[Federal Register Volume 79, Number 145 (Tuesday, July 29, 2014)]
[Notices]
[Pages 44076-44078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17748]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72658; File No. S7-08-14]


Notice of Proposed Exemptive Order Granting Permanent Exemptions 
Under the Securities Exchange Act of 1934 From the Confirmation 
Requirements of Exchange Act Rule 10b-10 for Certain Money Market Funds

July 23, 2014.
AGENCY: Securities and Exchange Commission.

ACTION: Notice of Proposed Exemptive Order; Request for Comment.

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SUMMARY: Pursuant to Section 36 of the Securities Exchange Act of 1934 
(``Exchange Act'') and Exchange Act Rule 10b-10(f), the Securities and 
Exchange Commission (``SEC'' or ``Commission'') is proposing to grant 
exemptive relief, subject to certain conditions, from the immediate 
confirmation delivery requirements of Exchange Act Rule 10b-10 for 
transactions effected in shares of any open-end management investment 
company registered under the Investment Company Act of 1940 
(``Investment Company Act'') that holds itself out as a money market 
fund operating in accordance with Rule 2a-7(c)(1)(ii) of the Investment 
Company Act.

DATES: Comments must be received on or before August 19, 2014.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-08-14 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Kevin M. O'Neill, 
Deputy Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-08-14. 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 (http://www.sec/gov/rules/other.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 charge; the Commission 
does not edit personal identifying information from submissions. You 
should only submit information that you wish to make publicly 
available.

FOR FURTHER INFORMATION CONTACT: Natasha Vij Greiner, Branch Chief, 
Jonathan C. Shapiro, Attorney-Adviser, George Makris, Attorney-Adviser, 
at 202-551-5550, Division of Trading and Markets, Securities and 
Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

I. Background

    Exchange Act Rule 10b-10 addresses broker-dealers' obligations to 
confirm their customers' securities transactions.\1\ Under Rule 10b-
10(a), a broker-dealer generally must provide customers with 
information relating to their investment decisions at or before the 
completion of a securities transaction.\2\ Rule 10b-10(b), however, 
provides an exception for certain transactions in money market funds 
that attempt to maintain a stable net asset value (``NAV'') and where 
no sales load or redemption fee is charged.\3\ The exception permits 
broker-dealers to provide transaction information to money market fund 
shareholders on a monthly basis (subject to certain conditions set 
forth in Rule 10b-10(b)(2) and (3)) in lieu of immediate confirmations 
for all purchases and redemptions of shares of such funds.\4\

[[Page 44077]]

