing
of money fund redemptions would turn intra-day overdrafts into
overnight overdrafts, resulting in much greater default and funding
risks to the bank. This extra day's float would mean more risk in
the system and a larger average float balance that each party must
carry and finance.''); Cachematrix PWG Comment Letter, supra note
293 (``A stable share price is critical to same-day and next-day
processing, shortened settlement times, float management, and
mitigation of counterparty risk among firms.'').
\297\ See, e.g., the prospectus for the DWS Variable NAV Money
Fund, dated December 1, 2011, available at https://www.sec.gov/
Archives/edgar/data/863209/000008805311001627/nb120111ict-vnm.txt
(``If the fund receives a sell request prior to the 4:00 p.m.
Eastern time cut-off, the proceeds will normally be wired on the
same day. However, the shares sold will not earn that day's
dividend.''); prospectus for the Northern Funds, dated December 7,
2012, available at https://www.sec.gov/Archives/edgar/data/916620/
000119312512495705/d449473d485apos.htm (``Redemption proceeds
normally will be sent or credited on the next Business Day or, if
you are redeeming your shares through an authorized intermediary, up
to three Business Days, following the Business Day on which such
redemption request is received in good order by the deadline noted
above, unless payment in immediately available funds on the same
Business Day is requested.'').
\298\ We understand that pricing vendors may not provide
continual pricing throughout the day. Instead, money market funds
could establish periodic times at which the fund would price its
shares.
---------------------------------------------------------------------------
Do commenters expect to incur the types of costs described
above (e.g., increased staffing costs to manually reconcile
transactions)? Are there additional costs we have not identified?
What kinds of costs, specifically, do commenters expect to
incur? What kinds of employee costs would be involved?
Would an extended settlement cycle impose costs on money
market fund investors? If so, what kinds of costs and how much?
Would money market funds extend the settlement cycle or
would they exercise either of those other options?
Would exercising either of the two options discussed above
impose costs on money market funds? If so, how much? Are there options
that we have not identified that money market funds could use to
provide same-day settlement?
Would extending the settlement cycle cause investors to
leave or not invest in money market funds?
Do commenters agree that a delay in settlement for some
money market fund transactions could expose parties to the transactions
to increased counterparty risk? To what extent would this occur, and
how does the nature of this risk differ from counterparty risk that
arises in other aspects of a money market fund shareholder's business?
Do commenters agree that money market funds generally
could still offer same-day settlement if required to use a floating
NAV?
Do fund pricing services have the capacity to provide
pricing multiple times each day? If not, what types and amounts of
costs would pricing services incur to develop this capacity? Would
pricing services pass these costs down to funds?
Are the money market funds that currently same-day settle
with a floating NAV representative of what a broader industry of
floating NAV money market funds could achieve? Are there additional
costs or complications in conducting such same-day settlement for
larger funds than smaller funds?
In addition to money market funds and other entities in the
distribution chain, each money market fund shareholder would also
likely be required to perform an in-depth analysis of our floating NAV
proposal and its own existing systems, procedures, and controls to
estimate the systems modifications it would be required to undertake.
Because of this, and the variation in systems currently used by
institutional money market fund shareholders, we do not have the
information necessary to provide a point estimate of the potential
costs of systems modifications. Nevertheless, our staff has attempted
to describe the types of activities typically involved in making
systems modifications and estimated a range of hours and costs that may
be required to perform these activities. In addition, the Commission
requests from commenters information regarding the potential costs of
system modifications for money market fund shareholders.
Our staff has prepared ranges of estimated costs, taking into
account variations in the functionality, sophistication, and level of
automation of money market fund shareholders' existing systems and
related procedures and controls, and the complexity of the operating
environment in which these systems operate.\299\ In deriving its
estimates, our staff considered the need to modify systems and related
procedures and controls related to recordkeeping, accounting, trading,
cash management, and bank reconciliations, and to provide training
concerning these modifications.
---------------------------------------------------------------------------
\299\ Some money market fund shareholders do not use systems and
would not use them under this proposal (e.g., many retail
investors), and these shareholders of course would not incur any
systems modifications costs.
---------------------------------------------------------------------------
Staff estimates that a shareholder whose systems (including related
procedures and controls) would require less extensive or labor-
intensive modifications would incur one-time costs ranging from
$123,000 to $253,000.\300\ Staff estimates that a shareholder whose
systems (including related procedures and controls) would require more
extensive or labor-intensive modifications would incur one-time costs
ranging from $1.4 million to $2.9 million.\301\ In addition, staff
estimates the annual maintenance costs to these systems and procedures
and controls, and the costs to provide continuing training, would range
from 5% to 15% of the one-time implementation costs.\302\ We request
comment on our analysis and the nature and extent of the costs money
market fund shareholders anticipate they would incur as a result of our
floating NAV proposal.
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\300\ Staff estimates that these costs would be attributable to
the following activities: (i) Planning, coding, testing, and
installing system modifications; (ii) drafting, integrating,
implementing procedures and controls; (iii) preparation of training
materials; and (iv) training. See also supra note 245 (discussing
the bases of our staff's estimates of operational and related
costs).
\301\ Id.
\302\ See supra note 286.
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Are shareholder systems in fact unable to accommodate a
floating NAV, even if the NAV typically fluctuates very little (a
fraction of a penny) on a day-to-day basis?
If shareholder systems are unable to accommodate a
floating NAV, what kinds of programming costs would shareholders incur
in reprogramming the systems and how do they compare to our staff's
estimates above?
Do shareholders have other systems they use to manage
their investments that fluctuate in value? If so, could these systems
be used for money market funds? If not, why not?
How much would it cost to adapt existing shareholder
systems (currently used to accommodate investments that fluctuate in
value) to accommodate money market funds with floating NAVs and how do
these costs compare to our staff's estimates above?
[[Page 36874]]
8. Disclosure Regarding Floating NAV
We are proposing disclosure-related amendments to rule 482 under
the Securities Act \303\ and Form N-1A in connection with the floating
NAV alternative. We anticipate that the proposed rule and form
amendments would provide current and prospective shareholders with
information regarding the operations and risks of this reform
alternative. In keeping with the enhanced disclosure framework we
adopted in 2009,\304\ the proposed amendments are intended to provide a
layered approach to disclosure in which key information about the
proposed new features of money market funds would be provided in the
summary section of the statutory prospectus (and, accordingly, in any
summary prospectus, if used) with more detailed information provided
elsewhere in the statutory prospectus and in the statement of
additional information (``SAI'').
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\303\ Rule 482 applies to advertisements or other sales
materials with respect to securities of an investment company
registered under the Investment Company Act that is selling or
proposing to sell its securities pursuant to a registration
statement that has been filed under the Investment Company Act. See
rule 482(a). This rule describes the information that is required to
be included in an advertisement, including a disclosure statement
that must be used on money market fund advertisements. See rule
482(b).
Our proposal would also affect fund supplemental sales
literature (i.e., sales literature that is preceded or accompanied
by a statutory prospectus). Rule 34b-1 under the Investment Company
Act prescribes the requirements for supplemental sales literature.
Because rule 34b-1(a) cross-references the requirements of rule
482(b)(4), any changes made to that provision will affect the
requirements for fund supplemental sales literature.
\304\ See Enhanced Disclosure and New Prospectus Delivery Option
for Registered Open-End Management Investment Companies, Investment
Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26,
2009)] (``Summary Prospectus Adopting Release'') at paragraph
preceding section III (adopting rules permitting the use of a
summary prospectus, which is designed to provide key information
that is important to an informed investment decision).
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a. Disclosure Statement
The move to a floating NAV would be designed to change the
investment expectations and behavior of money market fund investors. As
a measure to achieve this change, we propose to require that each money
market fund, other than a government or retail fund, include a bulleted
statement disclosing the particular risks associated with investing in
a floating NAV money market fund on any advertisement or sales material
that it disseminates (including on the fund Web site). We also propose
to include wording designed to inform investors about the primary risks
of investing in money market funds generally in this bulleted
disclosure statement. While money market funds are currently required
to include a similar disclosure statement on their advertisements and
sales materials,\305\ we propose amending this disclosure statement to
emphasize that money market fund sponsors are not obligated to provide
financial support, and that money market funds may not be an
appropriate investment option for investors who cannot tolerate
losses.\306\
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\305\ See supra note 303. Rule 482(b)(4) (which currently
requires a money market fund to include the following disclosure
statement on its advertisements and sales materials: An investment
in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the
Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund).
\306\ See infra note 607 and accompanying text (discussing the
extent to which discretionary sponsor support has the potential to
confuse money market fund investors); supra note 141 and
accompanying text (noting that survey data shows that some investors
are unsure about the amount of risk in money market funds and the
likelihood of government assistance if losses occur).
---------------------------------------------------------------------------
Specifically, we would require floating NAV money market funds to
include the following bulleted disclosure statement on their
advertisements and sales materials:
You could lose money by investing in the Fund.
You should not invest in the Fund if you require your
investment to maintain a stable value.
The value of shares of the Fund will increase and decrease
as a result of changes in the value of the securities in which the Fund
invests. The value of the securities in which the Fund invests may in
turn be affected by many factors, including interest rate changes and
defaults or changes in the credit quality of a security's issuer.
An investment in the Fund is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government
agency.
The Fund's sponsor has no legal obligation to provide
financial support to the Fund, and you should not expect that the
sponsor will provide financial support to the Fund at any time.\307\
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\307\ See proposed (FNAV) rule 482(b)(4)(i). If an affiliated
person, promoter, or principal underwriter of the fund, or an
affiliated person of such person, has entered into an agreement to
provide financial support to the fund, the fund would be permitted
to omit the last bulleted sentence from the disclosure statement for
the term of the agreement. See Note to paragraph (b)(4), proposed
(FNAV) rule 482(b)(4).
---------------------------------------------------------------------------
We also propose to require a substantially similar bulleted
disclosure statement in the summary section of the statutory prospectus
(and, accordingly, in any summary prospectus, if used).\308\
---------------------------------------------------------------------------
\308\ See proposed (FNAV) Item 4(b)(1)(ii)(A) of Form N-1A. Item
4(b)(1)(ii) currently requires a money market fund to include the
following statement in its prospectus: An investment in the Fund is
not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Although the Fund seeks
to preserve the value of your investment at $1.00 per share, it is
possible to lose money by investing in the Fund.
---------------------------------------------------------------------------
With respect to money market funds that are not government or
retail funds, we propose to remove current requirements that money
market funds state that they seek to preserve the value of shareholder
investments at $1.00 per share.\309\ This disclosure, which was adopted
to inform investors in money market funds that a stable net asset value
does not indicate that the fund will be able to maintain a stable
NAV,\310\ will not be relevant once funds are required to ``float''
their net asset value.
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\309\ See Item 4(b)(1)(ii) of Form N-1A; proposed (FNAV) Item
4(b)(1)(ii)(A) of Form N-1A.
\310\ See Registration Form Used by Open-End Management
Investment Companies, Investment Company Act Release No. 23064 (Mar.
13, 1998) [63 FR 13916 (Mar. 23, 1998)] (release amending
disclosure) (``Registration Statement Adopting Release''); Revisions
to Rules Regulating Money Market Funds, Investment Company Act
Release No. 18005 (Feb. 20, 1990) [56 FR 8113 (Feb. 27, 1991)]
(adopting release); Revisions to Rules Regulating Money Market
Funds, Investment Company Act Release No. 17589 (July 17, 1990) [55
FR 30239 (July 25, 1990)] (``1990 Proposing Release'').
---------------------------------------------------------------------------
As discussed above, the floating NAV proposal would provide
exemptions to the floating NAV requirement for government and retail
money market funds.\311\ Accordingly, the proposed amendments to rule
482 and Form N-1A would require government and retail money market
funds to include a bulleted disclosure statement on the fund's
advertisements and sales materials and in the summary section of the
fund's statutory prospectus (and, accordingly, in any summary
prospectus, if used) that does not discuss the risks of a floating NAV,
but that would be designed to inform investors about the risks of
investing in money market funds generally.\312\ We propose to require
each government and retail fund to include the following bulleted
disclosure statement in the summary section of its statutory prospectus
(and, accordingly, in any summary prospectus, if used), and on any
advertisement or sales material that it disseminates (including on the
fund Web site):
---------------------------------------------------------------------------
\311\ See supra sections III.A.3 and III.A.4 and proposed (FNAV)
rules 2a-7(c)(2) and (c)(3).
\312\ See supra notes 305-306 and accompanying text.
---------------------------------------------------------------------------
You could lose money by investing in the Fund.
The Fund seeks to preserve the value of your investment at
$1.00 per
[[Page 36875]]
share, but cannot guarantee such stability.
An investment in the Fund is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government
agency.
The Fund's sponsor has no legal obligation to provide
financial support to the Fund, and you should not expect that the
sponsor will provide financial support to the Fund at any time.\313\
---------------------------------------------------------------------------
\313\ See proposed (FNAV) rule 482(b)(4)(ii) and proposed (FNAV)
item 4(b)(1)(ii)(B) of Form N-1A; see also supra notes 305 and 308
(discussing the current corresponding disclosure requirements for
money market funds). If an affiliated person, promoter, or principal
underwriter of the fund, or an affiliated person of such person, has
entered into an agreement to provide financial support to the fund,
the fund would be permitted to omit the last bulleted sentence from
the disclosure statement that appears on a fund advertisement or
fund sales material, for the term of the agreement. See Note to
paragraph (b)(4), proposed (FNAV) rule 482(b)(4).
Likewise, if an affiliated person, promoter, or principal
underwriter of the fund, or an affiliated person of such person, has
entered into an agreement to provide financial support to the fund,
and the term of the agreement will extend for at least one year
following the effective date of the fund's registration statement,
the fund would be permitted to omit the last bulleted sentence from
the disclosure statement that appears on the fund's registration
statement. See Instruction to proposed (FNAV) item 4(b)(1)(ii) of
Form N-1A.
---------------------------------------------------------------------------
The proposed disclosure statements are intended to be one measure
to change the investment expectations and, therefore, the behavior of
money market fund investors. The risk-limiting conditions of rule 2a-7
and past experiences of money market fund investors have created
expectations of a stable, cash-equivalent investment. As discussed
above, one reason for such expectation may have been the role of
sponsor support in maintaining a stable net asset value for money
market funds.\314\ In addition, we are concerned that investors, under
the floating NAV proposal, will not be fully aware that the value of
their money market fund shares will increase and decrease as a result
of the changes in the value of the underlying portfolio
securities.\315\ In proposing the disclosure statement, we have taken
into consideration investor preferences for clear, concise, and
understandable language.\316\ We also considered whether language that
was stronger in conveying potential risks associated with money market
funds would be effective for investors.\317\ In addition, we considered
whether the proposed disclosure statement should be limited to only
money market fund advertisements and sales materials, as discussed
above. Although we acknowledge that the summary section of the
prospectus must contain a discussion of key risk factors associated
with a floating NAV money market fund, we believe that the importance
of the disclosure statement merits its placement in both locations,
similar to how the current money market fund legend is required in both
money market fund advertisements and sales materials and the summary
section of the prospectus.\318\
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\314\ See supra section II.B.3.
\315\ See Fidelity FSOC Comment Letter, supra note 295 (finding,
from its study, that 81% of its retail money market fund investors
understood that securities held by these funds have some small day-
to-day fluctuations). However, the study did not address the extent
to which these investors understood that these fluctuations could
impact the value of their shares of money market funds, rather than
the value of the underlying portfolio securities.
\316\ See Study Regarding Financial Literacy Among Investors, a
study by staff of the U.S. Securities and Exchange Commission (Aug.
2012), available at https://www.sec.gov/news/studies/2012/917-
financial-literacy-study-part1.pdf, at vi.
\317\ See Molly Mercer et al., Worthless Warnings? Testing the
Effectiveness of Disclaimers in Mutual Fund Advertisements, 7 J.
Empirical Legal Stud. 429 (2010) (evaluating the usefulness of
legends in mutual fund advertisements regarding performance
advertising).
\318\ See supra notes 305 and 308.
---------------------------------------------------------------------------
We request comment on the disclosure statements \319\ proposed to
be required on any money market fund advertisements or sales materials,
as well as in the summary section of a fund's statutory prospectus
(and, accordingly, in any summary prospectus, if used).
---------------------------------------------------------------------------
\319\ In the questions that follow, we use the term ``disclosure
statement'' to mean the new disclosure statement that we propose to
require floating NAV funds to incorporate into their prospectuses
and advertisements and sales materials or, alternatively and as
appropriate, the new disclosure statement that we propose to require
government or retail funds to incorporate into their prospectuses
and advertisements and sales materials.
---------------------------------------------------------------------------
Would the disclosure statement proposed to be used by
floating NAV funds adequately alert investors to the risks of investing
in a floating NAV fund, and would investors understand the meaning of
each part of the proposed disclosure statement? Will investors be fully
aware that the value of their money market fund shares will increase
and decrease as a result of the changes in the value of the underlying
portfolio securities? If not, how should the proposed disclosure
statement be amended?
Would the disclosure statement proposed to be used by
government and retail money market funds, which are not subject to the
floating NAV requirement, adequately alert investors to the risks of
investing in those types of funds, and would investors understand the
meaning of each part of the proposed disclosure statement? If not, how
should the proposed disclosure statement be amended?
Would different shareholder groups or different types of
funds benefit from different disclosure statements? For example, should
retail and institutional investors receive different disclosure
statements, or should funds that offer cash management features such as
check writing provide different disclosure statements from funds that
do not? Why or why not? If yes, how should the disclosure statement be
tailored to different shareholder groups and fund types?
Will the proposed disclosure statement respond effectively
to investor preferences for clear, concise, and understandable
language?
Would the following variations on the proposed disclosure
statement be any more or less useful in alerting shareholders to the
risks of investing in a floating NAV fund (as applicable) and/or the
risks of investing in money market funds generally?
[cir] Removing or amending the following bullet point in the
proposed disclosure statement: ``The Fund's sponsor has no legal
obligation to provide financial support to the Fund, and you should not
expect that the sponsor will provide financial support to the Fund at
any time.''
[cir] Removing or amending the following bullet point in the
proposed disclosure statement: ``The value of the securities in which
the Fund invests may in turn be affected by many factors, including
interest rate changes and defaults or changes in the credit quality of
a security's issuer.''
[cir] Amending the final bullet point in the proposed disclosure
statement to read: ``Your investment in the Fund therefore may
experience losses.''
[cir] Amending the final bullet point in the proposed disclosure
statement to read: ``Your investment in the Fund therefore may
experience gains or losses.''
Would investors benefit from requiring the proposed
disclosure statement also to be included on the front cover page of a
money market fund's prospectus (and on the cover page or beginning of
any summary prospectus, if used)?
Would investors benefit from any additional types of
disclosure in the summary section of the statutory prospectus or on the
prospectus' cover page? If so, what else should be included?
Should we provide any instruction or guidance in order to
highlight the proposed disclosure statement on fund advertisements and
sales materials (including the fund's Web site) and/or lead investors
efficiently to the
[[Page 36876]]
disclosure statement? \320\ For example, with respect to the fund's Web
site, should we instruct that the proposed disclosure statement be
posted on the fund's home page or be accessible in no more than two
clicks from the fund's home page?
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\320\ Such instruction or guidance would supplement current
requirements for the presentation of the disclosure statement
required by rule 482(b)(4). See supra note 305; rule 482(b)(5).
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b. Disclosure of Tax Consequences and Effects on Fund Operations
The proposed requirement that money market funds transition to a
floating NAV would entail certain additional tax- and operations-
related disclosure, which disclosure requirements would not necessitate
rule and form amendments.\321\ As discussed above, if we were to
require certain money market funds to use a floating NAV, taxable
investors in money market funds, like taxable investors in other types
of mutual funds, may experience taxable gains and losses.\322\
Currently, funds are required to describe in their prospectuses the tax
consequences to shareholders of buying, holding, exchanging, and
selling the fund's shares.\323\ Accordingly, we expect that, pursuant
to current disclosure requirements, floating NAV money market funds
would include disclosure in their prospectuses about the tax
consequences to shareholders of buying, holding, exchanging, and
selling the shares of the floating NAV fund. In addition, we expect
that a floating NAV money market fund would update its prospectus and
SAI disclosure regarding the purchase, redemption, and pricing of fund
shares, to reflect any procedural changes resulting from the fund's use
of a floating NAV.\324\ As discussed below, if we were to adopt the
floating NAV alternative, the compliance date would be 2 years after
the effective date of the adoption with respect to any amendments
specifically related to the floating NAV proposal, including related
amendments to disclosure requirements.\325\
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\321\ Prospectus disclosure regarding the tax consequences of
these activities is currently required by Form N-1A. See Item 11(f)
of Form N-1A.
\322\ See supra section III.A.6 (discussing the tax and economic
implications of floating NAV money market funds).
\323\ See Item 11(f) of Form N-1A.
\324\ We expect that a money market fund would include this
disclosure (as appropriate) in response to, for example, Item
11(``Shareholder Information'') and Item 23 (``Purchase, Redemption,
and Pricing of Shares'') of Form N-1A.
\325\ See infra section III.N.1.
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We request comment on the disclosure that we expect floating NAV
money market funds would include in their prospectuses about the tax
consequences to shareholders of buying, holding, exchanging, and
selling the shares of the fund, as well as the effects (if any) on fund
operations resulting from the transition to a floating NAV.
Should Form N-1A or its instructions be amended to more
explicitly require any of the disclosure we discuss above, or any
additional disclosure, to be included in a fund's prospectus and/or
SAI?
Is there any additional information about a floating NAV
fund's operations that shareholders should be aware of that is not
discussed above? If so, would such additional information already be
covered under existing Form N-1A requirements, or would we need to make
any amendments to the form or its instructions?
c. Disclosure of Transition to Floating NAV
A fund must update its registration statement to reflect any
material changes by means of a post-effective amendment or a prospectus
supplement (or ``sticker'') pursuant to rule 497 under the Securities
Act.\326\ We would expect that, to meet this requirement, at the time
that a stable NAV money market fund transitions to a floating NAV (or
adopts a floating NAV in the course of a merger or other
reorganization),\327\ it would update its registration statement to
include relevant related disclosure, as discussed in this section of
the Release, by means of a post-effective amendment or a prospectus
supplement. We request comment on this requirement.
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\326\ See 17 CFR 230.497.
\327\ See infra section III.N.
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Besides requiring a fund that transitions to a floating
NAV to update its registration statement by filing a post-effective
amendment or prospectus supplement, should we also require that, when a
fund transitions to a floating NAV, it must notify shareholders
individually about the risks and operational effects of a floating NAV
on the fund, such as a separate mailing or email notice? Would
shareholders be more likely to understand and appreciate these risks
and operational effects (disclosure of which would be included in the
fund's registration statement, as discussed above) if they were to
receive such individual notification? If so, what information should
this individual notification include? What would be an appropriate time
frame for this notification? How would such notification be
accomplished, and what costs would be incurred in providing such
notification?
d. Request for Comment on Money Market Fund Names
As discussed above, our floating NAV proposal would provide
exemptions to the floating NAV requirements for government money market
funds and retail money market funds. We request comment on whether we
should require new terminology in money market fund names \328\ to
reduce the risk of investor confusion that might result from permitting
some types of funds to maintain a stable price, while requiring others
types of funds to use a floating NAV.
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\328\ See rule 2a-7(b)(3) (setting forth the conditions for a
fund to use a name that suggests that it is a money market fund or
the equivalent, including using terms such as ``cash,'' ``liquid,''
``money,'' ``ready assets,'' or similar terms in a fund's name).
