SEC Proposes Money Market Fund Amendments
- The Securities and Exchange Commission has proposed revisions to its rules governing money market funds. Release Nos. 33-9408, IA-3616, IC-30551 (June 5, 2013). The most significant proposed revisions in the 698-page release are in the alternative, although the SEC could choose to adopt both alternatives. First, the SEC proposes to require prime institutional money market funds to "float" their reported net asset values per share, or NAVs. Second, the SEC proposes that a money market fund could impose liquidity fees and redemption gates if its weekly liquid assets fall below 15% of its total assets. Both proposals would eliminate the use of amortized cost valuation. The SEC also proposes that money market funds be subject to enhanced and more rapid disclosure requirements, and it also proposes stronger diversification requirements and enhanced stressed testing.
Under the floating NAV alternative, affected money market funds would be required to calculate their NAVs to the fourth decimal place in the case of a fund with a $1.00 target share price (e.g., a fund with a $0.9993 NAV would no longer round up to $1.00). Retail and government money market funds would not be subject to this requirement and could still penny round their NAVs. For this purpose, a "retail" money market fund would be a fund that restricts a shareholder of record from redeeming more than $1 million in any one business day. In the case of shareholders that are omnibus account holders (i.e., a broker, bank, or other person that holds the fund's securities in nominee name for others), the fund could allow redemptions of more than $1 million, but only if it had policies and procedures reasonably designed to allow the conclusion that the omnibus account holder did not permit any beneficial owner directly or indirectly to redeem more than $1 million in a single day.
Under the liquidity fees and gates alternative, if a money market fund's weekly liquid assets fell below 15% of its total assets, the fund would be required to impose a liquidity fee of 2% on all redemptions unless its board determined that imposing such a fee would not be in the best interest of the fund or that the fee should be lower. The fund board would also have the ability to impose a temporary suspension of redemptions (a "gate") if the weekly liquid assets fall below the 15% liquidity threshold. Such a gate would have to be lifted within 30 days, and a fund could not impose a gate for more than 30 days in any 90-day period. Any liquidity fees or gates imposed would be automatically lifted once the fund's weekly liquid assets had risen back to or above 30% of total assets, although the fund board could lift them earlier. Government money market funds would not be required to impose the liquidity fee, but they could impose liquidity fees and gates voluntarily.
The SEC is also proposing a number of disclosure requirements, including the following:
*Revisions to fund prospectus and advertising requirements to reflect the new regulatory requirements, including (if applicable) the historical post-compliance-period uses of liquidity fees and gates or decisions not to impose them.
*Current and historical disclosure of instances in the past ten years in which the fund has received financial support from a sponsor or fund affiliate, with the current disclosure in new Form N-CR and on the fund's website and the historical disclosure in the fund's statement of additional information.
*Daily website disclosure of the fund's NAV to four decimal places, as well as the fund's net inflows or outflows and the percentages of its total assets that are invested in daily and weekly liquid assets.
*More detailed information concerning portfolio securities, including maturity dates, market values, and yields, in Form N-MFP, which would become publicly available upon filing.
*Similar portfolio disclosures to the SEC for liquidity funds (i.e., private funds that resemble money market funds) in Form PF, which will continue not to be publicly available.
The SEC proposes three changes to strengthen the diversification requirements for money market funds. First, it proposes to require funds to treat entities that are affiliated with each other as single issuers for purposes of the 5% limit on first tier securities from a single issuer. Second, it proposes to require funds to treat the sponsors of asset-backed securities as guarantors for purposes of the diversification requirements, unless the fund board or its delegates determines that the fund is not relying on the sponsor to determine the security's quality or liquidity. Third, it proposes to eliminate the existing 25% 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. It also proposes several enhancements to money market funds' stress testing requirements.
The SEC proposes a compliance period of two years for the proposed floating NAV alternative, one year for the liquidity fees and gates alternative, and nine months for the other proposed amendments that are not specifically related to the implementation of either alternative. Comments on the proposal will be due 90 days after its publication in the Federal Register.
The SEC proposal is far more detailed than previous proposals to reform money market funds, and it displays a willingness to grapple with the difficult issues involved in a way not previously seen. It is also notable for its effort to preserve at least to some extent the benefits of money market funds for investors and the short-term financing markets. The industry response to date is dominated by an awareness of these facts.
The SEC's proposing release is available online at
For the SEC press release, which includes a factsheet summarizing the rule proposal, see
John M. Baker
Stradley Ronon Stevens & Young, LLP
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
FundLaw Listowner http://groups.yahoo.com/group/FundLaw/