Accordingly, customers historically have received information for their 
transactions in shares of money market funds on a monthly basis.
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    \1\ 17 CFR 240.10b-10.
    \2\ 17 CFR 240.10b-10(a).
    \3\ 17 CFR 240.10b-10(b).
    \4\ With respect to such money market funds, Exchange Act Rule 
10b-10(b)(2) requires a broker-dealer to give or send to a customer 
within five business days after the end of each monthly period a 
written statement disclosing, each purchase or redemption, effected 
for or with, and each dividend or distribution credited to or 
reinvested for, the account of such customer during the month; the 
date of such transaction; the identity, number, and price of any 
securities purchased or redeemed by such customer in each such 
transaction; the total number of shares of such securities in such 
customer's account; any remuneration received or to be received by 
the broker or dealer in connection therewith; and that any other 
information required by Rule 10b-10(a) will be furnished upon 
written request: Provided, however, that the written statement may 
be delivered to some other person designated by the customer for 
distribution to the customer. 17 CFR 240.10b-10(b)(2). Exchange Act 
Rule 10b-10(b)(3) requires that such customer is provided with prior 
notification in writing disclosing the intention to send the written 
information referred to in Rule 10b-10(b)(1) in lieu of an immediate 
confirmation. 17 CFR 240.10b-10(b)(3).
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    Today, the Commission adopted amendments to Rule 2a-7 of the 
Investment Company Act. Among other things, the amendments require 
institutional prime money market funds, which, under the prior rule, 
were permitted to maintain a stable net asset value, to sell and redeem 
shares based on the current market-based value of the securities held 
in their portfolios, i.e., transact at a ``floating'' NAV.\5\ As a 
result, institutional prime money market funds, like other mutual 
funds, will now be required to value their portfolio securities using 
market-based factors (rather than amortized cost) and sell and redeem 
shares at prices rounded to the fourth decimal place (rather than 
rounded to the nearest penny).\6\ However, institutional prime money 
market funds will continue to be subject to the ``risk limiting'' 
provisions of Rule 2a-7 and therefore will continue to be limited to 
investing in short-term, high-quality, dollar-denominated 
instruments.\7\
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    \5\ See Money Market Fund Reform; Amendments to Form PF, 
Securities Act Release No. 9616, Investment Advisers Act Release No. 
3879, Investment Company Act Release No. 31166, at section III.B 
(July 23, 2014) (``Money Market Fund Reform Adopting Release'').
    \6\ Id.; Investment Company Act Rule 2a-7(c)(1)(ii), 17 CFR 
270.2a-7(c)(1)(ii).
    \7\ Money Market Fund Reform Adopting Release, at 143; see also 
Investment Company Act Rule 2a-7(d), 17 CFR 270.2a-7(d) (risk-
limiting conditions).
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    Given that share prices of such institutional prime money market 
funds likely will fluctuate under the amended rule, absent exemptive 
relief, broker-dealers will not be able to continue to rely on the 
current exception under Rule 10b-10(b) for transactions in money market 
funds operating in accordance with Rule 2a-7(c)(1)(ii).\8\ Instead, 
broker-dealers will be required to provide immediate confirmations for 
all such transactions.
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    \8\ See generally Money Market Fund Reform; Amendments to Form 
PF, Securities Act Release No. 9408, Investment Advisers Act Release 
No. 3616, Investment Company Act Release No. 30551 (June 5, 2013), 
78 FR 36834, 36934 (June 19, 2013); see also Exchange Act Rule 10b-
10(b)(1), 17 CFR 240.10b-10(b)(1) (limiting alternative monthly 
reporting to money market funds that attempt to maintain a stable 
net asset value).
    As adopted, government and retail money market funds are exempt 
from the Investment Company Act Rule 2a-7(c)(1)(ii) floating NAV 
requirement, and therefore, will continue to maintain a stable NAV. 
See Money Market Fund Reform Adopting Release, at sections III.C.1 
and III.C.2. Accordingly, for investor transactions in such exempt 
funds, broker-dealers would continue to qualify under the exception 
under Rule 10b-10 and be permitted to send monthly transaction 
reports.
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    In the money market fund reform proposing release,\9\ the 
Commission requested comment on whether, if the Commission adopted the 
floating NAV requirement, broker-dealers should be required to provide 
immediate confirmations to all institutional prime money market fund 
investors. Commenters generally urged the Commission not to impose such 
a requirement, arguing that there would be significant costs associated 
with broker-dealers providing immediate confirmations.\10\ Such costs 
are expected to include both (1) the ongoing costs of creating and 
sending trade-by-trade confirmations and (2) the costs of implementing 
new systems to generate confirmations.\11\ The Commission recognizes 
that there may be costs associated with requiring immediate 
confirmations for such transactions,\12\ and is aware that such costs 
may be passed on to investors in funds subject to the floating NAV 
requirements.\13\ Nonetheless, given that institutional prime money 
market funds likely will fluctuate in price, some investors may find 
value in receiving information relating to their investment decisions 
at or before the completion of a securities transaction. The Commission 
requests comments regarding these potential benefits.
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    \9\ Money Market Fund Reform; Amendments to Form PF, 78 FR 
36934.
    \10\ See Letter from Paul Schott Stevens, President and CEO, 
Investment Company Institute, to Elizabeth M. Murphy, Secretary, 
Commission, dated September 17, 2013 (``Investment Company Institute 
Letter''), at 37, available at http://www.sec.gov/comments/s7-03-13/s70313-200.pdf; Letter from Timothy W. Cameron, Managing Director, 
SIFMA Asset Management Group, John Maurello, Managing Director, 
SIFMA Private Client Group, Matthew J. Nevins, Managing Director and 
Associate General Counsel, SIFMA Asset Management Group, dated Sept. 
17, 2013 (``9/17/13 SIFMA Letter''), at Appendices 1 and 2, 
available at http://www.sec.gov/comments/s7-03-13/s70313-199.pdf; 
Letter from J. Charles Cardona, President, The Dreyfus Corporation, 
to Elizabeth M. Murphy, Secretary, Commission, dated September 17, 
2013 (``Dreyfus Letter''), at 35, available at http://www.sec.gov/comments/s7-03-13/s70313-167.pdf; Letter from John D. Hawke, Jr., 
Arnold & Porter, on behalf of Federated Investors, Inc. and its 
subsidiaries, to Chair Mary Jo White, Commission, dated September 
17, 2013 (``Federated Letter''), at 22, available at http://www.sec.gov/comments/s7-03-13/s70313-225.pdf; Letter from Anthony J. 
Carfang, Partner, Cathryn R. Gregg, Partner, Paul LaRock, Principal, 
Steven Wiley, Manager, Treasury Strategies, Inc., to Elizabeth M. 
Murphy, Secretary, Commission, dated September 12, 2013 (``Treasury 
Strategies Letter''), available at http://www.sec.gov/comments/s7-03-13/s70313-118.pdf.
    \11\ See, e.g., Federated Letter, at 22.
    \12\ Money Market Fund Reform Adopting Release, at section 
III.B.7.
    \13\ See, e.g., Dreyfus Letter, at 35 (``Confirming transactions 
in [variable net asset value money market mutual funds] on a 
transaction basis will increase costs, which will be passed on to 
[money market mutual fund] investors or underwriters.'').
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II. Discussion of Proposed Relief