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Given that, under our floating NAV proposal, some funds'
share prices would increase and decrease as a result of changes in the
value of the securities in which the fund invests, should we require
new terminology in money market fund names to reduce any risk of
investor confusion that might result from both stable price money
market funds and floating NAV money market funds using the same term
``money market fund'' in their names? For example, should we require
money market funds to use either the term ``stable money market fund''
or ``floating money market fund,'' as appropriate, in their names? Why
or why not?
e. Economic Analysis
The floating NAV proposal makes significant changes to the nature
of money market funds as an investment vehicle. The proposed disclosure
requirements in this section are intended to communicate to
shareholders the nature of the risks that follow from the floating NAV
proposal. In section III.E, we discussed how the floating NAV proposal
might affect shareholders' use of money market funds and the resulting
effects on the short-term financing markets. The factors and uncertain
effects of those factors discussed in that section would influence any
estimate of the incremental effects that the proposed disclosure
requirements might have on either shareholders or the short-term
financing markets. However, we believe that the proposed disclosure
will better inform shareholders about the changes, which should result
in shareholders making investment decisions that better match their
investment preferences. We expect that this will have similar effects
on efficiency, competition, and capital formation as those that are
outlined in
[[Page 36877]]
section III.E rather than introduce new effects. We further believe
that the effects of the proposed disclosure requirements will be small
relative to the effects of the floating NAV proposal. The Commission
staff cannot estimate the quantitative benefits of these proposed
requirements at this time because of uncertainty about how increased
transparency may affect different investors' understanding of the risks
associated with money market funds.\329\ We request additional data
from commenters below to enable us to effectively calculate these
effects.
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\329\ Likewise, uncertainty regarding how the proposed
disclosure may affect different investors' behavior would make it
difficult for the SEC staff to measure the quantitative benefits of
the proposed requirements. With respect to the proposed disclosure
statement, there are many possible permutations on specific wording
that would convey the specific concerns identified in this Release,
and the breadth of these permutations makes it difficult for SEC
staff to test how investors would respond to each wording variation.
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We anticipate that all money market funds would incur costs to
update their registration statements, as well as their advertising and
sales materials (including the fund Web site), to include the proposed
disclosure statement, and that floating NAV funds additionally would
incur costs to update their registration statements to incorporate tax-
and operations-related disclosure relating to the use of a floating
NAV. We expect these costs generally would be incurred on a one-time
basis. Our staff estimates that the average costs for a floating NAV
money market fund to comply with these proposed disclosure amendments
would be approximately $1,480 and that the compliance costs for a
government or retail money market fund would be approximately
$592.\330\ Each money market fund in a fund group might not incur these
costs individually.
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\330\ Staff estimates that these costs would be attributable to
amending the fund's disclosure statement and updating the fund's
advertising and sales materials. See supra note 245 (discussing the
bases of our staff's estimates of operational and related costs).
The costs associated with these activities are all paperwork-related
costs and are discussed in more detail in infra section IV.A.7.
We expect the new required disclosure would add minimal length
to the current required prospectus disclosure, and thus would not
increase the number of pages in, or change the printing costs of, a
fund's prospectus. Based on conversations with fund representatives,
the Commission understands that, in general, unless the page count
of a prospectus is changed by at least four pages, printing costs
would remain the same.
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We request comment on this economic analysis:
Are any of the proposed disclosure requirements unduly
burdensome, or would they impose any unnecessary costs?
We request comment on the staff's estimates of the
operational costs associated with the proposed disclosure requirements.
We request comment on our analysis of potential effects of
these proposed disclosure requirements on efficiency, competition, and
capital formation.
9. Transition
The PWG Report suggests that a transition to a floating NAV could
itself result in significant redemptions.\331\ Money market fund
investors could seek to redeem shares ahead of other investors to avoid
realizing losses when their money market funds switch to a floating
NAV. Investors may anticipate their funds' NAVs per share being less
than $1.00 when the switch occurs or they may fear their funds might
incur liquidity costs from heavy redemptions resulting from the
behavior of other investors.
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\331\ PWG Report, supra note 111, at 22. Other commenters have
voiced additional concern that redemptions as a result of the
transition to a floating NAV could be destabilizing to the financial
markets. See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25;
Comment Letter from American Association of State Colleges and
Universities (Jan. 21, 2011) (available in File No. 4-619).
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To avoid large numbers of preemptive redemptions by shareholders
and allow sufficient time for funds and intermediaries to cost-
effectively adapt to the new requirements, we propose to delay
compliance with this aspect of the proposed rules for a period of 2
years from the effective date of our proposed rulemaking. Accordingly,
money market funds subject to our floating NAV proposal could continue
to price their shares as they do today for up to 2 years following this
date. On or before the compliance date, all stable value money market
funds not exempted from the floating NAV proposal would convert to a
floating NAV. However, we note that, under our floating NAV proposal,
investors who prefer a stable price product also could invest in a
government or retail money market fund. We request comment on the
proposed transition.
If we were to adopt the floating NAV proposal, money market funds
and their shareholders would have 2 years to understand the
implications of and implement our reform. We believe this would benefit
money market funds and their shareholders by allowing money market
funds to make this transition at the optimal time and potentially not
at the same time as all other money market funds (which may be more
likely to have a disruptive effect on the short-term financing markets,
and thus not be perceived as optimal by funds). It would also provide
time for investors such as corporate treasurers to modify their
investment guidelines or seek changes to any statutory or regulatory
constraints to which they are subject to permit them to invest in a
floating NAV money market fund or other investments as appropriate.
Giving fund shareholders ample time to dispose of their investments
in an orderly fashion also should benefit money market funds and their
other shareholders because it would give funds additional time to
respond appropriately to the level and timing of redemption
requests.\332\ We recognize, however, that shareholders might still
preemptively redeem shares at or near the time that the money market
fund converts from a stable value to a floating NAV if they believe
that the market value of their shares will be less than $1.00. We
expect, however, that money market fund sponsors would use the
relatively long compliance period to select an appropriate conversion
date that would minimize this risk. We therefore expect that providing
shareholders, funds, and others a relatively long time to assess the
effects of the regulatory change if adopted would mitigate the risk
that the transition to a floating NAV, itself, could prompt significant
redemptions.\333\
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\332\ Comment Letter of Thrivent Mutual Funds (Jan. 10, 2011)
(available in File No. 4-619) (``Any change [to a floating NAV]
could be implemented with sufficient advanced notice to allow
institutional investors to modify their investment guidelines to
permit investment in a floating NAV fund, where appropriate. A mass
exodus assumes that investors have a clear alternative, which they
do not, and come to the same conclusion in tandem, which is
improbable given the lack of clear alternatives.''); Richmond Fed
PWG Comment Letter, supra note 139 (``If informed well ahead of a
change [to a floating NAV], investors are more likely to move
gradually, mitigating the disruption.''). In addition, a relatively
long compliance period would provide money market funds sufficient
time to modify and/or establish the systems necessary to transact
permanently at a floating NAV.
\333\ In its proposal, FSOC suggested a transition period of 5
years. FSOC Proposed Recommendations, supra note 114, at 31.
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We considered an even longer transition period, including the 5-
year period in FSOC's proposed floating NAV recommendation.\334\ FSOC's
[[Page 36878]]
proposed recommendation, however, would have required money market
funds to re-price their shares at $100 per share, and would have
grandfathered existing money market funds (which could continue to
maintain a stable value) but required investments after a specified
date to be made in floating NAV money market funds. Money market fund
sponsors therefore would have had to take a corporate action to re-
price their shares and, if they chose to rely on the grandfathering, to
form new floating NAV money market funds to accept new investments
after the specified date. Money market funds and others in the
distribution chain may be better able to implement basis point rounding
as we propose, and therefore may not need a 5-year transition period.
Indeed, some commenters on FSOC's proposed recommendation, which could
require a longer transition period than our proposal, supported a 2-
year transition period.\335\
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\334\ See FSOC Proposed Recommendations, supra note 114, at 31
(``To reduce potential disruptions and facilitate the transition to
a floating NAV for investors and issuers, existing MMFs could be
grandfathered and allowed to maintain a stable NAV for a phase-out
period, potentially lasting five years. Instead of requiring these
grandfathered funds to transition to a floating NAV immediately, the
SEC would prohibit any new share purchases in the grandfathered
stable-NAV MMFs after a predetermined date, and any new investments
would have to be made in floating-NAV MMFs.'').
\335\ See BlackRock FSOC Comment Letter, supra note 204 (``We
agree that a transition period is extremely important to avoid
market disruption. Assuming existing funds are grandfathered as CNAV
funds and no new shares are purchased, a transition period of two
years from the effective date of a new rule should suffice.''); HSBC
FSOC Comment Letter, supra note 196 (``[W]e believe a 2-3 year
transition period should be sufficient for the industry, investors
and regulators to prepare for any required changes to products,
systems etc.''). But see U.S. Chamber Jan. 23, 2013 FSOC Comment
Letter, supra note 248 (suggesting a transition period of up to 5
years could be necessary).
---------------------------------------------------------------------------
We request comment on our proposed compliance date.
Would our proposed transition period mitigate operational
or significant redemption risks that could result from requiring money
market funds to use floating NAVs?
If not, how much time would be sufficient to allow money
market fund shareholders that do not wish to remain in a money market
fund with a floating NAV to identify alternatives without posing
operational or significant redemption risk?
Do commenters agree that a compliance period of 2 years is
sufficient to address operational issues associated with converting
funds to floating NAVs? Should the compliance period be shorter or
longer? Why? Would a 5-year transition period, consistent with FSOC's
proposed floating NAV recommendation, be more appropriate?
Do fund sponsors anticipate converting (at an appropriate
time) existing stable value money market funds to floating NAV funds or
would sponsors establish new funds? If sponsors expect to establish new
funds, are there costs other than those we describe below (related to a
potential grandfathering provision)?
Are there other measures we could take that would minimize
the risks that could arise from investors seeking preemptively to
redeem their shares in advance of a fund's adoption of a floating NAV?
Should we provide a grandfathering provision, in addition
to, or in lieu of, a relatively long compliance date? If we adopted a
grandfathering provision, how long should the grandfathering period
last? Would a grandfathering provision better achieve our objective of
facilitating an orderly transition?
B. Standby Liquidity Fees and Gates
As an alternative to the floating NAV proposal discussed above, we
are proposing to continue to allow money market funds to transact at a
stable share price under normal conditions but to (1) require money
market funds to institute a liquidity fee in certain circumstances and
(2) permit money market funds to impose a gate in certain
circumstances. In particular, this fees and gates alternative proposal
would require that if a money market fund's weekly liquid assets fell
below 15% of its total assets (the ``liquidity threshold''), the fund
must impose a liquidity fee of 2% on all redemptions unless the board
of directors of the fund (including a majority of its independent
directors) determines that imposing such a fee would not be in the best
interest of the fund. The board may also determine that a lower fee
would be in the best interest of the fund.\336\
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\336\ We would not require, but would permit, government funds
to impose fees and gates, as discussed below. Unlike under the
floating NAV alternative, we are not proposing to exempt retail
funds from our fees and gates proposal. See infra section III.B.5 of
this Release.
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We also are proposing that when a money market fund's weekly liquid
assets fall below 15% of total assets, the money market fund board
would also have the ability to impose a temporary suspension of
redemptions (also referred to as a ``gate'') for a limited period of
time if the board determines that doing so is in the fund's best
interest. Such a gate could be imposed, for example, if the liquidity
fees were not proving sufficient in slowing redemptions to a manageable
level.
Under this option, rule 2a-7 would continue to permit money market
funds to use the penny rounding method of pricing so long as the funds
complied with the conditions of the rule, but would not permit use of
the amortized cost method of valuation. We would eliminate the use of
the amortized cost method of valuation for money market funds under the
fees and gates alternative for the same reasons we are proposing to do
so under the retail and government exemptions to the floating NAV
alternative.\337\ We do not believe that allowing continued use of
amortized cost valuation for all securities in money market funds'
portfolios is appropriate given that these funds will already be
valuing their securities using market factors on a daily basis due to
new Web site disclosure requirements and given that penny rounding
otherwise achieves the same level of price stability.
---------------------------------------------------------------------------
\337\ See section III.A.3 and III.A.4 of this Release.
---------------------------------------------------------------------------
As previously discussed, the financial crisis of 2007-2008 exposed
contagion effects from heavy redemptions in money market funds that had
significant impacts on investors, funds, and the markets. We have
designed the fees and gates alternative to address certain of these
issues. Although it is impossible to know what exactly would have
happened if money market funds had operated with fees and gates at that
time, we expect that if money market funds were armed with such tools,
they would have been able to better manage the heavy redemptions that
occurred and to limit the spread of contagion, regardless of the reason
for the redemptions.
During the crisis, some investors redeemed at the first sign of
market stress, and could do so without bearing any costs even if their
actions imposed costs on the fund and the remaining shareholders. As
discussed in greater detail below, if money market funds had imposed
liquidity fees during the crisis, it could have resulted in those
investors re-assessing their redemption decisions because they would
have been required to pay for the costs of their redemptions. Based on
the level of redemption activity that occurred during the crisis, we
expect that many money market funds would have faced liquidity
pressures sufficient to cross the liquidity thresholds we are proposing
today that would trigger the use of fees and gates. If funds therefore
had imposed fees, this might have caused some investors to choose not
to redeem because the direct costs of the liquidity fee may have been
more tangible than the uncertain possibility of potential future
losses. In addition, funds that imposed fees would likely have been
able to better manage the impact of the redemptions that investors
submitted, and any contagion effects may have been limited, because the
fees would have helped offset the costs of the liquidity provided to
redeeming
[[Page 36879]]
shareholders, and any excess could have been used to repair the NAV of
the fund, if necessary. Regardless of the incentives to redeem, a
liquidity fee would make redeeming investors pay for the costs of
liquidity and, even if investors redeem from a fund, gates can directly
respond to a run by halting redemptions.
If a fund had been able to impose a redemption gate at the time, it
also would have been able to stop mounting redemptions and possibly
generate additional internal liquidity in the fund while the gate was
in place. However, fees and gates do not address all of the factors
that may lead to heavy redemptions in money market funds.\338\ For
example, they do not eliminate the incentive to redeem in times of
stress to receive the $1.00 stable share price before the fund breaks
the buck, or prevent investors from seeking to redeem to obtain higher
quality securities, better liquidity, or increased transparency.
Nonetheless, for the reasons discussed above, they provide tools that
should serve to address many of the types of issues that arose during
the crisis by allocating more explicitly the costs of liquidity and
stopping runs.
---------------------------------------------------------------------------
\338\ See infra nn 361 and 362 and accompanying text.
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As discussed in section III.C, we also request comment on whether
we should combine this option with our floating NAV alternative. This
reform would be intended to achieve our goals of preserving the
benefits of stable share price money market funds for the widest range
of investors and the availability of short-term financing for issuers,
while enhancing investor protection and risk transparency, making funds
more resilient to mass redemptions, and improving money market funds'
ability to manage and mitigate potential contagion from high levels of
redemptions, as further discussed below.
1. Analysis of Certain Effects of Liquidity Fees and Gates
As discussed in the RSFI Study and in section II above,
shareholders may redeem money market fund shares for several reasons
under stressed market conditions.\339\ One of these incentives relates
to the current rounding convention in money market fund valuation and
pricing that can allow early redeeming shareholders to redeem for $1.00
per share, even when the market-based NAV per share of the fund is
lower than that price. As discussed in section III.A above, the
floating NAV proposal is principally focused on mitigating this
incentive by causing redeeming shareholders to receive the market value
of redeemed shares. However, as the RSFI Study details, there are a
variety of other factors that may motivate shareholders to redeem
assets from money market funds in times of stress. Adverse economic
events or financial market conditions can cause shareholders to engage
in flights to quality, liquidity, or transparency (or combinations
thereof).\340\ When money market funds may have to absorb, suddenly,
high levels of redemptions that are expected to be in excess of the
fund's internal sources of liquidity, investors may expect that fund
managers will deplete the fund's most liquid assets first to meet
redemptions and may have to sell securities at a loss (because of
transitory liquidity costs) or even ``fire sale'' prices.\341\
Accordingly, shareholder redemptions during such periods can impose
expected future liquidity costs on the money market fund that are not
reflected in a $1.00 share price based on current amortized cost
valuation.
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\339\ See RSFI Study, supra note 21, at 2-4.
\340\ See id. at 7-14; Qi Chen et al., Payoff Complementarities
and Financial Fragility: Evidence from Mutual Fund Outflows, 97 J.
Fin. Econ. 239-262 (2010). Prime money market funds can be
particularly susceptible to redemptions in a flight to quality,
liquidity or transparency because they hold similar portfolios and
thus can present a correlated risk of loss of quality or loss of
liquidity (and particularly when the financial system is strained
because most of their non-governmental assets are short-term debt
obligations of large banks.) See infra section III.J. See also
Harvard Business School FSOC Comment Letter, supra note 24; Angel
FSOC Comment Letter, supra note 60.
\341\ See, e.g., Comment Letter of Americans for Financial
Reform (Feb. 20, 2012) (available in File No. FSOC-2012-0003);
BlackRock FSOC Comment Letter, supra note 204; Philip E. Strahan &
Basak Tanyeri, Once Burned, Twice Shy: Money Market Fund Responses
to a Systemic Liquidity Shock, Boston College Working Paper (July
2012) (finding that in response to the September 2008 run on money
market funds, the funds first responded by selling their safest and
most liquid holdings). See also Stephan Jank & Michael Wedow, Sturm
und Drang in Money Market Funds: When Money Market Funds Cease to be
Narrow, Deutsche Bundesbank Discussion Paper No. 20/2008 (finding
that German money market funds enhanced their yield by investing in
less liquid securities in the lead up to the 2007-2008 subprime
crisis, but then experienced runs during the crisis, while more
liquid money market funds functioned as a safe haven). We note that
other mutual funds also may tend to deplete their most liquid assets
first to meet redemptions, but the incentive to redeem because of
the potential for declining fund liquidity may be stronger in money
market funds because of their use as a cash management vehicle and
the resulting heightened sensitivity to potential losses.
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Because the circumstances under which liquidity becomes expensive
historically have been infrequent, we expect that liquidity fees only
will be imposed when the fund's board of directors considers the fund's
liquidity costs to be at a premium and the liquidity fee, if imposed,
will apply only to those shareholders who redeem and cause the fund to
incur that cost. Under normal market conditions, fund shareholders
would continue to enjoy unfettered liquidity for money market fund
shares.\342\ As such, liquidity fees are designed to preserve the
current benefits of principal stability, liquidity, and a market yield
under most market conditions, but reduce the likelihood that ``when
markets are dislocated, costs that ought to be attributed to a
redeeming shareholder are externalized on remaining shareholders and on
the wider market.'' \343\
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\342\ See Comment Letter of J.P. Morgan Asset Management (Jan.
14, 2013) (available in File No. FSOC-2012-0003) (``J.P. Morgan FSOC
Comment Letter'') (``the standby character of [fees and gates]
proposals appropriately balances the goal of allowing MMFs to
operate normally when not under stress, yet promote stability,
flexibility and reasonable fairness when stressed.''); Comment
Letter of Wells Fargo Funds Management, LLC (Jan. 17, 2013)
(available in File No. FSOC-2012-0003) (``Wells Fargo FSOC Comment
Letter'') (stating that standby fees and gates are narrowly
tailored, ``imposed to address [run risk] while preserving money
market funds' key attributes'').
\343\ HSBC Global Asset Management, Liquidity Fees; a proposal
to reform money market funds (Nov. 3, 2011) (``HSBC 2011 Liquidity
Fees Paper'').
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In addition to liquidity fees, our proposal also would allow money
market funds to impose redemption gates after the liquidity threshold
is reached. Our proposal on liquidity fees and gates, however, could
affect shareholders by potentially limiting the full, unfettered
redeemability of money market fund shares under certain conditions, a
principle embodied in the Investment Company Act.\344\ Currently, a
money market fund generally can suspend redemptions only \345\ after
obtaining an exemptive order from the Commission or in accordance with
rule 22e-3, which requires the fund's board of directors to determine
that the fund is about to ``break the buck''
[[Page 36880]]
(specifically, that the extent of deviation between the fund's
amortized cost price per share and its current market-based net asset
value per share may result in material dilution or other unfair results
to investors).\346\ Under our proposal, a money market fund board could
decide to temporarily suspend redemptions once it had crossed the same
thresholds that can trigger the imposition of a liquidity fee.\347\ The
fund could use such a gate to assess the viability of the fund, to
create a ``circuit breaker'' giving time for a market panic to subside,
or to create ``breathing room'' to permit more fund assets to mature
and provide internal liquidity to the fund.\348\ In the 2009 Proposing
Release, we requested comment on whether we should include a provision
in rule 22e-3 that would permit fund directors to temporarily suspend
redemptions during certain exigent circumstances.\349\ Many commenters
on our 2009 Proposing Release supported our permitting such a temporary
suspension of redemptions.\350\
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\344\ Section III.B.3 infra discusses the rationale for the
exemptions from the Investment Company Act and related rules
proposed to permit money market funds to impose standby liquidity
fees and gates.
\345\ There are limited exceptions specified in section 22(e) of
the Act in which a money market fund (and any other mutual fund) may
suspend redemptions, such as (i) for any period (A) during which the
New York Stock Exchange is closed other than customary week-end and
holiday closings or (B) during which trading on the New York Stock
Exchange is restricted, or (ii) during any period in which an
emergency exists as a result of which (A) disposal by the fund of
securities owned by it is not reasonably practical or (B) it is not
reasonably practical for the fund to determine the value of its net
assets. The Commission also has granted orders in the past allowing
funds to suspend redemptions. See, e.g., In the Matter of The
Reserve Fund, Investment Company Act Release No. 28386 (Sept. 22,
2008) [73 FR 55572 (Sept. 25, 2008)] (order); Reserve Municipal
Money-Market Trust, et al., Investment Company Act Release No. 28466
(Oct. 24, 2008) [73 FR 64993 (Oct. 31, 2008)] (order).
\346\ Rule 22e-3(a)(1).
\347\ See proposed (Fees & Gates) rule 2a-7(c)(2)(ii).
\348\ See, e.g., Angel FSOC Comment Letter, supra note 60
(``gates that limit MMMF redemptions to the natural maturity of the
MMMF portfolios can prevent the forced selling of assets and
transform a disorderly run into an orderly walk to quality''); ICI
Jan. 24 FSOC Comment Letter, supra note 25 (noting that a gate
provides time for the fund to rebuild its liquidity as portfolio
securities mature).
\349\ Being able to impose a temporary suspension of redemptions
to calm instances of heightened redemptions had been recommended by
an industry report. ICI 2009 Report, supra note 56, at 85-89
(recommending that the Commission permit a fund's directors to
suspend temporarily the right of redemption if the board, including
a majority of its independent directors, determines that the fund's
net asset value is ``materially impaired'').
\350\ See, e.g., Comment Letter of Charles Schwab Investment
Management, Inc. (Sept. 4, 2009) (available in File No. S7-11-09)
(``Schwab 2009 Comment Letter''); Comment Letter of the Dreyfus
Corporation (Sept. 8, 2009) (available in File No. S7-11-09)
(``Dreyfus 2009 Comment Letter''); Comment Letter of Federated
Investors, Inc. (Sept. 8, 2009) (available in File No. S7-11-09); T.
Rowe Price 2009 Comment Letter, supra note 208. One commenter
opposed the Commission permitting a temporary suspension of
redemptions. See Comment Letter of Fund Democracy and the Consumer
Federation of America (Sept. 8, 2009) (available in File No. S7-11-
09) (stating that such a ``free time-out provision would increase
incentives to run for the exits before the fund is closed and
virtually guarantee that, once the fund was reopened, a flood of
redemptions will follow. The provision provides a potential escape
valve that will reduce fund managers' incentives to protect the
fund's NAV. The provision provides virtually no benefit to
shareholders while serving primarily to protect fund managers'
interests.'').
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We are proposing a combination of liquidity fees and gates because
we believe that liquidity fees and gates, while both aimed at helping
funds better and more systematically manage high levels of redemptions,
do so in different ways and thus with somewhat different tradeoffs.