    After careful consideration, the Commission is proposing to grant 
exemptive relief pursuant to Section 36 of the Exchange Act \14\ and 
Exchange Act Rule 10b-10(f) \15\ that would allow broker-dealers, 
subject to certain conditions, to provide transaction information to 
investors in any money market fund operating pursuant to Rule 2a-
7(c)(1)(ii) on a monthly basis in lieu of providing immediate 
confirmations.
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    \14\ Section 36 of the Exchange Act authorizes the Commission to 
conditionally or unconditionally exempt any person, security, or 
transaction, or any class or classes of persons, securities, or 
transactions, from certain provisions of the Exchange Act or certain 
rules or regulations thereunder, by rule, regulation, or order, to 
the extent that such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of investors. 
15 U.S.C. 78mm.
    \15\ Exchange Act Rule 10b-10(f) specifies the Commission may 
conditionally or unconditionally exempt any broker or dealer from 
the requirements of Rule 10b-10(a) and Rule 10b-10(b) with regard to 
specific transactions or specific classes of transactions for which 
the broker or dealer will provide alternative procedures to effect 
the purposes of the rule. 17 CFR 240.10b-10(f).
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    The floating NAV requirement, as adopted, only applies to 
institutional prime money market funds--not to government or retail 
money market funds.\16\ Shareholders that invest in institutional prime 
money market funds will continue to have extensive investor protections 
separate and apart from the protections provided under Exchange Act 
Rule 10b-10. For example, as stated above, funds subject to the 
floating NAV requirement will continue to be subject to the ``risk 
limiting'' conditions of Rule 2a-7.\17\ These conditions limit the risk 
in a money market fund's portfolio by governing the credit quality, 
liquidity, diversification, and maturity of money market investments. 
Accordingly, mutual funds that hold themselves out as money market 
funds--including institutional prime money market funds--may acquire 
only investments that are short-term, high-quality, dollar-denominated 
instruments.\18\
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    \16\ See Investment Company Act Rule 2a-7(c)(1)(ii), 17 CFR 
270.2a-7(c)(1)(ii). As defined in Investment Company Act Rule 2a-
7(a)(25), as amended, a retail money market fund is defined as a 
money market fund that has policies and procedures reasonably 
designed to limit all beneficial owners of the fund to natural 
persons. 17 CFR 270.2a-7(a)(25). Under Rule 2a-7(a)(16), a 
government money market fund is defined as a money market fund that 
invests 99.5 percent or more of its total assets in cash, government 
securities, and/or repurchase agreements that are collateralized 
fully. 17 CFR 270.2a-7(a)(16).
    \17\ See Investment Company Act Rule 2a-7(d), 17 CFR 270.2a-7(d) 
(risk-limiting conditions).
    \18\ Id.; see also Money Market Fund Reform Adopting Release, at 
143.

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[[Page 44078]]