Liquidity fees are designed to reduce shareholders' incentives to
redeem when it is abnormally costly for the fund to provide liquidity
by requiring redeeming shareholders to bear at least some of the
liquidity costs of their redemption (rather than transferring those
costs to remaining shareholders).\351\ To the extent that liquidity
fees paid exceed such costs, they also can help increase the fund's net
asset value for remaining shareholders which would have a restorative
effect if the fund has suffered a loss. As one commenter has said, a
liquidity fee can ``provide a strong disincentive for investors to make
further redemptions by causing them to choose between paying a premium
for current liquidity or delaying liquidity and benefitting from the
fees paid by redeeming investors.'' \352\ This explicit pricing of
liquidity costs in money market funds could offer significant benefits
to such funds and the broader short-term financing market in times of
potential stress by lessening both the frequency and effect of
shareholder redemptions.\353\ Unlike liquidity fees, gates are designed
to halt a run by stopping redemptions long enough to allow (1) fund
managers time to assess the appropriate strategy to meet redemptions,
(2) liquidity buffers to grow organically as securities mature, and (3)
shareholders to assess the level of liquidity in the fund and for any
shareholder panic to subside. We also note that gates are the one
regulatory reform discussed in this Release and the FSOC Proposed
Recommendations that definitively stops a run on a fund (by blocking
all redemptions).
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\351\ See, e.g., Wells Fargo FSOC Comment Letter, supra note 342
(stating that a standby liquidity fee would ``provide an affirmative
reason for investors to avoid redeeming from a distressed fund'' and
``those who choose to redeem in spite of the liquidity fee will help
to support the fund's market-based NAV and thus reduce or eliminate
the potential harm associated with the timing of their redemptions
to other remaining investors'').
\352\ See ICI Jan. 24 FSOC Comment Letter, supra note 25.
\353\ We note that investors owning securities directly--as
opposed to through a money market fund--naturally bear these
liquidity costs. They bear these costs both because they bear any
losses if they have to sell a security at a discount in times of
stress to obtain their needed liquidity and because they directly
bear the risk of a less liquid investment portfolio if they sell
their most liquid holdings first to obtain needed liquidity.
---------------------------------------------------------------------------
Fees and gates also may have different levels of effectiveness
under different stress scenarios. For example, we expect that liquidity
fees will be able to reduce the harm to non-redeeming shareholders and
the broader markets when a fund faces heavy redemptions during periods
in which its true liquidity costs are less than the fund's imposed
liquidity fee. Redemptions during this time will increase the value of
the fund, which, in turn, will stabilize the fund to the extent
remaining shareholders' incentive to redeem shares is decreased.
However, it is possible that liquidity fees might not be fully
effective during periods of systemic crises because, for example,
shareholders might choose to redeem from money market funds
irrespective of the level of a fund's true liquidity costs and
imposition of the liquidity fee.\354\ In those cases, gates could
function as useful circuit breakers, allowing the fund time to rebuild
its own internal liquidity and shareholders to pause to reconsider
whether a redemption is warranted.
---------------------------------------------------------------------------
\354\ See RSFI Study, supra note 21, at 7-14 (discussing
different possible explanations for why shareholders may redeem from
money market funds in times of stress).
---------------------------------------------------------------------------
Finally, research in behavioral economics suggests that liquidity
fees may be particularly effective in dampening a run because, when
faced with two negative options, investors tend to prefer possible
losses over certain losses, even when the amount of possible loss is
significantly higher than the certain loss.\355\ Unlike gates, when a
liquidity fee is imposed, investors would make an economic decision
over whether to redeem. Therefore, under this behavioral economic
theory, investors fearing that a money market fund may suffer losses
may prefer to stay in the money market fund and avoid payment of the
liquidity fee (despite the possibility that the fund might suffer a
future loss) rather than redeem and lock in payment of the liquidity
fee.
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\355\ See, e.g., Daniel Kahneman, Thinking, Fast and Slow
(2011), at 278-288.
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We are proposing a combination of fees and gates, with a fee as the
initial default but with an optional ability for a fund's board to
replace the fee with a gate, or impose a gate immediately, in each case
as the board deems best for the fund.\356\ We are proposing this
structure as the initial default (rather than imposing a gate as the
default) because we believe that a fee has the potential to be less
disruptive to fund shareholders and the short-term financing markets
because a fee allows fund shareholders to continue to transact in times
of stress (although at a cost).\357\ At the same time, if the board
[[Page 36881]]
determines that a fee is insufficient to protect the interests of non-
redeeming shareholders, it still has the option of imposing a gate (and
perhaps later lifting the gate, but keeping in place the fee).
---------------------------------------------------------------------------
\356\ See proposed (Fees & Gates) rule 2a-7(c)(2).
\357\ See, e.g., Comment Letter of UBS on the IOSCO Consultation
Report on Money Market Fund Systemic Risk Analysis and Reform
Options (May 25, 2012), available at https://www.iosco.org/library/
pubdocs/pdf/IOSCOPD392.pdf) (``UBS IOSCO Comment Letter'') (``we are
convinced that [partial single swinging pricing] is more efficient
than gates as prices are more efficient signals of scarcity than
quantitative rationing''); Comment Letter of BNP Paribas on the
IOSCO Consultation Report on Money Market Fund Systemic Risk
Analysis and Reform Options (May 25, 2012), available at https://
www.iosco.org/library/pubdocs/pdf/IOSCOPD392.pdf (``BNP Paribas
IOSCO Comment Letter'') (``It would not make sense to restrict the
redeemer willing to pay the price of liquidity.'').
---------------------------------------------------------------------------
Many participants in the money market fund industry have expressed
support for imposing some form of a liquidity fee or gate on redeeming
money market fund investors when the fund comes under stress as a way
of reducing, in a targeted fashion, the fund's susceptibility to heavy
redemptions.\358\ Liquidity fees and gates are known to be able to
reduce incentives to redeem,\359\ and they have been used successfully
in the past by certain non-money market fund cash management pools to
stem redemptions during times of stress.\360\
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\358\ See, e.g., BlackRock FSOC Comment Letter, supra note 204;
J.P. Morgan FSOC Comment Letter, supra note 342; Northern Trust FSOC
Comment Letter, supra note 174; Comment Letter of the Securities
Industry and Financial Markets Association (``SIFMA'') (Jan. 14,
2013) (available in File No. FSOC-2012-0003) (``SIFMA FSOC Comment
Letter''); Vanguard FSOC Comment Letter, supra note 172. See also
David M. Geffen & Joseph R. Fleming, Dodd-Frank and Mutual Funds:
Alternative Approaches to Systemic Risk, Bloomberg Law Reports (Jan.
2011) (``The alternative suggested here is that, during a period of
illiquidity, as declared by a money market fund's board (or,
alternatively, the SEC or another designated federal regulator), a
money market fund may impose a redemption fee on a large share
redemption approximately equal to the cost imposed by the redeeming
shareholder and other redeeming shareholders on the money market
fund's remaining shareholders. . . . The redemption fee causes the
large redeeming shareholder to internalize the cost of the negative
externality that the redemption otherwise would impose on non-
redeeming shareholders.''). But see, e.g., Comment Letter of the
U.S. Chamber of Commerce on the IOSCO Consultation Report on Money
Market Fund Systemic Risk Analysis and Reform Options (May 24,
2012), available at https://www.iosco.org/library/pubdocs/pdf/
IOSCOPD392.pdf (``Imposing a liquidity fee is akin to implementing a
variable NAV, and as such, would preclude a number of companies from
investing in money market mutual funds. Although the liquidity fee
may not be imposed until the fund's portfolio falls below a
specified threshold or when there is a high volume of redemptions,
corporate treasurers have an obligation to ensure that ``a dollar in
will be a dollar out'' and therefore, will not risk investing cash
in an investment product that may not return 100 cents on the
dollar.''); Comment Letter of Federated Investors, Inc. on the IOSCO
Consultation Report on Money Market Fund Systemic Risk Analysis and
Reform Options (May 25, 2012) available at https://www.iosco.org/
library/pubdocs/pdf/IOSCOPD392.pdf (``Federated IOSCO Comment
Letter'') (``Federated believes that liquidity fees . . . are simply
a different way to break the dollar . . . and would generate large
preemptive redemptions from MMFs'').
\359\ Cf. G.W. Schwert & P.J. Seguin, Securities Transaction
Taxes: An Overview of Costs, Benefits and Unresolved Questions, 49
Financial Analysts Journal 27 (1993); K.A. Froot & J. Campbell,
International Experiences with Securities Transaction Taxes, in The
Internationalization of Equity Markets (J. Frankel, ed., 1994), at
277-308.
\360\ A Florida local government investment pool experienced a
run in 2007 due to its holdings in SIV securities. The fund
suspended redemptions and ultimately reopened but after the fund
(and each shareholder's interest) had been split into two separate
funds: One holding the more illiquid securities previously held by
the pool (called ``Fund B'') and one holding the remaining
securities of the fund. Fund B reopened with a 2% redemption fee and
did not generate a run upon its reopening. See David Evans and
Darrell Preston, Florida Investment Chief Quits; Fund Rescue
Approved, Bloomberg (Dec. 4, 2007); Helen Huntley, State Wants Fund
Audit, Tampa Bay Times (Dec. 11, 2007). Some European enhanced cash
funds also successfully used fees or gates during the financial
crisis to stem redemptions. See Elias Bengtsson, Shadow Banking and
Financial Stability: European Money Market Funds in the Global
Financial Crisis (2011) (``Bengtsson''), available at https://
papers.ssrn.com/sol3/papers.cfm?abstract--id=1772746&download=yes;
Julie Ansidei, et al., Money Market Funds in Europe and Financial
Stability, European Systemic Risk Board Occasional Paper No. 1, at
36 (June 2012), available at https://www.esrb.europa.eu/pub/pdf/
occasional/20120622_occasional_paper.pdf.
---------------------------------------------------------------------------
We recognize that the prospect of a fund imposing a liquidity fee
or gate could raise a concern that shareholders will engage in
preemptive redemptions if they fear the imminent imposition of fees or
gates (either because of the fund's situation or because such
redemption restrictions have been triggered in other money market
funds).\361\ We expect the opportunity for preemptive redemptions will
decrease as a result of the amount of discretion fund boards would have
in imposing liquidity fees and gates, because shareholders would not be
able to accurately predict when, and under what circumstances, fees and
gates may be imposed.\362\ Shareholders also might rationally choose to
follow other shareholders' redemptions even when those other
shareholders' decisions are not necessarily based on superior private
information.\363\ General stress in the short-term markets or fears of
stress at a particular fund could trigger redemptions as shareholders
try to avoid the fee.
---------------------------------------------------------------------------
\361\ See, e.g., FSOC Proposed Recommendations, supra note 114,
at 62-63; Harvard Business School FSOC Comment Letter, supra note 24
(``news that one MMF has initiated redemption restrictions could set
off a system-wide run by panic-stricken investors who are anxious to
redeem their shares before other funds also initiate
restrictions''); Comment Letter of The Systemic Risk Council (Jan.
18, 2013) (available in File No. FSOC 2012-0003) (``Systemic Risk
Council FSOC Comment Letter'') (stating that temporary gates or fees
that come down in a crisis do not address the structural problem of
the $1.00 NAV and would move up a run on money market funds).
Empirical evidence in the equity and futures markets demonstrates
that investors may trade in advance of circuit breakers being
triggered so as to not be left in temporarily illiquid positions.
Investors have been found to trade ahead of predictable market
closings and price limit hits. Empirical studies document trading
pressure before trading halts. See Y. Amihud & H. Mendelson, Trading
Mechanisms and Stock Returns: An Empirical Investigation, 42 J. Fin.
533-553 (1987); Y. Amihud & H. Mendelson, Volatility, Efficiency and
Trading: Evidence from the Japanese Stock Market, 46 J. Fin. 1765-
1789 (1991); H.R. Stoll & R. E. Whaley, Stock Market Structure and
Volatility, 3 Review of Financial Studies 37-71 (1990); M.S. Gerety
& J.H. Mulherin, Trading Halts and Market Activity: An Analysis of
Volume at the Open and the Close, 47 J. Fin. 1765-1784 (1992).
Empirical studies show trading volume accelerates before a price
limit hits. See Y. Du, et al., An Analysis of the Magnet Effect
under Price Limits, 9 International Review of Fin. 83-110 (2009);
G.J. Kuserk & P.R. Locke, Market Making With Price Limits, 16 J.
Futures Markets 677-696 (1996). An experimental study finds that
mandated market closures accelerate trading activity when an
interruption is imminent. See L.F. Ackert, et al., An Experimental
Study of Circuit Breakers: The Effects of Mandated Market Closures
and Temporary Halts on Market Behavior, 4 J. Financial Markets 185-
208 (2001). Empirical studies report trading volume increases
following trading halts and price limit hits. See, e.g., S.A. Corwin
& M.L. Lipson, Order Flow and Liquidity around NYSE Trading Halts,
55 J. Fin. 1771-1801 (2000); W.G. Christie, et al., Nasdaq Trading
Halts: The Impact of Market Mechanisms on Prices, Trading Activity,
and Execution Costs, 57 J. Fin. 1443-1478 (2002); and C.M.C. Lee, et
al., Volume, Volatility, and New York Stock Exchange Trading Halts,
49 J. Fin. 183-213 (1994). See also K.A. Kim & S.G. Rhee, Price
Limit Performance: Evidence from the Tokyo Stock Exchange, 52 J.
Fin. 885-901 (1997).
\362\ See A. Subrahmanyam, On Rules Versus Discretion in
Procedures to Halt Trade, 47 J. Economics and Business 1-16 (1995);
A. Subrahmanyam, The Ex-Ante Effects of Trade Halting Rules on
Informed Trading Strategies and Market Liquidity, 6 Rev. Financial
Economics 1-14 (1997).
\363\ Theoretical models show investors may rationally follow
others' actions, even though these other investors' decisions are
not necessarily based on superior private information. See S.
Bikhchandani, et al., A Theory of Fads, Fashion, Custom, and
Cultural Change as Informational Cascades, 100 J. Pol. Econ. 992-
1026 (1992); I. Welch, Sequential Sales, Learning, and Cascades, 47
J. Fin. 695-732 (1992). Experimental data demonstrates investors may
overreact to uninformative trades. See C. Camerer & K. Weigelt,
Information Mirages in Experimental Asset Markets, 64 J. Bus. 463-
493 (1991). Price limits, which are loosely akin to trading
suspensions, may help to protect markets from destabilizing trades.
See F. Westerhoff, Speculative markets and the effectiveness of
price limits, 28 J. Econ. Dynamics and Control 493-508 (2003).
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While we acknowledge that liquidity fees may not always preclude
redemptions, fees are designed so that as redemptions begin to
increase, if liquidity costs exceed the prescribed threshold for
imposing a fee and the fund imposes a fee, the run will be halted. The
fees, once imposed, should both curtail the level of redemptions, and
fees paid by those that do redeem should, at least partially, cover
liquidity costs incurred by funds and may even potentially repair the
NAV of any funds that have suffered losses. One
[[Page 36882]]
circumstance under which liquidity fees would not self-correct is if
the amount of the fee is less than or exactly equal to the fund's
realized liquidity costs. Gates would not be self-correcting in the
event of realized portfolio losses, but they can help the fund preserve
assets and generate more internal liquidity as assets mature. Some
commenters have considered whether liquidity fees and gates might
precipitate a run. For example, some commenters have expressed their
view that a liquidity fee or gate would not accelerate a run, stating
that such redemptions would likely trigger the fee or gate and that,
once triggered, the fee or gate would then lessen or halt
redemptions.\364\ Even if investors have an incentive to redeem, their
redemptions eventually will cause a fee or gate to come down and halt
the run.
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\364\ See, e.g., HSBC EC Letter, supra note 156 (``Some
commentators have objected that a trigger-based liquidity fee would
cause investors to seek to redeem prior to the imposition of the
fee. We disagree with this argument, which misunderstands the cause
of investor redemptions. . . . A liquidity fee would be imposed as a
consequence of investors' loss of confidence/flight to quality. It
could not, therefore, be the cause of investors' loss of confidence/
flight to quality.'') (emphasis in original); J.P. Morgan FSOC
Comment Letter, supra note 342 (standby liquidity fees ``do not
prevent an initial run, but they do provide a useful tool to slow a
run after one has begun''); SIFMA FSOC Comment Letter, supra note
358 (``the operation of the proposed gate and liquidity fee
themselves will stem any exodus and damper its effect''); Wells
Fargo FSOC Comment Letter, supra note 342 (``To the extent that
investor redemptions made for the purpose of avoiding a liquidity
fee have the effect of accelerating a run . . . the redemption gate
and liquidity fee apply an equally strong countermeasure. First, the
redemption gate would halt the run, and second, the ensuing
imposition of liquidity fees would either cause further redemption
activity to cease or monetize further redemptions into transactions
that are accretive, rather than dilutive, to a fund's market-to-
market NAV. The redemption gate and liquidity fee operate to
effectively reverse and repair any accelerated redemption activity
the existence of the liquidity fee might otherwise induce.
Redemption gates and liquidity fee mechanisms applying to all other
money market funds would also mitigate any contagion risk.'').
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Under this proposal, money market funds would have the benefit of
being able to use the penny rounding method of pricing for their
portfolios. As discussed further below in section III.F.4 and III.F.5,
they would also have to provide much fuller transparency of the market-
based NAV per share of the funds and the marked-based value of the
funds' portfolio securities. This increased transparency is designed to
allow better shareholder understanding of deviations between the fund's
value using market-based factors and its stable price. It also is aimed
at helping investors better understand any risk involved in money
market fund investments as a result of rule 2a-7's rounding convention.
However, retaining these valuation and pricing methods for money market
funds does not eliminate the ability of investors to redeem ahead of
other investors from a money market fund that is about to ``break the
buck'' and consequently may permit those early redeemers to receive
$1.00 per share instead of its market value as discussed in section
III.A above. Nevertheless, in times of fund or market stress the fund
is likely to impose either liquidity fees or gates, which will limit
the ability of redeeming shareholders to receive more than their pro-
rata share of the market-based value of the fund's assets.
Requiring that boards impose liquidity fees absent a finding that
the fee is not in the best interest of the fund, and permitting them to
impose gates once the fund has crossed certain thresholds could offer
advantages to the fund in addition to better and more systematically
managing liquidity and redemption activity. They could provide fund
managers with a powerful incentive to carefully monitor shareholder
concentration and shareholder flow to lessen the chance that the fund
would have to impose liquidity fees or gates in times of market stress
(because larger redemptions are more likely to cause the fund to breach
the threshold). Such a requirement also could encourage portfolio
managers to increase the level of daily and weekly liquid assets in the
fund, as that would tend to lessen the likelihood of a liquidity fee or
gate being imposed.\365\ Further, because our proposal provides the
board discretion not to impose the liquidity fee (or to impose a lower
liquidity fee) and gives boards the option to impose gates, the boards
of directors can impose fees or gates when the board determines that it
is in the best interest of the fund to do so.
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\365\ See, e.g., Vanguard FSOC Comment Letter, supra note 172 (a
standby liquidity fee along with daily disclosure of the fund's
liquidity levels ``will serve as an effective tool to force
investment advisors, particularly those managing funds with highly
concentrated shareholder bases, to manage their funds with adequate
liquidity to prevent the [standby liquidity fee] from ever being
triggered'').
---------------------------------------------------------------------------
The prospect of facing fees and gates when a fund is under stress
serves to make the risk of investing in a money market fund more
transparent and to better inform and sensitize investors to the
inherent risks of investing in money market funds. Fees and gates also
could encourage shareholders to monitor and exert market discipline
over the fund to reduce the likelihood that either the imposition of
fees or gates will become necessary in that fund.\366\ An additional
benefit to the board's determination of liquidity fees and gates is
that they create an incentive for money market fund managers to better
and more systemically manage redemptions in all market conditions.\367\
---------------------------------------------------------------------------
\366\ See, e.g., Vanguard FSOC Comment Letter, supra note 172 (a
standby liquidity fee ``will encourage advisors and investors to
self-police to avoid triggering the fee'').
\367\ See, e.g., HSBC 2011 Liquidity Fees Letter, supra note 343
(a liquidity fee ``will result in more effective pricing of risk (in
this case, liquidity risk) . . . [and] act as a market-based
mechanism for improving the robustness and fairness'' of money
market funds); BlackRock FSOC Comment Letter, supra note 204 (``A
fund manager will focus on managing both assets and liabilities to
avoid triggering a gate. On the liability side, a fund manager will
be incented to know the underlying clients and model their behavior
to anticipate cash flow needs under various scenarios. In the event
a fund manager sees increased redemption behavior or sees reduced
liquidity in the markets, the fund manager will be incented to
address potential problems as early as possible.'')
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Our proposal on liquidity fees and gates, however, could affect
shareholders by potentially limiting the full, unfettered redeemability
of money market fund shares under certain conditions, a principle
embodied in the Investment Company Act.\368\ Thus, this alternative, if
adopted, could result in some shareholders redeeming their money market
fund shares and moving their assets to alternative products (or
government money market funds) out of concern that the potential
imposition of a liquidity fee or gate could make investment in a money
market fund less attractive due to less certain liquidity.\369\ We also
recognize that the imposition of a gate may affect the efficiency of
money market fund shareholders' investment allocations and have
corresponding impacts on capital formation if the redemption
[[Page 36883]]
restriction prevents shareholders from moving cash invested in money
market funds to other investment alternatives that might be preferable
at the time.
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\368\ Section III.B.3 infra discusses the rationale for the
exemptions from the Investment Company Act and related rules
proposed to permit money market funds to impose standby liquidity
fees and gates.
\369\ See infra section III.E for a discussion of the potential
effects on money market fund investments and capital formation as a
result of this alternative, if adopted. See also Comment Letter of
Fidelity (Feb. 3, 2012) (available in File No. 4-619) (finding in a
survey of their retail money market fund customers that 43% would
stop using a money market fund with a 1% non-refundable redemption
fee charged if the fund's NAV per share fell below $0.9975 and 27%
would decrease their use of such a fund); Federated IOSCO Comment
Letter, supra note 358 (stating that they anticipate ``that many
investors will choose not to invest in MMFs that are subject to
liquidity fees, and will redeem existing investments in MMFs that
impose a liquidity fee'' but noting that ``[s]hareholder attitudes
to redemption fees on MMFs are untested''). But see HSBC EC Letter,
supra note 156 (``A liquidity fee [triggered by a fall in the fund's
market-based NAV] should also be acceptable to investors, because it
can be rationalized in terms of investor protection. (When we've
presented the case for a liquidity fee in these terms to our
investors, they have generally been receptive.)'').
---------------------------------------------------------------------------
We request comment on our discussion of the economic basis and
tradeoffs for this alternative.
Would our proposal on liquidity fees and gates achieve our
goals of preserving the benefits of stable share price money market
funds for the widest range of investors and the availability of short-
term financing for issuers while enhancing investor protection and risk
transparency, making funds more resilient to mass redemptions and
improving money market funds' ability to manage and mitigate potential
contagion from high levels of redemptions? Are there other benefits
that we have not identified and discussed?
Would a liquidity fee provide many of the same potential
benefits as the proposed floating NAV? If not, what are the differences
in potential benefits? Would it result in a more effective pricing of
liquidity risk into the funds' share prices and a fairer allocation of
that cost among shareholders? Would a liquidity fee that potentially
restores the fund's shadow price reduce some remaining shareholders
incentive to redeem?
Would the prospect of a fee or gate encourage investors to
limit their concentration in a particular fund? Would an appropriately
structured threshold for liquidity fees and gates provide an incentive
for fund managers to monitor shareholder concentration and flows as
well as portfolio composition to minimize the possibility of a fund
applying a fee or gate? Would it encourage better board monitoring of
the fund? Would it encourage shareholders to monitor and exert
appropriate discipline over the fund? Would shareholders underestimate
whether a fee or gate would ever be imposed by the board? How would the
prospect of a fee or gate affect shareholder behavior?
How will the liquidity fees or gates affect the fund's
portfolio choices? Will it affect the way funds manage their weekly
liquid assets?
Funds currently have the ability to delay the payment of
redemption proceeds for up to seven days.\370\ Are there considerations
that make funds hesitant to impose this delay that would also make
funds hesitant to impose fees or gates? What are those factors?
---------------------------------------------------------------------------
\370\ See section 22(e) of the Investment Company Act.
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Would the expected imposition of a liquidity fee or gate
increase redemption activity as the fund's liquidity levels near the
threshold? Would the prospect of a liquidity fee or gate create an
incentive to redeem during times of potential stress by shareholders
fearing that such a fee or gate might be imposed, thus inciting a run?
If so, do commenters agree that in such a case the redemptions would
trigger a fee or gate and slow or halt redemptions? If not, are there
ways in which we could modify our proposed threshold for liquidity fees
and gates such that a run could not arise without triggering fees or
gates? What information would be needed for investors to reliably
predict that a fund is on the verge of imposing fees or gates? Would
the necessary information be readily available under our proposal?
Are some types of shareholders more likely than other
types of shareholders to attempt to redeem in anticipation of the
imposition of the fee or gate? Are there ways that we could reduce the
risk of pre-emptive redemptions? Would imposition of a fee or gate as a
practical matter lead to liquidation of that fund? If so, should this
be a concern?
Is penny rounding sufficient to allow government money
market funds to maintain a stable price? Should we also permit these
funds to use amortized cost valuation? If so, why?
Should we prohibit advisers to money market funds from
charging management fees while the fund is gated? How might this affect
advisers' incentives to make recommendations to the board when it is
considering whether to not impose a liquidity fee or gate?
We note that we are not proposing to repeal or otherwise modify
rule 17a-9 (permitting sponsors to support money market funds through
portfolio purchases in some circumstances) under this proposal.
Therefore, money market fund sponsors would be able to continue to
support the money market funds they manage by purchasing securities
from money market fund portfolios at their amortized cost value (or
market price, if greater). Instead, we are requiring greater and more
timely disclosure of any sponsor support of a money market fund, as
further described in section III.F.1 below. We note that some sponsors
could use such support to prevent a money market fund from breaching a
threshold that would otherwise require the board to consider imposition
of a liquidity fee. Such support could benefit fund shareholders by
preventing them from incurring the costs or loss of liquidity that a
liquidity fee or gate may entail. However, because such support would
be discretionary, its possibility may create uncertainty about whether
fund investors will have to bear the costs and burdens of a liquidity
fee or gate in times of stress, which could lead to unpredictable
shareholder behavior and inefficient shareholder allocation of
investments if their expectations of risk turn out to be misplaced. Our
continuing to permit sponsor support of money market funds, albeit with
greater transparency,\371\ also could favor money market fund groups
with a well-capitalized sponsor that is better able to provide
discretionary support to its affiliated money market funds and thus
avoid the imposition of fees or gates. Nonetheless, even the
expectation of possible discretionary sponsor support may tend to slow
redemptions. We request comment on the retention of rule 17a-9 under
this proposal.
---------------------------------------------------------------------------
\371\ See infra section III.F.
---------------------------------------------------------------------------
Should we continue to allow this type of sponsor support
of money market funds, given the enhanced transparency requirements?
Would allowing sponsor support prevent or limit this proposal from
achieving the goal of enhancing investor protection and improving money
market funds' ability to manage high levels of redemptions? If so, how?
Should we instead prohibit sponsor support under this option? If so,
why? If we prohibited sponsor support, how would this advance investor
protection if such support would protect the value or liquidity of the
fund? Should we modify rule 17a-9 to limit or condition sponsor
support?
Would sponsors provide support to prevent a money market
fund from breaching a liquidity threshold? Would sponsors be more
willing and able to provide support to stabilize the fund under the
liquidity fees and gates proposal than they were to support money
market funds before the 2007-2008 financial crisis? Why or why not?
As discussed further below, we also are proposing to require that
money market funds disclose their market-based NAVs and levels of daily
and weekly liquid assets on a daily basis on the funds' Web sites.\372\
---------------------------------------------------------------------------
\372\ See infra section III.F.
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2. Terms of the Liquidity Fees and Gates
We are proposing that if a money market fund's weekly liquid assets
fall or remain below 15% of its total assets at the end of any business
day, the next business day it must impose a 2% liquidity fee on each
shareholder's redemptions, unless the fund's board of directors
(including a majority of its independent directors) determines that
[[Page 36884]]
such a fee would not be in the best interest of the fund or determines
that a lower fee would be in the best interest of the fund.\373\ Any
fee imposed would be lifted automatically once the money market fund's
level of weekly liquid assets had risen to or above 30%, and it could
be lifted at any time by the board of directors (including a majority
of its independent directors) if the board determines to impose a
different fee or if it determines that imposing the fee is no longer in
the best interest of the fund.\374\
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\373\ Proposed (Fees & Gates) rule 2a-7(c)(2)(i). A ``business
day,'' defined in rule 2a-7 as ``any day, other than Saturday,
Sunday, or any customary business holiday,'' would end after 11:59
p.m. on that day. See rule 2a-7(a)(4). If the shareholder of record
making the redemption was a direct shareholder (and not a financial
intermediary), we would expect the fee to apply to that
shareholder's net redemptions for the day. In order to provide the
money market fund flexibility, if a liquidity fee were in place for
more than one business day, the fund's board could vary the level of
the liquidity fee (subject to the 2% limit) if the board determined
that a different fee level was in the best interest of the fund.
Proposed (Fees & Gates) rule 2a-7(c)(2)(i)(A). The new fee level
would take effect the next business day following the board's
determination. Id.
\374\ Proposed (Fees & Gates) rule 2a-7(c)(2)(i)(B).
---------------------------------------------------------------------------
In addition, once the fund had crossed below the 15% threshold, the
fund's board of directors (including a majority of its independent
directors) would be able to temporarily suspend redemptions and gate
the fund if the board determines that doing so is in the best interest
of the fund.\375\ Any gate imposed also would be automatically lifted
once the fund's weekly liquid assets had risen back to or above 30% of
its total assets (although the board of directors (including a majority
of its independent directors) could lift the gate earlier.\376\ Any
money market fund that imposes a gate would need to lift that gate
within 30 days and a money market fund could not impose a gate for more
than 30 days in any 90-day period.\377\ Under this proposal, we also
would amend rule 22e-3 to permit the suspension of redemptions and
liquidation of a money market fund if the fund's level of weekly liquid
assets falls below 15% of its total assets.\378\
---------------------------------------------------------------------------
\375\ The fund must reject any redemption requests it receives
while the fund is gated. See proposed (Fees & Gates) rule 2a-
7(c)(2)(ii).
\376\ Proposed (Fees & Gates) rule 2a-7(c)(2)(ii).
\377\ Proposed (Fees & Gates) rule 2a-7(c)(2)(ii). We also note
that an adviser to a money market fund could seek an exemptive order
from the Commission to allow for continued gating beyond 30 days if
such gating would be necessary or appropriate in the public interest
and consistent with the protection of investors and the purposes
fairly intended by the policy and provisions of the Investment
Company Act.
\378\ See proposed (Fees & Gates) rule 22e-3.
---------------------------------------------------------------------------
a. Discretionary Versus Mandatory Liquidity Fees and Gates
We are proposing a default liquidity fee that the money market
fund's board of directors can modify or remove if it is in the best
interest of the fund, because this structure offers the possibility of
achieving many of the benefits of both fully discretionary and
automatic (regulatory mandated) redemption restriction triggers. A
purely discretionary trigger allows a fund board the flexibility to
determine when a restriction is necessary, and thus allows tailoring of
the triggering of the fee to the market conditions at the time, and the
specific circumstances of the fund. However, a purely discretionary
trigger creates the risk that a fund board may be reluctant to impose
restrictions, even when they would benefit the fund and the short-term
financing markets. They may not impose such restrictions out of fear
that doing so signals trouble for the individual fund or fund complex
(and thus may incur significant business and reputational effects) or
could incite redemptions in other money market funds in anticipation
that fees may be imposed in those funds as well. Fully discretionary
triggers also provide shareholders with little advance knowledge of
when such a restriction might be triggered and fund boards could end up
applying them in a very disparate manner. Fully discretionary triggers
also may present operational difficulties for fund managers who
suddenly may need to implement a liquidity fee and may not have systems
in place that can rapidly institute a fee whose trigger and size was
previously unknown.
Automatic triggers set by the Commission may mitigate these
potential concerns, but they create a risk of imposing costs on
shareholders when funds are not truly distressed or when liquidity is
not abnormally costly. Establishing thresholds that result in the
imposition of a fee, unless the board makes a finding that such a fee
is not in the best interest of the fund, balances these tradeoffs by
providing some transparency to shareholders on potential fee or gate
triggers and giving some guidance to boards on when a fee or gate might
be appropriate. At the same time, it also allows boards to avoid
imposing a fee or gate when it would be inappropriate in light of the
circumstances of the fund and the conditions in the market.
Our proposed rule essentially creates a default liquidity fee of a
pre-determined size, imposed when the fund's weekly liquid assets have
dropped below a certain threshold. However, it provides the fund's
board flexibility to alter the default option--for example, by imposing
a gate instead of a fee or by imposing a fee at a different threshold
or imposing a lower percentage fee--as long as it determines that doing
so is in the best interest of the fund.
We request comment on our proposed default structure for the
liquidity fees and gates.
Should the imposition of a liquidity fee or gate be fully
discretionary or should it have a completely automatic trigger? Why?
Would a money market fund's board of directors impose a
fully discretionary fee or gate during times of stress on the money
market fund despite its possible unpopularity with investors and
potential competitive disadvantage for the fund or fund group if other
funds are not imposing a liquidity fee or gate? On the other hand,
would a fund's board of directors be able to best determine when a fee
or gate should be imposed rather than an automatic trigger?
What operational complexities would be involved in a fully
discretionary liquidity fee? Would fund complexes and their
intermediaries be able to program systems in advance to accommodate the
immediate imposition of a liquidity fee whose trigger and size were
unknown in advance?
b. Threshold for Liquidity Fees and Gates
We are proposing that a liquidity fee automatically be imposed on
money market fund redemptions if the fund's weekly liquid assets fall
below 15% of its total assets, unless the fund's board of directors
(including a majority of its independent directors) determines that a
fee would not be in the best interest of the fund.\379\ We also are
proposing that, once the fund has crossed below this threshold, the
money market fund board also would have the ability to impose a
temporary gate for a limited period of time provided that the board of
directors (including a majority of its independent directors)
determines that imposing a gate is in the fund's best interest.\380\
Any fee or gate imposed would be automatically lifted when the fund's
weekly liquid assets had risen back to or above 30% of its total assets
(although the board of directors (including a majority of its
independent directors) could lift the fee or gate earlier if the board
determined it was in the best interest of the fund.\381\
---------------------------------------------------------------------------
\379\ See proposed (Fees & Gates) rule 2a-7(c)(2)(i).
\380\ See proposed (Fees & Gates) rule 2a-7(c)(2)(ii).
\381\ Proposed (Fees & Gates) rule 2a-7(c)(2).
---------------------------------------------------------------------------
[[Page 36885]]
Our proposed 15% weekly liquid asset threshold is a default for
money market funds imposing liquidity fees that requires the board to
consider taking action. Fund boards of directors have the flexibility
to impose a liquidity fee or gate if weekly liquid assets fall below
this threshold (or they may determine not to impose a liquidity fee or
gate at all), and can continue to reconsider their decision in light of
new events as long as the fund is below this liquidity threshold.\382\
Several industry commenters have recommended basing imposition of a
liquidity fee on the money market fund's level of weekly liquid assets,
with their proposed thresholds ranging from 7.5% to 15% of weekly
liquid assets.\383\ As shown in the chart below, our staff's analysis
of Form N-MFP data shows that, between March 2011 and October 2012,
there were two months in which funds reported weekly liquid assets
below 15% (one fund in May 2011, and four funds in June 2011) and there
were two months in which funds reported weekly liquid assets of at
least 15% but below 20% (one fund in March 2011, and one fund in
February 2012).
---------------------------------------------------------------------------
\382\ See infra text preceding n.385.
\383\ See, e.g., BlackRock FSOC Comment Letter, supra note 204
(recommending an automatic trigger of 15% weekly liquid assets); ICI
Jan. 24 FSOC Comment Letter, supra note 25 (recommending an
automatic trigger of between 7.5% and 15% weekly liquid assets);
Vanguard FSOC Comment Letter, supra note 172 (recommending an
automatic trigger of 15% weekly liquid assets).
---------------------------------------------------------------------------
Fees and gates are a tool to mitigate problems in funds, so we
selected a threshold that would indicate distress in a fund, but also
one that few funds would cross in the ordinary course of business,
allowing funds and their boards to avoid the costs of frequent
unnecessary consideration of fees and gates. The analysis below shows
that if the triggering threshold was between 25-30% weekly liquid
assets, funds would have crossed this threshold every month except one
during the period, and if it was set at between 20-25% weekly liquid
assets, some funds would have crossed it nearly every other month.
However, the analysis shows that funds rarely cross the threshold of
between 15-20% weekly liquid assets during normal operations, and that
during the time period analyzed, there were only 2 months that had any
funds below the 15% weekly liquid assets threshold.
Distribution of Weekly Liquid Assets in Prime Money Market Funds, March 2011--October 2012 \384\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Date [0.00-0.05] [0.05-0.10] [0.10-0.15] [0.15-0.20] [0.20-0.25] [0.25-0.30] Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mar-11.................................. .............. .............. .............. 1 1 11 259
Apr-11.................................. .............. .............. .............. .............. .............. 3 261
May-11.................................. .............. 1 .............. .............. 2 9 260
Jun-11.................................. .............. .............. 4 .............. 2 25 257
Jul-11.................................. .............. .............. .............. .............. .............. 3 257
Aug-11.................................. .............. .............. .............. .............. 3 10 256
Sep-11.................................. .............. .............. .............. .............. .............. 5 256
Oct-11.................................. .............. .............. .............. .............. 1 6 258
Nov-11.................................. .............. .............. .............. .............. .............. 4 257
Dec-11.................................. .............. .............. .............. .............. .............. 7 256
Jan-12.................................. .............. .............. .............. .............. .............. 3 256
Feb-12.................................. .............. .............. .............. 1 .............. 2 255
Mar-12.................................. .............. .............. .............. .............. .............. 5 251
Apr-12.................................. .............. .............. .............. .............. .............. .............. 248
May-12.................................. .............. .............. .............. .............. .............. 7 247
Jun-12.................................. .............. .............. .............. .............. 1 4 245
Jul-12.................................. .............. .............. .............. .............. 1 3 245
Aug-12.................................. .............. .............. .............. .............. .............. 4 244
Sep-12.................................. .............. .............. .............. .............. 1 6 241
Oct-12.................................. .............. .............. .............. .............. .............. 2 241
--------------------------------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\384\ For purposes of our analysis, the monthly distribution of
prime money market funds with weekly liquid assets above 30% is not
shown.
---------------------------------------------------------------------------
Because the data on liquidity is reported at the end of the month,
it could be the case that more than four money market funds' level of
weekly liquid assets fell below 15% on other days of the month during
our period of study. However, this number may overestimate the
percentage of funds that are expected to impose a fee or gate because
we expect that funds would increase their risk management around their
level of weekly liquid assets in response to the fees and gates
requirement to avoid breaching the liquidity threshold. Using this
information to inform our choice of the appropriate level for a weekly
liquid asset threshold, we are proposing a 15% weekly liquid assets
threshold to balance the desire to have such consideration triggered
while the fund still had liquidity reserves to meet redemptions but
also not set the trigger at a level that frequently would be tripped by
normal fluctuations in liquidity levels that typically would not
indicate a fund under stress.
We are proposing to require that any fee or gate be lifted
automatically once the fund's weekly liquid assets have risen back
above 30% of the fund's assets--the minimum currently mandated under
rule 2a-7--and thus a fee or gate would appear to be no longer
justified. We considered whether a fee or gate should be lifted
automatically before the fund's weekly liquid assets were completely
restored to their required minimum--for example, once they had risen to
25%. However, we preliminarily believe that automatically removing such
a restriction before the fund's level of weekly liquid assets was fully
replenished may result in a fund being unable to maintain a liquidity
fee or gate to protect the fund even when the fund is still under
stress and before stressed market conditions have fully subsided. We
note that a fund's board can always determine to lift a fee or gate
before the fund's level of weekly liquid assets is restored to 30% of
its assets.
There are a number of factors that a fund's board of directors may
consider in determining whether to impose a liquidity fee once the
fund's weekly liquid assets have fallen below 15% of its total assets.
For example, it may want to consider why the level of weekly
[[Page 36886]]
liquid assets has fallen. Is it because the fund is experiencing
mounting redemptions during a time of market stress or is it because a
few large shareholders unexpectedly redeemed for idiosyncratic reasons
unrelated to current market conditions? Another relevant factor to the
fund board may be whether the fall in weekly liquid assets has been
accompanied by a fall in the fund's shadow price. The fund board also
may want to consider whether the fall in weekly liquid assets is likely
to be very short-term. For example, will the fall in weekly liquid
assets be cured in the next day or two when securities currently in the
fund's portfolio qualify as weekly liquid assets? Many money market
funds ``ladder'' the maturities of their portfolio securities, and thus
it could be the case that a fall in weekly liquid assets will be
rapidly cured by the portfolio's maturity structure.
We considered instead proposing a threshold based on the shadow
price of the money market fund. For example, one money market fund
sponsor has suggested that we require money market funds' boards of
directors to consider charging a liquidity fee on redeeming
shareholders if the shadow price of a fund's portfolio fell below a
specified threshold.\385\ This commenter asserted that such a trigger
would ensure that shareholders only pay a fee when redemptions would
actually cause the fund to suffer a loss and thus redemptions clearly
disadvantage remaining shareholders. However, we are concerned that a
money market fund being able to impose a fee only when the fund's
shadow price has fallen by some amount below $1.00 in certain cases may
come too late to mitigate the potential consequences of heavy
redemptions and to fully protect investors. Heavy redemptions can
impose adverse economic consequences on a money market fund even before
the fund actually suffers a loss. They can deplete the fund's most
liquid assets so that the fund is in a substantially weaker position to
absorb further redemptions or losses. In addition, our proposed
threshold is a default trigger for the liquidity fee--the board is not
required to impose a liquidity fee when the fund's weekly liquid assets
have fallen below 15%. Thus, a board can take into account whether the
money market fund's shadow price has deteriorated in determining
whether to impose a liquidity fee or gate when the fund's weekly liquid
assets have fallen below the threshold. A threshold based on shadow
prices also raises questions about whether and to what extent
shareholders differentiate between realized (such as those from
security defaults) and market-based losses (such as those from market
interest rate changes) when considering a money market fund's shadow
price. If shareholders do not redeem in response to market-based losses
(as opposed to realized losses), it may be inappropriate to base a fee
on a fall in the fund's shadow price if such a fall is only temporary.
On the other hand, a temporary decline in the shadow price using
market-based factors can lead to realized losses from a shareholder's
perspective if redemptions cause a fund with an impaired NAV to ``break
the buck.''
---------------------------------------------------------------------------
\385\ HSBC FSOC Comment Letter, supra note 196 (suggesting
setting the market-based NAV trigger at $0.9975).
---------------------------------------------------------------------------
We also considered proposing a threshold based on the level of
daily liquid assets rather than weekly liquid assets. We expect that a
money market fund would meet heightened shareholder redemptions first
by depleting the fund's daily liquid assets and next by depleting its
weekly liquid assets, as daily liquid assets tend to be the most
liquid. Accordingly, basing this threshold on weekly liquid assets thus
provides a deeper picture of the fund's overall liquidity position, as
a fund whose weekly liquid assets have fallen to 15% has likely
depleted all of its daily liquid assets. In addition, a fund's levels
of daily liquid assets may be more volatile because they are one of the
first assets used to satisfy day-to-day shareholder redemptions, and
thus more difficult to use as a gauge of true fund distress. Finally,
as noted above, funds are able under the Investment Company Act to
delay payment of redemption requests for up to seven days. Thus,
substantial depletion of weekly liquid assets may be a better indicator
of true fund distress. We also considered a trigger that would combine
liquidity and market-based NAV thresholds but have preliminarily
concluded that a single threshold would accomplish our goals without
undue complexity and would be easier for investors to understand.
We request comment on our default threshold for liquidity fees and
our threshold on when a money market fund's board may impose a gate.
What should be the trigger either for a default liquidity
fee or for a board's ability to impose a gate? Rather than our proposed
trigger based on a fund's level of weekly liquid assets, should it be
based on the fund's shadow price or its level of daily liquid assets?
Should it be based on a certain fall in either the fund's weekly liquid
assets or shadow price? Why and what extent of a fall? Should it be
based on some other factor? Should it be based on a combination of
factors?
If we considered a threshold based on the fund's shadow
price, do shareholders differentiate between realized and market-based
losses (such as those from security defaults versus those from market
interest rate changes) when considering a money market fund's shadow
price? If so, how does it affect their propensity to redeem shares when
one or more funds have losses?
Should we permit a fund board to impose a liquidity fee or
gate even before a fund passes the trigger requiring the default fee to
be considered if the board determines that an early imposition of a
liquidity fee or gate would be in the best interest of the fund? Would
that reduce the benefits discussed above of having an automatic default
trigger? What concerns would arise from permitting imposition of a fee
or gate before a fund passes the thresholds we may establish?
What extent of decline in weekly liquid assets should
trigger consideration of a fee or gate and why? Should it be more or
less than 15% weekly liquid assets, such as 10% or 20%?
How do fund holdings of weekly liquid assets vary within
the calendar month, between Form N-MFP filing dates? How do net
shareholder redemptions vary within the calendar month, between Form N-
MFP filing dates? How accurately can the fund forecast the net
redemptions of its shareholders? When is the fund more likely to make
forecasting errors?
Should a liquidity fee or gate not be required until the
fund suffers an actual loss in value? Why or why not and if so, how
much of a loss in value?
Is one type of threshold less susceptible to preemptive
runs? If so, why?
Are there other factors that a board might consider in
determining whether to impose a fee or gate? Should we require that
boards consider certain factors? If so, which factors and why?
c. Size of Liquidity Fee
We are proposing that the liquidity fee be set at a default rate of
2%, although a fund's board could impose a lower liquidity fee (or no
fee at all) if it determines that a lower level is in the best interest
of the fund.\386\ Commenters have suggested that liquidity fee levels
ranging from 1% to 3% could be effective.\387\ We selected a default
fee of
[[Page 36887]]
2% because we believe that a liquidity fee set at this level is high
enough that it may impose sufficient costs on redeeming shareholders to
deter redemptions in a crisis, but is low enough to permit investors
who wish to redeem despite the cost to receive their proceeds without
bearing unwarranted costs.\388\ A 2% level should also permit a fund to
recoup the costs of liquidity it may bear, while repairing the fund if
it has incurred losses.\389\ We recognize that establishing any fixed
fee level may not precisely address the circumstances of a particular
fund in a crisis, and accordingly are proposing to make this 2% level a
default, which a fund board may lower or eliminate in accordance with
the circumstances of any individual fund.
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\386\ See proposed (Fees & Gates) rule 2a-7(c)(2)(i)(A).
\387\ See, e.g., Vanguard FSOC Comment Letter, supra note 172
(recommending a fee of between 1 and 3%); BlackRock FSOC Comment
Letter, supra note 204 (recommending a standby liquidity fee of 1%);
ICI Jan. 24 FSOC Comment Letter, supra note 25 (recommending a 1%
fee).
\388\ See, e.g., Vanguard FSOC Comment Letter, supra note 172
(``We believe a fee in this amount [1-3%] will serve as an adequate
deterrent to investors who may attempt to flee a fund out of fear,
but would still allow those investors who have a need to access
their cash the ability to redeem a portion of their holdings.'');
ICI Jan. 24 FSOC Comment Letter, supra note 25 (``A liquidity fee
set at this level [1%] would discourage redemptions, but allow the
fund to continue to provide liquidity to investors. . . . Investors
truly in need of liquidity would have access to it, but at a pre-
determined cost.'').
\389\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25
(``Insofar as investors choose to redeem, the fee would benefit
remaining shareholders by mitigating liquidation costs and
potentially rebuilding NAVs.'').
---------------------------------------------------------------------------
We also considered whether we should require a liquidity fee with
an amount explicitly tied to market indicators of changes in liquidity
costs for money market funds. For example, one fund manager suggested
that the amount of the liquidity fee charged could be based on the
anticipated change in the market-based NAV of the fund's portfolio from
the redemption, assuming a horizontal slice of the fund's portfolio was
sold to meet the redemption request.\390\ This firm asserted that such
a liquidity fee would proportionately target the extent that the
redemption was causing a material disadvantage to remaining investors
in the fund and it would be clear to investors how the fee would
advance investor protection.