    While institutional prime money market fund shares will fluctuate, 
they are not likely to fluctuate daily, primarily due to the high 
quality and short duration of such funds' underlying portfolio 
securities.\19\ In addition, the Commission anticipates that 
information on prices will be available through other means.\20\ For 
example, under the new fund disclosure requirements of Investment 
Company Act Rule 2a-7(h)(10)(iii), investors--including institutional 
investors--will be able to access a fund's daily mark-to-market NAV per 
share on a money market fund's Web site.\21\ Moreover, as previously 
noted, commenters raised concerns about the costs associated with 
requiring immediate confirmation for such transactions, which, to some 
extent, may be passed on to investors.\22\
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    \19\ Id., at 155 n.491. Based on staff analysis of Form N-MFP 
data between November 2010 and November 2013, 53% of money market 
funds would have fluctuated in price over a twelve-month period with 
an NAV priced using basis point rounding, compared with less than 5% 
of money market funds that would have fluctuated in price using 10 
basis point rounding. Id., at 158-59.
    \20\ Id., at section III.E.9.c.
    \21\ 17 CFR 270.2a-7(h)(10)(iii).
    \22\ Another commenter stated that institutions and 
intermediaries can demand more frequent confirmations through 
independent negotiations with money market fund providers. See 
Dreyfus Letter, at 35. Such an option, however, would not 
necessarily be available for retail investors in institutional prime 
money market funds.
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    Under Exchange Act Rule 10b-10(b), the exemption from providing 
immediate confirmations consistent with the written notification 
requirements under Rule 10b-10(a) is subject to certain conditions.\23\ 
The Commission preliminarily believes that these conditions are also 
appropriate for institutional prime money market funds subject to the 
floating NAV requirement under Rule 2a-7(c)(1)(ii) in order to provide 
customers with consistent information for all money market fund 
transactions.
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    \23\ See 17 CFR 240.10b-10(b); see also supra, Note 4, citing 
certain specific relevant conditions.
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    Given that there will be price fluctuations in institutional prime 
money market funds, the Commission preliminarily believes that it may 
be necessary or appropriate in the public interest and consistent with 
the protection of investors to also require that broker-dealers provide 
immediate confirmations upon a customer's request. Accordingly, to be 
eligible for the exemption from Rule 10b-10(a), the Commission proposes 
an additional condition beyond those in place pursuant to Rule 10b-
10(b). Specifically, the Commission proposes that, to be exempt from 
the immediate confirmation requirements of Rule 10b-10(a), the broker-
dealer must (1) notify the customer of its ability to request delivery 
of an immediate confirmation, consistent with the written notification 
requirements of Exchange Act Rule 10b-10(a), and (2) not receive any 
such request from the customer. This condition would provide investors 
with an option to receive confirmation information regarding a 
transaction at or before the completion of a securities transaction, 
while also providing relief to broker-dealers in circumstances where 
customers would not view this additional information as beneficial.
    Taking all of these factors into consideration, and consistent with 
the exemptions and related conditions applicable to money market funds 
that attempt to maintain a stable NAV, the Commission preliminarily 
believes that a conditional exemption is necessary and appropriate in 
the public interest, and consistent with the protection of investors. 
Therefore, the Commission proposes to exempt broker-dealers from the 
written notification requirements under Exchange Act Rule 10b-10(a) 
when effecting transactions in money market funds operating in 
accordance with Investment Company Act Rule 2a-7(c)(1)(ii), for or with 
the account of a customer, where: (i) No sales load is deducted upon 
the purchase or redemption of shares in the money market fund, (ii) the 
broker-dealer complies with the provisions of Rule 10b-10(b)(2) and 
Rule 10b-10(b)(3) that are applicable to money market funds that 
attempt to maintain a stable NAV referenced in Rule 10b-10(b)(1),\24\ 
and (iii) the broker-dealer has notified the customer of its ability to 
request delivery of an immediate confirmation consistent with the 
written notification requirements of Exchange Act Rule 10b-10(a) and 
has not received such request from the customer.
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    \24\ The proposed conditions under ``(i)'' and ``(ii)'' above 
are consistent with the confirmation delivery requirements provided 
in Exchange Act Rule 10b-10(b) for all transactions in investment 
companies that attempt to maintain a constant NAV where no sales 
load or redemption fee is charged. 17 CFR 240.10b-10(b).
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Solicitation of Comment

    The Commission requests comment on all aspects of this proposed 
exemptive order, including, but not limited to, the following 
questions:
     Do the monthly statements and other requirements under 
Rule 10b-10(b)(2) and (3) provide an appropriate alternative to 
immediate confirmations for transactions in floating NAV money market 
funds? What are the advantages and disadvantages to various market 
participants (including broker-dealers, shareholders, and funds) of 
permitting broker-dealers to provide fund shareholders of floating NAV 
money market funds with monthly confirmation statements?
     What are the reasons why shareholders might prefer to 
receive confirmation information immediately for floating NAV money 
market funds? What are the costs to broker-dealers associated with 
providing immediate confirmations? In particular, what are the nature 
and magnitude of such costs associated with providing immediate 
confirmations, and what, if any, costs would be passed along to 
investors?
     Should the Commission consider any alternatives other than 
the proposed exemption to the Exchange Act Rule 10b-10 requirements in 
the context of a floating NAV fund outlined above, such as requiring 
the provision of confirmations to shareholders at some different time 
interval (e.g., weekly statements)? Should broker-dealers be required 
to provide immediate confirmations upon request by an investor? Rather 
than requiring immediate confirmations upon request by an investor, 
should the Commission consider any alternatives (e.g., requiring next-
day delivery upon investor request)? What benefits and costs would be 
associated with any alternative approach?
     Should the Commission give investors the option to request 
delivery of an immediate confirmation statement for floating NAV money 
market funds? If investors should have that option, should the 
Commission require that broker-dealers notify the customer of its 
ability to request delivery of an immediate confirmation? What are the 
advantages and disadvantages of providing investors with the ability to 
request immediate confirmations? What are the potential effects on 
broker-dealers, investors, or other market participants? Should the 
Commission consider an alternative approach, such as requiring 
immediate confirmations unless the customer opts out?
     Would providing an exemption from the immediate 
confirmation delivery requirements of Exchange Act Rule 10b-10, as 
proposed, provide appropriate relief to broker-dealers and, at the same 
time, provide sufficient information to investors?

By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17748 Filed 7-28-14; 8:45 am]
BILLING CODE 8011-01-P