---------------------------------------------------------------------------
\390\ HSBC FSOC Comment Letter, supra note 196.
---------------------------------------------------------------------------
There may be a number of drawbacks to such a ``market-sized''
liquidity fee, however. First, it does not provide significant
transparency in advance to shareholders of the size of the liquidity
fee they may have to pay in times of stress. It could also reduce the
fees' efficacy in stemming redemptions if investors fear that the fee
might go up in the future. This lack of transparency may hinder
shareholders' ability to make well-informed decisions. It also may be
difficult for money market funds to rapidly determine precise liquidity
costs in times of stress when the short-term financing markets may be
generally illiquid. Indeed, our staff gave no-action assurances to
money market funds relating to valuation during the 2008 financial
crisis because determining pricing in the then-illiquid markets was so
difficult.\391\ We also understand that a liquidity fee that is not
fixed in advance and indeed may change from day-to-day may be
considerably more difficult and expensive for money market funds to
implement and administer from an operational perspective. Such a fee
would require real-time inputs of pricing factors into fund systems
that would need to be rapidly disseminated through chains of financial
intermediaries in order to apply to daily redemptions from the large
number of beneficial owners that hold money market fund shares through
omnibus accounts. A floating fee would assume sale of a horizontal
cross section of assets but we do not think that is how portfolio
securities would be sold to meet redemptions.
---------------------------------------------------------------------------
\391\ See Investment Company Institute, SEC Staff No-Action
Letter (Oct. 10, 2008) (not recommending enforcement action through
January 12, 2009, if money market funds used amortized cost to
shadow price portfolio securities with maturities of 60 days or less
in accordance with Commission interpretive guidance and noting:
``You state that under current market conditions, the shadow pricing
provisions of rule 2a-7 are not working as intended. You believe
that the markets for short-term securities, including commercial
paper, may not necessarily result in discovery of prices that
reflect the fair value of securities the issuers of which are
reasonably likely to be in a position to pay upon maturity. You
further assert that pricing vendors customarily used by money market
funds are at times not able to provide meaningful prices because
inputs used to derive those prices have become less reliable
indicators of price.'').
---------------------------------------------------------------------------
These factors have led us to propose a default liquidity fee of a
fixed size, but to allow the board of directors (including a majority
of its independent directors) to impose a smaller-sized liquidity fee
if it determines that such a smaller fee would be in the best interest
of the fund.\392\ We preliminarily believe that such a default may
provide the best combination of directing boards of directors to a
liquidity fee size that may be appropriate in many stressed market
conditions, but providing flexibility to boards to lower the size of
that liquidity fee if it determines that a smaller fee would better and
more fairly estimate and allocate liquidity costs to redeeming
shareholders. Some factors that boards of directors may want to
consider in determining whether to impose a smaller-sized liquidity fee
than 2% include the shadow price of the money market fund at the time,
relevant market indicators of liquidity stress in the markets, changes
in spreads for portfolio securities (whether based on actual sales,
dealer quotes, pricing vendor mark-to-model or matrix pricing, or
otherwise), changes in the liquidity profile of the fund in response to
redemptions and expectations regarding that profile in the immediate
future, and whether the money market fund and its intermediaries are
capable of rapidly putting in place a fee of a different amount. We are
not proposing to allow fund boards to impose a larger liquidity fee
than 2% because we understand that, even in ``fire sales'' or other
crisis situations, money market funds typically have not realized
haircuts greater than 2% when selling portfolio securities, and believe
that investors should not face unwarranted costs when redeeming their
shares. In addition, the staff has noted in the past that fees greater
than 2% raise questions regarding whether a fund's securities remain
``redeemable.'' \393\ If a fund continues to be under stress even with
a 2% liquidity fee, the fund board may consider imposing a redemption
gate or liquidating the fund pursuant to rule 22e-3.
---------------------------------------------------------------------------
\392\ See proposed (Fees & Gates) rule 2a-7(c)(2)(i).
\393\ Section 2(a)(32) of the Act [15 U.S.C. 80a-2(a)(32)]
defines the term ``redeemable security'' as a security that entitles
the holder to receive approximately his proportionate share of the
fund's net asset value. The Division of Investment Management
informally took the position that a fund may impose a redemption fee
of up to 2% to cover the administrative costs associated with
redemption, ``but if that charge should exceed 2 percent, its shares
may not be considered redeemable and it may not be able to hold
itself out as a mutual fund.'' See John P. Reilly & Associates, SEC
Staff No-Action Letter (July 12, 1979). This position is currently
reflected in our rule 23c-3(b)(1) under the Act [17 CFR 270.23c-
3(b)(1)], which permits a maximum 2% repurchase fee for interval
funds and rule 22c-2(a)(1)(i) [17 CFR 270.22c-2(a)(1)(i)] which
similarly permits a maximum 2% redemption fee to deter frequent
trading in mutual funds.
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We request comment on our proposed default size for the liquidity
fee.
What should be the amount of the liquidity fee? Should it
be a default amount, a fixed amount, or an amount directly tied to the
cost of liquidity in times of stress? If as proposed, we adopt a
default fee, should it be 2%, 1%, or some other level? Should we give
boards discretion to impose a higher fee if the board determines that
it is in the best interest of the fund? Commenters are requested to
please provide data to support your suggested fee level.
If the amount of the liquidity fee is tied to the cost of
liquidity at the time of the redemption, how would that
[[Page 36888]]
amount be determined? Would a liquidity fee that changes depending on
market circumstances provide shareholders with sufficient transparency
on the size of the fee to be able to affect their purchase and
redemption behavior? If the size of the liquidity fee changed depending
on market circumstances, would money market funds be able to determine
readily the amount of the liquidity fee during times of market
dislocation? Would such a fee affect one type of investor more than
another type of investor?
Is a flat, fixed liquidity fee preferable to a variable
fee that might be higher than the flat fee? Will the fund's ability to
choose a lower liquidity fee result in any conflicts of interest
between redeeming shareholders, non-redeeming shareholders, and the
investment adviser?
How should we weigh the risk that a flat liquidity fee may
be higher or lower than the actual liquidity costs to the money market
fund from the redemption, against the risk that a market-based
liquidity fee may not provide sufficient advance transparency to
shareholders and may be difficult to set appropriately in a crisis?
How difficult would it be for money market funds and
various intermediaries in the distribution chain of money market fund
shares to handle from an operational perspective a liquidity fee that
varied?
d. Default of Liquidity Fees
Our proposal provides that a liquidity fee be imposed once a non-
government money market fund's weekly liquid assets has fallen below
15% of its total assets (which is one-half of its required 30%
minimum), unless the board of directors determines that such a fee
would not be in the best interest of the fund. After the fund has
crossed that 15% liquidity threshold, the board could also impose a
gate. Based on this default choice, the implicit ordering of redemption
restrictions thus would be a liquidity fee, and if that fee is not
sufficiently slowing redemptions, a gate (although once the liquidity
fee threshold was crossed, a board would be able to immediately impose
a gate instead of a fee). We proposed a liquidity fee, rather than a
gate, as the default because we believe that a fee has the potential to
be less disruptive to fund shareholders and the short-term financing
markets because a fee allows fund shareholders to continue to transact
in times of stress (although at a cost). Some industry commenters
instead have suggested that money market funds impose a gate
first.\394\ Such a pause in redemption activity could provide time for
any spike in redemptions to subside before redemptions were allowed
with a fee. We request comment on liquidity fees being the default
under this proposal.
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\394\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25;
Vanguard FSOC Comment Letter, supra note 172.
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Should the implicit ordering in the proposed rule be
reversed, with a default of the fund imposing a gate once the fund has
crossed the weekly liquid asset threshold, unless or until the board
determines to re-open with a liquidity fee? Why?
Should there be a different threshold for consideration of
a gate if we adopted a gate as the default? Why or why not? Should a
gate be mandatory under certain circumstances? If so, under what
circumstances? Should any mandatory gate have a pre-specified window?
If so, how long should that gate be imposed?
e. Time Limit on Gates
We are proposing that a money market fund board must lift any gate
it imposes within 30 days and that a board could not impose a gate for
more than 30 days in any 90-day period. As noted above, a fund board
could only impose a gate if it determines that the gate is in the best
interest of the fund, and we would expect the board would lift the gate
as soon as it determines that a gate is no longer in the best interest
of the fund. This time limitation for the gate is designed to balance
protecting the fund in times of stress while not unduly limiting the
redeemability of money market fund shares, given the strong preference
embodied in the Investment Company Act for the redeemability of open-
end investment company shares.\395\ We understand that investors use
money market funds for cash management, and that lack of access to
their money market fund investment for a long period of time can impose
substantial costs and hardships.\396\ Indeed, many shareholders in The
Reserve Primary Fund informed us about these costs and hardships during
that fund's lengthy liquidation.\397\
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\395\ See Investment Trusts and Investment Companies: Hearings
on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and
Currency, 76th Cong., 3d Sess. 291-292 (1940) (statement of David
Schenker, Chief Counsel, Investment Trust Study, SEC).
\396\ See, e.g., Comment Letter of Thrivent Financial for
Lutherans (Feb. 15, 2013) (available in File No. FSOC-2012-0003)
(``Thrivent FSOC Comment Letter'') (``The proposed liquidity fees
reduce the simplicity, reduce the liquidity for the majority of
shareholders, increase the potential for losses, and as a result,
dramatically alter the product. Money market funds' intended purpose
is to be a liquidity product, but if the product is only liquid for
the first 15% of investors that redeem, then it is no longer a
liquidity product for the remaining 85%.'').
\397\ See Kevin McCoy, Primary Fund Shareholders Put in a Bind,
USA Today, Nov. 11, 2008, available at https://
usatoday30.usatoday.com/money/perfi/funds/2008-11-11-market-fund-
side--N.htm (discussing hardships faced by Reserve Primary Fund
shareholders due to having their shareholdings frozen, including a
small business owner who almost was unable to launch a new business,
and noting that ``Ameriprise has used `hundreds of millions of
dollars' of its own liquidity for temporary loans to clients who
face financial hardships while they await final repayments from the
Primary Fund''); John G. Taft, Stewardship: Lessons Learned from the
Lost Culture of Wall Street (2012), at 2 (``Now that the Reserve
Primary Fund had suspended redemptions of Fund shares for cash, our
clients had no access to their cash. This meant, in many cases, that
they had no way to settle pending securities purchase and therefore
no way to trade their portfolios at a time of historic market
volatility. No way to make minimum required distributions from
retirement plans. No way to pay property taxes. No way to pay
college tuition. It meant bounced checks and, for retirees,
interruption of the cash flow distributions they were counting on to
pay their day-to-day living expenses.'').
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These concerns motivated us to propose a time period that would not
freeze shareholders' money market fund investments for an excessively
long period of time. On the other hand, we do want to provide some time
for stressed market conditions to subside, for portfolio securities to
mature and provide internal liquidity to the fund, and for potentially
distressed fund portfolio securities to recover or be held to maturity.
As of February 28, 2013, 43% of prime money market fund assets had a
maturity of 30 days or less.\398\ Accordingly, within a 30-day window
for a gate, a substantial amount of a money market fund's assets could
mature and provide cash to the fund to meet redemptions when the fund
re-opened. We also note that some commenters suggested a 30-day time
limit on any gate.\399\ Balancing all of these factors led us to
propose a 30-day time limit for any gate imposed. So that this 30-day
time limit could not be circumvented, for example, by reopening the
fund on the 29th day for a day before re-imposing the gate for
potentially another 30-day period, we also are proposing that the fund
cannot impose a gate for more than 30 days in any 90-day period. The
30-day limit is a maximum, and a money market fund board likely would
need to meet regularly during any period in which a redemption gate is
in place and would lift the gate promptly when it
[[Page 36889]]
determines that the gate is no longer in the best interest of the
fund.\400\
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\398\ Based on Form N-MFP data, with maturity determined in the
same manner as it is for purposes of computing the fund's weighted
average life.
\399\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25.
\400\ The fund's board may also consider permanently suspending
redemptions in preparation for fund liquidation under rule 22e-3 if
the fund approaches the 30 day gating limit.
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Does a 30-day limit appropriately balance these
objectives? Should there be a shorter time limit, such as 10 days?
Should there be a longer time limit, such as 45 days? Why?
Will our proposed limit on the number of days a fund can
be gated in any 90-day period effectively prevent ``gaming'' of the 30-
day gate limitation? Should it be a shorter window or larger window? 60
days? 120 days?
Should we impose additional restrictions on a money market
fund's use of a gate? Should we, for example, require the board of
directors of a money market fund that has imposed a gate to meet each
day or week that the gate is in place, and permit the gate to remain in
place only if the board makes specified findings at these meetings? We
could provide that a gate may only remain in place if the board,
including a majority of the independent directors, finds that lifting
the gate and meeting shareholder redemptions could result in material
dilution or other unfair results to investors or existing shareholders.
Would requiring the board to make such a finding to continue to use a
gate help to prevent a fund from imposing a gate for longer than is
necessary or appropriate? Would a different required finding better
achieve this goal? Would fund boards be able to make such findings
accurately, particularly during a crisis when a board may be more
likely to impose a gate? Would such a requirement deter fund boards
from keeping a gate in place when doing so may be in the best interest
of the fund?
f. Application of Liquidity Fees to Omnibus Accounts
For beneficial owners holding mutual fund shares through omnibus
accounts, we understand that, with respect to redemption fees imposed
to deter market timing of mutual fund shares, financial intermediaries
generally impose any redemption fees themselves to record or beneficial
owners holding through that intermediary.\401\ We understand that they
do so often in accordance with contractual arrangements between the
fund or its transfer agent and the intermediary. We would expect any
liquidity fees to be handled in a similar manner, although we
understand that some money market fund sponsors will want to review
their contractual arrangements with their funds' financial
intermediaries and service providers to determine whether any
contractual modifications would be necessary or advisable to ensure
that any liquidity fees are appropriately applied to beneficial owners
of money market fund shares. We also understand that some money market
fund sponsors may seek certifications or other assurances that these
intermediaries and service providers will apply any liquidity fees to
the beneficial owners of money market fund shares. We also recognize
that money market funds and their transfer agents and intermediaries
will need to engage in certain communications regarding a liquidity
fee.
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\401\ See rule 22c-2. Our understanding of how financial
intermediaries handle redemption fees in mutual funds is based on
Commission staff discussions with industry participants and service
providers.
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We request comment on the application of liquidity fees and gates
to shares held through omnibus accounts.
Do commenters agree with our view that liquidity fees
likely will be handled by intermediaries in a manner similar to how
they currently impose redemption fees? If not, how would liquidity fees
be applied to shares held through financial intermediaries? Is our
understanding correct that financial intermediaries generally apply any
liquidity fees themselves to record or beneficial owners holding
through that intermediary? Would they do so based on existing
contractual arrangements or would funds make contractual modifications?
What cost would be involved in any contractual modifications?
Would funds in addition or instead seek certifications
from financial intermediaries that they will apply any liquidity fees?
What cost would be involved in any such certifications?
What other methods might money market funds use to gain
assurances that financial intermediaries will apply any liquidity fees
appropriately? At what costs? Will some intermediaries not offer prime
money market funds to avoid operational costs involved with fees and
gates?
3. Exemptions To Permit Liquidity Fees and Gates
The Commission is proposing exemptions from various provisions of
the Investment Company Act to permit a fund to institute liquidity fees
and gates.\402\ In the absence of an exemption, imposing gates could
violate section 22(e) of the Act, which generally prohibits a mutual
fund from suspending the right of redemption or postponing the payment
of redemption proceeds for more than seven days, and imposing liquidity
fees could violate rule 22c-1, which (together with section 22(c) and
other provisions of the Act) requires that each redeeming shareholder
receive his or her pro rata portion of the fund's net assets. The
Commission is proposing to exercise its authority under section 6(c) of
the Act to provide exemptions from these and related provisions of the
Act to permit a money market fund to institute liquidity fees and gates
notwithstanding these restrictions.\403\ As discussed in more detail
below, we believe that such exemptions do not implicate the concerns
that Congress intended to address in enacting these provisions, and
thus they are necessary and appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the Act.
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\402\ See proposed (Fees & Gates) rule 2a-7(c).
\403\ 15 U.S.C. 80a-6(c). In order to clarify the application of
liquidity fees and gates to variable contracts, we also would amend
rule 2a-7 to provide that, notwithstanding section 27(i) of the Act,
a variable contract sold by a registered separate account funding
variable insurance contracts or the sponsoring insurance company of
such account may apply a liquidity fee or gate to contract owners
who allocate all or a portion of their contract value to a
subaccount of the separate account that is either a money market
fund or that invests all of its assets in shares of a money market
fund. See proposed (Fees & Gates) rule 2a-7(c)(2)(iv). Section
27(i)(2)(A) makes it unlawful for any registered separate account
funding variable insurance contracts or the sponsoring insurance
company of such account to sell a variable contract that is not a
``redeemable security.''
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We do not believe that gates would conflict with the purposes
underlying section 22(e), which was designed to prevent funds and their
investment advisers from interfering with the redemption rights of
shareholders for improper purposes, such as the preservation of
management fees.\404\ The board of a money market fund would impose
gates to benefit the fund and its shareholders by making the fund
better able to handle substantial redemptions, as discussed above.
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\404\ See 2009 Proposing Release, supra note 31, at n.281 and
accompanying text.
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We also propose to provide exemptions from rule 22c-1 to permit a
money market fund to impose liquidity fees because a money market fund
would impose liquidity fees to benefit the fund and its shareholders by
providing a more systematic allocation of liquidity costs.\405\
Remaining shareholders also may benefit if the fees help repair any
decline in the fund's shadow price or lead to an increased
[[Page 36890]]
dividend paid to remaining fund shareholders. The amount of additional
fees that the fund might collect in this regard would be only to
further the purpose of the provision and could only be imposed under
circumstances of stress on the fund.
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\405\ See proposed (Fees & Gates) rule 2a-7(c) (providing that,
notwithstanding rule 22c-1, among other provisions, a money market
fund may impose a liquidity fee under the circumstances specified in
the proposed rule).
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A gate would also be similarly limited. It could only be imposed
for a limited period of time and only under circumstances of stress on
the fund. This aspect of gates, therefore, is akin to rule 22e-3, which
also provides an exemption from section 22(e) to permit money market
fund boards to suspend redemptions of fund shares in order to protect
the fund and its shareholders from the harmful effects of a run on the
fund, and to minimize the potential for disruption to the securities
markets.\406\ We are proposing to permit money market funds to be able
to impose fees and gates because they may provide substantial benefits
to money market funds and the short-term financing markets for issuers,
as discussed above. However, because we recognize that fees and gates
may impose hardships on investors who rely on their ability to freely
redeem shares (or to redeem shares without paying a fee), we also have
proposed limitations on when and for how long money market funds could
impose these restrictions.\407\
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\406\ See 2010 Adopting Release, supra note 92, at text
following n.379.
\407\ See proposed (Fees & Gates) rule 2a-7(c)(2). Cf. 2010
Adopting Release, supra note 92, at text following n.379 (``Because
the suspension of redemptions may impose hardships on investors who
rely on their ability to redeem shares, the conditions of [rule 22e-
3] limit the fund's ability to suspend redemptions to circumstances
that present a significant risk of a run on the fund and potential
harm to shareholders.'')
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We request comment on our proposed amendments allowing money market
funds to institute fees and gates.
Would the proposed amendments to rule 2a-7 provide
sufficient exemptive relief to permit a money market fund to institute
fees or gates with both the requirements of rule 2a-7 and the
Investment Company Act? Are there other provisions of the Investment
Company Act from which the Commission should consider providing an
exemption?
4. Amendments to Rule 22e-3
Under this proposal, we also would amend rule 22e-3 to permit (but
not require) the permanent suspension of redemptions and liquidation of
a money market fund if the fund's level of weekly liquid assets falls
below 15% of its total assets.\408\ This will allow a money market fund
that imposes a fee or a gate, but determines that it would not be in
the best interest of the fund to continue operating, to permanently
suspend redemptions and liquidate. As such, it will provide an
additional tool to fund boards of directors to manage a fund in the
best interest of the fund when that fund comes under stress regarding
its liquidity buffers. It will allow fund boards to suspend redemptions
and liquidate a fund that the board determines would be unable to stay
open (or, if gated, re-open) without further harm to the fund, and
prevents such a fund from waiting until its shadow price has declined
so far that it is about to ``break the buck.''
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\408\ See proposed (Fees & Gates) rule 22e-3.
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We considered whether a money market fund's level of weekly liquid
assets should have to fall further than the 15% threshold that allows
the imposition of fees and gates for the fund to be able to permanently
suspend redemptions and liquidate. A permanent suspension of
redemptions could be considered more draconian because there is no
prospect that the fund will re-open--instead the fund will simply
liquidate and return money to shareholders. Accordingly, one could
consider a lower weekly liquid asset threshold than 15% justified.
However, we believe such considerations must be balanced against the
risk that might be caused by establishing a lower threshold for
enabling a permanent suspension of redemptions. For example, a fund
with a fee or gate in place might know (based on market conditions or
discussions with its shareholders or otherwise) that upon lifting the
fee or gate it will experience a severe run. We would not want to force
such a fund to lift the fee or re-open and weather enough of that run
to deplete its weekly liquid assets below a lower threshold. We
preliminarily believe this risk is great enough to warrant allowing
money market funds to suspend redemptions permanently once the fund's
weekly liquid assets fall below 15% of its total assets.
As under existing rule 22e-3, a money market fund also would still
be able to suspend redemptions and liquidate if it determines that the
extent of the deviation between its shadow price and its market-based
NAV per share may result in material dilution or other unfair results
to investors or existing shareholders.\409\ Accordingly, a money market
fund that suffers a default would still be able to suspend redemptions
and liquidate before that credit loss lead to redemptions and a fall in
its weekly liquid assets.
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\409\ See proposed (Fees & Gates) rule 22e-3.
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We request comment on our proposed amendments to rule 22e-3 under
this proposal.
Is it appropriate to allow a money market fund to suspend
redemptions and liquidate if its level of weekly liquid assets falls
below 15% of its total assets? Is there a different threshold based on
daily or weekly assets that would better protect money market fund
shareholders?
Should a fund's ability to suspend redemptions and
liquidate be tied only to adverse deviations in its shadow price? If
so, is our current standard under rule 22e-3 appropriate or is there a
different level of shadow price decline that should trigger a money
market fund's ability to suspend redemptions and liquidate?
5. Exemptions From the Liquidity Fees and Gates Requirement
We are proposing that government money market funds (including
Treasury money market funds) be exempt from any fee or gate requirement
but that these funds be permitted to impose such a fee or gate under
the regime we have described above if the ability to impose such fees
and gates were disclosed in the fund's prospectus.\410\ This exemption
is based on a similar analysis to our proposed exemption of government
money market funds from the floating NAV proposal and also on our
desire to facilitate investor choice by providing a money market fund
investment option for an investor who was unwilling or unable to invest
in a money market fund that could impose liquidity fees or gates in
times of stress.
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\410\ See proposed (Fees & Gates) rule 2a-7(c)(2)(iii).
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As discussed in the RSFI Study, government money market funds
historically have experienced inflows, rather than outflows, in times
of stress due to flights to quality, liquidity, and transparency.\411\
The assets of government money market funds tend to appreciate in value
in times of stress rather than depreciate.\412\ Accordingly,
[[Page 36891]]
the portfolio composition of government money market funds means that
these funds are less likely to need to use these restrictions. We also
expect that some money market fund investors may be unwilling or unable
to invest in a money market fund that could impose a fee or gate. For
example, there could be some types of investors, such as sweep
accounts, that may be unwilling or unable to invest in a money market
fund that could impose a gate because such an investor requires the
ability to immediately redeem at any point in time, regardless of
whether the fund or the markets are distressed. Accordingly, exempting
government money market funds from the fees and gates requirement would
allow fund sponsors to offer a choice of money market fund investment
products that meet differing liquidity needs, while minimizing the risk
of adverse contagion effects from heavy money market fund redemptions.
Based on our evaluation of these considerations and tradeoffs, and the
more limited risk of heavy redemptions in government money market
funds, we preliminarily believe that on balance it is preferable to
exempt these funds from this potential requirement, but permit them to
use liquidity fees and gates if they choose.
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\411\ See RSFI Study, supra note 21, at 6-13.
\412\ Government money market funds tend to attract significant
inflows of investments during times of broader market distress,
which can appreciate their value. See, e.g., figure 1 in supra
section I.B (showing that during the 2008 Lehman crisis
institutional share classes of government money market funds, which
include Treasury and government funds, experienced heavy inflows).
Also see, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25
(noting government money market funds attracted an inflow of $192
billion during the week following the Lehman bankruptcy in September
2008); HSBC FSOC Comment Letter, supra note 196 (``As evidenced
during the credit crisis of 2008, Treasury and government funds
benefitted from a ``flight to quality'' during these systemic
events''); Dreyfus FSOC Comment Letter, supra note 174 (noting its
institutional government and institutional Treasury money market
funds generally experienced high levels of net inflows during 2008).
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We note that Treasury money market funds generally would be exempt
from any liquidity fees and gates requirement because at least 80% of
their assets generally must be Treasury securities and overnight
repurchase agreements collateralized with Treasury securities, each of
which is a weekly liquid asset. Accordingly, it is highly unlikely for
a Treasury money market fund to breach the 15% weekly liquid asset
threshold that would allow imposition of a fee or gate. Most government
money market funds similarly always would have at least 15% weekly
liquid assets because of the nature of their portfolio, but it is
possible to have a government money market fund with below 15% weekly
liquid assets. We also note that government money market funds and
Treasury money market funds do not necessarily have the same risk
profile. For example, government money market funds generally have a
much higher portion of their portfolios invested in securities issued
by the Federal Home Loan Mortgage Corporation (Freddie Mac), the
Federal National Mortgage Association (Fannie Mae), and the Federal
Home Loan Banks and thus a higher exposure to the home mortgage market
than Treasury money market funds. We note that this exemption would not
apply to tax-exempt (or municipal) money market funds. As discussed
above, because tax-exempt money market funds are not required to
maintain 10% daily liquid assets, these funds may be less liquid than
other money market funds, which could raise concerns that tax-exempt
retail funds might not be able to manage even the lower level of
redemptions expected in a retail money market fund. In addition,
municipal securities typically present greater credit and liquidity
risk than government securities and thus could come under pressure in
times of stress.
We request comment on our proposed exemption of government money
market funds from the proposed liquidity fees and gates requirement.
Is this exemption appropriate, particularly in light of
the redemptions from government funds in late June and early July 2011?
Why or why not?
Is it appropriate to give government money market funds
the option to have the ability to impose fees and gates so long as they
disclose the option to investors? Why or why not? What factors might
lead a government fund to exercise this option?
Should the exemption for government money market funds be
extended to municipal money market funds? Why or why not?
We also considered whether there should be other exemptions from
the proposed liquidity fees and gates requirement. For example, as
discussed in section III.A.4 above, we are proposing an exemption for
retail money market funds from any floating NAV requirement. We noted
in that section how retail money market funds experienced fewer
redemptions during the 2007-2008 financial crisis and thus may be less
likely to suffer heavy redemptions in the future. However, unlike with
government money market funds, a retail prime money market fund
generally is subject to the same credit and liquidity risk as an
institutional prime money market fund. In addition, a floating NAV
requirement affects a shareholder's experience with a money market fund
on a daily basis. Given the costs and burdens associated with a
floating NAV requirement, and the potential limited benefit to retail
shareholders on an ongoing basis given that they are less likely to
engage in heavy redemptions, a retail exemption might be more
appropriate on balance under a floating NAV requirement than under a
liquidity fees and gates requirement. In contrast, a fee or gate
requirement would not affect a money market fund unless the fund's
weekly liquid assets fell below 15% of its total assets--i.e., unless
it came under stress. Exempting retail money market funds from this
requirement thus could leave only institutional (and not retail)
shareholders protected when the money market fund in which they have
invested comes under stress. Given that such an exemption would merely
relieve them in normal times of the costs and burden on those investors
created by the prospect that the fund could impose a fee or gate if
someday it came under stress, we preliminarily believe that a retail
exemption may not be warranted for this alternative. We also considered
methods of exempting some retail investors from a fee or gate
requirement. For example, we could exempt small redemption requests,
such as those below $10,000, or $100,000 per day, from any fee or gate
requirement. Such small redemptions are less likely to materially
impact the liquidity position of the fund. This type of exemption could
retain the benefits of fees and gates for retail money market funds
generally while providing some relief from the burdens for investors
with smaller redemption needs. However, we are concerned that granting
such exemptions could complicate the fees and gates requirement both as
an operational matter and in terms of ease of shareholder understanding
without providing substantial benefits.
We also have considered whether irrevocable redemption requests
submitted at least a certain period in advance should be exempt as the
fund should be able to plan for such liquidity demands and hold
sufficient liquid assets. However, we are concerned that shareholders
could try to ``game'' the fee or gate requirement through such
exemptions, for example, by redeeming a certain amount every week and
then reinvesting the redemption proceeds immediately if the cash is not
needed. We also are concerned that allowing such an exception would add
significantly to the cost and complexity of this requirement, as fund
groups would need to be able to separately track which shares are
subject to a fee or gate and which are not.
We request comment on other potential exemptions from the proposed
liquidity fees and gates requirement.
Should retail money market funds (including tax-exempt
money market funds) or retail investors be exempt from any liquidity
fee or gate provision? Should there be an exemption for small
redemption requests, such as redemptions below $10,000? If so, below
what level? If a retail money
[[Page 36892]]
market fund crossed the thresholds we are proposing for board
consideration of a fee or gate, is there a reason not to allow the
fund's board to protect the fund and its shareholders through the use
of a liquidity fee or gate? Would investors ``game'' such exemptions?
Should we create an exemption for shareholders that submit
an irrevocable redemption request at least a certain period in advance
of the needed redemption? Why or why not? With what period of advance
notice? For each of these exemptions, could funds track the shares that
are not subject to the fee or gate? What operational costs would be
involved in including such an exemption? Would shareholders ``game''
such exemptions?
Would further exemptions undermine the goal of the
liquidity fee or gate in deterring or stopping heavy redemptions? Why
or why not? Would exemptions from the fee or gate proposal make it more
difficult or costly to implement or operationalize? How would any such
difficulties compare to the benefits that could be obtained from such
exemptions?
6. Operational Considerations Relating to Liquidity Fees and Gates
Money market funds and others in the distribution chain (depending
on how they are structured) likely would incur some operational costs
in establishing or modifying systems to administer a liquidity fee or
gate. These costs likely would be incurred by, or spread amongst, a
fund's transfer agents, sub-transfer agents, recordkeepers,
accountants, portfolio accounting departments, and custodian. Money
market funds and others also may be required to develop procedures and
controls, and may incur other costs, for example to update systems
necessary for confirmations and account statements to reflect the
deduction of a liquidity fee from redemption proceeds. Money market
funds and their intermediaries may need to establish new, or modify
existing, systems or procedures that would allow them to administer
temporary gates. Money market fund shareholders also might be required
to modify their own systems to prepare for possible future liquidity
fees, or manage gates, although we expect that only some shareholders
would be required to make these changes.\413\ They also may modify
contracts or seek certifications from financial intermediaries that
they will apply any liquidity fee.
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\413\ Many shareholders use common third party-created systems
and thus would not each need to modify their systems.
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These costs would vary depending on how a liquidity fee or gate is
structured, including its triggering event, as well as on the
capabilities, functions, and sophistication of the fund's and others'
current systems. These factors will vary among money market funds,
shareholders, and others, and particularly because we request comment
on a number of ways in which we could structure a liquidity fee or gate
requirement, we cannot ascertain at this stage the systems and other
modifications any particular money market fund or other affected entity
would be required to make to administer a liquidity fee or manage a
gate. Indeed, we believe that money market funds and other affected
entities themselves would need to engage in an in-depth analysis of
this alternative in order to estimate the costs of the necessary
systems modifications. While we do not have the information necessary
to provide a point estimate of the potential costs of systems
modifications needed to administer a liquidity fee or gate, our staff
has estimated a range of hours and costs that may be required to
perform activities typically involved in making systems
modifications.\414\ In estimating these hours and costs, our staff
considered the need to modify the systems described above.
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\414\ Staff estimates that these costs would be attributable to
the following activities: (i) Planning, coding, testing, and
installing system modifications; (ii) drafting, integrating, and
implementing related procedures and controls; and (iii) preparing
training materials and administering training sessions for staff in
affected areas. See also supra note 245 (discussing the bases of our
staff's estimates of operational and related costs).
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If a money market fund determines that it would only impose a flat
liquidity fee of a fixed percentage known in advance (e.g., it would
only impose the default 2% liquidity fee) and have the ability to
impose a gate, our staff estimates that a money market fund (or others
in the distribution chain) would incur one-time systems modification
costs (including modifications to related procedures and controls) that
ranges from $1,100,000 to $2,200,000.\415\ Our staff estimates that the
one-time costs for entities to communicate with shareholders (including
systems costs related to communications) about the liquidity fee or
gate would range from $200,500 to $340,000.\416\ In addition, we
estimate that the costs for a shareholder mailing would range between
$1.00 and $3.00 per shareholder.\417\ We also recognize that adding new
capabilities or capacity to a system will entail ongoing annual
maintenance costs and understand that those costs generally are
estimated as a percentage of initial costs of building or expanding a
system. Our staff estimates that the costs to maintain and modify these
systems required to administer a liquidity fee and the ability to
administer a standby gate (to accommodate future programming changes),
to provide ongoing training, and to administer the liquidity fee or
gate on an ongoing basis would range from 5% to 15% of the one-time
costs. Our staff understands that if a fund board imposes a liquidity
fee whose amount could vary, the cost could exceed this range, but
because such costs depend on to what extent the fee might vary, we do
not have the information necessary to provide a reasonable estimate of
how much more a varying fee might cost to implement.
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\415\ Staff estimates that these costs would be attributable to
the following activities: (i) Project planning and systems design;
(ii) systems modification, integration, testing, installation, and
deployment; (iii) drafting, integrating, implementing procedures and
controls; and (iv) preparation of training materials. See also supra
note 245 (discussing the bases of our staff's estimates of
operational and related costs).
\416\ Staff estimates that these costs would be attributable to
the following activities: (i) modifying the Web site to provide
online account information and (ii) written and telephone
communications with investors. See also supra note 245 (discussing
the bases of our staff's estimates of operational and related
costs).
\417\ Total costs of the mailing for individual funds would vary
significantly depending on the number of shareholders that receive
information from the fund by mail (as opposed to electronically).
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Although our staff has estimated the costs that a single affected
entity would incur, we anticipate that many money market funds,
transfer agents, and other affected entities may not bear the estimated
costs on an individual basis. Instead, the costs of systems
modifications likely would be allocated among the multiple users of the
systems, such as money market fund members of a fund group, money
market funds that use the same transfer agent or custodian, and
intermediaries that use systems purchased from the same third party.
Accordingly, we expect that the cost for many individual entities may
be less than the estimated costs due to economies of scale in
allocating costs among this group of users.
Moreover, depending on how a liquidity fee or gate is structured,
mutual fund groups and other affected entities already may have systems
that could be adapted to administer a liquidity fee or gate at minimal
cost, in which case the costs may be less than the range we estimate
above. For example, some money market funds may be part of mutual fund
groups in which one or more funds impose deferred sales loads or
redemption fees
[[Page 36893]]
under rule 22c-2, both of which require the capacity to administer a
fee upon redemptions and may involve systems that could be adapted to
administer a liquidity fee.
Our staff estimates that a money market fund shareholder whose
systems (including related procedures and controls) required
modifications to account for a liquidity fee or gate would incur one-
time costs ranging from $220,000 to $450,000.\418\ Our staff estimates
that the costs to maintain and modify these systems and to provide
ongoing training would range from 5% to 15% of the one-time costs.
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\418\ Staff estimates that these costs would be attributable to
the following activities: (i) Project planning and systems design;
(ii) systems modification, integration, testing, installation; and
(iii) drafting, integrating, implementing procedures and controls.
See also supra note 245 (discussing the bases of our staff's
estimates of operational and related costs).
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We request comment on our estimate of operational costs associated
with the liquidity fees and gates alternative.
Do commenters agree with our estimates of operational
costs?
Are there operational costs in addition to those we
estimate above? What systems would need to be reprogrammed and to what
extent? What types of ongoing maintenance, training, and other
activities to administer the liquidity fee or gate would be required,
and to what extent?
Are our estimates too high or too low and, if so, by what
amount? To what extent would the estimate vary based on the event that
would trigger the imposition of a liquidity fee or the manner in which
the fee would be calculated once triggered? To what extent would the
estimate vary based on how the gate is structured?
To what extent would money market funds or others
experience the economies of scale that we identify?
7. Tax Implications of Liquidity Fees
We understand that liquidity fees may have certain tax implications
for money market funds and their shareholders. Similar to the liquidity
fee we are proposing today, rule 22c-2 allows mutual funds to recover
costs associated with frequent mutual fund share trading by imposing a
redemption fee on shareholders who redeem shares within seven days of
purchase. We understand that for tax purposes, shareholders of these
mutual funds generally treat the redemption fee as offsetting the
shareholder's amount realized on the redemption (decreasing the
shareholder's gain, or increasing the shareholder's loss, on
redemption).\419\ Consistent with this characterization, funds
generally treat the redemption fee as having no associated tax effect
for the fund. We understand that our proposed liquidity fee, if
adopted, would be treated for tax purposes consistently with the way
that funds and shareholders treat redemption fees under rule 22c-
2.\420\
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\419\ Cf. 26 CFR 1.263(a)-2(e) (commissions paid in sales of
securities by persons who are not dealers are treated as offsets
against the selling price). See also Investment Income and Expenses
(Including Capital Gains and Losses), IRS Publication 550, at 44
(``fees and charges you pay to acquire or redeem shares of a mutual
fund are not deductible. You can usually add acquisition fees and
charges to your cost of the shares and thereby increase your basis.
A fee paid to redeem the shares is usually a reduction in the
redemption price (sales price).''), available at https://www.irs.gov/
pub/irs-pdf/p550.pdf.
\420\ Referring to IRS guidance in a different context, one
commenter suggested that our proposed liquidity fee also might be
characterized for tax purposes as an investment expense for the
shareholder and income to the fund. See ICI Jan. 24 FSOC Comment
Letter, supra note 25. This commenter noted that, if the fund were
required to treat the liquidity fee as ordinary income, the fund
would have to distribute the income to avoid liability for the
corporate level income tax and a 4% excise tax on the amount
retained. In that case, the fund would not realize all of the
benefit the liquidity fee is designed to provide. Id. (citing IRS
Revenue Procedure 2009-10 as supporting the position that the fee
received by the fund should be treated as a capital gain because it
is being used to offset capital losses incurred by the fund on its
portfolio in order to pay the redeeming shareholder and noting that
because the capital gain would offset the capital loss, the fund
would not have an additional distribution requirement). This
commenter suggests that the IRS provide guidance to this effect
(noting that in Revenue Procedure 2009-10, which provided only
temporary administrative guidance, the IRS took this position with
respect to amounts paid to a money market fund by the fund's adviser
to prevent the fund from breaking the buck). Id. See also Arrowsmith
et al. v. Commissioner of Internal Revenue, 344 U.S. 6 (1952).
---------------------------------------------------------------------------
If, as described above, a liquidity fee has no direct tax
consequences for the money market fund, that tax treatment would allow
the fund to use 100% of the fee to repair a market-based price per
share that was below $1.0000. If redemptions involving liquidity fees
cause the money market fund's shadow price to reach $1.0050, however,
the fund may need to distribute to the remaining shareholders
sufficient value to prevent the fund from breaking the buck (and thus
rounding up to $1.01 in pricing its shares).\421\ We understand that
any such distribution would be treated as a dividend to the extent that
the money market fund has sufficient earnings and profits. Both the
fund and its shareholders would treat these additional dividends the
same as they treat the fund's routine dividend distributions. That is,
the additional dividends would be taxable as ordinary income to
shareholders and would be eligible for deduction by the funds.
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\421\ See proposed (Fees & Gates) rule 2a-7(g)(2).
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In the absence of sufficient earnings and profits, however, some or
all of these additional distributions would be treated as a return of
capital. Receipt of a return of capital would reduce the recipient
shareholders' basis (and thus could decrease a loss, or create or
increase a gain for the shareholder in the future when the shareholder
redeems the affected shares).\422\ Thus, in the event of any return of
capital distributions, the shareholders, the fund, and other
intermediaries might become subject to tax-payment or tax-reporting
obligations that do not affect stable NAV funds currently operating
under rule 2a-7.\423\
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\422\ If the payment of liquidity fees forces a money market
fund to make a return of capital distribution to avoid re-pricing
its shares above $1.00, this could also create tax consequences for
remaining shareholders in the fund.
\423\ See the discussion above of the additional obligations
that would be created by gains and losses recognized with respect to
floating NAV funds.
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Finally, we understand that the tax treatment of a liquidity fee
may impose certain operational costs on money market funds and their
financial intermediaries and on shareholders. Either fund groups or
their intermediaries would need to track the tax basis of money market
fund shares as the basis changed due to any return of capital
distributions, and shareholders would need to report in their annual
tax filings any gains \424\ or losses upon the sale of affected money
market fund shares. We are unable to quantify any of the tax and
operational costs discussed in this section because we are unable to
predict how often liquidity fees will be imposed by money market funds
and how often redemptions subject to liquidity fees would cause the
funds to make return of capital distributions to the remaining
shareholders.
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\424\ Redemptions subject to a liquidity fee would almost always
result in losses, but gains are possible if a shareholder received a
return of capital distribution with respect to some shares and the
shareholder later redeemed the shares for $1.0000 each.
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We request comment on this aspect of our proposal.
If liquidity fees cause the fund's shadow price to exceed
$1.0049, will that result cause the fund to make a special distribution
to current shareholders?
Do money market funds and other intermediaries already
have systems in place to track and report the variations in basis, and
the gains and losses that might result from imposing liquidity fees? If
not, what costs would be
[[Page 36894]]
expected to be incurred to establish this capability? In light of the
fact that it may be necessary to establish new systems to track this
information, how does the cost of these new systems compare with the
costs that would be incurred to accommodate floating NAVs?
8. Disclosure Regarding Liquidity Fees and Gates
In connection with the liquidity fees and gates alternative, we are
also proposing alternate disclosure-related amendments to rule 2a-7,
rule 482 under the Securities Act,\425\ and Form N-1A. We anticipate
that the proposed rule and form amendments would provide current and
prospective shareholders with information regarding the operations and
risks of this reform alternative, as well as current and historical
information regarding the imposition of fees and gates. In keeping with
the enhanced disclosure framework we adopted in 2009,\426\ the proposed
amendments are intended to provide a layered approach to disclosure in
which key information about the proposed new features of money market
funds would be provided in the summary section of the statutory
prospectus (and, accordingly, in any summary prospectus, if used) with
more detailed information provided elsewhere in the statutory
prospectus and in the SAI.
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\425\ See supra note 303.
\426\ See Summary Prospectus Adopting Release, supra note 304,
at paragraph preceding section III.
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a. Disclosure Statement
The Commission's liquidity fees and gates alternative proposal
would permit funds to charge liquidity fees and impose redemption
restrictions on money market fund investors. As a measure to achieve
this reform, we propose to require that each money market fund (other
than government money market funds that have chosen to rely on the
proposed rule 2a-7 exemption for government money market funds from any
fee or gate requirements), include a bulleted statement, disclosing the
particular risks associated with investing in a fund that may impose
liquidity fees or redemption restrictions, on any advertisement or
sales material that it disseminates (including on the fund Web site).
We also propose to include wording designed to inform investors about
the primary general risks of investing in money market funds in this
bulleted disclosure statement. While money market funds are currently
required to include a similar disclosure statement on their
advertisements and sales materials,\427\ we propose amending this
disclosure statement to emphasize that money market fund sponsors are
not obligated to provide financial support, and that money market funds
may not be an appropriate investment option for investors who cannot
tolerate losses.\428\
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\427\ See id. Rule 482(b)(4) currently requires a money market
fund to include to following disclosure statement on its
advertisements and sales materials: An investment in the Fund is not
insured or guaranteed by the Federal Deposit Insurance Corporation
or any other government agency. Although the Fund seeks to preserve
the value of your investment at $1.00 per share, it is possible to
lose money by investing in the Fund.
\428\ See infra note 607 and accompanying text (discussing the
extent to which discretionary sponsor support has the potential to
confuse money market fund investors); supra note 141 and
accompanying text (noting that survey data shows that some investors
are unsure about the amount of risk in money market funds and the
likelihood of government assistance if losses occur).
---------------------------------------------------------------------------
Specifically, we would require each money market fund (other than
government money market funds that have chosen to rely on the proposed
rule 2a-7 exemption for government money market funds from any fee or
gate requirements) to include the following bulleted disclosure
statement on their advertisements and sales materials:
You could lose money by investing in the Fund.
The Fund seeks to preserve the value of your investment at
$1.00 per share, but cannot guarantee such stability.
The Fund may impose a fee upon sale of your shares when
the Fund is under considerable stress.
The Fund may temporarily suspend your ability to sell
shares of the Fund when the Fund is under considerable stress.
An investment in the Fund is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government
agency.
The Fund's sponsor has no legal obligation to provide
financial support to the Fund, and you should not expect that the
sponsor will provide financial support to the Fund at any time.\429\
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\429\ See proposed (Fees & Gates) rule 482(b)(4)(i). Rule
482(b)(4) currently requires a money market fund to include to
following disclosure statement on its advertisements and sales
materials: An investment in the Fund is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by
investing in the Fund.
If an affiliated person, promoter, or principal underwriter of
the fund, or an affiliated person of such person, has entered into
an agreement to provide financial support to the fund, the fund
would be permitted to omit this bulleted sentence from the
disclosure statement for the term of the agreement. See Note to
paragraph (b)(4), proposed (Fees & Gates) rule 482(b)(4).
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We also propose to require a substantially similar bulleted disclosure
statement in the summary section of the statutory prospectus (and,
accordingly, in any summary prospectus, if used).\430\
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\430\ See proposed (Fees & Gates) Item 4(b)(1)(ii)(A) of Form N-
1A. Item 4(b)(1)(ii) currently requires a money market fund to
include the following statement in its prospectus: An investment in
the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the
Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
---------------------------------------------------------------------------
As discussed above, the liquidity fees and gates proposal would
exempt government money market funds from any fee or gate requirement,
but a government money market fund would be permitted to charge
liquidity fees and impose gates if the ability to charge liquidity fees
and impose gates were disclosed in the fund's prospectus. Accordingly,
the proposed amendments to rule 482 and Form N-1A would require
government money market funds that have chosen to rely on this
exemption to include a bulleted disclosure statement on the fund's
advertisements and sales materials and in the summary section of the
fund's statutory prospectus (and, accordingly, in any summary
prospectus, if used) that does not include disclosure of the risks of
liquidity fees and gates, but that includes additional detail about the
risks of investing in money market funds generally. We propose to
require each government money market fund that relies on the exemption
to include the following bulleted disclosure statement in the summary
section of its statutory prospectus (and, accordingly, in any summary
prospectus, if used), and on any advertisement or sales material that
it disseminates (including on the fund Web site):
You could lose money by investing in the Fund.
The Fund seeks to preserve the value of your investment at
$1.00 per share, but cannot guarantee such stability.
An investment in the Fund is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government
agency.
The Fund's sponsor has no legal obligation to provide
financial support to the Fund, and you should not expect that the
sponsor will provide financial support to the Fund at any time.\431\
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\431\ See proposed (Fees & Gates) rule 482(b)(4)(ii) and
proposed (Fees & Gates) Item 4(b)(1)(ii)(B) of Form N-1A. If an
affiliated person, promoter, or principal underwriter of the fund,
or an affiliated person of such person, has entered into an
agreement to provide financial support to the fund, the fund would
be permitted to omit this bulleted sentence from the disclosure
statement that appears on a fund advertisement or fund sales
material, for the term of the agreement. See Note to paragraph
(b)(4), proposed (Fees & Gates) rule 482(b)(4).
Likewise, if an affiliated person, promoter, or principal
underwriter of the fund, or an affiliated person of such person, has
entered into an agreement to provide financial support to the fund,
and the term of the agreement will extend for at least one year
following the effective date of the fund's registration statement,
the fund would be permitted to omit this bulleted sentence from the
disclosure statement that appears on the fund's registration
statement. See Instruction to proposed (Fees & Gates) Item
4(b)(1)(ii) of Form N-1A.
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[[Page 36895]]
The proposed disclosure statements are intended to be one measure
to change the investment expectations of money market fund investors,
including the expectation that a money market fund is a stable,
riskless investment.\432\ In addition, we are concerned that investors,
under the liquidity fees and gates proposal, will not be fully aware of
potential restrictions on fund redemptions. In proposing the disclosure
statement, we have taken into consideration investor preferences for
clear, concise, and understandable language and have also considered
whether language that was stronger in conveying potential risks
associated with money market funds would be effective for
investors.\433\ In addition, we considered whether the proposed
disclosure statement should be limited to only money market fund
advertisements and sales materials, as discussed above. Although we
acknowledge that the summary section of the prospectus must contain a
discussion of key risk factors associated with a money market fund, we
believe that the importance of the disclosure statement merits its
placement in both locations, similar to how the current money market
fund legend is required in both money market fund advertisements and
sales materials and the summary section of the prospectus.\434\
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\432\ See supra section II.B.3.
\433\ See supra notes 316 and 317.
\434\ See supra notes 429 and 430.
---------------------------------------------------------------------------
We request comment on the proposed disclosure statement.\435\
---------------------------------------------------------------------------
\435\ In the questions that follow, we use the term ``disclosure
statement'' to mean the new disclosure statement that we propose to
require money market funds other than those exempted from the fees
and gates requirements to incorporate into their prospectuses and
advertisements and sales materials or, alternatively and as
appropriate, the new disclosure statement that we propose to require
government funds (that choose to rely on the rule 2a-7 exemption
from the fees and gates requirements) to incorporate into their
prospectuses and advertisements and sales materials.
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Would the proposed disclosure statement adequately alert
investors to the risks of investing in a money market fund, including a
fund that could impose liquidity fees or gates under certain
circumstances? Would investors understand the meaning of each part of
the proposed disclosure statement? If not, how should the proposed
disclosure statement be amended? Would the following variations on the
proposed disclosure statement be any more or less useful in alerting
shareholders to potential investment risks?
[cir] Removing or amending the following bullet in the proposed
disclosure statement: ``The Fund's sponsor has no legal obligation to
provide financial support to the Fund, and you should not expect that
the sponsor will provide financial support to the Fund at any time.''
[cir] Including additional disclosure of the possibility that a
temporary suspension of redemptions could become permanent if the board
determines that the fund should liquidate.
[cir] Including additional disclosure to the effect that retail
shareholders should not invest all or most of the cash that they might
need for routine expenses (e.g., mortgage payments, credit card bills,
etc.) in any one money market fund, on account of the possibility that
the fund could impose a liquidity fee or suspend redemptions.
[cir] Amending the final bullet in the proposed disclosure
statement to read: ``Your investment in the Fund therefore may
experience losses.''
Will the proposed disclosure statement respond effectively
to investor preferences for clear, concise, and understandable
language?
Would investors benefit from requiring this disclosure
statement also to be included on the front cover page of a non-
government money market fund's prospectus (and on the cover page or
beginning of any summary prospectus, if used)?
Should we provide any instruction or guidance in order to
highlight the proposed disclosure statement on fund advertisements and
sales materials (including the fund's Web site) and/or lead investors
efficiently to the disclosure statement? \436\ For example, with
respect to the fund's Web site, should we instruct that the proposed
disclosure statement be posted on the fund's home page or be accessible
in no more than two clicks from the fund's home page?
---------------------------------------------------------------------------
\436\ Such instruction or guidance would supplement current
requirements for the presentation of the disclosure statement
required by rule 482(b)(4). See supra note 429; rule 482(b)(5).
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b. Disclosure of the Effects of Liquidity Fees and Gates on Redemptions
Currently, funds are required to disclose any restrictions on fund
redemptions in their registration statements.\437\ We expect that, to
comply with these requirements, money market funds (besides government
money market funds that have chosen to rely on the proposed rule 2a-7
exemption from the fees and gates requirements) would disclose in the
registration statement the effects that the potential imposition of
fees and/or gates may have on a shareholder's ability to redeem shares
of the fund. We believe that this disclosure would help investors
understand the potential effect of their redemption decisions during
periods that the fund experiences stress, and to evaluate the full
costs of redeeming fund shares--one of the goals of this
rulemaking.\438\ Specifically, we would expect money market funds to
briefly explain in the prospectus that if the fund's weekly liquid
assets have fallen below 15% of its total assets, the fund will impose
a liquidity fee of 2% on all redemptions, unless the board of directors
of the fund (including a majority of its independent directors)
determines that imposing such a fee would not be in the best interest
of the fund or determines that a lesser fee would be in the best
interest of the fund. We also would expect money market funds to
briefly explain in the prospectus that if the fund's weekly liquid
assets have fallen below 15% of its total assets, the fund board would
be able to impose a temporary suspension of redemptions for a limited
period of time and/or liquidate the fund. We also would expect money
market funds to disclose in the prospectus that information about the
historical occasions on which the fund's weekly liquid assets have
fallen below 15% of its total assets, or the fund has imposed liquidity
fees or redemption restrictions, appears in the funds' SAI (as
applicable).\439\
---------------------------------------------------------------------------
\437\ See Item 11(c)(1) and Item 23 of Form N-1A.
\438\ See supra note 351 and accompanying text (discussing the
extent to which standby liquidity fees can provide a disincentive
for money market fund investors to redeem their shares during times
of stress).
\439\ See infra section III.B.8.d.
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In addition, we would expect money market funds to incorporate
additional disclosure in the prospectus or SAI, as the fund determines
appropriate, discussing the operations of fees and gates in more
detail.\440\ This could
[[Page 36896]]
include disclosure regarding the following:
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\440\ Prospectus disclosure regarding any restrictions on
redemptions is currently required by Item 11(c)(1) of Form N-1A.
However, we believe that funds could determine that more detailed
disclosure about the operations of fees and gates, as further
discussed in this section, would appropriately appear in a fund's
SAI, and that this more detailed disclosure is responsive to Item 23
of Form N-1A (``Purchase, Redemption, and Pricing of Shares''). In
determining whether to include this disclosure in the prospectus or
SAI, money market funds should rely on the principle that funds
should limit disclosure in prospectuses generally to information
that is necessary for an average or typical investor to make an
investment decision. Detailed or highly technical discussions, as
well as information that may be helpful to more sophisticated
investors, dilute the effect of necessary prospectus disclosure and
should be placed in the SAI. See Registration Form Used by Open-End
Management Investment Companies, Investment Company Act Release No.
23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 1998)], at section I.
Based on this principle, we anticipate that funds would generally
consider the disclosure topics covered by the first two bullets on
the above list (means of notifying shareholders of fees and gates
and the timing of the imposition and removal of fees and gates) to
be appropriate prospectus disclosure.
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Means of notifying shareholders about the imposition and
lifting of fees and/or gates (e.g., press release, Web site
announcement);
Timing of the imposition and lifting of fees and gates,
including an explanation that if a fund's weekly liquid assets fall
below 15% of its total assets at the end of any business day, the next
business day it must impose a 2% liquidity fee on shareholder
redemptions unless the fund's board of directors determines otherwise,
and an explanation of the 30-day limit for imposing gates;
Use of fee proceeds by the fund, including any possible
return to shareholders in the form of a distribution;
The tax consequences to the fund and its shareholders of
the fund's receipt of liquidity fees; and
General description of the process of fund liquidation
\441\ if the fund's weekly liquid assets fall below 15%, and the fund's
board of directors determines that the fund would be unable to stay
open (or, if gated, re-open) without further harm to the fund.
---------------------------------------------------------------------------
\441\ See supra note 408 and accompanying text.
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We request comment on the disclosure that we expect funds to
include in their registration statements regarding the operations and
effects of liquidity fees and redemption gates.
Would the disclosure that we discuss above adequately
assist money market fund investors in understanding the potential
effect of their redemption decisions, and in evaluating the full costs
of redeeming fund shares? Should we require funds to include this
disclosure in their prospectuses and/or SAIs? Should we require funds
to include any additional prospectus and SAI disclosure discussing, in
detail, the operations and effects of fees and redemption gates? In
particular, should we require funds to include any additional details
about the fund's liquidation process? \442\ Alternatively, should any
of the proposed prospectus and SAI disclosure not be required, and if
so, why not?
---------------------------------------------------------------------------
\442\ Disclosure about the process of fund liquidation might
include, for example, disclosure regarding any fees, including
advisory fees, that the adviser will collect during the liquidation
process.
---------------------------------------------------------------------------
Should we require any information about the basic
operations and effects of fees and redemption gates to be disclosed in
the summary section of the statutory prospectus (and any summary
prospectus, if used)?
Should we require disclosure to investors of the
particular risks associated with buying fund shares when the fund or
market is stressed, especially when the fund is imposing either a
liquidity fee or a gate?
Should Form N-1A or its instructions be amended to more
explicitly require any of the proposed disclosure to be included in a
fund's prospectus and/or SAI? If so, how should it be amended?
c. Disclosure of the Imposition of Liquidity Fees and Gates
If we were to adopt a reform alternative involving liquidity fees
and gates, we believe that it would be important for money market funds
(other than government money market funds that have chosen to rely on
the proposed rule 2a-7 exemption from the fees and gates requirements)
to inform existing and prospective shareholders when: (i) The fund's
weekly liquid assets fall below 15% of its total assets; (ii) the
fund's board of directors imposes a liquidity fee pursuant to rule 2a-
7; or (iii) the fund's board of directors temporarily suspends the
fund's redemptions pursuant to rule 2a-7 or permanently suspends
redemptions pursuant to rule 22e-3. This information would be important
for shareholders to receive, as it could influence prospective
shareholders' decision to purchase shares of the fund, as well as
current shareholders' decision or ability to sell fund shares. To this
end, we are proposing an amendment to rule 2a-7 that would require a
fund to post prominently on its Web site certain information that the
fund would be required to report to the Commission on Form N-CR \443\
regarding the imposition of liquidity fees, suspension of fund
redemptions, and the removal of liquidity fees and/or resumption of
fund redemptions.\444\ The amendment would require a fund to include
this Web site disclosure on the same business day as the fund files an
initial report with the Commission in response to any of the events
specified in Parts E, F, and G of Form N-CR,\445\ and, with respect to
any such event, to maintain this disclosure on its Web site for a
period of not less than one year following the date on which the fund
filed Form N-CR concerning the event.\446\
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\443\ See infra section III.G.
\444\ See proposed (Fees & Gates) rule 2a-7(h)(10)(v); proposed
(Fees & Gates) Form N-CR Parts E, F, and G; see also infra section
III.G (discussing the proposed Form N-CR requirements). With respect
to the events specified in Part E of Form N-CR (imposition of a
liquidity fee) and Part F of Form N-CR (suspension of fund
redemptions), a fund would be required to post on its Web site only
the preliminary information required to be filed on Form N-CR on the
first business day following the triggering event. See Instructions
to proposed (Fees & Gates) Form N-CR Parts E and F.
\445\ A fund must file an initial report on Form N-CR in
response to any of the events specified in Parts E, F, or G within
one business day after the occurrence of any such event. We believe
that funds should disclose these events within one business day
following the event because it is particularly important to provide
shareholders with information that could directly affect their
redemption of fund shares, and that could be a material factor in
determining whether to purchase or redeem fund shares, as soon as
reasonably possible.
\446\ See proposed (Fees & Gates) rule 2a-7(h)(10)(v). We
believe that the one-year minimum time frame for Web site disclosure
is appropriate because this time frame would effectively oblige a
fund to post the required information in the interim period until
the fund files an annual post-effective amendment updating its
registration statement, which update would incorporate the same
information. See infra notes 450 and 451 and accompanying text.
Although a fund would inform prospective investors of any redemption
fee or gate currently in place by means of a prospectus supplement
(see infra note 449 and accompanying text), the prospectus
supplement would not inform shareholders of any fees or gates that
were imposed, and then were removed, during the previous 12 months.
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We believe that this Web site disclosure would provide greater
transparency to shareholders regarding occasions on which a fund's
weekly liquid assets drop below 15% of the fund's total assets, as well
as the imposition of liquidity fees and suspension of fund redemptions,
because many investors currently obtain important information about the
fund on the fund's Web site.\447\ We understand that investors have, in
past years, become accustomed to obtaining money market fund
information on funds' Web sites.\448\ While we believe
[[Page 36897]]
that it is important to have a uniform, central place for investors to
access the required disclosure, we note that nothing in this proposal
would prevent a fund from supplementing its Form N-CR filing and Web
site posting with complementary shareholder communications, such as a
press release or social media update disclosing a fee or gate imposed
by the fund.
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\447\ For example, fund investors may access the fund's proxy
voting guidelines, and proxy vote report, as well as the fund's
prospectus, SAI, and shareholder reports if the fund uses a summary
prospectus, on the fund Web site.
\448\ See, e.g., 2010 Adopting Release, supra note 92 (adopting
amendments to rule 2a-7 requiring money market funds to disclose
information about their portfolio holdings each month on their Web
sites); SIFMA FSOC Comment Letter, supra note 358 (noting that some
industry participants now post on their Web sites portfolio
holdings-related information beyond that which is required by the
money market reforms adopted by the Commission in 2010, as well as
daily disclosure of market value per share); see also infra note 659
(discussing recent decisions by a number of money market fund firms
to begin reporting funds' daily shadow prices on the fund Web site).
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A fund currently must update its registration statement to reflect
any material changes by means of a post-effective amendment or a
prospectus supplement (or ``sticker'') pursuant to rule 497 under the
Securities Act.\449\ We would expect that, to meet this requirement,
promptly after a money market fund imposes a redemption fee or gate, it
would inform prospective investors of any fees or gates currently in
place by means of a prospectus supplement.
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\449\ See 17 CFR 230.497.
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We request comment on the proposed requirement for money market
funds to inform existing and prospective shareholders, on the fund's
Web site and in the fund's registration statement, of any present
occasion in which the fund's weekly liquid assets fall below 15% of its
total assets, the fund's board imposes a liquidity fee, or the fund's
board temporarily suspends the fund's redemptions.
Should any more, any less, or any other information be
required to be posted on the fund's Web site than that disclosed on
Form N-CR?
As proposed, should we require this information to be
posted ``prominently'' on the fund's Web site? Should we provide any
other instruction as to the presentation of this information, in order
to highlight the information and/or lead investors efficiently to the
information, for example, should we require that the information be
posted on the fund's home page or be accessible in no more than two
clicks from the fund's home page?
Should this information be posted on the fund's Web site
for a longer or shorter period than one year following the date on
which the fund filed Form N-CR to disclose any of the events specified
in Part E, F, or G of Form N-CR?
Besides requiring a money market fund that imposes a
liquidity fee or gate to file a prospectus supplement and include
related disclosure on the fund's Web site, should we also require the
fund to notify shareholders individually about the effects of the fee
or gate? Should we require a fund to engage in any other supplemental
shareholder communications, such as issuing a press release or
disclosing the fee or gate on any form of social media that the fund
uses?
How will the disclosure of the imposition of a fee or gate
affect the willingness of current or prospective investors to purchase
shares of the fund? How will this disclosure affect investors'
purchases and redemptions in other funds? How will it affect other
market participants? Will these effects differ based on the number of
funds that concurrently impose fees and/or gates?
d. Historical Disclosure of Liquidity Fees and Gates
We also believe that money market funds' current and prospective
shareholders should be informed of post-compliance-period historical
occasions in which the fund's weekly liquid assets have fallen below
15% or the fund has imposed liquidity fees or redemption gates. While
we recognize that historical occurrences are not necessarily indicative
of future events, we anticipate that current and prospective fund
investors could use this information as one factor to compare the risks
and potential costs of investing in different money market funds.
We are therefore proposing an amendment to Form N-1A to require
money market funds (other than government money market funds that have
chosen to rely on the proposed rule 2a-7 exemption from the fees and
gates requirements) to provide disclosure in their SAIs regarding any
occasion during the last 10 years (but not before the compliance
period) on which the fund's weekly liquid assets have fallen below 15%,
and with respect to each such occasion, whether the fund's board of
directors determined to impose a liquidity fee and/or suspend the
fund's redemptions.\450\ With respect to each occasion, we propose
requiring funds to disclose: (i) The length of time for which the
fund's weekly liquid assets remained below 15%; (ii) the dates and
length of time for which the fund's board of directors determined to
impose a liquidity fee and/or temporarily suspend the fund's
redemptions; and (iii) a short discussion of the board's analysis
supporting its decision to impose a liquidity fee (or not to impose a
liquidity fee) and/or temporarily suspend the fund's redemptions.\451\
We would expect that this disclosure could include (as applicable, and
taking into account considerations regarding the confidentiality of
board deliberations) a discussion of the following factors relating to
the board's decision to impose a liquidity fee and/or suspend
redemptions: The fund's shadow price; relevant market indicators of
liquidity stress in the markets; changes in spreads for portfolio
securities; the fund's future liquidity profile (taking into account
predicted redemptions and other expectations); the fund's ability to
apply any collected fees quickly to rebuild fund liquidity; and the
predicted time for portfolio securities to mature and provide internal
liquidity to the fund, and for potentially distressed portfolio
securities to mature or recover. The required disclosure would permit
current and prospective shareholders to assess, among other things, any
patterns of stress experienced by the fund, as well as whether the
fund's board has previously imposed fees and/or redemption gates in
light of significant drops in portfolio liquidity. This disclosure also
would provide investors with historical information about the board's
past analytical process in determining how to handle liquidity issues
when the fund experiences stress, which could influence an investor's
decision to purchase shares of, or remain invested in, the fund. In
addition, the required disclosure may encourage portfolio managers to
increase the level of daily and weekly liquid assets in the fund, as
that would tend to lessen the likelihood of a liquidity fee or gate
being needed, and the fund being required to disclose the fee or gate
to current and prospective investors.\452\
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\450\ See proposed (Fees & Gates) Item 16(g)(1) of Form N-1A. We
believe that the proposed 10-year look-back period would provide
shareholders and the Commission with a historical perspective that
would be long enough to provide a useful understanding of past
events, and to analyze patterns with respect to fees and gates, but
not so long as to include circumstances that may no longer be a
relevant reflection of the fund's management or operations.
\451\ See instructions to proposed (Fees & Gates) Item 16(g)(1)
of Form N-1A.
\452\ See supra note 365.
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We request comment on the proposed requirement for money market
funds to include SAI disclosure regarding the historical occasions in
which the fund's weekly liquid assets have fallen below 15% or the fund
has imposed liquidity fees or redemption gates.
Would the proposed disclosure requirement assist current
and prospective fund investors in comparing the risks and potential
costs of investing in different money market funds, and would retail
investors as well as
[[Page 36898]]
institutional investors benefit from the proposed disclosure? Would the
proposed requirement to include a short discussion of the board's
analysis supporting its decision whether to impose a fee or suspend
redemptions result in meaningful and succinct disclosure? Should any
more, any less, or any other disclosure be required to be included in
the fund's SAI? Should the disclosure instead be required in the
prospectus?
Keeping in mind the compliance period we propose,\453\
should the ``look-back'' period for this historical disclosure be
longer or shorter than 10 years?
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\453\ See infra section III.N.
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Should the proposed SAI disclosure be permitted to be
incorporated by reference in a fund's registration statement, on
account of the fact that funds will have previously disclosed the
information proposed to be required in this SAI disclosure on Form N-
CR? \454\
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\454\ See proposed (Fees & Gates) Form N-CR Parts E, F, and G.
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Should we require this historical disclosure to be
included anywhere else, for example, on the fund's Web site?
e. Prospectus Fee Table
Under the proposed liquidity fees and gates alternative, a
liquidity fee would only be imposed when a fund experiences stress
(i.e., we believe that shareholders would not pay the liquidity fee in
connection with their typical day-to-day transactions with the fund
under normal conditions and many funds may never need to impose the
fee). Because funds are anticipated to rarely, if at all, impose this
fee,\455\ we do not believe that the prospectus fee table, which is
intended to help shareholders compare the costs of investing in
different mutual funds, should include the proposed liquidity fee.\456\
Therefore, we propose clarifying in the instructions to Item 3 of Form
N-1A (``Risk/Return Summary: Fee Table'') that the term ``redemption
fee,'' for purposes of the prospectus fee table, does not include a
liquidity fee that may be imposed in accordance with rule 2a-7.\457\ As
discussed above, we do believe that shareholders should be able to
compare the extent to which money market funds have historically
imposed liquidity fees, and to this end, we have proposed SAI
amendments requiring this disclosure.\458\ Also, as previously
discussed, funds would disclose in the summary section of the statutory
prospectus (and, accordingly, any summary prospectus, if used) that
they may impose a liquidity fee, and also would include a detailed
description of the size of the fees, and when the fees might be
imposed, elsewhere in the statutory prospectus.\459\
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\455\ See supra text following note 383.
\456\ Instruction 2(b) to Item 3 of Form N-1A currently defines
``redemption fee'' to include any fee charged for any redemption of
the Fund's shares, but does not include a deferred sales charge
(load) imposed upon redemption.
\457\ See instruction 2(b) to proposed (Fees & Gates) Item 3 of
Form N-1A.
\458\ See supra notes 450 and 451 and accompanying text.
\459\ See supra notes 429, 431 and 440 and accompanying text.
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We request comment on the proposed Form N-1A instruction that would
clarify that, for purposes of the prospectus fee table, the term
``redemption fee'' does not include a liquidity fee imposed in
accordance with rule 2a-7.
Would shareholders find it instructive for funds to
disclose the proposed liquidity fee in the prospectus fee table? Why or
why not? If we were to require money market funds to include liquidity
fees in the fee table, how should the fee table account for the
contingent nature of liquidity fees and inform investors that liquidity
fees will only be imposed in certain circumstances? Should the
possibility of a liquidity fee be disclosed in a footnote of the fee
table? Should a cross-reference to the fund's SAI disclosure regarding
historical occasions on which the fund has imposed liquidity fees be
disclosed in a footnote of the fee table?
Would the proposed SAI amendments requiring disclosure of
the historical occasions on which the fund has imposed liquidity fees
be an effective way for shareholders to compare the extent to which
money market funds have historically imposed liquidity fees, and
analyze the probability that a fund will impose such fees in the
future?
f. Economic Analysis
The liquidity fees and gates proposal makes significant changes to
the nature of money market funds as an investment vehicle. The proposed
disclosure requirements in this section are intended to communicate to
shareholders the nature of the risks that follow from the liquidity
fees and gates proposal. In section III.B, we discussed why we are
unable to estimate how the liquidity fees and gates proposal will
affect shareholders' use of money market funds or the resulting effects
on the short-term financing markets because we do not have the
information necessary to provide a reasonable estimate. For similar
reasons, we are unable to estimate the incremental effects that the
proposed disclosure requirements will have on either shareholders or
the short-term financing markets. However, we believe that the proposed
disclosure will better inform shareholders about the changes, which
should result in shareholders making investment decisions that better
match their investment preferences. We expect that this will have
similar effects on efficiency, competition, and capital formation as
those outlined in section III.E rather than to introduce new effects.
We further believe that the effects of the proposed disclosure
requirements will be small relative to the liquidity fees and gates
proposal. The Commission staff has not measured the quantitative
benefits of these proposed requirements at this time because of
uncertainty about how increased transparency may affect different
investors' understanding of the risks associated with money market
funds.\460\ Where it is relevant, we request the data needed to make
these calculations below.
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\460\ Likewise, uncertainty regarding how the proposed
disclosure may affect different investors' behavior makes it
difficult for the SEC staff to measure the quantitative benefits of
the proposed requirements. With respect to the proposed disclosure
statement, there are many possible permutations on specific wording
that would convey the specific concerns identified in this Release,
and the breadth of these permutations makes it difficult for SEC
staff to test how investors would respond to each wording variation.
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We anticipate that money market funds would incur costs to amend
their registration statements, and to update their advertising and
sales materials (including the fund Web site), to include the proposed
disclosure statement. We also anticipate that money market funds
(besides government money market funds that have chosen to rely on the
proposed rule 2a-7 exemption from the fees and gates requirements)
would incur costs to (i) amend their registration statements to
incorporate disclosure regarding the effects of fees and gates on
redemptions; (ii) include disclosure of the post-compliance-period
historical occasions in which the fund's weekly liquid assets have
fallen below 15% or the fund has imposed liquidity fees or gates; and
(iii) update the prospectus fee table. These funds also would incur
costs to disclose current instances of liquidity fees or gates on the
fund's Web site. These costs would include initial, one-time costs, as
well as ongoing costs. Our staff estimates that the average one-time
costs for a money market fund (except government money market funds
that have chosen to rely on the proposed rule 2a-7 exemption from the
fees and
[[Page 36899]]
gates requirements) to comply with these proposed disclosure amendments
would be approximately $1,480, and that the average one-time compliance
costs for a government money market fund that has chosen to rely on the
proposed rule 2a-7 exemption from the fees and gates requirements would
be approximately $592.\461\
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\461\ Staff estimates that these costs would be attributable to
amending the fund's disclosure statement and updating the fund's
advertising and sales materials. See supra note 245 (discussing the
bases of our staff's estimates of operational and related costs).
The costs associated with these activities are all paperwork-related
costs and are discussed in more detail in infra section IV.B.7.
We expect the new required disclosure would add minimal length
to the current required registration statement disclosure, and thus
would not increase the number of pages in, or change the printing
costs of, a fund's registration statement. Based on conversations
with fund representatives, the Commission understands that, in
general, unless the page count of a registration statement is
changed by at least four pages, printing costs would remain the
same.
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Ongoing compliance costs include the costs for money market funds
periodically to update disclosure in their registration statements
regarding historical occasions in which the fund's weekly liquid assets
have fallen below 15% or the fund has imposed fees or gates, and also
to disclose current instances of any of these events on the fund's Web
site. Because the required registration statement and Web site
disclosure overlaps with the information that a fund must disclose on
Form N-CR when the fund's weekly liquid assets fall below 15%, or the
fund imposes or removes a fee or gate,\462\ we anticipate that the
costs a fund will incur to draft and finalize the disclosure that will
appear in its registration statement and on its Web site will largely
be incurred when the fund files Form N-CR, as discussed below in
section III.G.3. In addition, we estimate that a fund (besides a
government money market fund that has chosen to rely on the proposed
rule 2a-7 exemption from the fees and gates requirements) would incur
average annual costs of $296 \463\ to review and update the historical
disclosure in its registration statement (plus printing costs), and
costs of $207 \464\ each time that it updates its Web site to include
the required disclosure.
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\462\ See proposed (Fees & Gates) Form N-CR Parts E, F, and G.
\463\ The costs associated with updating the fund's registration
statement are paperwork-related costs and are discussed in more
detail in infra section IV.B.7.
\464\ The costs associated with updating the fund's Web site are
paperwork-related costs and are discussed in more detail in infra
section IV.B.1.g.iv.
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We request comment on this economic analysis:
Are any of the proposed disclosure requirements unduly
burdensome, or would they impose any unnecessary costs?
We request comment on the staff's estimates of the
operational costs associated with the proposed disclosure requirements.
We request comment on our analysis of potential effects of
these proposed disclosure requirements on efficiency, competition, and
capital formation.
9. Alternative Redemption Restrictions
a. Stand-Alone Liquidity Fees or Stand-Alone Gates
We are proposing that money market fund boards of directors be
permitted to institute liquidity fees or gates (and potentially one
followed by the other). This proposal is designed to provide money
market funds with multiple tools to manage heightened redemptions in
the best interest of the fund and to mitigate potential contagion
effects on the short-term financing markets for issuers.
We also have considered whether we should permit these money market
funds to institute only liquidity fees or only gates. As discussed
above, fees and gates can accomplish somewhat different objectives and
have somewhat different tradeoffs and effects on shareholders and the
short-term financing markets for issuers. For shareholders valuing
principal preservation in their evaluation of money market fund
investments, a gate may be preferable to a liquidity fee particularly
if the fund expects to rebuild liquidity through maturing assets. In
contrast, shareholders preferring liquidity over principal preservation
may prefer a liquidity fee because it allows full liquidity of that
investor's money market fund shareholdings--it just imposes a greater
cost for that liquidity if the fund is under stress.\465\
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\465\ See, e.g., Comment Letter of BlackRock, Inc. on the IOSCO
Consultation Report on Money Market Fund Systemic Risk Analysis and
Reform Options (May 28, 2012), available at https://www.iosco.org/
library/pubdocs/pdf/IOSCOPD392.pdf. (stating their preference for
liquidity fees over gates ``because clients with an extreme need for
liquidity can choose to pay for that liquidity in a crisis''); BNP
Paribas IOSCO Comment Letter, supra note 357 (stating that it
``would not make sense to restrict the redeemer willing to pay the
price of liquidity'').
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Because fees and gates can accomplish somewhat different objectives
and one may be better suited to one set of market circumstances than
the other, we preliminarily believe that providing funds with the
ability to use either tool, as the board determines is in the best
interest of the fund, is a better approach to preserve the benefits of
money market funds for investors and the short-term financing markets
for issuers, enhance investor protection, and improve money market
funds' ability to manage and mitigate high levels of redemptions. It
also may better allow funds to tailor the redemption restrictions they
employ to their experience with the preferences and behavior of their
particular shareholder base and to adapt the restriction they institute
as they or the industry gains experience over time employing such
restrictions. We request comment on stand-alone liquidity fees or
stand-alone gates.
Should we adopt rule amendments that would just permit
money market funds to institute liquidity fees or just permit these
money market funds to institute a gate? Why might it be preferable to
allow only a fee or only a gate? If we allowed only a fee or only a
gate, should there be different parameters or restrictions around when
the fee or gate could be imposed or lifted than what we have proposed?
If so, what should they be and why?
b. Partial Gates
We are proposing to permit money market funds to institute a
complete gate in certain circumstances--a temporary suspension of
redemptions. Some have suggested that we allow money market funds to
impose partial gates in times of stress.\466\ For example, once the
money market fund had crossed the 15% weekly liquid asset threshold, we
could permit the board of directors (including a majority of its
independent directors) to limit redemptions by any particular
shareholder to a certain percentage of their shareholdings, to a
certain percentage of the fund's outstanding shares, or to a certain
dollar amount per day. Those limited redemptions would not be charged a
liquidity fee.
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\466\ See, e.g., HSBC EC Letter, supra note 156 (stating that a
money market fund should be able to limit the total number of shares
that the fund is required to redeem on any trading day to 10% of the
shares in issue, that any such gate be applied pro rata to
redemption requests, and that any redemption requests not met be
carried over to the next business day and so forth until all
redemption requests have been met).
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A partial gate can operate to prevent ``fire sales'' of assets in
the fund and provide some liquidity to investors while allowing time
for the fund to satisfy the remaining portion of redemptions requests
under better market conditions or with internally generated liquidity.
It can act as a gradual brake on redemptions, reducing
[[Page 36900]]
them to the extent that they no longer impact the fund's value or
liquidity. In doing so, they can have a less severe impact on fund
shareholders because they know they will be able to redeem without cost
at least a certain portion of their investment on any particular day,
even in times of stress. A partial gate could be imposed in lieu of a
liquidity fee or could be combined with a liquidity fee (e.g., once the
fund imposed a partial gate, a shareholder could redeem 10% of their
shareholdings at no cost and the rest of their shareholdings by paying
a liquidity fee). Similarly, we could consider adopting a partial gate
in lieu of our full gate proposal or as an additional tool that would
be available to fund boards on the same terms as a full gate is
available.
On the other hand, a partial gate may not impose a substantial
enough deterrent on redemption activity in times of stress to
effectively reduce the contagion impact of heavy redemptions on
remaining investors and the short-term financing markets. For example,
in 2007 when a Florida local government investment pool suspended
redemptions in response to a run, it re-opened with a combined partial
gate and liquidity fee--local governments could take out the greater of
15% of their holdings or $2 million without penalty, and the remainder
of any redemptions were subject to a 2% redemption fee.\467\ We
understand that only a few investors redeemed more than what was
allowed without a fee, but that investors redeemed most of what was
allowed under the partial gate without triggering the redemption
fee.\468\ We also are concerned that a partial gate would operate in
substantially the same manner as an exemption from the fee or gate
requirement for small withdrawals, discussed above in section III.B.5,
and thus may be subject to many of the same drawbacks in terms of
operational costs and added complexity compared to our liquidity fees
and gates proposal.
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\467\ See David Evans and Darrell Preston, Florida Investment
Chief Quits; Fund Rescue Approved, Bloomberg (Dec. 4, 2007).
\468\ See, e.g., Neil Weinberg, Florida Fund Meltdown: Bad to
Worse, Forbes (Dec. 6, 2007) (noting that investors withdrew $1.2
billion from the $14 billion pool after it re-opened, while
depositing only $7 million, but that only 3 out of about 1,700
participants in the pool chose to pay the redemption fee to withdraw
additional assets).
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We request comment on whether we should require or permit partial
gates in certain circumstances.
Should we allow partial gates? If so, why? Under what
conditions and of what nature? Should they limit each shareholder's
redemptions to a certain percentage of his or her shareholdings (e.g.,
10% or 25%), to a certain percentage of the fund's outstanding shares
(e.g., 1% or 5%), or to a certain dollar amount per day (e.g., $10,000
or $50,000)? If so, what percentage or dollar amount and why?
How would partial gates affect shareholder redemption
decisions compared to our proposal of liquidity fees and full gates?
Would they achieve our goals of preserving the benefits of money market
funds for investors and the short-term financing markets for issuers,
while mitigating the risk of runs, enhancing investor protection and
improving money market funds' ability to manage and mitigate high
levels of redemptions to the same extent as our proposed liquidity fees
and gates? Why or why not?
If we allowed partial gates, should they be allowed in
addition to liquidity fees and full gates or in lieu of fees or full
gates? What operational and other costs would be involved if we allowed
partial gates in addition to or in lieu of fees and/or full gates?
c. In-Kind Redemptions
In 2009, we requested comment on requiring that funds satisfy
redemption requests in excess of a certain size through in-kind
redemptions.\469\ We also requested comment on this type of redemption
restriction when we requested comment on the PWG Report.\470\ In-kind
redemptions might lessen the effect of large redemptions on remaining
money market fund shareholders, and they would ensure that the
redeeming investors bear part of the cost of their liquidity needs.
During the 2008 financial crisis, one money market fund stated that it
would honor certain large redemptions in-kind in an attempt to decrease
the level of redemptions in that fund.\471\
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\469\ See 2009 Proposing Release, supra note 31, at section
III.B. An in-kind redemption occurs when a shareholder's redemption
request to a fund is satisfied by distributing to that shareholder
portfolio assets of that fund instead of cash.
\470\ See PWG Report, supra note 111, at section 3.c (discussing
requiring that money market funds satisfy certain redemptions in-
kind).
\471\ See 2009 Proposing Release, supra note 31, at n.309.
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In both instances, almost all commenters addressing this potential
reform option opposed it.\472\ Most commenters believed that requiring
in-kind redemptions would be technically unworkable due to the complex
valuation and operational issues that would be imposed on both the fund
and on investors receiving portfolio securities.\473\ They also
asserted that required in-kind redemptions could result in disrupting,
rather than stabilizing, markets if redeeming shareholders needing
liquidity were forced to sell into declining markets.\474\ Several
commenters stated that investors would dislike the prospect of
receiving redemptions in-kind and would structure their holdings to
avoid the requirement, but would nevertheless still collectively engage
in redemptions if the money market funds were to come
[[Page 36901]]
under stress with similar adverse consequences for the funds and the
short-term financing markets.\475\
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\472\ But see Comment Letter of Forward Management (Aug. 21,
2009) (available in File No. S7-11-09) (supporting in-kind
redemption requirement); Comment Letter of the American Bar
Association (Committee on Federal Regulation of Securities) (Sept.
9, 2009) (available in File No. S7-11-09) (same). In addition, two
PWG Report commenters expressed concern that redemptions in-kind
would be technically unworkable, but were open to further
examination of this option. See Comment Letter of Invesco Advisers,
Inc. (Jan. 10, 2011) (available in File No. 4-619) (``We have
previously expressed our concern that requiring money market funds
to satisfy redemptions in-kind under certain circumstances would
likely be technically unworkable and could result in disrupting,
rather than stabilizing, markets. While we continue to harbor these
concerns, we would be supportive in principle of a mandatory in-kind
redemption requirement if these technical challenges could be
addressed successfully in a partnership with regulatory
authorities.''); Comment Letter of Federated Investors, Inc. (Jan.
7, 2011) (available in File No. 4-619) (``Federated Jan 2011 PWG
Comment Letter'') (``we have identified some of the major problems
associated with redemption in-kind and included these in our comment
letter to the Commission on the recent money market fund reforms. .
. . At the appropriate time, we would be willing to meet with the
Commission or its staff to review our analysis of the issues raised
in responding to such events and to discuss approaches to resolving
these issues.'').
\473\ See, e.g., Comment Letter of BlackRock Inc. (Jan. 10,
2011) (available in File No. 4-619) (``BlackRock PWG Comment
Letter''); Comment Letter of The Dreyfus Corporation (Jan. 10, 2011)
(available in File No. 4-619) (``Dreyfus PWG Comment Letter'');
Comment Letter of Investment Company Institute (Jan. 10, 2011)
(available in File No. 4-619) (``ICI Jan 2011 PWG Comment Letter'');
Comment Letter of Fidelity Investments (Jan. 10, 2011) (available in
File No. 4-619) (``Fidelity Jan 2011 PWG Comment Letter''). For
example, the BlackRock PWG Comment Letter stated that some
shareholders cannot receive and hold direct investments in money
market assets and some portfolio securities, such as repurchase
agreements and Eurodollar time deposits, are OTC contracts and
cannot be transferred to retail or to multiple investors. The
Fidelity Jan 2011 PWG Comment Letter added that advisers may only be
able to transfer the most liquid securities, leaving a less liquid
portfolio for non-redeeming shareholders and with odd-lot positions
that are more difficult and expensive to trade.
\474\ See, e.g., Comment Letter of Goldman Sachs Asset
Management, L.P. (Jan. 10, 2011) (available in File No. 4-619) (``a
potential result of forced in-kind redemptions is simply to transfer
the selling responsibility from presumably sophisticated and
experienced asset managers to a disparate group of investors who do
not necessarily have any reason to know how to dispose of these
securities effectively''); Comment Letter of SVB Asset Management
(Jan. 10, 2011) (available in File No. 4-619); Comment Letter of T.
Rowe Price Associates, Inc. (Jan. 10, 2011) (available in File No.
4-619).
\475\ See, e.g., ICI Jan 2011 PWG Comment Letter, supra note
473; Richmond Fed PWG Comment Letter, supra note 139; Comment Letter
of Wells Fargo Funds Management, LLC (Jan. 10, 2011) (available in
File No. 4-619) (``Wells Fargo PWG Comment Letter'').
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These comments led us to believe that requiring in-kind redemptions
would create operational difficulties that could prevent funds from
operating fairly to investors in practice and that it would not
necessarily mitigate money market funds' susceptibility to runs and
related adverse effects on the short-term financing markets and capital
formation. Thus, we expect that the liquidity fees and gates approach
described above would better achieve our goals of preserving the
benefits of money market funds for investors and the short-term
financing markets for issuers while enhancing investor protection and
improving money market funds' ability to manage and mitigate potential
contagion from high levels of redemptions. Liquidity fees and gates
also may be easier to implement than required in-kind redemptions. We
request comment on whether we are correct in our analysis of the
relative merits and costs of in-kind redemptions as compared to the
other forms of redemption restrictions described in this Release as
well as any others that money market funds could seek to impose.
We also request comment on all the redemption restriction
alternatives discussed in this Release.
Are there other alternatives that we should consider? Do
commenters agree with our discussion about the advantages and
disadvantages of the various alternatives? Do commenters agree with our
discussion of their potential benefits and costs and other economic
effects?
C. Potential Combination of Standby Liquidity Fees and Gates and
Floating Net Asset Value
Today, we are proposing two alternative methods of reforming money
market funds. Although these two proposals are designed to achieve many
of the same goals, by their nature they would do so to different
degrees and with different tradeoffs. As discussed above, our first
alternative would require money market funds (other than government and
retail funds) to adopt floating NAVs. This proposal is designed
primarily to address the incentive for shareholders to redeem shares
ahead of other investors in times of fund and market stress. It also is
intended to improve the transparency of funds' investment risks through
more transparent valuation and pricing methods. It makes explicit the
risk and reward relation for money market funds. We recognize, however,
that the proposal does not necessarily address shareholders' incentive
to redeem from money market funds due to their liquidity risk or for
other reasons as discussed below. In times of severe market stress when
the secondary markets for funds' assets become illiquid, investors may
still have incentives to redeem shares before their fund's liquidity
dries up. It also may not alter money market fund shareholders'
incentive to redeem in times of market stress when investors are
engaging in flights to quality, liquidity, and transparency and the
related contagion effects from such high levels of redemptions.
Our second proposal, which requires funds to impose liquidity fees
unless the fund's board determines that it would not be in the best
interest of the fund and permits them to impose gates in certain
circumstances, is primarily focused on helping money market funds
manage heightened redemptions and reducing shareholders' incentive to
redeem under stress. It also could improve the transparency of funds'
liquidity risks through a more transparent and systematic allocation of
liquidity costs. In doing so, it addresses a principal drawback of our
floating NAV proposal by imposing a cost on redemptions in times of
market stress that may incorporate not just investment risk but also
liquidity risk. The prospect of facing liquidity fees and gates will
give the additional benefit of better informing and sensitizing
investors to the risks of investing in money market funds. We
recognize, however, that our liquidity fees and gates proposal does not
entirely eliminate the incentive of shareholders to redeem when the
fund's shadow price falls below a dollar. Moreover, it does not
eliminate the lack of valuation transparency in the pricing of money
market funds and any corresponding lack of shareholder appreciation of
money market fund valuation risks.
We are considering addressing the limitations of the two proposals
by combining them into a single reform package; that is, requiring
money market funds (other than government money market funds and,
regarding the floating NAV, retail money market funds) to both use a
floating NAV and potentially impose liquidity fees or gates in times of
fund and market stress.\476\ Doing so would address some of the
drawbacks of each proposal individually, but would present other
tradeoffs, as further discussed below.
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\476\ As discussed in supra section III.A.4, retail money market
funds would also be exempt from our proposed floating NAV
requirement.
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1. Potential Benefits of a Combination
A combined reform approach could reduce investors' incentive to
quickly redeem assets from money market funds in a crisis, improve the
transparency of funds' investment and liquidity risks, and enhance
money market funds' ability to manage and mitigate potential contagion
from high levels of redemptions relative to either proposal alone.
Under a combined approach, the floating NAV should reduce investors'
incentive to redeem early to avoid a market-based loss embedded in the
fund's portfolio because the fund would be transacting at the fair
value of its portfolio at all times. Doing so should reduce the
likelihood that investors engage in preemptive redemptions that could
trigger the imposition of fees and gates.\477\ Requiring a fund to
operate with a floating NAV with potential imposition of fees and gates
in times of fund or market stress should thus reduce the risk that
funds would face heavy redemptions. Early redeeming shareholders would
be less likely to be able to exit the fund without bearing the cost of
their redemptions, and thereby it will be less likely to concentrate
losses for the remaining shareholders. At the same time, requiring a
floating NAV fund to consider imposing liquidity fees or impose gates
when the fund's liquidity buffer comes under strain should enhance its
ability to manage its liquidity risk before it results in portfolio
losses.
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\477\ See supra section III.B.1 (discussing shareholders'
potential incentive to engage in preemptive redemptions in a stable
price money market fund that can impose fees or gates).
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The combination would provide a broader range of tools to a
floating NAV money market fund to manage redemptions in a crisis,
thereby avoiding ``fire sales'' of assets that would affect all
shareholders and potentially the short-term financing markets for
issuers. The combined approach also should further enhance the ability
of money market funds to treat shareholders equitably, and could allow
better management of funds' portfolios in a crisis to minimize
shareholder losses.
Requiring funds that can impose liquidity fees and gates to have a
floating NAV provides fuller transparency of fund valuation and
[[Page 36902]]
liquidity risk. This enhanced transparency may better inform investors
to the risk profile of their money market fund investment, and may make
investors less sensitive to fluctuations in a money market fund's NAV.
As a result of this familiarity with money market fund NAV
fluctuations, investors may be less likely to redeem shares in times of
fund and market stress because of the possibility that a fund's NAV
might change, and correspondingly reducing the chances that fees or
gates may be triggered.\478\ Liquidity fees also can encourage funds to
better and more systematically manage liquidity and redemption activity
and encourage shareholders to monitor and exert market discipline over
the fund to reduce the likelihood that the imposition of fees or gates
will become necessary in that fund.
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\478\ See supra section III.A.1.
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We request comment on the potential benefits of combining our two
alternatives into a single proposal.
Would combining the floating NAV alternative with the
liquidity fees and gates alternative have the benefits we discuss
above? Are there any other benefits that we have not discussed? If so,
what would they be?
Would combining the floating NAV alternative with only
liquidity fees or only gates provide different benefits?
2. Potential Drawbacks of a Combination
Some drawbacks may result from combining the two proposals.\479\
One potential drawback is that combining a floating NAV with liquidity
fees and gates does not preserve the benefits of stable price money
market funds for investors as our liquidity fees and gates alternative
does. Although any combination likely would include an exemption to the
floating NAV requirement for government and retail money market
funds,\480\ most other money market funds would have a floating NAV,
thereby incurring the costs and operational issues associated with that
proposal. As discussed more fully in the section on that alternative,
some investors may be deterred from investing in a floating NAV fund
for a variety of reasons. We have designed our liquidity fees and gates
alternative in large part to preserve the benefits of stable price
funds for those investors while enhancing investor protection and
improving money market funds' ability to manage and mitigate potential
contagion from high levels of redemptions. Combining the proposals thus
may not fully accomplish our goal of preserving the current benefits of
money market funds.
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\479\ One commenter noted their opposition to combining
redemption gates with a floating NAV, arguing that such a
combination ``acknowledges that the floating NAV does not resolve
such first mover advantage.'' See Dreyfus FSOC Comment Letter, supra
note 174.
\480\ See supra sections III.A.3 and III.A.4. In any
combination, retail funds would likely be subject to fees and gates,
although exempt from the floating NAV, and thus would not be exempt
from both provisions as government funds likely would.
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Another drawback of combining the two proposals is that if a
floating NAV significantly changes investor expectations regarding
money market fund risk and their prospect of suffering losses,
requiring funds with a floating NAV to also be able to impose standby
liquidity fees and gates may be unnecessary to manage the risks of
heavy redemptions in times of crisis. Because of the unique features of
stable price money market funds, liquidity fees and gates may be
necessary for a fund to ensure that all of its shareholders are treated
the same, while also managing the risks of contagion from heavy
redemptions. A fund with a floating NAV may not face these same risks
and thus providing those funds with the ability to impose fees or gates
may not be justified, particularly in light of the Investment Company
Act's expressed preference for full redeemability of open-end fund
shares.\481\
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\481\ See 15 U.S.C. 80a-2(a)(32) and 80a-22(e); see also supra
note 395.
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A last potential drawback is that although some investors may be
comfortable investing in a money market fund that has either a floating
NAV or liquidity fees and gates, some investors may not wish to invest
in a fund that has both features because a fund that does not have a
stable price and also may restrict redemptions may not be suitable as a
cash management tool for such investors. The combination of our
proposals may result in these investors looking to other investment
alternatives that offer principal stability or that do not also have
potential restrictions on redemptions. We discuss the potential effects
of such a shift in section III.E below.
We request comment on the potential drawbacks of combining our two
alternatives into a single proposal.
Would combining the floating NAV alternative with the
liquidity fees and gates alternative have the drawbacks we discuss
above? Are there any other drawbacks that we have not discussed? If so,
what would they be?
